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

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

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

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

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

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

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

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

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

Transcript:

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

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

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

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

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

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

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

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

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

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

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

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

Joerg: Yes, definitely looking forward.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: Yeah, yeah.

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

Andrew: I saw that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joerg: Thank you, Cory.

Cory: Thanks so much, everyone.

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

The upshot: Exports are still picking up the slack.

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

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

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

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

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

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

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

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

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

Transcript

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

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

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

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

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

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

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

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

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

Joe: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: A slowdown in the decline.

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

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

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

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

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

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

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

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

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

Joe: Yeah. So there’s two things on the policy front. The first is this expansion of interest rate subsidies for consumers. So, the Ministry of Finance pays a portion of the interest rate consumers pay on loans. Idea being this lowers the cost of credit. And so, consumers, it’s going to increase their willingness to borrow money and spend. The reason I’m skeptical about it, and I talk about this in the report that went out today, September 17th, I guess the podcast is going to go out a couple of days later, is because China’s weak consumption isn’t a function of expensive credit.

It’s not a credit problem. Rates are already low. The reason this weak consumption is far more structural, it’s to do with slowing wage growth, kind of this structural long-term slowdown in consumer confidence and their willingness to spend. And of course, all of that is tied to the negative wealth effect. So, property prices down almost 30% from their peak five years ago. Interest rates already low, meaning fixed-term deposit, the return on fixed-term deposits or wealth management products is low. Return on government bonds is low. China’s stock market is super sluggish.

And think about that in contrast to Western equities, which this year have absolutely soared. So cheap credit doesn’t fix any of those things. It doesn’t repair household confidence. It doesn’t somehow translate into higher wage growth. So, without addressing the structural problems, interest rate subsidies are going to do very little for consumption. The second policy we saw in August was a bunch of county-level supply-side measures. So, what that means when I say supply side, consumption supply side measures are really all about trying to either improve the quality or increase the quantity of goods and services that exist in the market.

The idea being if there’s more things that consumers can buy, then they will buy them. And so, supply side measures that were released last month include increasing the amount of charging points for electric vehicles. So consumers maybe want to buy electric vehicles because they’re easier to charge. Building new shopping centers, upgrading existing local consumption facilities that can be like storage warehouses or upgrading shops, things like this. But we talked about this at the beginning of the pod. Beijing always relies on supply-side initiatives to try and boost demand. And it ain’t going to work, Andrew.

Andrew: Yeah. Well, you know, your typical rational consumer, not that consumers are always rational, is not going to look at their financial situation and say, “My employment prospects are somewhat shaky. My wages are growing more slowly. My confidence in my economic future is not particularly high. Maybe now’s the time to take on a bunch of new credit to buy stuff I don’t necessarily need.” Now-

Joe: Yeah, at this new shopping center.

Andrew: Yeah, exactly. Now, I was going to say, there might be some American consumers that think that way. I do think that maybe we’re built a little different over here, and not necessarily always a good way, but Chinese consumers and most consumers in the world, and even most American consumers do not think that way. And so, it’s just making it easier to borrow as a consumer in these circumstances. I agree with you. It’s not going to have much impact.

Joe: Yeah.

Andrew: Let’s wrap it up. This was a good breakdown. Thank you for that. I think to wrap it up, I mean, the really $10,000 question that everybody wants to know is, okay, put it all together for us. And what are the prospects for the economy? What’s the trajectory? We’ve talked before, we don’t really do GDP forecasts per se because the official GDP numbers are a political target, blah, blah, blah. But so you got weak consumption, as always, or not, you know, as has been for several years now. You’ve got booming exports, but maybe a little of the shine coming off. You’ve got weak overall investment, but maybe infrastructure turning a bit from a low base.

What does it mean for the next six months? Is this an economy that’s decelerating or accelerating or staying flat? I mean, we understand the supply-demand mismatch dynamics, but what about the overall kind of momentum of the economy?

Joe: It’s an economy that’s decelerating. It’s an economy that’s trapped in a, I guess I could say, like a narrowing growth model. So, it’s an economy that relies on manufacturing and exports. And as you said, some of the shine on the exports is starting to fade. So the growth drivers just get narrower and narrower. All the while, domestic demand, so whether that’s consumption or property, or private investment, just keeps deteriorating. So, if one’s interested in the six-month outlook economy, we need to ask ourselves, what changes this trajectory? And the answer is some sort of demand-side reset.

And there’s nothing on the policy front that suggests that’s coming. So without any sort of demand-side reset, the economy keeps drifting towards slower growth, propped up by manufacturing and exports. I mean, particularly exports, that’s also cyclical in some respects, driven by this AI build-out. And so even that’s not necessarily a structural strength. It’s a cyclical one. All of that means it’s an economy which is decelerating and faces a growing number of challenges.

Andrew: Well, on that pessimistic note, I mean, it’s hard to talk about the Chinese economy and not really be pessimistic at the moment. And yet, more and more foreign companies are doing more and more production there. So, it’s an interesting dynamic. But we will continue to cover these details, these dynamics on the Chinese economy going forward. Joe, really appreciate this breakdown this month, looking at the most recent data. Thanks a bunch for the time.

Joe: Yeah. Thanks for having me on, Andrew. It’s good fun. As I said, macroeconomics is always interesting.

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

• But Eric Olander, co-founder of the China Global South Project, says that framing is wrong — because a race implies a finish line, and this competition doesn’t have one.

• Eric’s view is that Chinese AI companies aren’t necessarily looking to out innovate US closed-weight models.

• Instead, the goal for China is to become Android to America’s Apple — 10% of the profit, but 90% of the world’s users.

On this week’s episode of the Trivium China Podcast, Eric discusses China’s approach to building AI offerings in the Global South with host Andrew Polk — but only after the two run through the flurry of travel and diplomacy Xi Jinping is undertaking throughout September.

The two discuss the implications of Xi’s travels, then turn to China’s AI strategy in the region, touching on:

• How Xi turned a single stop in Egypt into a four-birds-one-stone diplomatic play, touching on the Iran war, the Israel-Palestine conflict, Africa-China relations, and the dynamics around Xinjiang all at once

• Why the India-China thaw is real but fragile, and why Xi and Modi’s sideline meeting at the upcoming BRICS summit matters more than anything on the summit’s official agenda

• Why China’s AI push into the Global South won’t really be about the models themselves — but about enabling those models with Huawei servers, support contracts, and services sold on top of free, open-weight code

• Why the “China is less secure” pitch against Chinese AI companies doesn’t land in a Global South that trusts Washington about as little as it trusts Beijing

• Why nobody in the Global South expects much from Xi’s Washington visit, and why the mood in Beijing right now is just as hardened as it is in DC

Strap in — we cover a lot of ground in this one!

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I’m joined today by a very special guest. He is the Co-Founder of the China Global South Project. Joining us from Ho Chi Minh in Vietnam, it’s Eric Olander. Eric, how are you doing today, man?

Eric Olander: Great to be here. Long-time listener, first-time caller, first-time guest, you know, but big fan.

Andrew: That works. And for those who don’t know, we’ll talk a little bit about the China Global South Project in just a sec. But Eric and his team are also a member of the Sinica Podcast Network. Their work is excellent. You should definitely check out their podcast. They’ve got a whole suite of them.

Excellent, excellent work on what China is doing in the Global South.

And the reason I’m talking to Eric today is because that’s exactly what we’re going to go over. We’ll get into Xi Jinping’s recent run of diplomacy with sort of Global South entities, having been at the Shanghai Cooperation Organization, having trips to Kyrgyzstan and Egypt, and then in the next few days, participating in the BRICS summit in India.

Then we will talk about China’s AI push into the Global South and what that means for global AI competition. I say global, but really between the US and China. And then we’ll close maybe with Eric’s thoughts on what to expect from Xi Jinping’s upcoming trip to Washington and the EU-China trade talks as well, because I know he spends a lot of time speaking with European policymakers and businesses as well.

But before we get into that, we have to start, of course, with our customary vibe check. So, Eric, how’s your vibe today, man?

Eric: Oh, the vibe is uncertain. You know, when you live here in Southeast Asia, you’re getting pulled in all these different directions. On the one hand, you’re looking at the economies that are looking at 8%, 10% growth. Can you imagine 10% growth anywhere in the world? But in Southeast Asia, they still talk about those kinds of numbers. And at the same time, there’s this precipice of disaster right in the South China Sea, or it’s the Thailand, Myanmar, you know, has the Thailand, Cambodia, and the Myanmar civil war and, and all these things.

And obviously AI and Trump and the disruptions. And so, every day in this part of the world, you wake up with a kind of a split view of the world, which is one incredibly optimistic, surrounded by vibrant young people who are just busting their asses to improve themselves. And at the same time, a geopolitics that feels incredibly dangerous.

Andrew: Yeah. Well, uncertainty is one way, certainly an aspect of it. So, I’m in Shanghai reporting from Shanghai today. I love being back in China. I love being back in this part of the world. The part and parcel of uncertainty is just energy and vibe and people like striving and possibility and all of those things and the chaos. I miss all of that about being in Asia.

Eric: There’s an energy here that you don’t get in other parts of the world.

Andrew: A hundred percent.

Eric: And I mean, it’s the kind of thing that on a Sunday night at seven o’clock, and I don’t know if this is a good or bad thing, but kids are getting out of English class at seven o’clock on a Sunday night. And you just get this sense that there’s a drive to hustle, a drive to improve, a drive to really take advantage of the moment. And it contrasts with Europe where people talk about going to a four-day work week, a 35-hour work week.

And it feels weird in Europe because you see how hard they’re working out here. It may be, I’ve been out here in this part of the world for too long. This feels normal to me to basically have a six-day kind of drive. There’s a little bit of slowdown on Sunday, but not much in these parts of the world. So, it is a contrast, it’s also with the U.S. as well.

Andrew: Yeah, well, we’ll talk about all those aspects, that energy, that chaos, that striving as part of our conversation today. So, love that vibe that you bring to the podcast. It’s matching mine today. But before, of course, we get into the content, got to quickly do some housekeeping. Just a reminder to folks, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape.

That, of course, includes domestic policy in China along a range of areas, tech, autos, minerals, consumer goods. You name it, we do it. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please do reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund.

And otherwise, please just tell your friends and colleagues about Trivium. The word-of-mouth recommendations really, really, really help to grow our business and to grow the listenership for the podcast as well. I want to get into the content, but one last piece of housekeeping today. Eric, I’d love for you to tell folks. So, we’re going to put this podcast out on your channels and our channels. But for folks on the Trivium channel who aren’t familiar with the China Global South Project, can you just tell people a little bit about what you guys are doing?

Eric: Yeah, I appreciate it. We’ve been around for 16 years now.

Andrew: Wow.

Eric: And it’s funny that we go back to the early 2010s. We started podcasting and creating this. And we started with this idea that we don’t look at China as good or bad. And so much of the discussion about China has been so hyper-polarized. We look at China as complicated. And so, on a Monday, you’re going to see some critical coverage. On Tuesday, you’ll see some more favorable coverage. On Wednesday, it’s critical. And it just goes back and forth because we’re following the complexity.

And so, what we look at is China and what they’re doing in Asia, Africa, Latin America, West Asia, which is the broader Mideast Persian Gulf, Central Asia, critical minerals, looking at tech, looking at the diplomacy. So, what we’re going to talk about with Xi Jinping today in Egypt. This is the stuff that we do every day, whereas the New York Times, for example, will have a big article that came out this week on China and the Chancay Port in Peru. We literally have a service based in Peru that covers this in Spanish every day.

And so that’s what we do. And you really can’t understand the full breadth of the China story in 2026 if you’re only looking at U.S., China, China, Taiwan, and China domestic issues. Just as it was in the first Cold War, the competition between the U.S. and China is not going to be played out in the U.S. and in China. The competition is going to be played out in Brazil. It’s going to be played out in Vietnam. It’s going to be played out in Kenya, all over the world.

And unless people have this full understanding of the landscape, you’re missing big parts of it. And that’s the gap that we try and fill with our team. And our team is all from the Global South. I’m the only one not from the global South, but I’m living in the global South. So, we try and bring that out of D.C., out of Brussels’ view of the world to try and give people a different way of thinking about these things.

Andrew: Love it. That’s awesome. And so, everyone should check out the China Global South Project. They’ve got subscription products as well that you should check out that really keep you up to date on what China is doing in the Global South. And then also an excellent YouTube channel with a bunch of content as well. So, check that out. Great. Well, Eric, you ready to get into it?

Eric: Let’s do it.

Andrew: All right. Well, so we’re going to start with diplomacy. I mean, Xi Jinping is on a bit of a tear. He’s been, I would say, he’s kind of at the start of a really real journey around the world. We’re recording today on September 10th, but from August 30th to September 3rd, he had a five-day trip where he attended the 2026 Shanghai Cooperation Organization Summit and then had state visits in Kyrgyzstan and Egypt.

So, we’re going to start there. Can you just talk to us a little bit about kind of what you saw coming out of the SCO?

Eric: Yeah.

Andrew: Xi talked about, his big speech was, at least the part that Chinese media is particularly highlighting this “push for an equal and orderly multipolar world.” I think there’s some real, I don’t know, hopium in that. But anyway, interested in kind of your take on how the SCO went.

Eric: So, it’s not surprising that the president of China or the, in this case, the leader of China, the head of the Communist Party, is traveling abroad. It is surprising that this particular president and this particular general secretary is starting to travel again. If you recall over the past several years, really since the COVID pandemic, Xi’s travel schedule has fallen considerably. And he’s really relegated a lot of that to Li Qiang, the premier. So, that he’s gone on so many trips in such a short period of time is something notable and something we haven’t seen in several years.

So, that is very interesting that he’s getting out. I think Xi sees a moment in all of these trips, and there’s a linkage among all of them, between the SCO, Egypt, BRICS, and the Trump visit that, of course, the Chinese like to talk about changes not seen in a hundred years, but this is an incredible moment that we’re in right now, where the power dynamics are shifting. And Xi clearly sees an opportunity to try and push that more into China’s favor. So, I think that this is the context that you have to look at these trips and his messaging at each of the different stops, which had some similarities to it.

Again, another baseline point, you know, we hear this in the U.S. quite a bit, that the Chinese want to displace the United States as the global hegemon, that the Chinese want to overthrow U.S. institutions. That is just not backed up by the facts. And that’s not backed up by the scholarship and also what the Chinese themselves are saying. The Chinese have no desire to be a global hegemon. They don’t want to pay for it. They don’t want the burdens of it. And they don’t want the responsibilities. Xi is first and foremost focused on making China great again. He is a nationalist through and through.

And so, when we see the rhetoric, when he’s talking about a multipolar world and he’s talking about community for common destiny, that’s the umbrella structure of all of this. All of that is to give China more room to move in the international system to achieve its own objectives, but to the point where it doesn’t overthrow the existing institutions that it has benefited from enormously over the past 40 years. It doesn’t want to overthrow the UN. It doesn’t want to overthrow any of these institutions, but it does want to create these new parallel international governance architectures like the SCO and like the BRICS.

So, I think that’s a scene-setting that is really important, I think, to understand. We can go into the particulars of what he said. But I think that it’s vastly misunderstood and misframed in a lot of the Western discourse on these types of engagements.

Andrew: I totally agree. And I want to pick up on that, another just kind of scene-setting point for our audience who are all over the place, but many of them are in Europe or the U.S. and come at this through that lens. Again, I’ve already mentioned, you talked about the global initiatives that Xi Jinping is putting forward. And then I talked about this sort of equal and orderly multipolar world that Xi Jinping is talking about. I think people in Washington, where I live, hear that and they have one of two responses.

One is never going to happen, people don’t want to follow China, or they just generally kind of roll their eyes. But as you know, from living in the global South, or maybe I’ll ask you in case some are wrong, I mean, there is a receptive audience for that kind of ideas in this part of the world, right?

Eric: So, there’s two things that are going on simultaneously. And again, unfortunately, our discourse in the U.S., and to some extent in Europe, is reductive and binary, and it lacks the nuance to understand these two things that are going on at the same time. You cannot overstate the depths of frustration and anger and resentment that many people in these countries have towards the U.S. and Europe for the way that they have run the world for the past four or five hundred years.

Okay? And this is part of the discussion that Europeans don’t get because they don’t talk about colonialism in their education, the same way we don’t want to talk about slavery in our education. It makes them uncomfortable. But when you go to Africa, you’re in here in places like Southeast Asia. The resentment is very close to the surface. Now, here’s the thing. You’ll see that Americans get treated very well when they go to these parts of the world. And because there’s a custom in Southeast Asia, in the Middle East, and in Africa that you treat visitors with respect.

And so, you’ll get this rhetoric from American diplomats say, “Well, we really prefer working with you.” You hear this all the time. You know, an American cabinet secretary will come back from an African country and say, “You know, they told me that they would rather work with us than the Chinese.” And you know what that guy is telling the next visitor that comes in, “I’d rather work than the Americans.” So, we get blinded by that. And so, we have this kind of us versus them.

In so much of these countries, the choice is not the U.S. or China. It’s a both and combination. They don’t feel that they are in the position to be able to choose one or the other, and they want to engage them all. Vietnam, of course, is the best example of this. Bamboo diplomacy, friend to all, enemy to none. That is the pronounced policy and the announced policy of the Vietnamese government that a lot of developing countries adopt.

Notice that within a week of Xi Jinping leaving Egypt, the Egyptian government announces a new billion-dollar NVIDIA AI data center. This is the dynamic. So, it’s not an either-or, and I think that’s a very important thing. So, the resentment towards the West is deep, is growing more so, and China kind of fills in then and says, “Hey, listen, we’re here.”

And so, you see in a lot of these pollings from Pew, Afrobarometer, Arab Barometer, the Institute for Southeast Asian Studies — China is ticking above the U.S. more and more. What the posters, and we’ve interviewed all of them on our show, what they’re telling us is that the depth of support for the Chinese tends to be quite shallow. In many ways, it’s a protest vote against the U.S. So they go, “I don’t like the U.S., so I’m going to vote for the Chinese. Yeah, I like the Chinese.” And then they’ll go back and they’ll ask people in secondary questions saying, “Why do you like the Chinese?”

And people oftentimes don’t have an answer. They’ll be like, “Well, they’re not the U.S.” Okay? Well, so then China’s support in these countries is quite low and it’s kind of superficial. And again, that is a takeaway. And it’s a current discussion going on in foreign affairs right now that really the U.S. is the stronger soft power in the world. I would be cautious of that because, again, when China comes out with these new governance initiatives and says, “We want to have you to have a seat at the table.”

And I was in Europe a couple of weeks ago with some senior-level stakeholders and I challenged them. I said, “Name me one European governance institution or one European initiative that puts Togo,” and I just picked a random country, pick any country, “puts Togo as a member at the table with you.” Okay, I’ll wait. Okay? There isn’t one. So, we can say all of these things that the Chinese are doing- SCO, BRICS, New Development Bank, Asian Infrastructure Investment Bank, the Global Governance, Security, Civilization, AI- all these initiatives are just a bunch of vaporware.

But when you are Togo, or you are Keny,a or you are any of these countries who have been excluded from the system for so long, and China then says, “Hey, we want you to have a seat at the table.” So, Kenya signs on to the World Artificial Intelligence Organization as a founding member. That has never happened in a U.S. or European institution, in contemporary U.S. or European institutions.

Andrew: Yeah, great point.

Eric: That’s very powerful. So, when we look at the Global Development Initiative, and some 70+ foreign ministers were there as founding kind of supporters of it in 2022 on the sidelines of the UN General Assembly, and yet the New York Times doesn’t even send a reporter to it, you start to see our blind spots on this, that no one’s forcing the Saudi foreign minister to go to a global development initiative thing. They’re going because they think it’s interesting and there’s something there for them. What is it? When does it pay off? Nobody really knows, but they like the rhetoric, and they like the tone, and they like the both/and of it where they can sit down with the Americans and they can sit down with the Chinese.

And also, this emphasis that the Chinese have on multilateralism now is something that resonates in this part of the world because, again, we’ve lived in a system where the Americans got to pick the head of the World Bank, the Europeans got to pick the head of the IMF, and then there were five countries at the top of the UN, and everybody else is basically told to sit on the sidelines. And so, this new multilateralism, if you’re India, Nigeria, Indonesia, Brazil, you have power today, real power, and you want to be respected in that.

Last point that I’ll make on this is that S. Jaishankar, the very outspoken external affairs minister of India, he famously said, “Listen, we tried to get into the G7, and they wouldn’t let us. So we made the BRICS.” So, this sense of exclusion that many people in these countries feel from the existing institutions is something that is fed into what the Chinese are doing. And the Chinese are leveraging that, leaning into it. Some say exploiting it, but it’s good politics.

Andrew: Totally. Well, and the cynic would say, “Well, this just serves China’s interests,” but that’s just smart politics. Exactly.

Eric: But it is. Of course, it serves their interests.

Andrew: Yeah, yeah. Both can be true at the same time. Yeah.

Eric: I mean, come on, this is the game we’re in, you know, just the same way that in the post-war era, us creating these institutions, these governance institutions served our interests.

Andrew: A hundred percent.

Eric: And for 75 years, it served our interests. Marco Rubio says it doesn’t anymore. I think a lot of us would disagree with that. But here we are. So, we can’t blame the Chinese for pursuing initiatives that are self-interested. That is the nature of politics.

Andrew: Yeah, totally, totally agree. Well, excellent analysis on sort of the contextual part of this. Let’s get into some of the details. Was there anything from the Shanghai Cooperation Organization meeting that jumped out at you?

Eric: Well, yeah, so from SCO, first of all, it’s not surprising that he went because Central Asia holds a very special place in Xi’s kind of worldview. Remember that it was Central Asia where he went in 2013, less than a year after he was general secretary, to launch the Belt and Road Initiative. He’s seen Central Asia as one of the few uncontested spaces around China’s periphery that isn’t affected by great power competition or by rivalries like with India, for example, and whatnot.

And so Central Asia has been this space that he really likes to go to. In fact, after the pandemic, it was at the C+C5, the China plus the Central Asian five were the first leaders to come to China. So again, he has this special place. So, it didn’t surprise me that he went to Bishkek. The rhetoric was very much what we expected. Again, it’s a security organization. You know, the SCO has struggled in these current issues because of India’s relationship with Israel. Iran is a full member.

And there was this very awkward picture of Xi and Wang Yi, the foreign minister, with the Iranian delegation and the Iranian counterparts. I don’t know if you saw that picture where some people looked at it. It was like, yeah, the Iranians positioned it as — we had a sideline meeting with the Chinese — and everybody were looking at it going, “Well, that didn’t really look like a sideline meeting.”

Andrew: Standing meeting.

Eric: It was a standing meeting and Xi has this very standoffish approach if he doesn’t like somebody. His body language is always very interesting to watch. You know, when he’s with a Japanese prime minister, he just looks pissed off. He just puts the dead fish handshake. He’s like, I just want you to get away from me. And then when he’s with the Tanzanian president, he’s just so effusive and smiling. I think we were somewhere in between on that one with the Iranians, where he wanted a picture to show that he’s not isolating them and abandoning them. But at the same time, he also didn’t want to get too close.

That, in a microcosm, shows you the complexities of the SCO for China. And so, on the one hand, remember that the SCO has struggled on the Iran wars because India has had this very close relationship with Israel. In the June 2025 five attacks from the U.S. and Israel against Iran, the SCO didn’t issue a statement. And then when they issued a statement, they did it without India. And then India came up and said, “Wait, whoa, no, we did not agree to this.” And it shows you the fissures within these organizations.

This brings up the point on the BRICS as well. What do these organizations actually do? If you cannot issue a statement after one of your members is under full attack by rivals, what’s the point, right? I come back to that these are forums that allow for these leaders to get together for Modi and Xi. In this case, Modi didn’t meet with Xi, but it allows a space for this interaction. That’s number one, which wouldn’t happen otherwise. It allows for the articulation of these frustrations and grievances with the legacy institutions of the international system. That’s really important.

And grievance is something that I think is underappreciated as a political force. Grievance is what drove the AfD to win in Germany. Grievance is what powers Trump. Grievance is what powers Nigel Farage. Grievance is the currency of our politics today. And so, the SCO and the BRICS don’t actually produce much in the way of tangible outcomes, but they do allow a forum for grievance. And Xi spoke to that when he talked about his displeasure with the current security system. That is an expression of grievance.

And so, I think if we look at it on the level of grievance, then these institutions start to make more sense. And I’ve heard people in D.C., MAGA people in D.C., dismiss grievance as a force. And I’m just like, wait, what? I mean, you’re literally in power because of grievance. So, they dismiss it when they see it from people that they don’t understand or they don’t like. But when it’s their grievance, it’s legitimate.

Andrew: Right.

Eric: And so that’s, I think, the most important things that come out of these SCO and BRICS summits.

Andrew: Yeah, that’s a really, really good point. Really well put. I think the tendency is to look at these things and say they’re nothing burgers. You know, people kind of put up this sort of false expectation. Like, if there’s not a $40 billion worth of commercial deals or something concrete you can hold in your hand, that it was a flop. But that’s not the point.

Eric: No, that’s dumb. That’s an old way of looking at it. And think about this. If these institutions or whatever they are, these forums were nothingburgers, why is it that dozens and dozens of countries are lining up to join them? Vietnam has plenty of things to do with its time besides go to the BRICS. But yet the prime minister is going to the BRICS summit.

Why?

Now, is it because they’re going to get big trade deals out of it?

No.

Is it because they’re going to get some type of financial benefit?

No, because the BRICS has been around for 15 years and has produced barely anything.

So, in that sense, yeah, it’s a failure.

But it puts the Vietnamese prime minister in the room with Modi, with Xi, with any number of presidents, prime ministers, and others who are very much aligned with him in terms of that worldview. Now, it’s not all grievance. There is productive things that do come out of these things. And also, it’s a de-centering of the West. This is really important. The West is not invited to these clubs. They’re not even invited as observers. This is not their party. And that is very empowering for people, again, who’ve been marginalized for as long as they’ve been marginalized, and saying, “You know what, you’ve got your things, we’ve got ours, you can stay over there.”

And notice how sensitive it gets, how people in Washington are becoming increasingly sensitive about this. As much as Trump and the MAGA folks want to say these are nothing burgers, Trump turned around on multiple occasions and threatened 100% tariffs on any BRICS country if they go through with the BRICS currency. Okay, on any number, you know, he didn’t even know that China was part of the BRICS, which I think is laughable. But again, you can tell that there’s a little bit of anxiety about this. It’s a nothingburger, but we don’t like it. And you’re like, “Well, if it’s a nothing burger, then what do you care?”

Andrew: Totally. Totally. Well, again, I think those are really good observations and super helpful for, I think, how we think about these things. We’ll talk more about the BRICS piece of it in a second because that’s upcoming. But in the meantime, after the SCO, Xi went to Kyrgyzstan and Egypt for a state visit. Definitely want to talk about Egypt. I don’t know if you have any thoughts on the Kyrgyzstan visit.

Eric: Well, so Kyrgyzstan is important because that’s really the heart and soul of the Belt and Road Initiative. This is where it started and this is where the beating heart thrives. So, when we look at the big infrastructure projects, we look at the energy projects, you look at critical minerals, Central Asia is right in the middle of all of those. So, the announcements again on progress, on the big railways, these are railways that are connecting China to Europe. And so, a lot of air conditioners went through these countries on the way to Europe this summer.

Again, these are railways that are probably going to become more important in the future as waterways become potentially contested and weaponized. So, railways will play a more important role. So, the fact that they made announcements on the rail systems, I think is something that we should watch. Also, you can’t take away anything when it comes to Central Asia and the competition between Russia and China. Russia still sees that as its traditional sphere of influence. China clearly feels the upper hand over Russia.

Basically, in many ways, in my view, there’s nothing that pleases the Chinese more than seeing Vladimir Putin walk up the steps of the Great Hall of the People, you know, of like, “You work for me now,” right? And so that plays out in Central Asia. I think, again, taking advantage of the moment. Russia may be stronger one day. Russia’s relationship with China may be more contentious. Historically, it has been that way. And so, I think the Chinese are taking advantage of the moment that we’re in right now by exerting considerable influence in Central Asia while Russia is focused on Ukraine and Europe and all the other things that are going on and its ability to exert influence in Central Asia is diminished.

That’s always been a big part of it. Again, China’s periphery, its neighborhood diplomacy is supreme right now in its strategic thinking. And Central Asia is absolutely central, no pun intended, to that. So, I think you have to look at that all in that context of Russia, neighborhood diplomacy, supply lines, the Belt and Road. That’s what makes this visit to Bishkek so important. And all the visits to Central Asia and the engagements with Central Asia are so important. It doesn’t get a lot of attention outside of the kind of BRI press, if you will, these kind of small communities like us, who obsess over these things. But it’s one that I recommend people to follow closely.

Andrew: Yeah, I know you’re an avid reader of BRI Monthly, your magazine. So, well, then what do you make of the Egypt trip?

Eric: Okay, so this one was really interesting. And at first, I was scratching my head as to, okay…

Andrew: Why?

Eric: Why? But then when you sit and think about it, it was a masterful stroke of diplomacy. So, ostensibly, the reason they’re going is to mark the 70th anniversary of diplomatic ties between Egypt and China. Blah, blah, blah. There’s always those anniversaries. You know, it’s the 60th anniversary, the 70th anniversary. Xi doesn’t go to those. Egypt, though, is a country, because of its location, that ticks so many boxes. So, let’s just go through the list right now. North Africa.

So, this is the second visit since 2024 that Xi has made to North Africa. Remember, he made a stopover in Morocco on the way back from the U.S. And that by itself indicates that MENA and we call, you know, so North Africa is treated separately like it is for the U.S. It’s not part of the sub-Saharan Africa in the Ministry of Foreign Affairs. They count North Africa as part of their MENA division. So, MENA holds a very special place. And if you look during the pandemic where vaccines went, disproportionately, they went to North African countries much more than they did to sub-Saharan African countries.

Andrew: Interesting.

Eric: When you look at investment now, huge investment flows into the Moroccan auto industry.

Why?

Because Morocco is one of the few countries that has a free trade agreement with both the U.S. and Europe. Makes it very, very important. Egypt now is one of the major magnets of Chinese auto manufacturing. So, First Automotive Works, SAIC, any number of these companies have huge investments in both ICE and new energy manufacturing there. There is a big Chinese investment zone along the Suez Canal. And so, the Chinese, more than anything, when it comes to BRI price connectivity.

And so, Egypt, because of its strategic location at the intersection of sub-Saharan Africa, North Africa, the Middle East, and the Persian Gulf, make it strategically very important economically. But that’s not the reason why he went, because a lot of countries fit that. China is concerned that they are being relegated to a secondary position in what comes after the Iran war. That they are not a primary actor in shaping the outcome of this. And that’s by their own choice, by the way.

They don’t want to get involved in the security. Remember, Trump on many occasions said the PLA Navy should join the U.S. I mean, we’re in a different timeline, Andrew. But, you know, I mean, can you imagine this? A joint naval operation between the U.S. and the PLAN, you know, to patrol the Strait of Hormuz? I mean, like, but that’s where we are in 2026. I mean, that was his request. I mean, not once, but on multiple occasions that the Chinese should do it. The Chinese naturally saying, “No, we don’t do that. We’re not going to get involved in other countries and other regions militarily.”

So, there is a concern as to when the dynamics in West Asia start to settle down that they may be positioned on the outside. So, Xi wants to still be considered an actor in the political discussions related to West Asia. But he can’t go to the Emirates because the Emirates is right in the middle of the U.S.-China competition. He can’t go to Iran, obviously, because, well, that would mess everything up. The Saudis, I don’t think, want him there right now. It’s just too difficult of a time. They don’t want the Trumpers there either, okay?

I mean, they’re trying to figure it out. Egypt is one of these countries a little bit like India, which has a tense but deep relationship with the U.S., always a suspicious relationship with the U.S., and at the same time is welcoming to the Chinese. So, there’s a political dynamic there. Remember, so that’s box number two in terms of thinking about the Iran war and the politics of the Iran war and having some presence.

Andrew: Sure.

Eric: Box three is the Palestinian-Israel conflict. And China has seen itself as a long ally of the Palestinian cause from going back to the 60s in Yasser Arafat. And obviously, Egypt is right on the front lines of that. This conflict has been a topic of discussion between El-Sisi and Xi. The Chinese at one point when they were high on their mediation success in terms of bringing Saudi Arabia and Iran back together. They even talked about, you know, maybe they could step in to mediate the Palestinian conflict.

They brought all the Palestinian factions to China in ‘23 or ‘24, which was quite a move. They fancy themselves as being an ally of the Arab street on this, if you will. The Arab street, for those who are not familiar, is public opinion that is shaped out of Cairo. And the Palestinian cause is central to that. And the Chinese have been avid defenders of the Palestinians at the United Nations. They’ve been avid defenders of the Palestinians, obviously, in China and the diplomacy. And going to Cairo allows you that opportunity to talk about that.

The last part, and this did come up in the conversations, and there’s the one that’s poorly understood is Xinjiang. So, in the early ‘20s, remember I said about the Arab street, there is a convergence between China and Egypt on combating Islamic terrorism and Islamic radicalism. This is their words, not mine. So for El-Sisi, it’s about cracking down on the Muslim Brotherhood. And for the Chinese, it’s obviously talking about Xinjiang. So, in the early 20s, Wang Yi goes to Cairo and lays out the policy on Xinjiang and says, “This is what we’re doing.”

And they famously go and say, back then it was like six years, we’re up to about 10 years, “We have not had an attack by an Islamic extremist in six, seven, eight, nine.” They always put the number every year. That resonates in Cairo. And the Chinese get the blessing of the Egyptian government on this. And it legitimizes China’s policies on Xinjiang. And so, they love going to Cairo to talk about human rights, Muslim extremism, and the successes that both the Egyptian and the Chinese governments have had in combating Islamic extremism.

It’s a safe space for them to talk about that. They get no criticism. There’s no protest in Cairo on this. And let’s not forget that the Egyptians have been deporting Uyghur activists back to China and repatriating them. So, there’s been very much an alliance there.

Andrew: That makes sense. Oh, sorry. Go ahead.

Eric: The last box. Sorry. I mean…

Andrew: No, that’s great.

Eric: I get really excited about Egypt, about China politics.

Andrew: No, I love it.

Eric: The last box to tick. And again, this is why I said it was a masterful stroke that, in one trip, he could do all of these things is that, and he referenced this in his speech that Egypt is a part of Africa. Africa is an important part of China’s diplomacy in the Global South. And it allows him the leverage to say, “I am back in Africa again.” And again, this is something that Donald Trump will never go to Africa for obvious reasons. Biden barely went to Africa, only in the last month of his presidency when he was lame duck. Same with Obama. This is a part of the world that the U.S. doesn’t take seriously, has not taken seriously, and there is no indication they will take seriously.

And so, Xi benefits from that by saying, here I am back in Africa again. And I think he used the word Africa quite a bit in his remarks. And that was intentional to direct those remarks to sub-Saharan Africa and to the continent of Africa, not just to the MENA, West Asia, Mideast, Persian Gulf dynamics of it all. So, that’s why Egypt was such a masterful diplomacy for them because they got to do a lot in a very short amount of time. I’ll pause there.

Andrew: No, that’s really well summed up and makes a ton of sense terms of checking all those boxes. I was just going to ask an additional question on some of the comments that he made. It jumped out to us that he proposed this four-point approach to “building a new Middle East security architecture.” And I just wanted to get your thoughts on that.

Eric: So that speaks to what I was talking about, how they are concerned about being marginalized in the post-war dynamic. They want to try and have some space in that. I find it hard to believe that anybody in the region will take them seriously on this, that they don’t look to the Chinese as a provider of security. They don’t see the Chinese as having any leverage on this. They don’t see the Chinese as using what leverage they do have to exert changes. That’s just not the way the Chinese operate. And I also would argue, and I think I’m channeling now a lot of the great Middle East scholars and West Asia scholars that we talk to who say that China’s leverage in these regions is significantly less than most people actually think.

They really don’t have a lot of leverage because none of these countries are going to make national security considerations based on Chinese input on trade. When it comes to national security, that’s above and beyond everything else. So, I don’t think the Chinese actually have a lot of leverage, but they want to be seen as somebody having a role in what comes after this. Now, there may be a tremendous opportunity for the Chinese in the Gulf at the end of this. We are looking at a scenario where a lot of scholars are forecasting that the era of U.S. permanent military presence in the Gulf states may be coming to an end.

And that has been a main priority for the Chinese is to see a retrenchment of U.S. military presence around the world, not just in the Western Pacific, but also in places like the Gulf. Now, the Chinese may not be happy with what comes out of that. They’ve been freeloading off U.S. security for decades to benefit from those supply lines that made oil pass through those regions for a long time without them having to worry about the transit of that energy. So, we don’t know what comes after this. So, it’s not a guarantee that the Chinese win just because the U.S. has lost.

Andrew: Well, that’s what I was going to ask is I want you to clarify that point a little bit, because I think a lot of people hear that. I kind of it was my initial instinct is, “Oh, they want the U.S. to pull back so they can go in and provide the security.” But it’s not that at all. Yeah.

Eric: No, absolutely not. 100% you are not going to see… First of all, the Chinese have a foundational philosophy. It’s back to the Zhou Enlai era of not putting bases in foreign territory. Djibouti was the exception to that. They are showing some flexibility on that. Again, is the Ream Naval Base in Cambodia a base for the Chinese? Is it not? There’s a little bit of both. We don’t know. But there is a lot of resistance within the body politic in China for a large basing presence around the world because it would make them look like freaking hypocrites for them accusing the United States of having a global military presence around the world.

So, I mean, for 10 years, the Pentagon has been putting in their annual report that the Chinese are looking to put bases around the world. And yet, beyond Djibouti, we haven’t seen it. Djibouti was a really exceptional case because of its just incredible strategic location at the mouth of the Gulf of Aden and in Africa and all the different, and right near the Red Sea. And because of the presence of so many other foreign bases, it gave the Chinese some cover.

Whereas you’re not going to see a military base in the Emirates or in Qatar. There’s no evidence that that’s going to happen. And I know, I can imagine some of your listeners right now are rolling their eyes and being like, you know, “Eric is so naive. He doesn’t get it.” And all I just say is decades now have gone by with people forecasting that this is going to happen and it hasn’t happened. That doesn’t mean they’re not going to project security. There’s different ways of doing this today, but they’re not going to follow our way of doing things. That much we know. And we’ve seen that now over the past 40 years of China’s evolution to where it is today.

Andrew: Yeah, I fully agree with you that that is not their intention. The one caveat is I don’t think it’s them potentially looking like hypocrites that will keep them from doing it. I’m sure they’re perfectly happy to look like it.

Eric: I think they can get over it. They have no problem getting over hypocrites. It’s just also you have to understand on a basing thing, and this is why I get into so many fights on social media and folks in the Pentagon who are convinced that the Chinese want to put a base in West Africa. And just let’s go through the logic of this very quickly. And this could be anywhere in the world.

To have a base, you need a supply chain that can service that base. You need to power that base. You need to protect that base. It would be so easy in the event of a conflict for the U.S. to cut off that base. Okay? Just to cut off the power to that base, to cut off the food supplies in the base. So the U.S. is able to do it because it’s got this massive ecosystem that allows it to be able to supply these bases. It’s got the logistics capability to do it. China does not have that capacity. It just doesn’t. For all the logistics prowess that China has in delivering Taobao goods, it does not have that capacity militarily. And it is a truly unique ability of the United States to be able to service these bases.

However, what we have seen in the Gulf shows you the extreme vulnerability that these bases have in modern warfare today in an era of drones. That the Abraham Lincoln was sitting in the Gulf getting food from Diego Garcia because the Bahrain base, where it normally was supposed to get food, is shut down because of Iranian drones. The Chinese can’t be a part of that because they don’t have the capacity to defend or supply foreign bases yet. Maybe that’ll change one day, but I’m dubious, you know.

Andrew: Yeah, no, totally makes sense. And I agree, again, being in D.C., it is an uphill battle to convince people.

Eric: It is. They really convince themselves of these narratives. And it’s just like you get 10 people in a room…

Andrew: It’s projection.

Eric: Who all agree with themselves about it. And that’s why I’m just like…

Andrew: But it’s, “Well, we would do it.” You know what I mean? Like, “So, of course, they’re going to do it.”

Eric: That’s right. And that is faulty logic.

Andrew: Yeah, I agree. Well, let’s pivot now to what’s next on the diplomatic agenda, the BRICS Summit. So, this is in India. This is, I think, this upcoming weekend. It also seems like maybe Xi and Modi are going to have…

Eric: Xi and Modi will have a sideline. That is the expectation. A couple of different things. The reason why Xi is going to this, and wasn’t 100% sure, but then it became clear, next year, China is the rotating chair of the BRICS. And the Chinese are obsessed with the optics of these summits in Beijing. And so, if Xi didn’t go to New Delhi, then Modi would have stayed home from Beijing next year. And that could not have happened. So, under any circumstances, to not have India and Beijing for the China-hosted BRICS summit would have been a non-starter. So, that’s the main reason I think he’s going.

The reason why we had some doubts was because there was a foreign minister’s meeting, a BRICS foreign minister’s meeting, at the same time as the Trump visit. So clearly Wang Yi was next to Xi’s side when he was talking to Trump. But that the Chinese didn’t send Vice President Han Zheng, who, remember, welcomed Trump at the airport, but could have easily gotten onto a plane to stand in for Wang Yi. And Vice President Han does do that. He is a ceremonial vice president, but he has the stature to stand in for a foreign minister at some of these types of events.

Instead, they put the ambassador in, which was diplomatically and protocol wise, really a statement. You know, there’s no coincidence in Chinese protocol politics. Everything is thought through. And that let us who are observers going, huh? And it was a wonder if, are they not taking the BRICS as seriously anymore? Are they not as interested when they didn’t send anybody of higher rank than an ambassador when all the other foreign ministers were there? So that was notable. But then people said, “Well, listen, next year, BRICS is going to be in Beijing. So of course, he’s got to go.”

At the same time of all of this, we’re seeing this real détente happen between India and China that’s really started over the past 18 months. And both sides, remember, if you recall, in early 2020 at the Galwan Valley incident, where dozens of Indians, and again, I mean, the numbers are very imprecise. I’m invariably going to upset some part of your audience. The Chinese say only four of their soldiers were killed. Indians will say there were way more. Let’s just say Indians and Chinese were both killed in the Galwan Valley incident. And it really put relations into a deep, deep freeze for about four to five years.

So much so that Xi and Modi couldn’t even look at each other at the South Africa RICS Summit. And they withdrew their ambassadors. They kicked out journalists. There wrecked flights. This was bad. More importantly, they moved tens of thousands of troops to each sides of the border, heavy artillery, mechanized artillery. In fact, the Indians redeployed off of Pakistan to the line of actual control. And what ended up happening about ‘24, ‘25 is that both sides said, “Crap, this is getting too expensive. We just can’t have this much.” the Chinese need to you know, dedicate military resources into the South China Sea, the East China Sea. They need to dedicate resources to other places. The Indians, obviously, it’s about Pakistan.

And both sides said, “This is ridiculous. We got to back down.” And so, they have started this, this détente, which for the most part has really shown signs of progress. Flights are back. Ambassadors are back. Business is starting to pick up. Cultural exchanges are happening. And they’ve pulled back some of troops. Not all, but some of the troops have pulled back. So, that’s all good. In fact, just last week, they had the highest meeting of corps commanders. The top military commanders on both sides of the border met as part of the ongoing conversations. We’ve never seen those two leaders meet.

So, it shows you that there is positive momentum. That being said, the level of distrust and just hate between these two sides is stunning. Just, I mean, go to our YouTube and see the show, the Indian shows, and see how the Chinese comments are like, “These effers, I hate them, I don’t trust them.” And the Indians are like, “I hate the Chinese.” And that distrust is right there under the surface. Som despite all of this kind of wonderful détente and this kumbaya moment and the commanders meeting and, you know, all these different things, boy, the distrust runs very, very deep. And that, of course, goes back to the 1962 border war and disputes over Tibet.

And obviously now what’s happened in Nepal has brought a lot of that back up. Indian media really were quick to jump on the idea that it was Chinese infrastructure building in Tibet that caused this. Again, it’s too early to tell what the causes of this were yet definitively. Nonetheless, you can see how close to the surface the suspicions are. So the meaning between Xi and Modi in summary, in my view, is more important actually than whatever happens at the BRICS.

Andrew: Yeah. Well, that’s also great context in summary. I guess the question for me when it comes to this thaw is like, what do you think the prospects are that it lasts?

Eric: It will last because both have a strategic interest that it should. There is a strategic interest that it gets to a point of sustainability. Are we going to see the Indians pull out of the quad, line up with Xi against Trump? Never. Never, never, never. Despite the hugs in Beijing, remember the famous pictures of the hugs in Beijing? That was a big middle finger to Trump. The Indians simply don’t play politics that way. So, the Indians, again, are a little bit like the Egyptians and a little bit like the Vietnamese where they play all sides and they put money down on red and on black at the casino. So, they both, I think, recognize the limits of what can be done.

The Indians are very, very conscious of the trade imbalance, that they’re not selling very much back to China, but importing quite a bit from China. This is, of course, a concern that everybody has. The Chinese are very conscious and nervous about the Indians kind of being, remember that China Plus One? Well, they’re worried about India being the plus one. So China put exit bans on technical engineers. They are not transferring over some of the advanced technology for phones manufacturing and for auto manufacturing. They’re worried about India because of the scale of what India can produce, that it could be an alternative.

Apple has moved a significant portion of its manufacturing out of China to India for sale in the U.S. and other places. That is something that is of deep concern to the Chinese. Remember, the Indians and the Chinese compete for influence in the Indian Ocean. I, you know, push back heartily against the U.S. when they talk about the Chinese in the Atlantic. The Chinese have no interest in the Atlantic. The Chinese have deep interest in Indian Ocean supply lanes that take resources and energy from Africa and from West Asia through the Indian Ocean to the Port of Gwadar in Pakistan, to Myanmar, and then around India.

Those sea lanes are strategically essential for the Chinese. And India doesn’t like that. They’re competing in places like Sri Lanka and Bangladesh as well for influence. These are areas. And then, of course, there’s Pakistan. The Chinese have a partnership with Pakistan that is really quite remarkable. 80+ percent of Pakistan’s military hardware today comes from China. It is a real-world showcase for Chinese weaponry and military technology. So, they talked about the… remember the DeepSeek moment? Well, during Operation Sindoor, which was the brief war between India and Pakistan, it was the J-10s and the PL-15 missiles- the J-10 fighter jets and PL-15 air-to-air missiles that were being showcased.

And a lot of people were like, “Wow, this is great. Chinese tech has finally arrived.” We just reported this week that Pakistan has added to its arsenal HQ-17 anti-drone technology to combat the Indians. So, there’s a whole bunch that gets on in this relationship, and it’s very complex. So, we’re literally looking to a point where can we just make it that they don’t dislike each other? It’s like divorced parents with the child. You’re like, “Let’s just be civil to one another. We’re never going to be lovey-dovey. If we can avoid being antagonistic, that’s where I think the sweet spot is.” And that’s where I think they are.

On the BRICS itself, there’s a real cleavage that’s starting to kind of form within the BRICS, more so than the SCO. The SCO is a security-related organization. The BRICS is a much more comprehensive type of group, but you have two blocks that are starting to take shape. Brazil, South Africa, and India don’t want to see the BRICS as an anti-Western block, whereas Russia, China, Iran, all members, do like to see the BRICS as an anti-Western bloc.

And so that is one of the reasons why we’re not really going to see big outcomes out of the BRICS. You’re going to see lots of little incremental announcements. They have an industrial park, you know, sharing agreement. They’ve got media that they do. There’s cultural exchanges. You know, these are all pretty much small-time things in our era, big-time, great-power rivalry politics. The biggest thing we’re going to see out of this one is maybe a BRICS cross-border payment system, which is different than a BRICS currency.

Andrew: Yeah, but it’s not a small thing, actually, potentially.

Eric: That’s not a small thing, but it depends on the mechanics of how that works. The biggest concern for the Indians, and to some extent the Russians, is they don’t want to surrender any monetary sovereignty to the Chinese, which would invariably happen if there was a currency, because a currency would need a central bank. And the largest economy would probably have the largest voting shares in the central bank. And there’s no way that Putin or Modi would ever give that power to the Chinese. So, that’s why Trump is completely idiotic for thinking that there’s a BRICS currency coming.

But maybe a crypto coin back kind of blockchain type of payment system that facilitates non-use of dollar is…

Andrew: Exactly right. That’s what I was going to say.

Eric: … something that could be interesting.

Andrew: Anything that lets these companies increasingly circumvent use of the dollar is high on the agenda, very in vogue, not just in vogue. That’s not strong enough of a word. I mean, these countries don’t want to get caught up in U.S. sanctions, and they’re trying to blunt the power of those.

Eric: Sanctions are one thing, but remember that a lot of these countries, and again, at the beginning of our discussion, I talked about the resentment of the U.S. Remember, a lot of these countries are on the downstream impact of whenever the central bank chief decides to adjust interest rates, that has an immediate impact on the poorest countries and the value of their dollars. And so, they suffer mightily every time the U.S. makes an adjustment to its interest rate and to its monetary policy. And so, they hate that. And a lot of countries, especially after the pandemic, were extremely short of dollars. And that put a huge inflationary pressure on these countries.

And they resent the fact that so much of their monetary policies are out of their control. They’re dependent on this thing that happens in Washington. So, if they can reduce that risk, sanctions is one thing, but just reducing the reliance on the dollar gives them more flexibility. So, this is one of the things the Chinese have been doing aggressively over the past year is doing more of these yuan-based loans, settlement transactions in yuan, and doing more. And a lot of these countries are welcoming that because it doesn’t require them to convert into dollars.

The dollar is still paramount. Until the Saudis decide they want to start trading oil in yuan, which they could do tomorrow, by the way. There’s nothing stopping the Saudis from saying, yeah, the petrodollar is over. It’s the petroyuan now. They don’t because they don’t trust the yuan. They don’t understand the monetary policy. They don’t understand the risks inside with it. So, therefore, they don’t do it. That’s the limitation of yuan-based growth on that. But you’re going to see these non-dollar-based transactions go up, and settlement tools like the BRICS payment system, or whatever that is, go up, just the same way we’re seeing more in crypto and blockchain.

Andrew: Totally, yeah. Well, that would be an interesting one to look out for if there’s any actual movement on that out of the BRICS.

Eric: I’d look for an announcement on that. I think that’s coming. We did something on that, and I think there’s going to be a movement towards a payment system. But you saw the Brazilian foreign minister in Singapore this week going out of his way to say a BRICS payment system is not de-dollarization, and it’s not a BRICS currency. So, they’re just really trying to placate the Americans who are obviously very sensitive about this. And so, we’ll hear a lot of, “No, it’s not this, but we’re doing something.”

Andrew: Interesting. I’ve got one more question for you. Another kind of contextual question on before, if we’ve still got the time to talk a little bit about the AI piece that I know you’ve got a lot of thoughts on.

Eric: Yeah.

Andrew: Just on the diplomacy, someone posited the other day, you know, maybe part of the explanation behind the spate of diplomacy at this time is a year from now, we’re going to have another party Congress. Xi Jinping likely going to go for a fourth term. Do you think there’s any merit to kind of that kind of argument? Is there anything reflected in these meetings about domestic politics in China?

Eric: Not that I’m seeing, no. Yeah, I don’t see anything related to the upcoming party congress in any of the rhetoric or even some of the coded language that they use that you have to interpret. No, I think that this moment right now is very much focused on the U.S. and focused on great power competition and focused on making sure China has a space that it wants. That whatever is happening now, change is not seen in 100 years, right? That they are able to shape the direction of whatever comes next. That’s, I think, the focus less than domestic Chinese politics. I think most people outside of China have a very, very poor understanding of what happens domestically in China.

So, I think if they were bringing that dynamic into their diplomacy, it would probably go over most people’s heads. There’s just not the level of China competency to have that level of sophistication to understand that.

Andrew: Yeah, no, I tend to agree with you. And I thought that the argument, I was a little skeptical of the argument when it was made, but I just wanted to check it with you.

Eric: I bet you that was made by a Chinese domestic policy analyst who overstates the importance of domestic politics.

Andrew: Of what they did, yeah.

Eric: I would be surprised if anybody on the outside would think that. Now, there are things like dual circulation and these community for common destiny, these kind of umbrella statements that both the Party, Qiushi, and Xi will kind of use as architecture language to better understand. But it takes people like Kevin Rudd to then explain that to the rest of the world. The Chinese do an absolutely horrific job of explaining this to the rest of the world. They talk about community for common destiny or dual circulation as if everybody understands what it is. Almost nobody does.

So, that’s the only thing I would look for in the next party Congress is there going to be another architecture type of language that shapes Chinese thinking that will then impact their diplomacy. But typically, that comes out either in the run-up to the Congress or it comes out at the Congress itself. So, just for example, like we saw in the run-up to the latest five-year plan that was released at the two sessions was Qiushi, nine months before, publishes an article talking about how they’re going to hold the entire value chain and low-end manufacturing is going to be important.

Xi then comes out and says and articulates that. That has huge ramifications for the Global South. I mean, just massive ramifications, but most people don’t understand that because they don’t read Qiushi and they’re not following Xi’s speeches. But when China says it wants to hold the bottom of the manufacturing ecosystem value chain, that means that developing countries traditionally who would move up into that space now can’t.

Andrew: 100%.

Eric: So that’s where domestic politics are important to follow. But again, there’s not a lot of China literacy in the world today.

Andrew: Yeah. Well, that’s a whole nother podcast. I’d love to talk to you about the changing development model and how that’s going to impact the global south. I want to touch on the other piece of you said, again, changes unseen in a century. I mean, one of those changes is according to China, the rise of China and the relative decline in the West. Another one is the rise of AI and the absolute breakneck speed of technological innovation. And I know you’ve got a lot of observations around what China is doing in that space, what Chinese companies are doing that you think particularly is going to potentially cause big challenges or present significant competition to U.S. AI companies in terms of deployment in the global south. What do you see?

Eric: If the first China shock was what, the early 2000s and the Walmart China shock where all the manufacturing moved out of the U.S. to make the stuff we buy at Target and Walmart, and the second China shock is new energy and cars, the third China shock, of course, is going to be AI. And what I don’t think is appreciated as much as it should. and by the way, Scott Galloway on the Pivot Podcast, I mean, he’s on this, he gets it right away. And he sees what I see out here, that, yeah, OpenAI, Meta, you know, and Anthropic, they are going to be the Apple, and they’re going to capture 90% of the profits in the market, but they’re going to have 10% of the market share.

And 90% is going to go to Android. And that Android is going to be equivalent in the AI world is Moonshot, or Kimi, and DeepSeek, and Qwen and the others. So, you’re seeing the uptick, even in sovereign AIs, which I think is very funny, that countries are adopting Chinese open source, open weight models into their sovereign AIs. And I wrote an article when Kimi came out and Moonshot kind of came out with this moment. And I said, I gave five reasons why it’s so appealing to global South countries. You’ll appreciate this because you were talking about sanctions.

But number one, remember, there is jurisprudence. There’s law, precedent that the United States said that if data passes through U.S.

servers, that is subject to U.S. jurisdiction. That was overturned, if my understanding is correct. But the fact that it happened, and this was a case involving Ireland where data was passing through a Microsoft server in Ireland, and the U.S. said, “Nope, that’s our jurisdiction because it’s an American company.” You know what? If you’re sitting in many parts of the world, you’re like, “Holy crap, I do not want the FBI or the Justice Department in my business.” So, there’s a sovereignty issue. There is the cost issue, obviously.

Most people focus on the cost issue. A lot of people will tell you that the cost, sure, closed networks from OpenAI and Anthropic may be more expensive, but when you’re getting an open-weight, open-source model, you’re still going to need a lot of support to customize it, support it, to defend it, and all these things. So, it’s not free. If you’re a bank in Vietnam and you’re building AI tools, you’re going to do basically what you did with Linux, where you’re going to get Linux as an open-source code, and then you’re going to hire Red Hat, and you’re going to hire all these companies to be able to service it.

This is where the Chinese are going to make their money. They’re not going to make their money by selling the code. The code is the razor blade. No, the code is the razor. They’re going to sell the razor blades. So, all of a sudden you’re going to get free tokens, but Huawei servers, Huawei support, Huawei engineers, Huawei protection, Huawei updates- that’s where the money’s going to be made. So, on the AI itself, yes, are the Chinese three months behind, six months behind? I don’t think it matters. I think that’s the wrong way of looking at it. And again, people keep talking about a race. A race implies there’s a finish. We have no finish in this thing. Okay?

So, success is going to be defined in lots of different ways. Another issue here, and this is a really important one, is that if we look at the seven largest AI companies in the U.S., six are not profitable, and the seventh is profitable only because it’s selling or leasing out data center space to the other six. This was predicated. The whole model for open AI going into so much debt the way they have, was predicated in some ways on a Google model. Here in Southeast Asia, everybody buys Google ads, everybody buys Facebook ads. They had a truly global market and they extracted trillions of dollars of wealth from this global exposure.

Now, if you have Chinese AI, I don’t need to buy OpenAI. I can buy much cheaper alternatives. So, one has to wonder if this is the concern that Scott Galloway keeps talking about, and I share his concern, is that if the Chinese are going to completely undermine the entire premise of what the OpenAI and Anthropic and all these companies who’ve leveraged up into massive amounts of debt, they’re never going to be able to pay it off because they’re not going to get Vietnamese and Kenyans and South Africans to buy their service the way that they bought Facebook and Google, okay? Because the Chinese are there. So that’s another, you know, of my list of five things, and I’ll give you one more, you know.

So, obviously having a closed network without any access to the U.S. is really an important selling point. And the customization is an important selling point. But the security is another important selling point. Remember that the United States will accuse the Chinese of having back doors. Everything runs through the CCP. If you’re sitting in many parts of the global South, let me go back to the first part of my conversation— the depth of resentment that’s in these parts of the world for the West cannot be overstated. They don’t trust the Americans any more than they trust the Chinese. Okay? So, this whole idea that the Chinese tech is somehow less secure is not something that is selling in many parts of the developing world where they look at the U.S. without a lot of credibility on this front.

Andrew: Right. Yeah. That’s a good point. Very good point. And there’s a bunch of different threads there in terms of kind of how this plays out in the competition between U.S. and China. I mean, one point you made was, you know, the characterization of a race doesn’t make sense. I totally agree. And we talk a lot, Kendra, one of my business partners who runs our tech practice and all of our kind of tech-related internal aspects of our company, which includes our use of LLMs, just talks about how we don’t need, for most of the stuff we do, a cutting edge, we don’t need an AGI, you know, adjacent AI capability.

Eric: And neither does a bank in Ho Chi Minh City, by the way.

Andrew: Exactly right.

Eric: And so that’s why Scott Galloway says they’re making a Mercedes when a Toyota or a Hyundai will do fine.

Andrew: Exactly right.

Eric: And again, the Chinese, are they going to make money off the AI? Probably not. I mean, and Kai-Fu Lee was just on a Bloomberg podcast and said the same thing. But the services around the AI are going to be the areas that they make a poop ton of money. And that’s also going to be very empowering for local businesses around the world who, just the same way Linux produced huge quantities of service companies in every part of the world, I think you’re going to see popping up in Nigeria, popping up in Nairobi, all these different companies that are going to take Chinese AI and do amazingly innovative things with it. And they are going to profit from it. That is going to build huge quantities of goodwill for the Chinese.

The last point that I make on this is that you’re going to see much more Chinese out into the product level. So, a Chinese AI will be at the product level, in the cars, in the phones, in the devices. Those are going to be things that people will use in the Global South much more than they’ll use an OpenAI or a Kimi, you know, LLM. So, I think that’s going to be another way that people in the bottom four billion will engage AI is through the product. And so, we’ll see, for example, phones that are better optimized for darker complexions.

We’re going to see better recommendation engines in different languages, in Hausa, in Igbo, in Swahili, and other things that the AI will be able to do. And that’s going to be something very important. That’s going to be a space that the Americans are not going to pay attention to at all. And so you’ll see Chinese AI move into those spaces much more aggressively too because of the open-weight, open-source dynamic that makes it possible to do that.

Andrew: Totally. Another kind of related issue that you talked about, the Google model. I forget who I was hearing say this, but I thought it was a smart point. They were arguing that the AI companies are making the mistakes that some early SaaS companies made, which is to understand that consumers, by and large, are not going to pay for online tools. And yes, there are a lot of people who pay 18 bucks, 20 bucks a month, or whatever it is, for OpenAI, for ChatGPT, and for Claude. But the Google model was to keep everything free and sell the ads. And to know that B2C is not the path to nirvana: basically, you get as many users as you can, and then the users basically become the product and then you sell ads.

And so, it also strikes me as two things. One, a strategic mistake that maybe these companies are making because it’s another way they’re shutting off revenue streams from a bunch of different countries, including Global South countries. But I wonder if the Chinese will figure that out.

Eric: Well, so it was never about consumers with AI. It’s always about enterprises where the big money was. And the key thing to remember is that-

Andrew: No, that’s the point. That’s exactly the point. Yeah.

Eric: Yeah. And Bloomberg has done quite a bit of coverage on this, as well as the New York Times just did a really big spread on Chinese AI in Africa. And one of the things that we’re hearing, again, is the sales distribution channels for Chinese AI is not going to be a moonshot sales team going to knock on every door. They’re going to sell it through the existing hardware distributors who have already a massive presence across these countries. ZTE, Huawei, go down the list, Transsion, all the phone companies. They’re going to start bundling Chinese AI products into their sales channels. So ,I think that you’re going to see a lot more distribution. Again, the AI, that’s not the product. The product is the services on top of the AI. And that’s going to be where I think the money comes in for it.

And the Chinese already have a formidable presence in these countries because they’ve got distribution and sales channels set up everywhere to sell hardware that they’ve been selling already, not to mention the auto companies now that are setting up everywhere. And they’re going to have sales channels. Again, are they going to sell you a moonshot subscription with your car?

No.

But are they going to sell to the auto dealer networks in South Africa a package of software options that can better help you target customers?

Yes.

Do you know what I mean?

Andrew: Yeah.

Eric: So, there’s all these kind of B2B things that I think the Chinese are already well positioned to take care of. Think about it in the mining industry. We’re seeing AI now, you know, facilitate so much in terms of the mining industry. Chinese mining companies are already so present there. Again, I see that’s where I think it’s going to play out. And we don’t have strengths there. U.S. mining companies are not strong. U.S. infrastructure companies are not strong. U.S. technology companies and consumer tech are not strong other than Apple. So, how is Meta going to sell this stuff to a bank in Vietnam? I don’t know. I mean, we’ll see how it shapes, but I’m not as optimistic on that. And I tend to follow Scott Galloway and Kai-Fu Lee on these things.

Andrew: Yeah. Well, and another point relatedly that, again, Kendra has made, which speaks to this idea that you don’t need the cutting-edge model for everything is, you know, her argument is right now everybody’s trying to figure out what the new tool is. People are sort of jumping from platform to platform, AI company to AI company for different use cases because everything’s changing so quickly and the tools are getting to the place where you can actually use them for different things. But pretty soon, people are just settle in, they’re going to have their setup, their AI setup, their various apps that they use for different things, and they’re going to be kind of set in their ways.

And it’s not going to be like every few weeks or every month or whatever, I change from this to that. And so, it becomes, if the Chinese get in early in these countries, and once people kind of stop, once they’ve adopted and they’ve kind of got their setups, if China’s the first mover there, it will give them potentially an enduring advantage. Do you agree with that?

Eric: Yeah, and then software’s a service. So, the updates will come through the service. And again, you can’t keep upgrading your systems, big upgrades in the systems. One last point on this that I think is important. Again, I go back to what I said earlier about both and. And again, good hygiene in a mobile telecom tech stack is to have some Huawei, some Cisco, some, you know, back in the day, Nortel, Ericsson. You don’t want all from one system because if there’s a virus or if there’s an outage or if there’s a problem, your whole system goes down.

So, you will see probably some diversification in the big companies. The big multinational banks are probably going to have some Chinese and some Western AIs that come in there. And by the way, let’s not discount the Europeans. Lovable is there. Mistral is also there. Mistral, in many respects, is positioning itself, that’s the French AI, as a B2B kind of solution provider. And they’ll be niche. And I guess the important thing to remember is that this is not only an American play. And I think we in the U.S., I am shocked in the U.S. by how few people, even in Silicon Valley, and I live, you know, my U.S. home is in Berkeley, and how little people know about Chinese AI in places like Silicon Valley.

It’s really quite remarkable. And they know the headline. DeepSeek, yeah. Kimi, yeah. Three months behind, yeah. But beyond that, they really don’t know very much. And that is, I think, quite stunning to me. We’re going to see the emergence of other AIs too that are going to be either industry-specific, culture-specific. So, again, they’re developing fascinating LLMs in Nigeria to preserve Nigerian languages because they’re concerned that as the English-dominant LLMs start to kind of take over the world that it just crushes dialects and crushes languages.

That’s really interesting. So we’re not going to see this kind of simple world of China and the U.S. I think right now that’s where we are. But in 10 years, I think it’s going to be far more fragmented than what it is today.

Andrew: Yeah, no, I was thinking about that the other day. I mean, obviously, everyone just assumes that the AI companies that are leading the world now, whether they’re Chinese or U.S., are going to be the ones that outlast. But this is the kind of world where a competitor can come out of nowhere, right?

Eric: Yeah, and you and I are old enough to remember the 1990s in the internet and AOL and Netscape and Yahoo. None of them are around today.

Andrew: Exactly right.

Eric: So, I think that in 10 years, it’s a good chance that all of the current players are wiped out from something else that comes along. You know, Andy Grove, the former chairman of Intel, once said that he’s not afraid of, you know, competition from a Fortune 500 company. He’s afraid of a 16-year-old in a garage. And I think that’s…

Andrew: For many reasons.

Eric: For many reasons. But I think that’s where the concern is, is that innovation comes from lots of different places. Nobody expected that DeepSeek would do what it did. I mean, the Americans were so arrogant, you know, that they had years ahead of the Chinese, and that all vaporized. And Ukraine has taught us that they can reset the rules of war. So, everything can be reset now. And so, I think this is a time that we should all be very, very humble.

Andrew: Yeah, I totally agree. Do you have time for one more question?

Eric: Sure. Yeah, let’s do it.

Andrew: All right. So, last thing, which is coming up. I know you’ve got views on this. U.S., China, Xi coming to Washington. You know, the normal question people ask is, what do you expect? But I want to ask you really just kind of how do you think that meeting and that relationship at this point is viewed from where you sit, Ho Chi Minh and other Global South countries?

Eric: Yeah. The thing that people, I think, want more than anything is stability. That is what has so unnerved so many of these countries is that, you know, the old saying that when the elephants fight, it’s the grass that suffers. And in this case, the grass is Southeast Asia, Africa, Latin America and whatnot. And we see this playing out in Latin America right now. Marco Rubio is on a three-country tour of South America very much to counter China and to push back against China. This is not a space that these countries want to be in.

China is the largest trading country for most of these countries. China is a major source of investment for some of these countries. It’s a very important economic partner, and increasingly a diplomatic partner. They would prefer to have stable relations with both. They would not like to see people like Marco Rubio running around telling them you have to choose us or them. That is not a space that any of them want to be in. Some, like Vietnam and like Kenya, have managed this exceedingly well. Others are struggling to do it. So, when they see some type of stability come back into the U.S.-China relationship, I don’t think anybody believes that this visit is going to do that.

I don’t think that anybody really believes that Trump represents his government when it comes to China. What’s so interesting in Washington today is that Donald Trump has his views on China, and pretty much everybody below Donald Trump, from J.D. Vance down, doesn’t agree with him. And so, there is a sense, I think, that whatever comes out of this is temporary. The Chinese are already indicating that they’re going to buy more wheat, and they’re going to do the typical kind of like, we’re going to make nice, nice for the short term. They’re never going to fulfill Trump’s fantasies of a super mega uber deal.

So, I don’t think the Brazilians are that worried that their soybean market is going to evaporate, again, back to the U.S. I think American farmers made a bet on Trump, and they’ve lost. And the Chinese are never going to come back to buy soy from American farmers in the volumes that they did. Full stop. That is a huge benefit to Argentina and to Brazil. The world has changed from Trump, and it will not go back to the way it was. So, I don’t think people are paying that much attention in the sense of, like, is something big going to come out of this? Are we going to get a start to a type of nuclear treaty with Gorbachev? No.

But it’s a little bit like the India thing — Can we get to a point of sustainability? Can we get to a point where they’re not spitting at each other?

Andrew: Yeah.

Eric: I don’t know if we can, because I don’t think the mood you’re in China, When I’m in China, I was just there a few months ago, it was as toxic there about the U.S. as it is in Washington about China. Like they’re in no mood to placate the Americans any more than the Americans are in any mood to placate the Chinese. One point that I’ll make on this, and I find this really interesting, and I was talking to some high-profile D.C. folks in the think tanks, and they shared the same view on this. I don’t want to say their name because maybe I don’t know if it was in confidence or not.

But when I go to D.C., you hear this kind of parallel universe of like China’s the end-all, be-all evil of everything. I go a lot to Georgia. I was in Ohio. I live in California. I’m going to New Mexico pretty soon. And I find much more moderate views about China outside of D.C. Like, yeah, I don’t like these people, but I’d love to sell them my chicken feet. I’d love to sell them car parts. Silicon Valley would love more investment and more technology and key exchanges. I was at a small college in Ohio, and they said, “We love our Chinese foreign students. They’re fantastic. They bring a lot to our community. They pay full fare. They subsidize local kids.” They’ve never had a problem.

And I think that’s a really important thing to remember in this standoff, is that the people in Washington do not represent the full totality of American views on this. And I say this, by the way, also to people in the global South as well, who don’t always have a full understanding of that. There’s a lot more texture and nuance to American views on China than what’s reflected in mainstream media and what comes out of D.C. And I see that just in everywhere I travel across the U.S.

Andrew: Yeah, that’s a great point. That is a very good point. And we’ll see if those views start to impact kind of the longer-term trajectory of the U.S.-China relationship. I’m hopeful.

Eric: They might.

Andrew: Yeah.

Eric: You might have a pragmatism coming back in the next election and the swing that we’re going to have back. Pragmatism may be the driving force of politics in America, and that may call for a more pragmatic relationship with China. The same dynamics and strategic interest that brought the Indians and the Chinese to a more sustainable, pragmatic relationship might drive the U.S. and China back, that this is not sustainable at its current form. And once the Americans are starting to have an appreciation that if they got into a war the Western Pacific, there’s no guarantee they would win it now, that may also recalculate some of the thinking too.

Andrew: Well, I was going to say, we’ll end on an optimistic note until you added that last little bit.

Eric: Well, hopefully that recalculation will lead to a more pragmatic worldview.

Andrew: Yes. No, that is the optimistic bit. And I like that. I think that’s a good place to leave it because we have covered a lot of ground. Really, this was a lot of fun, Eric. I really appreciate it. And we’re going to make this a regular thing, right?

Eric: Yep. We’re going to do this regularly.

Andrew: Awesome.

Eric: And we’re going to do a lot more between CGSP and Trivium, and looking forward to it.

Andrew: That’s right. yeah.

Eric: So fantastic. And we’ll have you guys on our shows soon too. So looking forward to it.

Andrew: Absolutely. Anytime.

Eric: It was really great to speak with you and I really enjoyed the conversation.

Andrew: Yeah. Well, thanks a bunch for the time. This was amazing, and look forward to doing it again soon and working more with you. And thanks, everybody, for listening. We’ll see you next time, everybody. Bye.

• Fixed asset investment (FAI) has declined across all three of its main components — manufacturing, infrastructure, and real estate — and it’s set to keep dragging on growth through year-end.

• But look beneath the headline numbers, and three very different stories are playing out.

Manufacturing is stuck in a genuine malaise.

• The Iran war pushed up input costs just as an escalating anti-involution campaign was already squeezing margins in sectors from chemicals to building materials.

• Meanwhile, capacity utilization is at the lowest reading on record outside of COVID — and the first year on record in which utilization failed to tick up from its seasonal Q1 low.

• When factories are running this far below capacity, there’s little appetite to build more of it.

Real estate is worse and shows no sign of turning.

• Developer cash reserves fell 20% in H1 — faster than either sales or investment — meaning construction is being strangled by a genuine cash crunch, not just weak demand.

• The cushion that kept construction going through the worst of the crisis — finishing off pre-sold homes — has now largely run out.

• Meanwhile Beijing’s unwillingness to rescue the sector was best demonstrated by Xi Jinping’s recent choice of photo-op — a visit to a Shanghai housing project that didn’t involve any new home purchases.

Infrastructure is the one component we forecast to grow in the second half of the year — but there’s less here than meets the eye.

• On the surface, Beijing’s new “six networks” investment push and a fresh wave of bond issuance look set to push infrastructure investment back into growth territory.

• But investment in H2 2025 was exceptionally weak, meaning infrastructure investment can look meaningfully better this year without genuinely accelerating at all.

• Strip out that base effect, and we see a picture of modest investment stabilization, rather than a genuine investment rebound.

We’ve just published a full breakdown of what’s driving investment in each of these areas, sector-by-sector forecasts through year-end, and the specific policy signals that could change our view.

• It’s available now to subscribers of our China Markets service — along with the rest of our macro, markets, and policy research.

Not yet a subscriber? Start a 30-day free trial to get the full report.

• Or if you’d like to talk through what China Markets covers before diving in, get in touch — we’re always happy to walk you through it.

What you missed

U.S.-China

Xi Jinping is considering bringing a group of “tech, electric vehicle and aerospace” execs on his visit to Washington later this month.

• But the business contingent may be more show than substance, with one SCMP source saying the delegation was “more about optics than concrete deliverables.”

US intelligence agencies issued a joint advisory alleging that Chinese AI companies have systematically extracted capabilities from U.S. frontier models through distillation.

• The document names DeepSeek and Moonshot AI as the worst offenders, and also accuses Alibaba, MiniMax, StepFun, and Z.AI.

The U.S. and China are reportedly preparing a mid-September AI safety dialogue.

• Washington wants labs on both sides to police themselves and share information to head off AI-directed cyberattacks, following July’s Hugging Face breach by rogue AI agents.

Econ and finance

China’s exports grew 25.0% y/y in August, up from 23.9% the previous month, but growth continues to be driven by price rather than volume.

Meanwhile, consumer prices (CPI) rose 0.8% y/y in August, up from a meager 0.5% in July.

• The uptick is mostly due to base effects, as CPI fell 0.4% y/y in August 2025.

Business environment

AmCham Shanghai’s annual China Business Report found that 58% of respondents were optimistic about their five-year outlook in China, up 17 percentage points from last year’s record low.

• Firms are less worried about the U.S.-China relationship, with only 53% citing bilateral tensions as one of their top three challenges – down from 66% in 2025.

Competition from Chinese firms has overtaken U.S.-China tensions as the top challenge for American firms in China for the first time since 2022.

• In an attempt to keep pace with Chinese rivals, half of firms surveyed by AmCham Shanghai plan to raise R&D spending in China, up from a third last year.

Corporates

BYD is reportedly planning to build 70,000 charging stations in China between 2027 and 2028, on top of the 20,000 it plans to have in place by end-2026.

• If true, the size of BYD’s charging network would approach that of China’s entire network of 110,000 gas stations.

Tech

The securities regulator (CSRC) has issued informal “window guidance” to investment banks that raises the bar for humanoid robotics IPOs.

• Private market funding for humanoid robots is showing signs of overheating — a couple dozen humanoid unicorns were minted in H1 2026 alone.

The industrial ministry (MIIT) released its 15th Five-Year Plan for the information and communications industry, covering targets for telecoms, data centers, satellites, and spectrum.

• The plan targets a 6.2x increase in intelligent computing power over the next five years and explicitly calls on officials to “step up efforts to adapt to domestic chips,” indicating an even narrower space for foreign chips in Chinese data centers.

Agriculture and rural affairs

The agriculture ministry (MARA), the Party’s rural policy office, and four other agencies jointly issued a plan to improve financing mechanisms for rural revitalization.

• The plan aims to make rural finance more effective by 2030 by prioritizing rural areas in fiscal budgets, putting rural assets to work, and ensuring investment is coordinated with ag policy priorities and trade settings.

As always, it was a busy week in China.

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

To discuss the nature – and limits – of the fragile US-China economic détente, we are joined this week by Evan Medeiros, the Penner Family Chair and Director of Asian Studies at Georgetown University’s School of Foreign Service.

• Evan’s read: The US-China relationship is at an unstable equilibrium, and in for a snapback toward a much more contentious state of play.

In this episode, host Andrew Polk and Trivium colleague Cory Combs sit down with Evan to unpack:

• Why Xi Jinping’s upcoming state visit to Washington, the first in over a decade, may be the one thing still holding the relationship together

• How the trade war became a supply chain war back in April 2025, and why tariffs aren’t the main event anymore

• Why China keeps reaching for chokepoints tied to US national security instead of hitting the broader economy, and what that reveals about Beijing’s actual theory of leverage

• The uncomfortable new front opening up: Beijing increasingly penalizing American companies for the crime of complying with US laws

It’s another great discussion, so enjoy!

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network.

I’m your host, Trivium Co-Founder, Andrew Polk, and I’m joined today again by Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs, who’s going to co-host with me today because we’ve got a terrific guest… very excited to have him on.

He is the Penner Family Chair and Director of Asian Studies at Georgetown School of Foreign Service and a former senior China and Asia official on the National Security Council under the Obama administration.

It’s Evan Medeiros. Evan, how are you doing?

Evan Medeiros: Good, Andrew. Great to be here.

Andrew: Thanks so much for coming on. I’m really glad to get you on the pod. Been wanting to have you on for a while, so I’m glad we were able to make it happen.

Evan: Yeah, I’m a huge fan of Trivium. Hope everybody continues to read it. It’s the best stuff out there. So, I’m excited to sit down with you and Cory and spin a little yarn this afternoon.

Cory Combs: Cheers.

Andrew: Yeah, well, thank you for the kind words. We certainly appreciate that. Cory, how are you doing today?

Cory: Well, I feel like, you know, I’ve been reading, catching up on the papers I haven’t read of Evan’s and other corresponding research. And it makes me wish I could go back to graduate school and do it properly this time. So, it’s fun to be able to zoom out a little bit and talk about these issues.

Evan: You’re always welcome at Georgetown, Cory. Always welcome. Maybe we’ll give you a friends and family discount.

Cory: Cheers.

Andrew: I love it. I love it. Always be selling. Always be selling.

So, Evan, we are going to talk today about some of the work that you’ve been doing, which is, of course, relevant to our listeners and to our clients — This is around the U.S.-China relationship and kind of how you’ve framed the evolving nature of that competition. We’re going to start with sort of the news of the day, Xi Jinping’s upcoming state visit to D.C., and then we’ll kind of broaden out and talk more about that relationship more generally and some of the economic lawfare that China’s been using to hit back against the U.S. and sort of the nature of that leverage, both from the Chinese side and the U.S. side.

So, going to be a very fascinating conversation. But before we get into it, of course, we have to do the customary vibe check. So, Evan, how’s your vibe today?

Evan: Vibe is good. I would say excited, but anxious. Excited because we’re starting a new school year at Georgetown, teaching my first or giving my first lecture of the year this afternoon. But, anxious because there’s just so much uncertainty in global markets, in geopolitics, and we have this weird U.S.-China summit coming up. We’ll get into it, but it’s hard to see where this takes the relationship.

Andrew: Yeah. I feel like excitement and anxiety increasingly go together in our line of work. So, I think that’s a very inappropriate vibe to be bringing into this conversation, Evan. How about you, Cory? How’s your vibe today?

Cory: Yeah. I mean, I don’t think you can beat that vibe. It seems evergreen right now. So completely agreed. And me personally, that tracks in terms of upcoming travel. I’ll be back in D.C. shortly. A quick trip up to New York as well, and back to LA, where it’s been, you know, I was going to complain about the heat, but it’s been like 92. And for LA, that’s insane. Dry heat here, something we complain about. So, I finally get to complain about the weather briefly, but I’ll be back in the swamp soon, and it’ll probably be a hundred degrees and given. So, looking forward to that.

Andrew: Yeah. Well, it certainly is hot here. So, you’re not going to get any respite in D.C. For my part, I am headed off on Friday to Shanghai to see some of our clients and our colleagues there. So, always excited to get back to China, ready to get back on the road, kick off the fall. So, that kind of energy is what I’m bringing to the podcast today. So, I think we got a good mix here. Some excitement, some anxiety, some ready to get on an airplane from Cory and I. And I know Evan’s on the road a lot. So that’ll suit us well for the rest of the conversation.

Before we get into the content, I quickly also have to do the housekeeping up top. So, just a quick reminder that we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China along a range of areas, tech, autos, minerals— you name it, we do it— but it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please do reach out to us at hq@triviumchina.com.

We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you want more Trivium content, please check out our website. Again, www.triviumchina.com. We’ve got a bunch of different subscription options in terms of staying on top of Chinese policy intel, whether that be in policy related to the markets, to the tech environment, or just as a general China business person or China watcher, you’ll find the China policy intel option you need on our website for sure.

And then, finally, please do tell your friends and colleagues about Trivium, both about the business and about the podcast. Those word-of-mouth recommendations really, really do help us grow the company and the listenership. So, we really appreciate it. All right. With that, Evan, let’s get into it. You ready?

Evan: Yeah, let’s go.

Andrew: All right. Well, you already teed it up. We’ve got this big trip from Xi Jinping coming to Washington, D.C. on September 24th. I believe this is going to be the first official state visit by a Chinese leader to Washington in more than a decade. We’ll get into some of the bigger context around the relationship and how you see that evolving in a minute. But I just want to start with that piece.

What are you expecting out of this meeting? Are we going to see any significant breakthroughs, any changes to kind of how the two countries deal with each other? Or what are your thoughts on what’s going to happen a few weeks from now?

Evan: Yeah, I think that’s the critical question — What are our expectations? I have to admit, Andrew, I have pretty modest- I would say even low expectations for the meeting because it comes at a time of fragile truce, tactical détente. Pick your adjective and noun. There’s loads of them floating around out there. But the reality is we’re at a highly uncertain period in the relationship because we’re in this period of a commercially driven détente where the leaders are meeting twice this year, maybe upwards of four times.

But yet, below the surface, competition continues to be fairly intense. And you could argue it’s actually even growing greater. The administration likes to use the analogy of water polo. Below the surface, there’s an enormous amount of competing and fighting and kicking going on. So, the summit comes at a moment of this sort of unstable equilibrium. And the Trump administration, because of who they are, they haven’t approached this summit using the typical ways that other American leaders, Republicans and Democrats have.

So, there haven’t been a lot of high-level meetings to prepare for the summit. It’s very unclear what the deliverables are going to be, either geopolitical or commercial. So, I think the most likely outcome of the summit is an extension of the truce that was reached in Busan in the fall of 2025. But even then, that extension of the truce, it could be six months, it could be a year, and I think that’s probably most of what we can expect.

I think from the Chinese perspective, they’re much more focused on limiting downside risks than they are at achieving upside gains. What I’m hearing from the Chinese is that they’re most concerned about ensuring that Xi Jinping is not embarrassed and making sure that he looks good because he has to return to China and quickly prepare for the fifth plenum, which is key politically to the party Congress that will be in the fall of next year. So, I got pretty low expectations.

There might be a few small deliverables related to Chinese purchases of agricultural goods. But again, it’s going to be a lot of implementation of past commitments as opposed to anything substantially or dramatically new.

Andrew: Yeah, I think we would tend to share that view. And related to that, I just wonder how you think about the Busan deal at the moment. Because over the past nine months, I’ve thought, you know, it’s actually provided a pretty decent level of stability. Both sides seem to want to broadly adhere to the deal. Now, the reporting is that both sides seem to want to extend the deal.

But over the past just three, four weeks or so, we’ve seen kind of a barrage of back-and-forth sort of spearheaded by the Federal Communications Commission on the U.S. side, and China hitting back against moves by that entity out of the U.S. And it just has felt to me over the past few weeks like we’re sort of bursting at the seams almost. I don’t know if that’s the right way to say it, or that détente, that agreement is kind of straining as both sides continue to try to find different ways to assert their interests even under that agreement.

Kind of like you said, the water polo example is a great metaphor, right? Calm up top, but still a lot of kicking and jabbing underneath. Do you get the same sense?

Evan: Oh, absolutely. I completely agree, Andrew, because there are two fundamental dynamics at the heart of the U.S.-China relationship. The way I think about them is there are two negotiations. One is the U.S. and China negotiating the threshold of competition. So, we have the Busan truce, but both sides continue to take actions below some undetermined threshold or boundary — the U.S. with its FCC actions, the Chinese in retaliation. And nobody really knows where the threshold or boundary is, but we keep taking actions and the Chinese retaliate.

And I think it’s just inherently unstable. So that’s why my favorite adjective-noun combo for the relationship is an unstable equilibrium, because it’s a détente that’s constantly being stressed. And so, we’re in this situation where both leaders talk about meeting maybe upwards of four times this year. We talk about extending the Busan cruise. We talk about maybe some other deliverables, ag purchases, Boeing planes, etc.

But yet the tech competition is intensifying; it’s expanding, and it’s diversifying. The other negotiation, of course, that’s going on is between the executive and the legislative branch of the U.S. government, which is odd because typically, and I know this from my time in the Obama NSC, most of the intense debates are within the interagency, so within the different parts of the U.S. government.

Right now, the debates appear to be largely between the executive and the legislative, with the Congress debating and discussing passing new pieces of legislation, which would accelerate the tech competition and the tech decoupling. And I think that these two processes are fundamentally unsustainable. And so I think that, and I’ve written about this, that we’re on track for a snapback to a much more competitive rivalrous relationship at some point.

I can’t tell you precisely when that’s going to happen yet. We’ll know more, of course, after the summit. And so, to me, what’s so interesting about the summit process is it’s sort of stress-testing the demand for stability because both sides want stability in the relationship. But the question is, is what costs and risks are they willing to pay to sustain stability?

You know, Trump obviously needs it because we’re at war in Iran and we have economic problems at home. The Chinese need it because they’re entering into a very sensitive, difficult political year in advance of the 21st Party Congress. And of course, they have their own economic problems. And so, it’s in some ways, both sides are trying to figure out, how much can I compete without blowing up this stability? And I don’t think either side really knows where the line is.

And so, all of these interactions, the summit, if Trump goes to APEC, if Xi Jinping reciprocates by coming to the G20 that we’re hosting, we will sort of begin to learn where these boundaries exist and how deep the yearning is for stability in the relationship or whether or not both sides ultimately find the politics and the geopolitics can’t sustain.

Andrew: Yeah, I like the way you have written about this, about the potential for a snapback. And I know you just said you can’t really, in advance, pinpoint exactly sort of what the tipping point for that might be. But can you talk a little bit more? And then I want to bring in Cory on how and if critical minerals might play into that, which I would guess would be potentially a large part of it. But can you just expound on the snapback idea and what you kind of in broad strokes think that looks like?

Evan: Yeah. So, the idea of the snapback is that we move from this current era of tactical détente, unstable equilibrium, to something that looks more like the U.S.-China relationship in 2020 post-COVID. In other words, the relationship is defined much more by acrimony and intense competition, economic competition, military security competition.

And the question is, what will trigger that? So there are both Chinese actions and U.S. actions that could cross this imaginary threshold. And I think both are relevant here. I think on the U.S. side, you could have a situation where, you know, for example, the Chinese provide some assistance to Iran that really alienates the president. Number two, you could have the Chinese miscalculate in one of their export control actions that alienates the White House.

You could have Trump simply come to the conclusion that the Chinese are playing him for time, manipulating him, and he just decides that it’s not worth it anymore. You could have congressionally mandated actions, especially after the midterms, if you see major changes in the House and Senate that could lead to a sort of new political configuration in the United States where either the Congress becomes more active on China or more likely the president feels that he has big political vulnerabilities and decides to go full MAGA on China, not unlike COVID.

So, I think on the U.S. side, there are multiple things. As I said, I think on the Chinese side, there are multiple actions they could take that largely involve just over-cranking that alienates the U.S.

Andrew: Yeah, I share your concern here that there’s going to be a miscalculation and someone’s going to go too far and kick a little too hard under the water, to stick with the water polo metaphor. But Cory, Evan has pointed out that a lot of the back and forth, or the tension on this issue currently, is between the executive branch and potentially the legislative branch if Congress were to take action against China to sort of ramp things up in a way that China would see as abrogating the Busan deal. What do you see as issues that might trip up the relationship? And China is to… yeah, I think the assumption is that China’s ready at any moment to pull the lever again on critical minerals. How do you think they’re thinking about that as a potential reaction?

Cory: Absolutely. I think Beijing has made clear that a lot of options are on the table. It’s also made clear, I think, since probably around May or so this year, that we might be in what I think Evan has rightly characterized as finding the new floor. And earlier this year, kind of up through April this year, it seems like both sides were trying to find the new floor of relationships, or the relations. But since then, I mean, we’ve had a number of actions. They’re so many, but most recently leading to the August 5th retaliations, right?

And so, you have all this willingness to press further and to kind of explore the boundaries, sort of the détente really. And I think it’s clear that Beijing, one, is willing to push back. And two, it’s not trying to unilaterally escalate, right? So, I think it would take a lot to get the rare earths card going back in all of a sudden. It’s possible that negotiations break down. But there’s one case, I guess, where you have the extension of Busan breaks down for some reason. Now, that’s, I think, a tail of risk. We were actually fairly optimistic that some kind of deal will get advanced.

But at the same time, we’re a little less confident in that now than it would have been in, say, March, April, May. Because at that time, you’re looking at this kind of commitment to let’s not break up this brief floor setting that we’ve managed to achieve. Let’s maintain the détente for now. But then over the summer, you’ve seen a lot more of these moves: FCC action, the UFLPA, Uyghur Forced Labor Prevention Act listings from the Department of Homeland Security.

Those are actions that the U.S. took that China immediately responded to in a way that it’s all proportionate in terms of impact, not unilaterally escalatory. But you start pushing on the boundaries, like you said earlier, kind of bursting at the seams, the water polo metaphor, the question is, is there a threshold of which this boundary pushing goes a little too far, and one side or the other kind of blows things up? And this is question and comment.

What I’m concerned about is, Evan, you already mentioned, it’s not quite clear where the thresholds for both sides lie. And my bigger concern is that they move. Some of the thresholds are clear, like don’t embarrass Xi Jinping and stuff like that, like that’s pretty clear. But there’s a lot of thresholds that are far below that. I think they are shifting. And so, does Trump feel he’s getting played? Well, it depends on a lot of things, including things that have nothing to do with China. Does he feel like he’s getting played by other countries and regional blocks like the EU?

And he does tend to kind of take it out when he’s losing somewhere; he’ll take it out somewhere else. All these factors that I think just make it very difficult to predict. I am still optimistic that we won’t see Beijing feel a need to throw a unilateral, well, rare earth controls are back on the table, right? I don’t expect that right now, but there are a variety of other pathways. And so, further decreasing the flow of license approvals, which would cut off exports more broadly than just Japan, that’s on the table right now.

And that’s kind of somewhere between the actions we’ve seen so far, like blacklisting MP materials and USA rare earths, which are notable, but I would say not, you know, catastrophic. Between that and a full rare earth export ban, there’s a lot of middle-ground options that China has. And I just don’t know when exactly. And that’s my question for Evan is, you know, what thresholds do you see? And what do you see moving in the current state?

What does stability look like up through the agreement of a new extension to the Busan agreement? What does that look like?

Evan: One quick caveat before I answer Cory’s excellent question. Keep in mind that when we talk about the boundaries around this unstable equilibrium, this tactical détente, that because this is Trivium, we’re talking about the economic dimensions of it, but let’s not forget there are big geopolitical dimensions. And here, I’m thinking of Taiwan, South China Sea, and Japan as well. I mean, it is notable that since the Busan Agreement and the tactical détente have been reached, the Chinese have actually been quite aggressive and assertive in their claims against the Philippines in the South China Sea, including trying to establish a near-permanent presence in and around Scarborough.

For example, the Chinese on Taiwan have now come much more active to the east of Taiwan using Coast Guard activities, basically trying to assert maritime rights in Taiwan’s littoral in a way that sort of effectively, you know, turns it into territorial waters, right? As opposed to international waters to assert Chinese sovereign rights over the landmass and the sea rights that accord with that. And so, all of that is out there as well, in addition, that I think is very much stress-testing where the floor in the relationship is.

But to get to Cory’s very good question, sort of where do I see the thresholds? What I would say is, number one, I can’t pinpoint the threshold. I don’t think anybody can. That’s the problem. Nobody really knows what action is going to be a step too far. What I would say is that I do believe that 2026 has been a very, very important year in the supply chain competition, export control competition, because it’s a year and kind of pretty substantially built out its architecture.

Some of our listeners may be familiar about an article that Andrew and I wrote about a year ago that sort of told the broad story of the export control architecture from 2018 onward. But in 2026, the state council passed decrees 834, 835, 837, all within 90 days of one another, all done at the state council level, all effective immediately, all of them building out certain rights under the broader infrastructure of the Unreliable Entities List, the Anti-Foreign Sanctions Law, with different and new dimensions layered on.

In 2026, we saw China move to much more actively assert its extraterritorial rights or extraterritorial mechanisms in the application of export controls. In particular, basically, it looks like every entity listing this year bars anyone anywhere from transferring China-origin dual-use items to listed parties, basically asserting jurisdiction over third-country conduct. And it’s, of course, started with Japan, but it’s more than that now. And now we have, you know, China targeting entities like the Responsible Business Alliance in April and the sort of accreditation activities.

They’re now listing MP materials and USA rare earths on some of their control lists, which to me makes export control policy look increasingly like industrial policy. In other words, using export controls to shape supply chain activity of other countries.

So, it feels like 2026 in retrospect will really be a very, very significant year. So, going back to your core question, Cory, I don’t know where the threshold is, but I feel like we’re pretty rapidly stressing wherever that threshold is. And I think the only thing sort of holding all of this up are these leader-level meetings.

And I say that as somebody that has studied and worked on the U.S.-China relationship. This pattern of behavior on both sides, it’s just not sustainable. And imagine if this year finishes with Trump not going to APEC because the losses of the midterm are too bad and he doesn’t feel like he got enough from Xi at the summit, Xi Jinping doesn’t come to the G20 and then we’re sort of off to the races.

Andrew: Well, I hadn’t even really kind of contemplated that sort of quick of a deterioration because I’ve been hoping that this Busan deal and the leader-level meetings would kind of continue to provide a ballast. But that’s a good point. Something trips up those meetings, then you sort of lose the one leg of the stool that’s still hanging on. And one-legged stool, by definition, isn’t very stable to begin with.

But I did want to stay on this idea of the supply chain war. I mean, I think you articulated well this idea that we’ve really morphed. We’ve written about this at Trivium. You and I, Evan, wrote about it a little bit in our piece earlier that, I mean, tariffs aren’t even the main show anymore. This is absolutely a supply chain war. This is a choke point war.

And I guess maybe the question is, I mean, in my view, China sort of shifted the ground onto that playing field. Do you agree with that? One. And secondly, why do you think they did that? Why do you think they did it now? Why is 2026 the year of the supply chain war?

Evan: Well, I mean, they did it in April of 2025, right? And this story is well known to your listeners, right? I mean, we had tariffs that were well above 150%. And the Chinese, I think, said they basically looked around, they broke the glass, and they pulled the fire alarm, so to speak, they pulled the greatest, most significant source of leverage they had, which was rare earths. Now, the U.S. retaliated with its own supply chain and vulnerabilities. These are specific commodities China can only source from the United States.

But I think it was at that point that the trade war really transitioned to a supply chain war. And it was really about both sides trying to reduce their own vulnerabilities and increase sources of leverage. I mean, the good news is, is in 2025, I think both sides in May sort of had walked to the brink of using these cutoffs in critical choke point technologies and materials and walked back and said, we don’t want to go there.

But they had already crossed that threshold. And I think that’s where we are today. I mean, as you guys know well, you write about it so frequently. I mean, the administration is very concerned about the fact that the Chinese are not providing general licenses for the export of rare earth materials. They’re approving individual licenses on a case-by-case basis, which is super slow and super inefficient, which has led to a huge amount of frustration.

And so, I think that the whole issue of the extension of the Busan truce, will it be three months, six months, nine months, 12 months will be tied in part to whether or not the Chinese are willing to accelerate their licensing regime for rare earths. And then, another part of a possible summit package is this whole question of Boeing planes — will China buy Boeing planes? And part of that is held up by the fact that there’s this Chinese requirement for Boeing to sell them a huge supply of spare parts. So, they’re not subject to some kind of choke point cutoff in the future. So, we are very much in a supply chain competition.

I think that’s exactly right. And we should understand it as such. And as a result, basically what’s happening is both sides are sort of racing to reduce vulnerabilities and increase leverage. And the challenge is that there’s a little bit of an asymmetry there between the U.S. and China.

Cory: I’d like to build on that a little bit. I absolutely agree. And I don’t just say it’s a supply chain issue because I’m a supply chain guy. I became a supply chain guy because it’s an issue. So, 100% aligned there. One further point, I’m curious if you’ll agree with this. I think when we shifted from the economic to supply chain conflict, it shifted from commercial and national security grounds. And I think that is the deeper, very fundamental issue here.

For China, the motivation on kind of when they’re looking for asymmetric leverage, right? U.S. tariffs them, they can’t just tariff back and that’s proportional. They needed something else. So they reached, as you say, they broke the glass, they reached out at other tools. And specifically, it has always struck me that nine times out of 10, Beijing has not tried to attack, say, the U.S. economy broadly.

There’s probably a lot of reasons, but at least one is implicit, I think, is that they didn’t think it would move the needle. I don’t think they believed it would change U.S. behavior. I think they believed what would change U.S. behavior is things that would affect national. So, rare earths and tungsten and other things that go to the Pentagon. And I think that message was shown to be basically validated by, certainly the Chinese industrial discourse will suggest it was validated on October 9th when the U.S. kind of backed down.

So, for China, there’s not much of a tension there to kind of use this commercial control to impact national security grounds of the U.S. to secure China’s commercial interests by getting the U.S. to back off. But for the U.S., and you’ve pointed this out, among others, that the U.S., with its tech controls, has actually treated what used to be purely national security matters. Can you use certain chips like Huawei? Can you export certain chips that are essentially banned for national security purposes?

Can you use those national security interests as bargaining chips in what is technically a commercial negotiation? And so, the use of national security as a bargaining chip is something that has concerned many people. So, I think that’s all part and parcel in my head of this shift to supply chain conflict. It’s specifically supply chains for national security interests that are really kind of the center of this discourse. I’m curious if you would align on that and what that means.

Is this an appropriate kind of use in terms of the way that the U.S. has been responding?

Evan: Well, the challenge, I think, Cory, is where’s the line between commercial interests and national security interests, right? I mean, China denies the sale of permanent magnets to American companies making motors for EVs. That doesn’t feel particularly national security. I agree with you that a lot of their export controls have been much more focused on denying rare earths and permanent magnets to defense contractors, but there’s also been a commercial application.

So, I think the Chinese are careful, but I don’t think the line is very clear anymore in a supply chain war between commercial and national security. What I will say is that the Chinese are very careful with the way they sort of apply these controls. In other words, they pay great attention in the extent to which the application of new controls is reciprocal, proportional, and symmetrical.

Because I think the Chinese, as you rightly went out, are often trying to find the sweet spot between imposing costs and not escalating the situation. And I think back to the controls that they adopted in September of 2025 when they applied the Foreign Direct Product rule to rare earth controls. The way that they adopted that was actually phased in a way that was meant to sort of give them time and give both sides breathing space to do what they ultimately did, which was suspend them in Busan. And that suspension is still in place.

So, I do think that the Chinese pay great attention to the way they calibrate the imposition of export controls for punitive purposes, because they’re very attentive to escalating the situation and they want to maintain some degree of escalation control. And they also want to see how much resistance and pushback they get. What I hear a lot these days is a great amount of focus among Chinese on the whole concept of reciprocity. They’re like, basically, when we use the rare earth controls, we demonstrated that we could impose real costs on you. You have a vulnerability.

It’s going to take you a very long time to fix it. That source of leverage for us has sort of leveled the playing field. We’re now equal status with you. So, if you do something, we’re going to retaliate. There’s a new commitment to reciprocity. And I think we’ve seen that play out all summer because every FCC action seems to be met with a Chinese action.

But interestingly, the FCC actions are not met with symmetrical actions, right? I mean, the stuff that the Chinese did most recently on August 5th was all pretty interesting in the sense that it was just a series of sort of four different actions the Chinese took to retaliate, you know, the actions on drones, etc.

Cory: Yeah, I think building up on that, just in terms of finding that line, I think Beijing’s line has been, I mean, very early on and more recently, you look at the early actions on rare earths, and you see them, there’s this conversation of did China of overstep or overreach. And I’d say a lot of that discourse I kind of pushed against. But the one piece where I think that was fair was where they had commercial impacts that they didn’t intend to, they would very quietly try to roll that back.

And so, a good example was with the auto industry you bring up. The auto industry. I mean, Ford shut down their plants early on because they couldn’t get access to material. That hasn’t happened. They reopened. It hasn’t happened since they reopened. And partly it’s because the Chinese are making sure they actually do get those flows because the goal isn’t to shut down Ford. And with the EU, it’s a similar thing. All the older companies, among others, who really were not the intended targets, but obviously were impacted, and Beijing, kind of, trying to do this without losing face or admit faults or anything, of course.

But you start to see things flow in that direction. And now when you hear companies getting licenses rejected, and again, the licenses are applied to the Chinese exporter, but they have to clear their end user, just for the audience’s reference. So, the end users are unable to get that material. Nine times out of 10, the reason listed is we couldn’t prove that you’re not going to end up giving this to Raytheon or someone. And so in that gap is where a lot of companies still get hit.

And so that strikes me as a lot of the intent behind the actual work controls remains really around dual use, national security, that kind of approach. Of course, there are huge commercial impacts, but it seems to be kind of a tolerated collateral damage. But yeah, so that’s one piece. And I think what’s so interesting is the US has used chips, which is also kind of a national interest story, not so much national security in the same sense of, do you have Samarium for this, right? That’s a little bit more direct.

But with chips, it’s a lot about China’s ability to use U.S. chips in military systems and for AI that could be deployed for defensive… all that rationalization. And then to relax those controls, right? I do not ever see China relaxing controls specifically on the dual-use or national security grounds. I don’t ever see them allowing Boeing to get whatever they want. That could go into non-commercial applications. But you do see the U.S. enabling some chips to be sold that originally were argued to be banned under national security grounds. That seems to be an asymmetry to me.

If there’s empirics I’m missing, I’d love to know, but I’m just curious if you see it that way or if you can push back or what that means.

Evan: Well, let’s bring Andrew into the conversation. Andrew, I want to get your sense of sort of these dynamics.

Andrew: Yeah, I mean, I agree with you, Cory, in terms of the asymmetry. I think, in my view, part of the reason that China has done this is because just very fundamentally when it came to the tariff war, they were outgunned, right? Because the U.S. buys more stuff from China than vice versa. And so they, years ago, realized they were going to have to fight an asymmetric war when it came to a tariff war or a trade war. And then as time went on, and their various moves kind of went, I don’t know, not unnoticed, but not really… The Trump administration just didn’t react that strongly to some of the asymmetric moves that China was making.

They sort of ratcheted it up piece by piece until they found an asymmetric weapon in rare earths, as Evan pointed out, that the Trump administration absolutely could not ignore. But on that score, Evan, I wanted to ask you, you know, if you were to give each side a grade, just I’m thinking about the nature of leverage in this competition now and going forward- if you were to give each side a grade, how good do you think China is? How good do you think the U.S. is? Or how good have we been on using our leverage vis-à-vis the other country?

Evan: Yeah, I mean, leverage is a tricky thing because it’s not a mathematical equation. And in part, leverage, you know, depends on the political tolerance of a country and its leadership to withstand pain. So, it’s important to understand that I can sort of give you a balance sheet of leverage, but it’s an inherently political calculation, right? So, if the Chinese can really impose costs on us, but we’re willing to sustain those costs, it’s not really leverage.

But what I would say is at least the events of 2025, Andrew, revealed to me the asymmetrical nature of U.S. and Chinese vulnerabilities and leverage. You know, it basically as of 2025, and I want to highlight that this is meant to be a snapshot. This is not a forecast or projection for the future. But the U.S. vulnerability to China is pretty broad and its leverage is relatively narrow. And, again, we’re only talking about the economic supply chain realm and that affords China certain benefits because the areas where we have vulnerabilities to China are pretty significant.

Right? In other words, China’s leverage over us is in the global supply of critical minerals, rare earths, magnets, and other sectors like, you know, biopharma, etc. And so, the trade war highlighted that the Chinese could pretty substantially impose costs on us. And of course, the Chinese buy lots of our agricultural goods, both grains and animal products. That could be a source of leverage for them as well.

And so, because China is an important part of so many of our supply chains, right now, I think China has a lot of leverage. By contrast, China’s vulnerability to U.S. actions at this moment look relatively narrow. It’s more commodity-specific than sector-specific. You know, we have choke point actions we can take against China — semiconductor design tools, jet engines for commercial airliners, a few other areas that are genuine choke points. And the Chinese know that and they’re trying to reduce those vulnerabilities, especially in the semiconductor supply chain.

One of the difficulties in assessing our leverage is that we do have a wider assortment of tools available to us, but they’re tools that would be so highly disruptive and costly to the global economy, like cutting China off from the dollar system, cutting it off from a swift global payment system, cutting off their access to U.S. capital markets, trying to globalize all of our export controls. These are things that conceivably we could do. The problem is that they’re so highly disruptive and costly to the global economy, they’re really not credible threats in peacetime. They seem like they’re tools that we would use during a conflict.

So, when I think about what the balance of leverage is, you have to think which tools does each side have that can credibly be used. And so, I think right now, because we’re so exposed to so many different supply chains where China plays a critical role, I think we have a lot of vulnerabilities that we need to correct. And I hope the Trump administration is doing that. We know that they’re investing in critical minerals, rare earths and permanent magnets, but there clearly are other areas. So, I think the picture right now doesn’t redound to America’s benefit.

Cory: Yeah, I agree with that. And then I have a follow-up for you on that. And I think you laid out several pieces of the answer, and I’d like to get your take on the whole thing is, what is the end destination of this? What is a stable point after this? And I’m asking specifically in terms of there’s the rare earth’s vulnerabilities, there’s other critical minerals. Beyond that, there are a lot of intermediates, there are new technologies and bio and advanced materials that China’s developing that the U.S. don’t have access to. So, there’s a list of things.

And part of the problem we’ve already seen is that rare earths is not one choke point. There’s like five just within rare earth themselves. And there’s 50 others. It’s a lot of downstream stuff. And you rightly characterized this thing before as it’s kind of broad. Even the seemingly narrow specific choke points, they have broad impacts downstream. Even if not broad economic, like in terms of one… rare earths themselves are not a huge industry. But the stuff that you’re into is massive industry and they all depend on it. So, that’s where the breadth comes out of its specificity.

Let’s say the U.S. somehow manages to clean up a lot of that stuff. There’s always something else is the concern. And so, in the worst case, do we end up just back in an ongoing destructive dance as we patch one vulnerability and the other side finds another one? Or do you think that there’s a level of cost that starts to constrain any growth of spiral? And you mentioned, for example, the U.S. has leverage of the so-called- maybe nuclear options is not the right kind of phrase here, but cutting China out of the dollar system would be just such a dramatic, just absolutely not foreseeable now.

Do you think we run up against a point where that’s the only leverage left and the cost of that additional leverage prevents the cycle sufficiently to kind of constrain it? What do you see as an end point in the kind of mid to near term?

Evan: Cory, it’s a great point, but I don’t think that there’s an end point. I think that this is a new dynamic at the heart of the relationship that is ongoing, in which both sides are constantly going to be trying to identify and eliminate vulnerabilities, at the same time, try to accumulate sources of leverage where possible.

Some leverage is big, some leverage is small, but I think that this just becomes an essential element of this broader thing we call long-term geopolitical strategic competition between the United States and China. I think it’s with us for the long term. And let’s not forget, this dynamic that we’re talking about exists within a broader geopolitical competition as well.

So, when we enter into periods of détente, that affects the cost-benefit calculus of both sides to whether or not they want to probe or test or whatever. But I think these sources of vulnerability and leverage are now a persistent, consistent feature of our long-term competition with China.

Andrew: Yeah, you’ve been really generous with your time, Evan. I know we’ve only got a few minutes left. I wanted to press on the leverage piece just one last time and then some thoughts on how businesses should be thinking about this. But do you fundamentally think, good or bad, I don’t know if those are the right words, but is it in a way positive for China and the U.S. to each have some leverage over each other?

There seems to be a strain of thinking out there that both sides having leverage over each other kind of creates an entanglement, an entwinement, a sort of the whole idea of mutually assured destruction on the economic front, right? That creates some stability because both sides can’t fully extract from each other or at least not without a lot of pain.

But then I guess, you know, that leaves sort of unexplored the counterfactual of, well, what if both sides were able to reduce their vulnerabilities to each other significantly? Might that be a better situation to be in? Where do you come down on kind of leverage as a stabilizing force or not when both sides have it over each other?

Evan: It’s a hard question for me to answer because this is when the part of my brain that’s a former policymaker kicks in, Andrew. And my instinct is that the United States should accumulate as much leverage as possible and then use it to advance American interests. And so that’s my instinct.

What I would say in answer to this question about mutually assured disruption, and I know you and I have talked a lot about this, and I hope we will continue talking about it. I don’t really see it as a stabilizing force. Everybody forgets that mutually assured destruction was not this great source of stability between the nuclear powers. In fact, both sides were constantly trying to exit MAD because they didn’t like the mutual vulnerability associated with it. I mean, there’s lots of books and articles about that.

So, in retrospect, it looks broadly stabilizing, but at the time, both sides were deeply, deeply uncomfortable with it. The other thing, of course, is, you know, mutually assured disruption economically is fundamentally different than nuclear MAD, because with nuclear MAD, the stakes are so high, they’re existential. With mutually assured disruption, the stakes are not existential, right? It’s basically just how much pain is the other person willing to withstand and how might they retaliate in ways that you don’t like.

And so, I think we’re in a world where both sides are going to be, at least at this current moment, much more willing and able to use these sources of vulnerability and leverage in their broader competition. So I don’t think it’s necessarily stabilizing. Sometimes I do wonder whether or not this whole idea of mutually assured disruption is really has mistaken the source of, or the cause of stability in this current period. In other words, it’s the fact that Donald Trump is not a hawk on China, worst kept secret in Washington.

The fact that he secretly wants to have a good relationship with Xi Jinping, that he himself is very committed to leader-level diplomacy. And so both sides sort of put together, kludged together with duct tape, a sequence of events for 2026 that have sort of allowed for this, the current weird moment that we’re in. But that once we’re outside of this leader level diplomacy, the fundamental sources of competition are going to kick back in again.

I don’t really buy the mutually assured disruption aspect or I don’t really buy the mutually assured disruption explanation for the current moment. I think there might be other forces at work that really explain the stability of the moment. But we won’t really know. Let’s do the same podcast in a year. And who was right and who was wrong.

Andrew: For sure. Well, to wrap up then, one last question for you, which is, it’s just, I mean, if you’re right, and I think your analysis here is strong, right? That a snapback is highly likely coming, that we’ve got a current floor, but it’s not sort of the medium-term floor. And that each side is going to be persistently and consistently finding new sources of leverage and trying to maximize that.

I know you talk to businesses a lot as part of your work. Of course, every business is different, but how do business leaders think about, how should they think about this? If just this is the new world where Beijing is going to be looking for leverage over the United States, of course, in the national security realm, but also the commercial realm and vice versa, how on a broad level should companies be navigating that dynamic, which doesn’t seem to be going away anytime soon?

Evan: Well, I think every company, if they haven’t done it, needs to do their own sort of China risk audit. How exposed are they to China, both demand in China as well as supply in China? And on the supply piece, make sure that there aren’t choke-point single-source vulnerabilities. I think even in this day and age after the rough-and-tumble events of 2025 and 2026, there’s still loads of companies that I don’t think fully appreciate how vulnerable they are to disruption.

Number two, I think that American companies, and we haven’t talked about it on this podcast, but I got to bring it up, need to pay attention to this growing Chinese preoccupation with American companies doing business in China who are complying with American laws. So, it’s all captured in the Anti-Foreign Sanctions Law. It’s reiterated in 834 and 835, the new state council regs from this year, where basically I think that there’s a growing appetite in China to start penalizing American companies who are just trying to comply with American laws like the Uyghur Forced Labor Protection Act.

And from my perspective, the Chinese started doing this a little bit earlier this year when it came to companies that were trying to comply with American sanctions on buying Iranian oil. Cory will know the details better than me. And then, of course, this recent action against the RBA, which does these audits relevant to both complying with the Uyghur Forced Labor Protection Act, as well as critical minerals.

And so, I think that to me, that’s a big new vulnerability that companies need to think about because the Chinese basically are going to try and force them to choose. Like you can’t operate in our market and comply with U.S. law. And so, I think determining where those vulnerabilities are is another real challenge for American companies.

Andrew: Yeah.

Cory: Yeah. We work on that a lot, specifically like the potential for compliance trap. And we do, generally, sense that Beijing doesn’t have an overriding interest in kicking out all American investment and business operations, obviously. But at the same time, absolutely, they’re using this as pressure. And if the U.S. is trying to put the U.S. in a position of like, you’re the reason… So, there’s a lot of compliance trap issues that Andrew, I’m sure, has a lot of framing on. But that is, in short, one of the top issues that we’re focused on right now. So, I’m glad you raised that.

Andrew: Yeah, it’s certainly only going to become more complex to be a multinational company trying to navigate this environment. And especially as these dynamics, as you say, Evan, are not going away anytime soon.

Evan: And just to reiterate a point I made earlier, I think it’s important to be mindful that on certain supply chains where the Chinese want to have dominant influence, I think you’re going to begin to see the use of export control policy basically as a proxy for industrial policy, right? They’re going to build alternative supply chains.

Now, I’m not trying to say that they’re reducing their exposure to imported oil as a weapon to target the Western world, but there are ways in which the Chinese, as they build up a greater degree of their own self-reliance and resilience, can, in certain ways, use that to the advantage of their economic policy and industrial policy. And I think we just have to be really frank about how China could sort of weaponize some of these tools. I think it’s a real risk.

Andrew: Absolutely. And we know for certain they will be continuing to sort of look at what the next leverage point is and the next leverage point, not only as you kind of pointed out, because that makes sense from a policymaker’s point of view, it’s what policymakers do, but they basically have said as much in the 15th Five-Year Plan.

And we’re doing a lot of work to kind of figure out what are the next choke points. And so, as soon as the U.S. closes the rare earth choke point, there will be something else that pops up.

Evan: Exactly.

Andrew: Evan, thank you so much for the time today. This has been a really great discussion. There was a ton of other stuff I wanted to get to that we just unfortunately didn’t have time to. But hopefully we can have you on again soon and talk about these issues because, as you said, they’re not going away. You said we can reconvene next year, but hopefully even before that we can try it again.

Evan: Yeah. Look, you guys are great. I’m a huge committed Trivium reader. It’s my favorite thing to read every morning. So, I hope everybody listens to the podcast, signs up, and to be continued. Look forward to keeping in touch with you guys and talking again in the near future.

Andrew: Well, thanks so much.

Cory: Cheers.

Andrew: Can’t ask for a better organic plug than that. So, thanks again for the time today, Evan. And thank you, Cory. And thanks, everybody, for listening. We’ll see you next time, everybody.

Cory: Thanks so much.

Andrew: Bye.

Evan: Thank you.

This week’s US sanctions are the perfect example: On August 20, President Donald Trump’s warned of “TREMENDOUS Economic Consequences” for any country that provides “any type of lifeline to Iran.”

Days later, Treasury Secretary Scott Bessent unveiled “Operation Economic Outcast,” Washington’s plan to cut Iran off from external economic support.

· Bessent announced sanctions on more than 60 entities – including several in mainland China and Hong Kong – accused of supporting Iran’s nuclear and missile programs, cyber operations, and oil-revenue generation.

· He also warned that entities failing to cut ties with Iran risked being frozen out of the dollar-based financial system entirely.

Notably absent from the list, however, were any Chinese oil refineries or banks.

· That’s a telling gap, given these are the institutions facilitating the vast majority of Iran’s oil exports.

Hardly the TREMENDOUS consequences we were expecting.

Washington is concerned that sanctioning major Chinese refineries or banks would lead Beijing to retaliate, reigniting the trade war the two countries have spent considerable political capital trying to wind down.

· Instead, the administration has sanctioned a collection of smaller, more peripheral entities – disguised behind a barrage of aggressive rhetoric – while leaving the institutions that really matter untouched.

The Iran sanctions aren’t an isolated case: Washington’s approach to China in recent months has followed the same script of all bluster, no substance.

· In mid-July, Trump made a televised address accusing China of interfering in the 2020 election. There was no substantive policy follow-up.

· Earlier this month, the White House released a report accusing China of exploiting differential tariff rates to evade US import duties, titled “The Great Transshipment Scam.” But the report’s own proposed remedies amount to little more than AI-assisted customs monitoring.

Beijing appears to have clocked the difference between what’s real and what’s theatre, and is responding with studied indifference.

· China arguably needs less from this relationship right now than the US does. Washington wants Chinese purchases of American agricultural goods and Beijing’s help nudging Iran toward a peace deal, while also pushing China to rein in the alleged industrial overcapacity fuelling its export machine.

· Beijing, for its part, mostly wants the relationship to hold steady long enough for Xi’s visit to the US, now less than four weeks away, to go smoothly and, beyond that, for Washington to stay out of its face.

That asymmetry is shaping Beijing’s entire posture. Rather than responding tit-for-tat to every fresh round of tariffs or provocative rhetoric, Chinese officials appear willing to absorb the noise and wait Washington out – confident that the threats which would actually hurt are precisely the ones Washington has so far declined to make.

The danger is that this equilibrium is more fragile than it looks.

· Strategic patience only works for as long as Beijing judges the costs of waiting to be lower than the costs of acting – and Washington’s next move, on Iran or anything else, could easily tip that calculation.

A relationship held together by one side’s forbearance and the other side’s bluster is not built to last.

· But for now, that is precisely the foundation the world’s most important bilateral relationship is resting on.

Joe Mazur, Head of Geopolitical Research, Trivium China

What you missed

US-China

A “broad understanding” that the Busan trade truce will be extended is taking shape ahead of Xi Jinping’s September visit to the US.

· The Chinese side has reportedly pushed for an extension through the end of Trump’s term, while the US wants another one-year extension.

The US is preparing to impose a 7.5% tariff on Chinese imports due to Beijing’s alleged industrial overcapacity.

· On top of the forced labor tariff imposed in June, the excess capacity tariffs would restore Trump’s duties on China to around 20% – consistent with the trade truce terms agreed in Busan.

Foreign affairs

Xi Jinping met with King Abdullah of Jordan in Beijing on the final day of the king’s week-long state visit.

· Like other powers in the region, Jordan wants deeper ties with China to diversify its sources of investment and trade, while preserving the US security relationship that remains essential to the kingdom’s stability.

Econ and finance

The macro planner’s (NDRC) vice chair Yue Xiuhu convened ministries and companies to work out how to finance the “six networks” infrastructure push.

· The shift from discussing what to build to how to finance it signals that investment in the six networks is set to pick up in the coming months – providing Beijing with a lever to shore up slowing growth.

Corporates

CATL is now the largest shareholder of battery swapping (BS) unicorn Qiyuan Green Power, having acquired an additional 24.9% stake in the company.

· With Beijing offering generous policy support for heavy-duty truck (HDT) electrification, buying into the BS industry leader is a shrewd move for CATL, giving it a sizable customer base and countrywide battery swapping network which would otherwise need to be built from scratch.

Tech

eVTOL (aka “flying cars”) maker EHang withdrew its full-year revenue guidance of RMB 600 million, citing uncertainty around manned commercial flight approvals following a fatal crash in late June.

· Beijing has been aggressively promoting the low-altitude economy as a growth driver, but a single fatal crash has shown how quickly safety concerns can override industrial policy ambitions.

The cyberspace regulator’s (CAC) new plan to support digital enterprises, released August 21, outlined the agency’s regulatory priorities over the next several years.

· In a bid to rebuild trust with digital enterprises in the post-tech crackdown era, the plan commits to standardizing administrative inspections of these firms to reduce disruption to normal operations.

Net zero

The Party Central Committee and State Council general offices jointly released a set of measures governing how local cadres will be punished for causing ecological and environmental damage.

· Notably, officials will remain accountable for misconduct that occurred on their watch even after they retire or move on to other roles – much like the Party’s approach to corruption.

Politics

A massive mudslide on August 26 at Tibet’s Jilong port has left at least three dead and 558 missing in China, with Xi directing the response from Beijing.

· During his nearly 14 years in power, Xi has rarely appeared at the frontline of a disaster, in stark contrast to his predecessors Jiang Zemin and Hu Jintao.

The Party’s anti-corruption watchdog (CCDI) convened an unusual special plenum to appoint two new deputy secretaries, Zhao Shiyong and Zhang Zhong.

· The August meeting was the first stand-alone mid-year CCDI plenum of its kind in at least two decades.

As always, it was a busy week in China.

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

· Beijing just released a plan to fix both problems at once.

Our take: “China’s nefarious plan to get its companies to obey overseas laws” is a Foreign Affairs headline just waiting to be written.

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

• Why lumping AI labs, e-commerce platforms, and cybersecurity firms into the single regulatory category of “cyberspace enterprises” is a bigger deal than it sounds

• The story behind AliExpress’s EUR 550 million EU fine, and why Chinese companies keep getting tripped up by rules they don’t fully understand

• One vague line in the CAC’s latest policy doc that might matter most: Beijing says it will “regulate the overseas competitive behavior” of its own tech firms, with zero detail on how

• Why cleaning up Chinese tech companies’ act abroad might get Beijing branded as the bad guy either way

Transcript

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

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

Andrew: I’m wonderful, especially since I have the opportunity to talk to you about China tech policy. I mean, that’s just what gets me going. I’m only half kidding. Actually, I’m 90% serious. So, anyway, we are going to talk today about this regulation that came out on August 21st. We are recording today on August 25th. And this document came out on the 21st from the Cyber Administration of China.

It’s a 2026 to 2030 action plan aimed at helping Chinese digital companies, everything from SMEs to big platform companies and AI firms, grow stronger and compete internationally.

So there’s a lot in here about supporting firms as they head abroad, but also some pointed language about bringing in some bad behavior once they get there.

So we’re going to unpack all of that with Kendra today and talk about what it signals. But of course, before we get into it, we have to start with the customary vibe check.

Kendra, how’s your vibe today?

Kendra: A little bit overwhelmed, actually. I am going to be on four trips in September. I’m not really sure how that happened, but I’m going to be in D.C. like three times, and then I’m going to go to New York once. That just kind of trip’s just piled on trips, so I’m gearing up for a lot of Amtrak in the next four weeks.

Andrew: Wow. Well, that sounds like a lot of fun. That’s great. My vibe is, I don’t know, like ready for the fall. Our kids are back in school, so it feels like we’re getting back in that whole rhythm of D.C. starting to heat up, not temperature-wise, of course, but activity-wise. Once Labor Day comes and goes, that’s when D.C.’s back at it.

So, kind of getting warmed up over here and excited to talk about this with you today as part of getting back into the rhythm. So, welcome. We also have to quickly do the housekeeping up top. Just a quick reminder, we’re not just a podcast here.

Trivium China is a strategic advisory firm that helps businesses and funds navigate the China policy landscape. That, of course, includes domestic policy in China around a bunch of different issues like tech, which we will talk about today, macro policy, minerals, autos, exports, choke points, industrial policy, you name it, we do it.

It also includes China or policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love the chance to talk about how you can support your business or your fund.

Otherwise, check out our website, again, triviumchina.com, where you can see all of our various subscription options for subscription policy monitoring and policy analysis products that we have there. We’ve got a range of options – free, paid. You’ll definitely find what you need on the site in terms of China policy intelligence.

And finally, please do tell your friends and colleagues about Trivium, both about the company and about the podcast. It really helps us grow our listenership, grow the business. Really cannot stress enough how the word-of-mouth recommendations really help us out a lot. They go a long way to building trust with potential new clients and new listeners. So, help us out and tell your friends and colleagues about us. All right, let’s get into it. Kendra, are you ready?

Kendra: Yeah, I’m ready. Let’s go.

Andrew: All right. So as I said, the CAC, the China Cyberspace Administration, released a new policy on digital enterprises. The policy is a bird’s-eye view on how the state is thinking about both big tech platforms, AI companies, and smaller tech companies, and how it wants to support those firms and regulate them.

So, a digital enterprise means a social media platform, an e-commerce company, a cybersecurity firm, an AI lab, a software SME, basically any kind of company that builds and sells digital products and services. So, with that intro, straight over to you, Kendra. Why is this policy interesting, or why should it be to our listeners?

Kendra: It’s interesting for a couple of reasons, actually. So, I think the first one is that we haven’t really seen the state lump AI companies into a sort of targetable category with e-commerce platforms and software companies before.

So, I thought it was vaguely interesting that we now have a sort of category.

They’re calling them cyberspace enterprises that policymakers can essentially target. But more important than that, since the tech crackdown ended, I think AI has sucked a lot of the regulatory air out of the room. There hasn’t really been a lot of discourse in the policy space about what the state wants for its digital companies.

And so, this policy gives us a really good overview, right? What kind of regulations are coming out, but what is the state also supporting? And a lot of the things that we’ll see in this policy, I think, are policy trees or trajectories that are threads that our regular listeners are probably pretty familiar with because they’re continuations of policies that have been ongoing for a while.

But there’s a couple of really interesting new things in here. So, I’m excited to do a little overview.

Andrew: All right. Well, let’s jump into the overview. Give us the overview of what’s in there, what’s interesting?

Kendra: All right. Well, actually, before I talk about the interesting stuff, let me talk about the not-so-interesting stuff. And I say it’s not interesting because-

Andrew: Great place to start; the not interesting stuff.

Kendra: Yeah, always get right in with like a really good, boring headline and get everybody really drowsy before we get into the fun part. But no, I think our regular listeners will remember a lot of this or have been tracking a lot of this for a few years, right? The state still wants Chinese companies, Chinese tech companies to invest more in basic research, particularly in strategic technologies. Those are the obvious ones — AI, quantum, blockchain, etc.

And they also want tech companies to participate in some of these national science and technology projects. So that means getting in the room with researchers, with universities, and really starting to kind of push the frontier forward on some of those emerging technology fields. They don’t want there to be a big separation between enterprises and academia.

They’re trying to sort of close that gap. So again, that’s something we’ve heard of for a long time.

They also want tech companies to digitize traditional industries like manufacturing and agricultural production. And that idea that the cyberspace companies should be contributing to the digitization and upgrading of traditional sort of dinosaur industries is another thread that we’ve seen in, for example, in the recent AI Plus policy and in several other tech policies in recent years. There were also some very familiar refrains on platform regulation.

It’s kind of funny that the state has been trying to crack down on some of these problems in the platform economy for many years now and is still sort of pursuing those regulatory pathways. One of them is improving personal information protection, of course. The other one is strengthening anti-monopoly compliance, so making sure that tech companies are adhering to antitrust law.

Eliminating forced exclusivity. And we’ve talked about that in the past during the tech crackdown. Obviously, there was a sort of push to prevent platform companies from forcing on-platform merchants from only listing on one platform, for example, through various nefarious contracting methodologies.

So, forced exclusivity elimination. Eliminating excessive consumer subsidies and involution-style competition. So, in other words, I mean, I think we’ve talked about that a lot on the podcast, right? Trying to crack down on this idea of, or this competitive mechanism whereby Chinese companies just try to drive each other out of business in some kind of war of attrition by holding each other’s head into the water until your competitor runs out of money, until they don’t want to see that anymore.

And then they also want to reduce unreasonable or obfuscated platform fees, reduce telecommunications fraud, improve AI governance. So, all of those things are sort of, again, regulatory trajectories that haven’t changed. So, even though we’ve already generally got a clear picture of where the state is going there, it’s always good to get an overview, right?

It’s like a little bit of putting a pin in the map. Yes, we’re still thinking about these things. Yes, we intend to think about them for the next half-decade. So, those are going to be, you know, those things aren’t ending. We don’t see that regulatory push as being complete. So that’s a good thing to know.

But the most interesting part, I think, of this policy is that it explicitly outlines the state’s intentions to help platform companies and AI firms and this sort of group of cyberspace enterprises compete in international markets. And that’s something we haven’t really seen the state explicitly outlined before.

It’s definitely said that it intends to support Chinese companies going out. It has said that it wants Chinese companies to compete internationally, but exactly what the state would do to support that and how the state would support that has not previously been discussed, I think, in this level of detail.

Andrew: Yeah, well, that’s all super helpful. I think you’re right to lay out the domestic stuff first, right? Because they want to continue to push forward their various regulatory priorities over these companies within the China market. And, as you say, you know, a lot of times these high-level documents, they’re not mind-blowing. They’re not a bunch of new stuff, but sort of a reassertion of, hey, this is the top five, top 10 list of things we’re going after.

So, kind of always good to get a reminder that these issues are what are top of mind for regulators domestically. But as you said, that the probably more interesting stuff is what regulators are going to do, policymakers are going to do to sort of grease the wheels for companies to go abroad. So, why don’t you talk to us a little bit about what was in the document in terms of what the state intends to do to support those efforts?

Kendra: There are so many tantalizing hints in here. I think the first one and the most interesting one is that they basically explicitly say that the state will use international fora, like the WTO, like the Belt and Road Initiative, like BRICS, like APEC, like the Shanghai Cooperation Organization, to smooth the pathway for Chinese firms to compete abroad.

And the way that they would do that is by cooperating with foreign countries and regions in areas like digital infrastructure or artificial intelligence or e-government or e-commerce or mobile payments, right? So, these areas where cooperation could basically lay the foundation for Chinese technical solutions to come in and kind of backfill the results of that cooperation.

And that’s something that we have tracked for a long time, suspected for a long time, read between the lines about for a long time. But this policy makes that very explicit that that is part of the state strategy. So, that’s one thing that I thought was kind of interesting.

Secondly, it also lays down a series of measures that regulators are going to take to help Chinese cyberspace enterprises navigate an increasingly hostile international market and an international legal environment.

And some of the things the policy says they’ll do are interesting. One, they’re going to provide what they’re calling an early warning mechanism to ensure that firms can predict and respond to unreasonable trade restrictions imposed by foreign countries. And we know what they probably mean by unreasonable trade restrictions imposed by foreign countries. That would be things like going after, right? TikTok and forcing a divestment or imposing stricter rules on Chinese companies in foreign markets when they’re competing, etc. So, unreasonable trade restrictions imposed by foreign countries.

Two, they’re going to establish overseas compliance guidance centers to help firms understand how to stay legal in foreign markets. And I’ll talk about some examples of why I think that might be important in a minute. And then three, they’re going to set up a case, like a case database of legal disputes that involve internet and information technology enterprises overseas, basically as a method to help corporate lawyers at Chinese companies understand how similar cases usually go and I think to help Chinese technology companies understand what the foreign legal environment looks like when they’re entering into it and where the risks actually are and to sort of prepare in advance for all of that.

Andrew: Yeah, that’s really interesting, that last part of kind of helping Chinese companies protect themselves abroad. I know we wrote about this today separately in our Neopol Daily that the NDRC, the National Development and Reform Commission, also on August 21st, released a draft revision to outbound investment measures.

And basically, the revision requires companies at sort of every level of the overseas investment process to report back to regulators about sort of the dynamics they’re facing on the ground, partly because they don’t want to or they want to keep companies from transferring technology or assets kind of on the back of the whole Meta-Manus thing and transfer of tech outside of China, but also for national security reasons.

And I think even more so, it says investors must flag when overseas holdings face foreign discriminatory or unreasonable measures to which the NDRC can respond by restricting the foreign party’s investment in China or Chinese entities’ dealings with it. And so, I feel like everything you just talked about is very much in line with what the NDRC is saying here, that basically we’re trying to keep Chinese companies from being messed with while they’re overseas or unfairly treated.

And I feel like it’s a little bit of an underappreciated part of the lawfare build-out. We talk about the export controls and the anti-foreign sanctions law and China building up extraterritoriality, but it’s not just about sort of punitive, retaliatory-type measures against foreign companies. It’s also asserting and helping defending Chinese companies’ rights overseas.

Do you kind of agree with that assessment that that’s part of what’s going on here?

Kendra: Oh, for sure. I would say that it’s half of what’s going on or maybe 70 percent of what’s going on. I think the other half of it, I think there’s actually two kind of things they’re tackling. The first is, as you say, the perception that Chinese companies are getting treated unfairly overseas or getting unfairly targeted. And the state wants to kind of help them protect themselves and also have the information necessary to intervene as necessary.

But secondly, there’s so many cases where Chinese companies have entered foreign markets and violated the rules of those markets simply because they’re behaving the way they behave in China. And I think there’s just a sort of lack of understanding about… I mean, if you think about it the same way that you get a foreign MNC that comes into the China market and they don’t know anything about the local government when they first enter that market, they don’t understand the business norms.

They don’t really get the legal environment. Sure, they’ve hired a lot of very smart people, but the decisions that are being made at the headquarters level are not necessarily plugged into the realities on the ground. I mean, we sit in the middle of those kind of issues all the time.

So, there’s a similar thing now with Chinese companies that are going the other way. And so you see things like, actually, the one that I’m probably most intimately familiar with is all of these Chinese e-commerce platforms that have entered the EU in recent years.

And you probably, you know, you know all about this, but just a couple of months ago, the EU Commission sort of fined AliExpress 550 million euros for failing to sort of prevent the sale of illegal goods on their platforms. There was also a big fine levied against TAMU, I think 200 million euros, right? I think that was violations of the Digital Services Act or Product Safety Act or something like that.

And we actually did a big research project on that at one point. And one of our key findings was, I mean, I think the assumption by EU policymakers was that those platforms were going into that market like with total disregard for local law. And they didn’t really care about local law at all. But the reality of the situation was, I think they were a little bit unfamiliar with the operating environment.

It was partly that. And they were simply behaving. I mean, I’m wildly oversimplifying a very complicated issue. But part of it is that they were just behaving exactly the way you would behave in China; when a regulator knocks on your door in China and says, “Hey, you need to fix XYZ,” you pay a bunch of lip service and they’re going to go away, and then they’ll come back and tell you to knock it off, and then they’ll go away and then they’ll come back and tell you to knock it off. And surely, you’ll be able to sort it out at some point.

But the entire sort of legal and compliance environment is really different. And all these sort of e-commerce companies got caught up in that to some extent. Now, there were lots of other things going on. They were selling unsafe goods into those countries, and they failed to stem the tide of those services. I think those fines were probably quite justified.

And in fact, I would say that the state, Beijing, knows that those fines were justified. They know those fines were justified because the EU talked to them about some of those; they were very provable, obvious issues. And the EU talked to Beijing multiple times about what was going on and Beijing couldn’t fix it. And the platform struggled to fix it. And so, you’ve got two situations, right? One is, as you say, companies go abroad and because they’re Chinese companies, they’re under additional scrutiny.

They’re more concerned about data collection maybe than there would be of another company from the same size from a different country. They get sort of targeted for exclusionary trade treatment. They feel that that’s unfair, and Beijing wants to step in. But the other half of it is those companies go into those foreign markets, Beijing knows they’re violating the rules, and they just get sort of caught up. They give Beijing a bad name, essentially. They get sort of caught up in, right?

Andrew: Yeah, that’s kind of a tough one to untether — when are Chinese companies being unfairly discriminated against and when are Chinese companies being fairly penalized for acting like Chinese companies — It’s kind of a hair-splitting exercise. But talk to us about that second piece of it in terms of what this document talks about specifically to help companies both protect themselves, but also kind of educate themselves or at least shape up their act in overseas markets.

Kendra: Well, it doesn’t get into extreme detail specifically about what they’re going to do, but how the Chinese government is going to intervene, let’s say, in the second case where you’ve got a situation where a Chinese company is operating abroad, it’s operating illegally or it’s not complying or it’s behaving badly in the market or whatever it is doing. Right? But there’s a little tantalizing clue in this policy. It says “Beijing will regulate the overseas competitive behavior of cyberspace enterprises,” and then didn’t go into detail at all.

And that is very interesting to me because they have largely not done that. There are a couple of mechanisms by which they might regulate the overseas behavior. Well, maybe they might regulate the overseas behavior of Chinese companies abroad, but there really hasn’t been a push or any mechanism by which a Chinese regulator would pull a Chinese tech company into a room and say, “Hey, we just got a complaint from the EU. What are you doing?” Right.

So, if that means and again, I’m going on four words here, but if that means there’s going to be a more formal or aggressive mechanism by which Beijing pushes both of those angles, on the one hand, it becomes much more aggressive about supporting its companies abroad and not taking such a passive non-interventionist approach to, well, you could argue, depending on the case, they’ve been very interventionist, that they weren’t just sort of responding on an ad hoc retaliatory basis to U.S. moves, but rather trying to step in to support companies in a way that they haven’t done before, right?

And then also being very aggressive with companies and very disciplinarian with companies, insisting that if the state is going to lend its support to you, you have to earn that support by trying to be compliant with overseas laws so that you don’t put us in a bad position when we’re in here supporting your outward expansion.

Andrew: Here’s one for you. That’s all very interesting. What do you think the reaction is going to be from EU member countries and the U.S., you know, Western countries generally, to something like this? Because it strikes me, part of this is Beijing trying to say, clean up your act in these other markets, which should be good, right? But part of it’s also saying we’re going to support you. And my guess is that this just gets interpreted by foreign governments as, oh, you know, Beijing’s trying to direct its companies to, I don’t know, overtake our markets. How is this going to be interpreted? Am I being too skeptical there?

Kendra: No, no. I was going to say I have a pretty cynical view of that. I mean, I think the interpretation of this will be Beijing is helping its companies abuse foreign legal environments better, that it’s going to really equip its companies with the knowledge necessary to weasel their way out of various lawsuits and penalties abroad.

And that, of course, depends on what some of those outcomes are. I mean, if regulators see a positive change in the way that some of those companies behave in the market, then maybe they’ll be a little bit more apt to appreciate some of this. But I am skeptical about that as well. I mean, in historical cases, when Chinese companies have changed behavior or the entire Chinese marketplace has changed behavior for the better over time, that rarely does get recognized.

So, even if this does work, I mean, you could take the case of counterfeiting, for example, right? It’s like 20 years ago, counterfeiting was absolutely… I mean, you couldn’t buy a non-counterfeit product. I mean, there was no real product. There was no real Gucci store at all. It was only fakes, right? The entire country and every single store had counterfeit products of every single thing.

And now China is still the primary source of counterfeits globally, but the problem has been significantly reduced over 20 years in very little credit. I mean, nobody’s patting China on the back for that. So, I think that even, you know…

Andrew: I was just going to say, people are going to give me a hard time for saying this, but I can see The Foreign Affairs article now — China’s nefarious plan to get its companies to obey overseas laws.

Kendra: But I could understand somebody having concerns about, well, if China, if they fall under the radar in foreign markets, that means that they will then be free to compete in those markets in a way that is, you know, endangering to local enterprise. So yeah, I think there’s a damned if you do, damned if you don’t situation here.

Andrew: Fair enough, fair enough, fair enough. Although I do think There is a little bit of a tide turning in terms of I’m seeing more and more articles out there by well-respected, particularly academics, but also policy-adjacent people about sort of what we’re losing by cutting off Chinese investment, what we’re losing by cutting off our markets to different Chinese companies like the whole EV story.

So, I think it’s interesting that that conversation is starting to be out there or starting to be had more. And I believe at least that would be a positive conversation to at least for us to consider if, you know, just a reflex of cutting off China from our markets is the right path. But any thoughts on that?

Kendra: Yeah, totally. And I mean, setting aside what policymakers will think of it, or what D.C. will say, or what Brussels will say, there is absolutely great benefit to having Chinese companies or having a pathway to push Chinese companies to abide by things like safety standards. It doesn’t matter what policymakers think about that. If there are less unsafe toys in international markets, that is overall just an objective good.

Andrew: Yeah. Totally. Totally.

Kendra: So I’m all about it. So hopefully we’ll see over time some results in that respect.

Andrew: Yeah. Well, thanks for walking us through all that so far. You just mentioned one other thing that might be worth flagging, which is there was one other thing in here around IPO channels. And that was another kind of element of regulators looking to support these companies. Why don’t you walk us through that and we’ll wrap it up.

Kendra: Yeah, I just had a quick little note I wanted to point out. I mean, one thing this policy says as well is that it’s going to expand exit channels beyond IPOs. Actually, I’m going to read the quote here. “We will expand exit channels beyond IPOs, encourage the development of private equity secondary market, market funds or S funds and M&A funds and further facilitate a virtuous cycle of investment, exit, reinvestment.”

And so, that’s obviously a continuation of this effort that policymakers have had to unblock the IPO pipeline. You’ll remember that about a year ago, IPOs had essentially ground to a halt, and they were gridlocked for about eight months. Approvals were gridlocked for about eight months. Then there was a push to get the IPO pipeline restarted again. That pipeline restarted again a couple of months ago. Now we’re seeing a bunch of major listings.

We saw some chip makers have listed; Unitary listed earlier just a few days ago. And now they’re looking for channels for exit beyond IPOs. So, this reads to me as the next step of that trajectory, right? That they’re not just going to support IPOs as an exit mechanism, but also these other pathways as well.

Andrew: Yeah. And that’s important, obviously, to get investment in these smaller companies, innovative companies. I mean, the capital market ecosystem is one of the great strengths of the U.S. innovation ecosystem. And China’s sort of innovated absent that ecosystem. Dinny and I have talked a lot about how they’re trying to establish more trust in capital markets, have capital markets be more plugged into national industrial policy goals so that individual investors and institutional investors can basically reap the gains of what policymakers expect to be more and more innovative companies going forward.

So, it’ll be interesting to see how that part of it plays out. The financing piece, you always have to get it right. We’re talking about that with the U.S. side in terms of trying to build out our critical minerals industry in the wake of the Chinese export controls. Cory and I talk about that a lot. It’s like, well, yeah, you can say you want all these companies to build out capabilities to process rare earths. But if the money’s not there, you don’t know what the funding mechanisms are. It’s just never going to get it off the ground. So, this is an important one to keep in mind as well.

Kendra: Totally, totally.

Andrew: Well, great. Well, thanks for walking us through that. This has been a nice, tight, short one, but always great to have you on, Kendra. Thanks for giving us some time today.

Kendra: Yeah, great to talk to you as always.

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

• Two prominent essays published earlier this month – one in the Party’s flagship theoretical journal Qiushi and the other in state media Economic Daily – laid out with unusual clarity how Party leadership is thinking about the country’s economic malaise.

The core message: Getting China out of its economic funk requires broader adoption of advanced technologies across the economy.

The Qiushi article argued that China’s economy is “in a critical period of transition between old and new growth drivers,” adding that:

• “A seamless transition…is impossible; there will inevitably be a gap”

Bridging the gap requires “maximizing the positive effects of new technologies,” and ensuring the benefits aren’t limited to a handful of advanced industries by:

• “Vigorously promoting the penetration and diffusion of new technologies into traditional industries.”

The commentary in Economic Daily made a similar argument, saying China’s “uneven development reflects a profound structural transformation,” and that:

• “There will inevitably be…discomfort along the way”

The way through is to pursue:

• “The diffusion of new technologies across different industrial sectors”

It identified environmental, digital, and AI as the key technologies that should be adopted more broadly.

Read together, the two essays confirm what we have been arguing for months: Beijing is playing the long game.

• That framing helps explain why policymakers haven’t responded to the country’s weak consumption, collapsing property market, and depressed household confidence with a proper demand-side stimulus.

• Because from Beijing’s perspective, weak demand is a short-term price to pay for a much bigger prize – an economy in which advanced technology permeates every sector, from steelmaking to logistics to agriculture, lifting productivity and cementing China’s position at the technological frontier.

The consequences of this strategy are clear:

• First, China’s K-shaped economy – with AI and renewable-energy sectors surging while domestic-facing industries stall – is not going to correct itself any time soon.

• Second, exports, which are the natural outlet for surplus industrial capacity that the domestic economy can’t absorb, will keep surging.

This has significant implications for anyone doing business in or with China.

Companies planning around a domestic consumption rebound need to reset their expectations. Exporters competing with Chinese firms in third markets should expect competition to sharpen. And investors betting on a stimulus-driven turn in Chinese equities should think again.

We help clients think through exactly these kinds of strategic implications.

• Get in touch if you want to work through what Beijing’s long-game strategy means for your business.

Dinny McMahon, Head of Markets Research, Trivium China

What you missed

US-China

The first meaningful volumes of Nvidia H200 chips have entered China, with ByteDance and Tencent receiving about 10,000 in recent weeks.

• This approval comes roughly five weeks out from Xi’s September 24 state visit to Washington, suggesting it’s a gesture to signal that China isn’t totally rejecting Trump’s offerings.

Chinese officials are reportedly frustrated with the Trump administration’s lack of planning for Xi Jinping’s pending visit to the US.

• Per the SCMP’s sources: “No US official or agency had thus far assumed responsibility for organizing the visit.”

Foreign affairs

Swiss President Guy Parmelin and Commerce Minister Wang Wentao announced the two sides had concluded talks on upgrading their 2014 free trade agreement.

• Under the upgraded deal, 99.8% of Swiss exports will enter China duty-free.

Xi Jinping met with Ecuadorian President Daniel Noboa during the latter’s eight-day state visit to China.

• Beijing okayed resumed imports from eight Ecuadorian shrimp plants just ahead of Noboa’s visit.

Econ and finance

A Shenzhen court sentenced Evergrande founder Xu Jiayin to life imprisonment over eight financial-crime charges, including illegal fundraising, financial fraud, and corporate bribery, to which he pleaded guilty in April.

• The court also handed prison terms to 56 other former Evergrande executives and employees involved in the offenses, including Xu’s two sons.

In an August 16 piece co-authored with the China Iron and Steel Association (CISA), top Party journal Qiushi argued that steel must not become a “sunset industry.”

• The article argues steel is foundational for both emerging industries and strategic sectors like shipbuilding and defense, and explicitly warns against US rust belt-style hollowing out.

In July, retail sales of services grew just 3.3%, the slowest rate in two years and the most concerning signal in this month’s macro data.

• Throughout 2026, we have pointed to resilient services spending as evidence that consumer spending still had pockets of strength.

• That argument is becoming harder to sustain – and if services consumption continues to decelerate, the last remaining pillar of China’s consumption story will have crumbled.

Tech

Anhui issued a 2026-2028 action plan to promote AI-powered one-person companies (OPCs) – solo ventures built on large models and agents.

• Hangzhou and Tianjin have both rolled out their own support for solo AI start-ups this year.

Net zero

The macro planner (NDRC) and energy administration (NEA) released the 15th Five-Year Plan (FYP) for oil and gas development, covering 2026 through 2030.

• The plan signals no acceleration in China’s decarbonization drive, instead aiming to increase combined production of oil and gas to 440 million tonnes of oil equivalent, up from ~420 million in 2025.

Politics

The Party gathered in the Great Hall of the People to celebrate the 100th anniversary of the birth of former Party General Secretary Jiang Zemin.

• In a speech, Xi explicitly praised Jiang for voluntarily proposing to give up his leadership positions within the Party.

• But unlike in his eulogy for Jiang in 2022, Xi did not mention how in so doing Jiang cleared the way for a new generation of Party leaders.

As always, it was a busy week in China.

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

• Consumption, investment, and property all deteriorated further last month – and the two props that supported the economy in the first half of the year are now fading fast.

On this episode, Trivium China podcast host Andrew Polk sits down with Joe Peissel (Lead Macro Analyst) to unpack:

• How July’s slowdown was broad-based, across nearly every metric that matters – and why growth looks even worse than the headlines suggest

• How the K-shaped economy has spread from output into investment flows, entrenching the divide between booming and struggling sectors

• Why deflation, not inflation, remains the real danger for a heavily indebted economy like China’s – as officials are having to quietly pick their poison

• Why even China’s 24% y/y export growth print obscures a much less impressive reality, once you separate price from volume

Transcript

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

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

Andrew: Good to have you. Joe is here today to talk us through China’s July macroeconomic data. The title of his most recent note pretty much says it all. It’s titled A Grim Picture. So, we’ll get into that and talk about why consumption, investment, and property all deteriorated further, why the K-shaped economy is now showing up, not just in output, but investment flows as well, and why the deflationary pressures that eased earlier this year look set to make a comeback.

But, of course, before we get into it, we’ve got to start with the customary vibe check. Joe, how’s your vibe today, man?

Joe: Yeah, my vibe’s good. Well, the thing is, my vibes are closely correlated with the Chinese economy by nature of my job. So, I would summarize my vibes, Andrew, as…

Andrew: Grim?

Joe: Gloomy, yeah, but with pockets of strength. That’s how I’m vibing, man.

Andrew: Yeah, well, you’re going to have some critical distance, man. You can’t let the work become your life. You definitely do not want your life dictated by the whims of the Chinese economy, let me tell you that. I’ve been doing this for a long time, and that was something I learned long ago.

Joe: That’s one of the saddest vibe checks I’ve given, I think.

Andrew: Well, my vibe is pretty mellow. This is the last week of summer. My kids are not in camp. So, we got me working from home, my wife working from home, my kids hanging out. It’s always just a little bit all four of us on top of each other at home all day. It gets a little bit much for everybody. I think our kids are going a little bit stir crazy. They do not want to start school on Monday, but I think it will be good for them. And I certainly am looking forward to it.

Joe: Sounds pretty intense, man.

Andrew: Well, we will not let my mellow state and your gloomy state undercut the energy of this podcast. We will still have a good discussion. So, stick with us, listeners. But of course, before we get into the content, we also have to do the quick housekeeping. So, a quick reminder, we’re not just a podcast here.

Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China across a range of issues, including macroeconomic policy, which we’ll talk about today. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund.

Otherwise, if you’re interested in more Trivium content, go to our website, again, triviumchina.com, to peruse our different subscription options. We’ve got a bunch of different China policy intel options on the site that you can check out, both free and paid, and along several different lines: tech policy, general business policy, China watcher policy, markets, which Joe covers. So, check that out.

You’ll definitely find the China policy intel option you need on the site. And finally, please do tell your friends and colleagues about Trivium, both the business and the podcast. It really helps to grow the company and our listenership. We really, really appreciate the word of mouth recommendations that you all help us out with. So, please continue to do that. It means a lot to us. And finally, if you’ve got a second, leave us a rating on your favorite podcast platform. It really helps to boost the visibility of the pod.

So, with that out of the way, Let’s get into it. You ready, Joe?

Joe: Yeah, I’m ready, Andrew.

Andrew: All right. So, I already started or noted the title of your piece is literally “A Grim Picture.” The July numbers just landed. Talk us through how bad it is and what’s different about this month’s sort of data and the slowdown you’re seeing versus the headwinds that we’ve seen economically all year.

Joe: Sure. Yeah. So yeah, it’s pretty grim. We’ve seen this broad-based slowdown across pretty much every metric that we care about — a slowdown in consumption, continuation of this unprecedented collapse in investment across China’s domestic economy, an acceleration in the property decline. I think there’s actually two things from H1, from the first half of the year, or certainly Q2, the second quarter, that were propping up China’s economy, which is starting to fade, and which make July’s data look even worse than it was earlier this year.

So, one is services consumption. That’s what households spend on services has so far been really resilient, but the growth rate slowed a lot in July, dropped to a two-year low. So, sort of the one final strong point of consumption appears to be waning. And the second area is inflation. There’s been this cost-push inflation from the Iran war. That in and of itself isn’t a good thing.

But what it did do is inflated literally Q2 GDP growth. So, Q2 nominal GDP growth, which incorporates price effects. I mean, it grew at its fastest rate in three years. And while that was mainly just a consequence of cost-push inflation, which we don’t want, there are positive consequences from that high growth. For example, nominal GDP growth is really closely correlated to tax revenues, for example. And we’ve actually seen an increase in government tax revenues. So, there are signs that deflationary pressures are returning, the end of this cost-push inflation, that brings a whole other set of challenges for China’s economy. So, hence the title, it very much was a grim picture.

Andrew: Excellent. Well, thanks for walking us through that. I mean, excellent explanation, not excellent for the Chinese economy, but you get what I mean. Talk to me now about this idea about the K-shape of the trajectory sort of moving beyond output and towards investment flows themselves. First of all, maybe you can kind of remind folks what the K-shape and the output is, and then tell us what you mean by the K-shaped shifting to these investment flows.

Joe: Sure. So the macro note I wrote last month, so that was covering June, and H1 data was creatively named; I think it’s, can you see the K or the K-shaped economy? The idea here, which we really highlighted last month, was China’s economy is diverging. You can see that really clearly if you put it on a graph, all the main economic indicators. A bunch of them are, or a few of them are heading up, very strong growth rates, and a bunch of them are heading down. They’re actually declining, already sluggish growth rates. On a graph, it literally looks like a K, hence the name.

So, what’s been growing strongly so far this year has been exports and high-tech manufacturing. So, that’s the output of EVs, shipbuilding, AI-related products, or semiconductor chips, or AI hardware, things like this. And then the tail end, or the bottom end of the K, are the things that are declining — property, domestic investment, really sluggish consumption growth, things like this. Now, what I highlighted in this month’s note, which I think is quite interesting, is we’re not just seeing the K-shape in China’s broader macroeconomy.

If we drill down into specific data sets, it’s appearing there as well. So, imports is one such example. But in particular, in this month’s note, I talked about it in the investment data. So, if we look at China’s aggregate domestic investment, fixed asset investment that fell by double digits. I think it’s about 13% decline. That’s huge. That is unprecedented. It’s actually accelerating. It was a faster decline than the previous months.

Within that manufacturing investment, that’s a subcomponent of aggregate FAI, manufacturing investment, that fell about four and a half percent. And again, that decline is accelerating. But if we drill into the manufacturing investment, so we disaggregate it by different industries, what we see is there’s still strong growth, but concentrated in a very narrow subset of industries. And these are sectors where manufacturing output is also really high.

So, we can think about computers, AI-related components, AI hardware, really, various different areas of transport, equipment, specialized machinery. All of these areas from a manufacturing output perspective are grown by double digits. And so, manufacturing investment in these areas has also grown really strongly. But meanwhile, investment in the broader or in other areas or other manufacturing subsectors is pulling back really fast. So investment in things related to property. So you can think of things like in furniture, in cement production, glass manufacturing, metal output, both manufacturing output and manufacturing investment is pulling back.

Actually, there’s this K-shape within the investment data where we’re seeing investment growth in some subsectors growing really fast, but in the majority declining. So, there’s really tight correlation between manufacturing investment and manufacturing output disaggregated at the individual industry level. The problem with that is that it entrenches this K-shape. It exacerbates this discrepancy, because if you have some part of the sectors, you almost have this positive feedback loop.

So, they’re investing lots, they’re producing lots, they invest more. But the flip side is that also applies to the sectors which are declining. They invest less, they produce less, and, as a consequence, they also invest less. So it exacerbates the K-shape in China’s economy.

Andrew: And talk to me just a little bit on this about sort of the relative scale between the upper end of the K and the lower end of the K. My impression is that the pieces of the economy that are doing well, particularly the AI-linked high-tech type stuff, are growing very fast, but are a relatively small portion of manufacturing and of overall industrial manufacturing output.

And I would guess that it’s the same for investment, right? That these parts of the economy make up a smaller part of overall investment. And thus, you put it all together and you’ve still got a pretty weak investment environment, even though some areas are doing really well. Is that right?

Joe: Yeah, that’s exactly it. We spend a lot of time talking about China’s high-tech or high-value manufacturing, and it is an important part of the economy, but it’s still the minority of economic activity. China’s manufacturing base still involves a lot of lower-value or medium-value output that is not related to the things we talk a lot about, like AI or EVs or clean energy. And so, a consequence of that is, well, we see investment in AI manufacturing facilities grown by double digits, but overall, manufacturing investment still declined by 4.5% because it’s dominated by these other parts of the economy which aren’t performing as well.

Andrew: Yeah, and I say this pretty regularly, but my sense is that, I mean, based on everything that we write and everything that we read about both the Chinese economy and what Chinese officials are saying is that top policymakers kind of approach is to kind of wait it out and allow these smaller portions of the economy that are growing very fast to get bigger and bigger and bigger and bigger and bigger, and eventually carry the weight for economic growth or carry the load.

That’s just a process that’s going to play out. So, that’s one thing that I kind of always remind people of. I think that’s a key part of what they’re thinking. And then the second piece related to that is that one of the biggest chunks of the economy, even though it’s shrinking, is still the property sector. And so, if you’re trying to wean the economy off of property as a growth driver, that’s also going to take time. And it just means that you still have this massive chunk of the economy struggling, contracting.

And while you’ve got new growth drivers, they are, or budding growth drivers, we shall say, they remain still very small, especially compared to the property sector. And so, this is a process that the party seems pretty committed to that they’re going to let play out over time. And so, in a way, that explains, one, why they’re not panicking, but also it underscores that this is going to be a pretty extended transition process.

And also, I would say, it seems to me that this is a path that is at least partially intentional, so that officials have made themselves comfortable with the idea that overall growth is going to be sluggish throughout this transition process. And I, again, just would say, you know, for people looking at the Chinese economy, everyone keeps saying, oh, the Chinese economy is terrible, is terrible, is terrible.

Well, a big chunk of that is simply down to the real estate market, which they are purposefully shrinking and purposely trying to move away from. Do you agree with those kind of framing ideas?

Joe: Yeah, I agree with everything you said. Nothing to add. Beijing is like very aware that they have a painful transition ahead of them. And they’re willing to tolerate that pain to support this structural change in the economy.

Andrew: So don’t expect any big transitions in policy terms anytime soon, I don’t think, but we’ll get to that piece in a minute. Before we do that, I want to now pivot to sort of the price action and the economy. You mentioned in your piece that there is a risk, and I would say it’s probably more than a risk. It’s virtual certainty at this point that China’s deflationary pressures will return in the coming months. Can you talk more about what’s happening in that space?

Joe: Yeah, sure. I would just say, I mean, I’m not convinced it’s a certainty because so much of it is dependent on the outcome of conflict in the Middle East. So, I think it’s plausible. There’s a scenario where commodity prices, oil prices in particular, spike for a sustained period. And I think that could spill over into kind of broader inflation in China’s economy. I don’t know whether that’s likely, but I think it’s possible. But I agree. I think the more likely outcome is a return of deflationary pressures.

So, over the past few months, we’ve seen this rebound really in producer prices and, to a lesser extent, in consumer prices. And this has totally been a cost-per-shock. It’s not a domestic demand story at all. So, input prices for manufacturers, oil and other commodities, just various manufacturing inputs, these have increased mainly because of the Iran war. And so, as a consequence, we saw a reversal in like three plus years of PPI deflation. What manufacturers have been selling their goods for at the factory gate has been declining for over three years, and finally reversed a few months ago.

And there was a slight spillover impact on consumer prices as well, which picked up. But we’re seeing a slowdown in both CPI and PPI inflation. So, in July, consumer price inflation, it slowed sharply to half a percentage point, down from 1% the previous month. So, a really sharp slowdown. And if we look at it on a month-to-month basis, so generally when we talk about changes in inflation, we’re thinking about year-to-year. So, what were prices in July 2026 relative to July 2025?

But if we look at it on a month-to-month basis, so what were prices in July relative to June of the same year? Well, then CPI has actually been declining for three consecutive months. So, in many respects, consumer price inflation has already returned. We’re just not seeing it in the headline, the year-on-year growth figures yet, but it’s very likely that there’s going to be a return of deflationary pressures. Now, this really isn’t a demand story, aside from the fact that there is no demand. That’s why prices have fallen, but prices have been falling for a long time.

There was simply a short interval of cost-push inflation, predominantly caused by the Iran war. Now, that is fading away. We’re seeing this unmasking of deflationary pressures, which have been sitting there all along. It’s really no change from what we’ve been tracking over the past few years. Of course, the return of deflation is really problematic for China.

I mentioned earlier, nominal growth was boosted in Q2 because of these inflationary pressures. And again, I’ll say this again, we don’t like cost-push inflation. It’s not a good thing in and of itself, but it does lead to a boost in nominal economic activity, and that is associated with some benefits. Increase in tax revenue is the most obvious one. And so now we have a return of deflationary pressures, we’re going to have all the associated problems. That’s going to hammer corporate revenue. That’s going to hammer government tax receipts. That’s going to undermine consumer confidence. So, it’s just another headwind to an already struggling economy.

Andrew: Yeah. I want to throw a little bit of a curveball at you. So yeah, congratulations, or get ready for this one. I think you’ll be fine for it. But just as you’re talking through that, I was thinking, I mean, for any policymaker, you really want kind of inflation to be in a sweet spot, right? You want mild inflation that kind of is indicative of expanding domestic demand, but isn’t growing so quickly that it’s reducing people’s real wages, real wealth, that kind of thing.

Traditionally, over decades, Chinese policymakers have been very wary of inflation, specifically consumer price inflation, because in the ‘70s and ‘80s, huge inflationary pressures in a lot of emerging markets led to economic and social instability. And so, officials have really been very focused on kind of trying to keep that contained for a long time. Yet, at the same time, deflation is also not a good situation to be in. And it underscores other vulnerabilities with the economy, specifically the overcapacity, overproduction type issues.

So, neither high inflation nor deflation is particularly good. You’re kind of looking for that sweet spot. And so, the reason I bring this up is we talk about deflation as insidious and difficult to do, and I think that’s true. But then we also say, well, this inflationary impulse that they have is also not ideal because, like you said, it’s cost-push inflation through an external shock that is just rising or driving up commodities prices, which is reducing margins for industrial producers.

But my sense is that officials have sort of, if they had to choose, they might choose the cost-push inflation. And even if that’s not the case, I would say they’re sort of like taking advantage of the cost-push inflation to sort of make some adjustments. Dinny has written about how they’re kind of using that inflationary environment plus strong exports to start a little bit of deleveraging in order to sort of cap debt growth with the idea that several years down the road, five, 10 years down the road, they’re probably going to have to raise more debt to build up their social security framework.

But do I have that right? Do you think they’re sort of like, well, this isn’t the best option, but we will kind of take advantage of inflation while we have it? Or do you think both options are bad? Or what do you think, I don’t know, Chinese policymakers would almost prefer when it comes to the inflationary?

Joe: They have to pick their poison.

Andrew: Yeah, yeah.

Joe: Right. Yeah, yeah. I think there’s no doubt deflation is the more dangerous problem for China’s economy. I can think of two main reasons. And I think the first, probably the most important, is that China is a highly indebted economy. And as you just mentioned, China’s trying to use inflationary pressures to try and deleverage the economy, to try and reduce its debt-to-GDP ratio. Well, deflation achieves the opposite of that.

Deflation raises the real value of debt while incomes or tax revenues stagnate. So, for a highly indebted economy, which China is, deflation is a real problem and makes it very difficult to tackle rising debt stocks. And then I think the second problem, there’s many, I’m just picking the main two, is that there’s this idea, there’s this risk of self-reinforcing expectations. So, consumers delay purchases, waiting for lower prices, which in turn harms the economy even further.

And we see this most clearly in the property data. Property prices have fallen. We’ve long argued that a prerequisite for an increase in property activity, so things like home building or real estate investment, or even sales, are for property prices to bottom out. And so, these two risks, the increase of the real value of your debt and this self-reinforcement expectations are two huge problems, real dangers for the Chinese economy.

I think inflation, in contrast, also has its problems, which you alluded to. But it’s a problem that China and also just conventional economic theory knows how to fight. So, we can think about tightening policy or reducing fiscal expenditure. It’s arguably easier to deal with excessive inflation than it is excessive deflation.

Andrew: Great points. I will say this all kind of gets back to the point that we’ve made and a lot of economists have made, which is, ideally, you’d have an inflationary environment driven by strong demand, and that’s the argument for China having or enacting a little bit more direct demand-side stimulus, which officials seem pretty reluctant to do. So, they’re kind of picking from bad options, but partly because they’re putting themselves in that place by refusing to do sort of more traditional macroeconomic management from fiscal expansion. Do you agree with that?

Joe: Yeah.

Andrew: Okay, let’s turn to exports — the part of the economy that is particularly bright has been all year, has been for several years now, continues to sort of outstrip expectations or outpace expectations. So last month, exports continued to go strongly at roughly 24% year on year. It sounds like a big win. How upbeat are you on the export side?

Joe: Yeah, it’s one of the successes of China’s economy right now. It’s the upward part of this K. 24% growth in July is amazing. It’s a really strong headline. But I think there’s some nuance we can add to that, which is if we look at exports in volume terms, they’re still growing but by a lot less than the export value. There’s 24% growth in value. So that growth in value, a lot of that is a price story. What I mean is that the prices Chinese exporters are charging is going up, that’s inflating overall export value.

But if we think about exports in real terms, like real activity, really stripping out the price effect, and we can do that by looking at volumes, how are exports growing in volume terms? It’s a lot less. So I can give some examples which really demonstrate this point. In value terms, semiconductor exports more than doubled. There’s growth of 117% year on year in July. In volume terms, they rose by 2%. It’s entirely a price story. And that’s because of the surging cost of memory chips, which is a consequence of the global AI investment boom.

So, just demand for memory chips has gone through the roof everywhere. And that’s led to inflationary pressure on the cost of memory chips, not just in China. Mobile phones, which are kind of a classic Chinese export, in value terms, they grew by double digits. In volume terms, they actually fell. China exported less mobile phone units in July 2026 than last year. But in value terms, they grew because the price is going up.

Same with a bunch of commodities. If we look at metals or petroleum-related products, in value terms, they grew. In volume terms, they shrunk. So, the surge in value, as I mentioned, partly driven by this global AI memory chip shortage, which has led to inflated prices for memory chips, and secondly, elevated commodity prices. So, export growth mainly driven by price, not really driven by China shipping more physical goods. Of course, there are exceptions to this.

Auto exports are surging in value and volume terms. They were up. China shipped 60% more cars in July 2026 than in July 2025. And again, the export of ships, of manufactured ships, that was up about 30% in volume terms. So, there are still some success stories. But I think the big takeaway here is we shouldn’t just look at the headline figure. It’s important to think about the nuance behind that. In this case, exports are an important part of the economy, but maybe not as much as the 24% year-on-year growth, the headline figure that we’re seeing.

Andrew: Yeah, I was thinking about that both as I was reading your piece and as you were talking here. And we kind of present or you kind of present the fact that export growth, at least last month, was driven by price effects as sort of not a negative, but kind of undercutting some of the positivity of the large export growth figure. But I guess the other side of that is, one, Chinese exporters have been dealing with negative margin pressure for a long time, right? Partly as they shift exports away from the U.S. and try to find new markets, partly due to a relatively sluggish global economy.

So, one, is this some relief for exporters with prices going up or at least a certain subset of exporters? And then secondly, I’d just say, as somebody who runs a business, I mean, if my total revenue goes way up, even if I’m not shipping more volumes, just simply on margin, then I’m perfectly happy with that. So, from a macro standpoint, it might not be ideal, but from an individual business standpoint, that seems totally fine.

Joe: Exactly.

Andrew: What do you think?

Joe: Yeah, you’re totally touching on it. So, from an individual business perspective, it’s great news. From a macro perspective is what we really care about when we think about trans macro economy, right? Higher export prices per se aren’t a bad thing. There’s still benefits —increased corporate revenues. And, as a consequence, higher corporate tax receipts for the government, things like this. But what I’m saying is we think of 24 year-on-year export growth really strong figure. What we care more about, if we had to pick, a minute ago you asked me to pick between too much inflation or too much deflation, now I’m asking myself – do I care more about export prices or export?

Volume, definitely volume, because that leads to more manufacturing activity, factory activity, has positive spillover effects on the labor market. It can lead to upward pressure on wages, things like this. So, ultimately, export volumes are really important here. And the export volume story is nowhere near as positive as the prices. But again, to clarify, I’m not saying export prices in and of themselves, it’s not a bad thing if exporters raise their prices. But if there’s no subsequent increase in volume, then I’m less excited about the headline export growth than otherwise.

Andrew: Yeah, I think the key is, one is kind of more beneficial for the macro economy as a whole. Another may be beneficial for individual businesses, as we talked about. And then the other piece is this isn’t China exporting inflation. This is China raising prices because of general sort of weak supply for key goods, particularly in the semiconductor and other AI-driven space, and very, very high demand. So, this is just kind of exporters reacting to the environment. So, they’re sort of more of a passive player in this.

Joe: Yeah, totally. We see the same with China’s imports in value terms. They’re way higher than in volume terms. So, China’s as much, yeah, it’s just a passive player here. Its exports have benefited from high global prices, but its import bill has surged as well. Actually, imports have been growing faster than exports most of this year. China’s trade surplus is actually down a couple of percent so far this year.

Andrew: Yeah, that’s interesting.

Joe: Yeah.

Andrew: Yeah. I think I’ve read headlines or not headlines, but in news articles, people make an argument, “Well, that should make policymakers in other parts of the world more comfortable,” but really not because it’s primarily down to surging cost of commodities. And part of the problem is that China doesn’t buy non-commodity goods from the rest of the world. Right? And that’s what people…

Joe: Exactly. Yeah. We actually, we did some research. We wrote a piece on this for our subscribers. If you strip out the impact of gold imports and memory chips, then China’s imports this year are up by single digits. If you include gold and memory chips, they’re up like 30% year on year. It’s not a broad-based increase in imports. It’s just a spike in the import bill because memory chip inflation and a kind of a one-off surge in gold purchases.

Andrew: Yeah. I’m glad you mentioned that because I thought that was a really interesting finding. So, I’m glad you highlighted it. Okay, let’s move now to another kind of downbeat piece, which has been continually downbeat for basically since the pandemic, and it’s China’s consumption picture. How bad is it and what’s going on there?

Joe: Oh, it’s pretty bad, Andrew. You teed me up for that one, man. So, sales of consumer goods, consumer durables, right? This is like autos and furniture and garments and cosmetics, all that sort of stuff. Sales of consumer durables rose by 0.6% in July. Tiny, tiny growth rate. Down from June, which grew by 1%. So, miserable growth in June, even more miserable growth in July. And we saw a decline in pretty much all of these big ticket items, which is what really from a macro perspective, we care more about the sale of, say, cars than we do of t-shirts because production of cars has much more spillover benefits.

It requires more skilled labor, higher wages, more complex supply chains. So, if we look at big-ticket items, then it’s even worse news. So, sale of cars, home appliances, furniture, all declined by double digits. The one exception was the sale of mobile phones and other consumer electronics, which grew quite strongly. And that’s interesting. It’s a very good kind of case study of the impact of fiscal stimulus. So, all of these items I just talked about- cars, furniture, mobile phones, consumer electronics, home appliances- they’re all part of the consumer goods trading program, right?

There’s essentially, the government providing subsidies for these goods. Now, the program was rolled out in 2024, and it initially targeted only at autos, home appliances, and furniture. So, they’ve now had like two and a half years of this subsidy stimulus. And the stimulus impulse has totally worn away. The reason being it boosts sales by pulling demand from the future. So, an individual that was going to buy a new piece. Let’s say they’re going to buy a new washing machine next year, but now there’s government subsidies available that will they buy it this year instead?

So, you get the short-term boost, but it means over the medium term, over several years, the stimulus impact fades. And this is what we’ve seen. This is why, even though in 2026, there are still subsidies available, the sale of these items is declining by double digits. But the program was only expanded to include mobile phones and other consumer electronics last year in 2025. So, they’ve only benefited from the program for about 12, 12 plus months, meaning that the stimulus impulse is still very much alive.

This is why last month, mobile phone sales, they grew by over 20%. So, what we’re seeing is that by borrowing future demand, over time, the stimulus fades. That’s already played out for cars, home appliances, furniture. And at some point, it’s going to happen to mobile phones as well and consumer electronics. Towards year end, the sale of these items is also going to decline. So, even kind of this one bright spot in the consumption data, this 20% growth in mobile phone sales, that’s running on a clock. It’s not a sustainable driver. At some point, it runs out.

And then to add to this gloomy picture, which I mentioned earlier, is the sale of services. This is household spending on travel and medical services, entertainment, going to the cinema, catering sales, all this sort of stuff. That’s fallen to its lowest growth rate in over two years. So, it grew by about 3.5%, 3.7%, I think. Previously, it’s been growing around the 5% mark. So, a sharp slowdown in one of the only strong parts of the consumption picture.

Andrew: So not ideal. Yeah, yeah, yeah.

Joe: Sorry, I left you on a cliff.

Andrew: No, that’s okay. That’s okay.

Joe: That’s my piece.

Andrew: Yeah. Well, anything that you see on the horizon that is going to turn the consumption picture around? I mean, we’ve been waiting for it. It seems like policy is not there. Are we just in for sluggish consumption? It seems like Beijing is… they talk about it a lot, but when push comes to shove, they seem unwilling to put more fiscal resources here. And maybe it’s unwilling, maybe it’s unable to manage this demand side picture on the consumption side. I mean, is there anything that can change this?

Joe: No, as you say, it’s largely focused on supply-side measures, even today. So, this August the 19th when we’re recording this, and Beijing has just released a policy plan to support local governments to support consumption in their local economies. This is like at the township level really localized policies. And it’s all about supply-side measures kind of building new shopping centers or converting dilapidated government buildings into retail stores, all this sort of stuff, improving consumption infrastructure is generally what they refer to it as very much a supply-side focus.

The one demand-side tool, which is this trading program, these consumer subsidies, that was effective for the original set of goods last year. It’s been effective for the mobile phone and consumer electronics this year. I mean, that’s just pulling forward demand. It’s not leaving a structural change in consumption. And it does raise the question, for which I don’t have a good answer, is what fills the gap when the program’s runway ends? At the moment, it looks like probably nothing. So, it’s another potential headwind for consumption in the coming months.

Andrew: Well, with that further grim sort of assessment, why don’t you wrap us up here? If you sort of had a single takeaway from the month’s data, what would it be? And then also sort of look ahead. What are you expecting from both the trajectory of the economy and policy, macro policy going forward?

Joe: So, look, a single takeaway, I think, is there’s been an exacerbation of this K-shaped economy. It’s kind of a tale of two economies. This narrow part of the economy, which is performing well, which is AI and export-driven and performing exceptionally well. And then there’s the much larger domestic economy, consumption and property and investment and mainstream manufacturing outside of AI and export-related sectors that is deteriorating. And this is exacerbated this month because we’re seeing a slowdown in consumption of services, and we’re seeing a removal or kind of a waning of this cost-push inflation, so the return of deflationary pressures.

What that means for H2, clearly pressure is building on policymakers to do something. I think the most recent signal we saw was in late July when they explicitly acknowledged economic challenges, but didn’t really commit to any new policies. I think they used the phrase “incremental policy measures,: so they promised to implement incremental policies, whatever these are, presumably modest and not very effective. But at least there’s explicit acknowledgement of the challenges that face them.

Now, I think the one clear area where we may see some progress or some momentum would be in infrastructure investment. It’s really unprecedented that infrastructure is declining for so long and so fast. And we’ve seen some movements. So, this week, the macro planner has pushed policy banks to increase their funding for infrastructure development. And there’s chatter going on in policy circles that Beijing sees this as a kind of as an increase in the important lever, something they really do have control over in the domestic economy to boost growth.

So, what that entails, it could be an increase in local government debt instruments, could be an expansion of the central government balance sheet to fund more infrastructure. I mean, we’re going to find out in the next few months. As of now, we’ve seen a push towards policy banks issuing more. At some point, we expect an increase in government debt as well to support infrastructure spending.

Andrew: Well, I was just again thinking as you were talking, it used to be when I started in this business 20 years ago, that if you said something like Chinese policymakers understand the issue and it’s on their radar, that you could expect a policy fix, a policy, fairly aggressive policy response to whatever that issue was in short order. And I feel increasingly the idea that Chinese policymakers know the problems. It’s like we have the same problem we have in the West. They’re admiring the problems. They’re not doing much about it, right?

Joe: Mm-hmm, yeah.

Andrew: So, we do not expect that necessarily to change anytime in the short term, which means kind of what you see is what you get. And the economy is likely to kind of struggle and bounce along on its current trajectory for the foreseeable. But as it does, we will continue to analyze it through Joe’s great work. So, Joe, I appreciate you walking us through all this today.

Joe: Yeah. Thanks for having me, Andrew.

Andrew: Yeah. Thanks, everybody, for listening. We’ll see you next time. Bye, everybody.

But the more durable — and future — points of leverage are already hiding in plain sight, in hundreds of intermediate goods most people never think about.

• Gerard DiPippo, Director of Global Macro at Eurasia Group, returns to the pod as our first ever two-time guest, joined by Dinny McMahon and Cory Combs, to unpack it.

On this episode, host Andrew Polk sits down with Gerard, Dinny, and Cory to dive into:

• Why rare earths are a uniquely cheap and low-cost weapon for Beijing, and why other chokepoints like batteries carry far higher stakes

• How China’s licensing regime doubles as a surveillance system, giving Beijing visibility into global supply chains it can use to ratchet pressure up or down at will

• The “shoe that hasn’t dropped yet”: China’s shelved extraterritorial rule that could restrict any product containing Chinese-origin content, anywhere in the world

• Why intermediate goods are the next frontier to watch, and why China’s reaction function gets a lot murkier once controls move further down the production chain — into products with real commercial value to Chinese firms themselves

It’s another great discussion – so enjoy!

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and today we’ve got a bit of a special lineup. I’m joined by two Trivium regulars, our Head of Markets Research, Dinny McMahon, and our Head of Supply Chain and Critical Minerals Research, Cory Combs, but we also have an extra guest with us today, and that is the Director of Global Macro at Eurasia Group, Gerard DiPippo.

Gerard, how are you doing, man?

Gerard DiPippo: Good. Very happy to be back on the show.

Andrew: Yeah, it’s great to have you back. You’re our first two-time guest.

Gerard: Really? Wow.

Andrew: Yeah, absolutely. Very excited to have you back. Dinny, how are you doing, man?

Dinny McMahon: Good, mate. Always happy to be here.

Andrew: And Cory, how about yourself?

Cory Combs: Doing great. Really excited. We’re starting the hiring process for a new analyst position. So, very jazzed for that. It’s a good week.

Andrew: Awesome. Love to hear it. All right. Well, today we’re going to do another look at basically the economic lawfare and economic coercion playbook that is evolving out of China, specifically looking at kind of future choke points that China may look to draw on as its export regime evolves and its kind of choke point capabilities evolve. We’re going to use, as a jumping-off point, a piece of research that Gerard has done called China’s Chokepoint Leverage Goes Beyond Critical Minerals.

We’re not going to go line by line on that research, but we will kind of use that as a jumping-off point. And we’ll talk about where China is quietly building a dominant kind of share in various global markets. And then we’ll walk through that paper in general and our general thoughts from the Trivium side on Gerard’s analysis. It’ll be a great discussion. But of course, before we get into it, we have to do the customary vibe check. Gerard, I’ll start with you. How’s your vibe today, man?

Gerard: I’m happy to be here, although it’s funny because just before we recorded this, I was talking to my co-author from that piece, Amanda Hsiao, and she was saying how she loves this podcast, but actually doesn’t like the vibe check. And so it’s always controversial. So, shout out to her and shout out to the vibe check.

Andrew: Awesome. I love it. Yes, the vibe check is very controversial. We get a lot of people who love it, a lot of people who hate it. And so I guess that means you’re doing something right. I don’t know.

Gerard: I love it for what it’s worth.

Andrew: Well, see, good. Exactly.

Dinny: Yeah, I’m on the other side of the divide.

Andrew: Well, and with that, Dinny, how’s your vibe today?

Dinny: I’m feeling good now that I know that there are people out there who feel the same way that I do. But no, my vibe today, I’m feeling pretty rested. I had a long weekend in New York with the family. So yeah, I’m feeling good.

Andrew: Nice. So Dinny’s vibe is officially unburdened, I feel, now that he’s let it be known. Cory, how about you, man? How are you doing today?

Cory: I’m good. Yeah, again, just really excited to be bringing on a new team member soon, in particular to help work on a lot of these types of issues. Although now I have a new interview question, which is going to be the make-or-break for the candidates, which is whether or not they like the vibe check. It’s going to be a deciding factor now.

Andrew: Well, you can’t give away what the correct answer is actually now so that people will make sure that they answer honestly. Well, my vibe is pumped to have all you guys on. I’m excited. I think this is going to be a great conversation. I’m also excited. I’m going to see Gerard in real life later today. I always enjoy catching up, talking China beyond what we put on the pod.

So, we’ll get into the meat of the discussion in a sec, but of course, we also have to quickly do the housekeeping. So, a quick reminder to everybody — we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China on a range of areas: autos, tech, etc., minerals, you name it, we do it. But it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others.

So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in more Trivium content, check out our website. Again, triviumchina.com. You’ll definitely find a subscription option that will meet your needs in terms of staying on top of China policy, intelligence, and research. We have a bunch of different options on the site. And finally, please do tell your friends and colleagues about Tribune, both about the podcast and about the company. It really helps us to grow through those word-of-mouth recommendations, so we really appreciate those.

All right, Gerard, are you ready to walk us through this?

Gerard: Let’s do it.

Andrew: All right. So, Gerard, your piece, or not just your piece, but let’s start sort of where the conventional conversation around this U.S.-China back-and-forth and evolving China lawfare usually starts, which is critical minerals and rare earths. Your paper argues that rare earth controls remain Beijing’s preferred retaliatory tool, but that the approach is evolving within that space. Why don’t you just set the scene and talk to us about how you see things evolving?

Gerard: Yeah, I’ll just give you the bottom line, which is that it is proper to be focused on critical minerals as a key choke point. And those are, in fact, what Beijing knows it can weaponize for at least years, and we can debate how long. But the point we wanted to make is that there are other choke points that are developing, particularly in intermediate goods. And Chinese industrial policy is geared towards expanding China’s market share of those goods.

And so, the implication of all of that is even if you think at some point the West is able to have enough secure supply of critical minerals, and we can debate how long that takes, at that point, China will have other choke points. And there are implications from that because it means that China’s coercive leverage is growing in ways that I think Western governments are not planning for.

Andrew: So, Gerard, we’re going to talk a little bit about the evolving nature of some of these choke points that you point to in your paper. And Trivium has done some work on this as well, so we’ll kind of be able to compare notes on what we think is next. But before we get there, you also identify some of the current attributes of China’s export control regime, specifically zeroing in on the licensing aspect, which sort of allows Beijing to ration supply and deny importers of goods from China the ability to stockpile.

Can you talk to us a little bit about why you think Beijing’s leaning on the licensing piece rather than an outright ban of sales to have a more durable and effective approach to export controls?

Gerard: It’s for several reasons. One is that the licensing requires foreign companies to apply for those licenses, which means they’re able to collect information on supply chains and general needs of companies. Relatedly, if they have more comprehensive data, they can then have a sense of what total demand is and have better mechanisms for detecting whether there’s any sort of transshipment or stockpiling going on.

So, they want full visibility so that there’s no smuggling or workarounds that put holes in things once they leave China’s borders. The other reason is you want to be able to keep companies on as short of a leash as possible. And that, one, is to prevent stockpiling. But two, it also means that if Beijing wants to dial up the pressure on any government or company, it can do so fairly quickly precisely because it’s prevented that stockpiling and workarounds.

And so think of it as sort of a surveillance and enforcement capacity that’s working together.

Andrew: Totally makes sense. And another piece I wanted you to highlight is, you know, focus in on Chinese state investment and overseas mining as well. So, this isn’t just about sort of controlling the source inside China, it’s also about reinforcing dependencies in the long term through investments. Cory’s also done a bunch of work on this. So, talk to us about that piece of it in terms of what China’s doing externally to reinforce its domestic export control regime.

Gerard: Right. So, they’re investing in overseas mining and capacities. I mean, Cory is a master of tracking this stuff, so I wouldn’t deign to lecture him on it. But think of it as a comprehensive plan. I don’t know if there’s a single plan, but there’s at least planning going on such that they’re able to track the supply chains of the things they know are upstream vulnerabilities. And their companies are making those investments, right?

And so, they also are aware that Western governments are working quickly by at least Western government industrial policy standards, to try to indigenize or sort of de-Chinaize offshore those capacities. And so, it’s really like a race of industrial policy systems.

Andrew: Cory, what are you seeing on this side? Do you see it similarly to how Gerard’s characterizing it?

Cory: Yeah, the first thing is that top to bottom, at a high level, there is systematic effort to map and understand China’s vulnerabilities. And so we have that supply chain and industrial security policy from March made public in April. And it’s a state council level doc that says that very explicitly, various authorities, including Central Planner and DOC, are basically in charge of making sure that these foreign vulnerabilities don’t disrupt China’s industrial upgrading and regular operations.

So, that’s driving a lot of investment by state actors, by state investors, Ex-Im, development banks, policy banks, all that. And so absolutely, at the same time, you also, at a lower level, at a more commercial level, you still see a ton of, and I would probably argue even more, private sector investment. Now, obviously, private gets very messy when you talk about private sector in China’s mining ecosystem, but you also have things like CATL, BYD, genuinely private listed companies that are pursuing no-one supply chain security overseas, especially in Latin America, parts of Africa, etc.

So, there’s both fronts happening simultaneously, and they both support Chinese mineral resiliency, as well as processing. So, it all aligns. And to the extent that Beijing doesn’t have certain central-level plans for driving specific niches of minerals, it’s because the market’s doing it for them. And so the areas where the market’s not doing it, Beijing is making sure it’s happening. So in both regards, it’s happening, 100%.

Gerard: I may be jumping ahead here, but I would say that China’s focus on overseas investments as a means of securing its own critical materials or other resources is not new. That’s been going on pretty much for decades, at least in a concerted way, at least 20 years. I think what is more new is China imposing export controls, not only as a means of having coercive leverage against countries, which you’ve already mentioned, but also to control the technology that it knows those countries want, including for things like magnets, so that they can indigenize their own technology.

I mean, one theme you can see is that a lot of China’s recent measures, including recent controls and outbound investment, are really aimed at technology, including but not limited to things that would be useful for critical minerals, right? So, it’s the idea that China now has the capacity, one, to hit back, but two, it also has technologies that it knows other countries want, particularly to break free of those chokeholds. And so, it’s sort of protecting in both directions.

Cory: Exactly right. And a good case study of that, I think there’s 100 of them, but I think one very clear one is gallium. So, one of the earliest controls, so gallium and germanium, had a lot of attention. Australia is now recovering some gallium as a byproduct of other operations. But what do we need the gallium for? And one of the most important applications right now, to my view, is the rising demand for GaN, a gallium nitride used in wideband-gap semiconductors.

I don’t know of really any large-scale producer outside of China that can turn the gallium into gallium nitride in the substrates we use for semiconductors. So, it’s great that we’re getting gallium, but what about the processing? And that’s exactly the kind of choke point that I completely agree — this is the intermediate goods issue. This is the processing issue. And where Beijing continues to control that, that is leverage.

Andrew: So, staying on this kind of idea of where we are now with the export controls and the strength of the export controls around critical minerals and rare earths, you guys both, I think, rightly touched on the processing piece, which now, of course, other countries, notably led by the U.S. are trying to you know alleviate that choke point from China, trying to build processing capacity. But again, Gerard, you point out in your paper, in your research that even if China’s critical minerals processing eventually erodes, Beijing could extend restrictions to foreign-made goods containing Chinese mineral content.

So, this is sort of the extraterritorial piece that we talked about a little bit, Cory, where you say if there’s any piece of Chinese content, doesn’t matter if it’s processed in China or not, we’re going to restrict that. Notably, that was part of their big October 2025 controls that really brought things to a head in the U.S.-China negotiations and led to the U.S. backing off a little bit and ultimately to the Busan agreement. But talk to us about that aspect of it, Gerard. How do you think that unfolds?

Gerard: Right. So, it’s the Chinese version of the foreign direct product rule. And that is the provision among several, but maybe that one in particular in October that scared Russian government so much. Because if you read it, at least verbatim, it sounded like China had the ability to impose controls on anything that had any non-negligible amount of Chinese rare earth content in it.

Which would, if you read it that way, would mean like a battery that China had made that is in a car made in Poland that goes to France or whatever. That is still subject to those controls. Now, because of the Busan truce, that part of the controls has been shelved. It’s not dead. It’s just on pause as part of the ceasefire. And so, to my knowledge, that part has not been fully tested. And it’s sort of the shoe that hasn’t dropped yet.

But because China is collecting data during this time through the application process for the sort of normal export controls and licensing requirements, it might be able to more effectively implement that in the future. And I don’t think that regulation or that capacity is going away.

Andrew: 100% agree. I mean, I think we always talk about these export controls as, Cory, let me bring you in, like, basically, China is sort of suspending their use. But there’s just one way of general travel here, right? China wants to bolster its export control regime overall. The actual implementation of the controls may ebb and flow, but they want extraterritorial jurisdiction. They want to be able to not only use these in a weaponized fashion when needed, but also for broader industrial policy purposes. What’s your perspective on the piece Gerard was just talking about?

Cory: Yeah, I mean, all of these tools, I think the hardest part of all this to map is what are the constraints on Beijing’s use of these tools, right? And so, I think exactly right, there’s one direction of travel when it comes to the material level controls. I think at this point it’s pretty clear. Meaning, which is to say, Beijing can impose an export restriction, which just means you have to apply for the licenses. I shouldn’t say just, it means you have to apply for licenses. And this is where a lot of the attention comes from.

At that point, I don’t see any way of coming back from that. Like that is just a lever that it can ratchet it up, it can ratchet it down. And there’s two different levers on top of that, which I’m sure many listeners will be familiar with, but just to confirm, first, they can escalate the restriction to a prohibition, which means you’re not getting a license. And separately, there’s a number of ways they can expand, add new compounds, add new derivative materials, etc. Or they could go the extraterritorial route and say, “Not only are you not getting it from China, you’re not getting it from somewhere else if it has a Chinese input,” right?

Som there’s other ways of escalating. And so, I think that is negotiable. That’s up and down. That’s leverage that you can deploy at will or pull back when you’re trying to pursue strategic stability, all that. But the existence of a licensing requirement in the first place, I don’t see you coming back from that point. I see one direction of travel there, and then it’s flexible from there on. And this is in contrast to, for example, some of the commercial security or industrial security investigations, which have been very explicitly used as leverage in negotiations.

Like, oh, maybe we’ll investigate this sector, but we’ll scrap that investigation if we get certain concessions, right? And so, one question I have for Gerard and Dinny as well is, in this context, is where do intermediate goods fall? I mean, we have some intermediate goods are already affected, right? spluttering targets are a good one. They’re not intermediate from a consumer perspective, but if you’re making semiconductors, you’re not taking rare earth, making a spluttering target making a chip. You’re buying a sputtering target from somebody who bought rare earths elsewhere.

So, in the upstream sense, we’ve already seen that migration down the production chain, so to speak, and we’ve seen it in a number of others that I won’t go on about. When do we start seeing that in intermediate goods where that, I think, starts to play? Those are much bigger factors in China’s total export value. Those have much bigger costs associated with them. So that’s why I’m very curious, how do you see China’s reaction function? What are the constraints on its willingness to move further down the production chain with export controls?

Gerard: So, I think we’re waiting to see what happens when they fully weaponize other intermediate goods. I mean, you’re referencing things that might have critical mineral components in them, but there are a lot of things that are unrelated to critical minerals where China makes intermediate goods. But you mentioned something that’s really important, which is those other goods, or some of them at least, things like, say, batteries, right, they have much more commercial value for China to restrict those things, but actually be imposing harm on its own companies in a way that rare earths do not.

Rare earths are basically an optimal upstream weapon, right? Because in dollar value terms, they’re really not worth all that much. But China controls the chokehold on the processing side. It has basically two state firms it can operate with to do that. It has the ability to use that to get visibility through licensing of a whole bunch of other industries. And it can do it without really disrupting its own exports all that much. And so, it can sort of pick and choose which industry it wants to disrupt.

There are other intermediate goods, like just think of industrial chemicals, let’s say, right, where China could disrupt something, but that’s going to be probably more narrow, right? So, I’m actually skeptical that there’s any one set of things that is going to be as powerful and as sort of cheap to use for China as critical minerals. That said, there are a lot of other things that could be used in conjunction.

And if you have a sort of whole supply chain visibility, you don’t have to use the same type of good to retaliate against any one country, right? You could use different sets of goods for multiple countries. So that was kind of the point of our piece, that there are other things I can go at that would be valid, even if it were the case that there were Western supplies of processed critical minerals that could avoid China.

Cory: Absolutely. Excellent. And just to put some scale on this, you’re talking about the difference in the impact for China, the cost of imposing this. China’s rare earth industry, the entire rare earth industry is probably on the order of one to $2 billion in terms of total value. That’s obviously not strategic value. I believe their exports of batteries last year were over 60 billion. So, that’s one product and that’s just exports, right? That’s exports compared to the entire rare earth industry. So, it just doesn’t really compare, and the nature of the companies as well.

The battery revenues are even more critical because a lot of Chinese companies can sell batteries, for example, at a much higher premium overseas than they can domestically given involution. And a lot of that money is going straight back into R&D. It’s going straight back into development of new battery chemistries that China is hoping will drive its competitiveness long term. You’re not seeing that kind of R&D in rare earths. You don’t need it. So, I think both financial value-wise and strategically, the costs are so much higher for some of these.

But very well said, I completely agree with the kind of ability to target narrowly these intermediate goods. It’s not quite the same blanket. Yeah, so just seconding all of that.

Gerard: And part of why we’re still talking about this is basically hypotheticals because they still don’t need to use as other weapons, so to speak, right? You could debate how long, but at least say five years conservatively where they would have a lot of leverage with critical minerals. And if we get to a point, say, in 2030, where there is Western self-reliance, we’re going to have another conversation about what else to go after.

One thing we tried to highlight in our piece was to look at specific intermediate goods in the trade data where China has 50% market share globally, both in value and volume terms. And we identified 300 goods at the HS6 level where that’s the case. And it’s grown rapidly since 2022. It’s almost like a straight line up and on track to be 400 goods by the end of this decade. Now, I should say that because we’re operating at the HS6 level in trade code terms, that’s like sort of medium granularity.

If you are assessing your own vulnerabilities, I would want to go much more granular than that. But the problem is that you don’t actually have a global standardization of those codes at that level. So, think of that as just sort of a high-level illustration that you actually see in the data what their industrial policies are saying they’re trying to do, which is to develop whole supply chain security, including for their own defensive reasons.

But it also means that because a lot of these things are pretty low value added or low margin goods, it’s things that Chinese industrial policy is just much better suited to absorb.

Dinny: Yeah, I’d say that when it comes to the intermediate goods, I mean, what Gerard’s saying makes perfect sense that for the most part, you know, so many of these intermediate goods for the meantime don’t necessarily pose a… aren’t the sort of things that can be weaponized particularly although one day it might get to that point. In some ways, the real threat to developed economies in particular at the moment is that China’s moving so aggressively on intermediate goods. And I think that’s kind of what Europe in particular is sort of struggling with.

It kind of looks at the degree to which China is so aggressively expanded into things like chemicals or it looks at the degree to which sort of China dominates, you know, precursor ingredients for pharmaceuticals. And yet, to a certain extent, it feels exposed, but it’s also worrying about the hollowing out of its own industry because China is moving so aggressively into these sorts of bits and pieces.

I think the researcher Richard Baldwin coined the phrase that China is effectively the OPEC of intermediate goods just because of the sheer scale at which it’s producing the components that go into manufactured goods. So yeah, the point’s well taken that for most industries, China isn’t in a position to weaponize these, certainly without sort of doing damage to their own industries. But certainly, I think the rest of the world is increasingly cognizant of just how vulnerable they feel, given how dependent they are.

Andrew: Yeah, I think this is basically the sexiest part of your research, Gerard, is the intermediate good space. Can you talk to us about how you think that’s going to increase China’s leverage over time? And then you also make an interesting point about how it’s more politically palatable to control intermediate goods instead of final goods?

Gerard: The intermediate goods are, in some sense, better as a weapon because you can mess up the production side of a target economy. And you might even be able to mess with multiple industries at once with the same good. The counterfactual would be if China were going after, say, consumption goods or final goods, right? These are things that consumers or end users would notice more visibly. They could, in theory, do that, right?

So, for example, in theory, BYD could be told you have to restrict exports of electric vehicles. The problem is that’s just much more visible, so more likely to engender political pushback. And also, because final goods, by definition, contain the value of all the intermediary goods, they’re worth more, right? Which means that if you go after final goods, you’re basically asking Chinese firms to eat a bigger cost as part of that weaponization.

So, again, the intermediates are really just the better tool, both economically and politically. And in terms of how they’re going to do it going forward, now, as I said, this hasn’t really happened yet because they haven’t had to rely on non-critical minerals because they still have critical minerals. Right? But we’ve seen in March, the Chinese Academy of Sciences published a note, a bulletin that had some research looking at 63 different technologies that China could, in theory, control.

And it sort of bracketed them in different metrics. And you get a sense of, you know, that’s just like one window, right? I’m sure there’s more going on that we’re not seeing. And there are ways of trying to systematically assess different technologies or goods where there are choke points. And what that shows is we think there are basically five broad criteria that they can assess whether something is, you know, a good weapon, right? So, one is obviously, does it hurt the target economy? Two, how replaceable is it? Because it can cause a supply or policy response.

The third is how much hurts Chinese industry, because if it’s worth a lot, then you don’t really want to actually impose those costs on the Chinese firms. And then there’s the enforcement capacity, which we talked about briefly. But if you’re talking about extraterritorial controls, that is harder to do. And they have spent the last year building up their ability to map out rare earths. But if you try to do that with other goods, they might not have the same visibility into that.

And finally, there’s reputational risk. So, there are things like pharmaceutical APIs. People talk about China having choke points there, which is basically true. And I should say that last year during the height of the U.S.-China trade war, Chinese interlocutors were back channeling, suggesting that a nice API supply chain there would be a shame if something happened to it, meaning that would be sort of the next threat. We’re personally skeptical they would actually do that, partially because if you’re trying to cut off pharmaceutical goods, you’re basically risking, at least narratively, killing people because they’re not getting medication, right?

So that’s not really optimal. That’s why I think their preference would be to stay in things that are either more sort industrial or “dual use,” they would have the pretense of having that sort of geopolitical security covered.

Andrew: Yeah. Cory, Gerard just walked through his kind of framework in terms of how he thinks Beijing identifies its next export control or its item to export control. What are your thinking or what is your thinking on how Beijing makes that decision? What are its key criteria going through that? And then I want you both to say what you think, kind of based on that criteria, what might be next? That’s what people want to know. What’s coming down the pike in terms of what the next choke points are?

Cory: Yeah. I mean, first off, seconding so much of what you said, I think it’s a great framework. I’ll just add a couple of pieces. I think one is in a lot of the lawfare countermeasures retaliation, we still see a preference for symbolic reciprocity, you know, reciprocal actions. When it comes to specific critical mineral-related export controls, you know, they’ve run down the list, you’re not going to see exact reciprocity. So, if there’s a defense action, you’re not necessarily going to see a defense mineral, right?

But at the same time, I think at this point, that on the export control piece specifically, we’re just seeing them go through kind of the next best targets in terms of where China has control and where the costs are not extreme. And so, for example, if I had my money where my mouth is, I think tungsten was one early on that we were very concerned about. And it’s a huge issue now because China appears to not be exporting any of it, as far as we can tell.

Another one very similar to that or akin to that is magnesium, which goes into so many things. But magnesium metal specifically, not oxide, is just such a risk if Beijing were to go after that, and we’d have to talk about that another time. So there’s your one, going on a limb to say something specific. But I think more broadly, I mean, I agree that we’re moving past the era of just an export control, right? There’s so much more dimensionality retaliation across the lawfare toolkit, but even within the realm of export controls.

And so, I agree with Gerard as well on things like API that there are costs that are not just financial that definitely seem to factor in. I think Beijing has had many opportunities to cause more damage, if it so chose, against a particular economy, against a particular sector, against particular institutions or interests that are very clearly not taken or stopped short of. And I think API is a good example. If you really want to force the other person to do what you want, API is not a bad target, but if you also want to be accused of killing people.

There are costs beyond financial that Beijing has been very wary of, including, for example, hurting the broad consuming public. I haven’t seen them go after, for example, things that would just drive inflation. I know it’s one of the early kind of questions– would Beijing go after kind of downstream goods? And there’s other reasons for that. Like Gerard said, they’re not the top strategic targets, but I also think the cost is, you know, right now, I think more Americans are mad at America than China, and for the current situation when it comes to consumers.

Not talking about the fans, not talking about the people involved in procurement, but the average person. There’s power in that, right? And so actually, I mean, one question I have going further down the chain, I had for Gerard is, does Beijing’s reticence to use certain tools in intermediate goods, obviously, there are potential risks there, but for the ones that aren’t risks, is that enough for the U.S. to focus less on de-risking, diversifying, decoupling in certain areas?

Is the sense that, for example, Beijing would not want to target certain sectors, is that enough for the U.S. to feel more comfortable in that space? Like, right now, I feel like the strategy in D.C. is decouple as much as possible, de-risk every possible thing that China has any leverage over. Are there pockets where we can relax a little bit, or should we continue to try to push to de-risk as much as humanly possible, just because China has control, regardless of the analysis of its likelihood of using it?

How much can we trust that? So, I’m going to fight the premise a little bit, which is to say that it is true that in D.C., where I live, there’s a lot of concern about reliance on China. But as a matter of policy, the focus is overwhelmingly on critical minerals. There are a lot of other things like, say, industrial chemicals, right? Which is there are various kinds, but that’s sort of a decent bucket of targets.

I am not aware of any U.S. industrial policy specifically to address that. The point I keep making to clients is that we knew, the West, everyone knew, about the risks of reliance on China for processing of rare earths 15, 16 years ago. And yet, there was not really a concerted Western response until about a year ago. Why? It’s because China had to fully weaponize them against the U.S., they’d use them a little bit against Japan.

So, we talked about the policy response function in Beijing, but the policy response function in the West, certainly in the United States, when it comes to industrial policy, is not all that forward-leaning. It’s quite reactive. So, there might be a lot of things where the system in the U.S. is good at sort of prohibiting emerging reliances on the technology side.

So, you see that with some of the actions with the FCC just announcing, for example, that they’re going to basically ban new types of robots coming from China. But there’s nothing equivalent on the lower value added intermediate goods side of things. I think it’s because there’s just too many goods to track. I actually don’t think the U.S. government is that good at tracking these things.

But maybe the more important point is even if they were, they don’t have the policy instruments or enough fiscal firepower to actually address all of them anyway. So, my sort of scary so-what of all of this is that my belief, my observation, is that Chinese industrial policy is quite good at targeting a very wide set of goods, in this case, intermediate goods.

Whereas the Western industrial policy apparatus, which is much less intricate and less developed, is more responsive. And so, the Chinese have this sort of first mover advantage in all cases. So, it might be true that the U.S. prevents reliance on China for, say, electric vehicles because the U.S. doesn’t allow any Chinese electric vehicles to come in.

But do the same thing across, say, pharmaceutical inputs or across industrial chemicals, things that are not really all that valuable but are still part of the supply chain? I doubt it. And so, I actually don’t think that the Western response can front-run Chinese industrial policy, so to speak, which is why I push against the premise of your question. So, you might say that the West might be less worried about things like batteries if you think there’s a big financial cost for China imposing controls on that, which I agree with.

But nonetheless, there are other things they’re going to miss. And I think the Chinese are going to map those things out.

Andrew: I’ve got a couple of thoughts and a bunch of questions. So, one is I think almost the exception that proves the rule of what you just said is that the FCC is now talking about restricting inputs into AI data centers from China, right? And it’s kind of like, oh, we found this one intermediate good, right? First of all, it’s the FCC doing it, a smaller regulatory body, not the Department of Commerce would do larger-scale export controls.

And secondly, it’s only there because it is part of the AI buildup, right? It is the sexy thing that everybody’s focused on. And data centers in particular are a huge, you know, they’re becoming a political issue. They’re part of the infrastructure buildup, all that stuff. So, I think the fact that the FCC is like looking ahead at this one intermediate good really backs up your point because it’s so rare that they would do that. I guess on the back of your statements just now, I wanted to bring in Dinny to see, I mean, again, you’ve done a lot of work on this intermediate goods stuff… Well, I’ll bring Dinny in and then have Gerard respond.

How much of this, if you can put a proportion on it, China’s investment in intermediate goods is for the express purposes of future weaponization versus this is just a strategy to grow our exports versus we just want to ensconce ourselves in supply chains, not for weaponization’s sake, but for our own economic security’s sake? What do you think about that, Dinny?

Dinny: It started off as the latter. So, I mean, Xi Jinping first started talking about this, I think, back in, probably going to get it slightly wrong, but I think it was about 2019, the idea of, you know, we need to do, that Intermediate goods is something that we have vested interest in investing more in and expanding our capacity. And the idea was that China would become so embedded in global supply chains that it’d be incredibly difficult to decouple. It’d be very difficult to extract China from them.

And so, it was a defensive measure. It kind of speaks to what Gerard was talking about before. It’s like, you know, it’s a smaller target. It doesn’t attract the same attention as sort of a consumer brand or anything that, you know, it’s sort of an end product. And so, it was a way to protect China’s export machine by embedding it more deeply in global supply chains and make it more difficult to extract China from it.

And so, in a world of decoupling and de-risking, it was a degree of protection that China could lean into. And I think, over time, it’s probably evolved because as China becomes more embedded in those supply chains and the rest of the world becomes more dependent on China for procurement, it gives China unprecedented power to sort of withhold supply. And so, yeah, I don’t think it started off as a weapon, but the success of the policy has certainly created weaponization opportunities.

Andrew: Gerard, what do you think? Well, let me restate the question. If we break it down, weaponization versus just growing exports versus economic and industrial or supply chain security, where do you put the emphasis? And then I guess the follow-up question is, does it matter? Am I splitting hairs? It’s all everything all the time, just because this helps China out economically?

Gerard: So, I agree with Dinny that you can see clearly in the planning, going back to maybe probably around 2019, that the fixation on supply chain security that was embedded in the 14-5-year plan, I think that was born out of a sense of insecurity based on U.S. actions, particularly what happened with Huawei and ZTE, and then also the trade war, right? So, I actually think it does come primarily from a position of insecurity. But that’s evolving over time as we’re getting more confidence.

And I think you’ve seen over the last roughly year or two, much more confident Beijing in how they’ve been using the export controls and how they’ve handled the United States for various reasons. So, it could be that, yes, most of this is “defensive” in origin, but then it has offensive implications. In terms of growing exports, it’s obvious that they care about manufacturing as a source of growth and they generally care about exports.

But a lot of these things that are going to be choke points, those that are actually the best types of choke points, are precisely those things that actually aren’t worth all that much. So, from an overall developmental perspective, they don’t actually do much for China. What they do is buy China resiliency against coercion against them. But then once you do that, with sort of the same mechanisms, you have your own indigenous supply, and then it gets big enough, it starts to be 50% or more of global supply, you then created a weapon, right? So, it’s sort of like a distinction without a difference.

Andrew: What do you, Gerard, and then I’ll bring Dinny and Cory on this as well, make of this argument that we touched on a little bit with the whole processing versus upstream inputs piece? That China sort of shot the starting gun on companies diversifying away from China, and therefore, the export controls actually backfired, they overreached. What do you make of that in terms of, A, the current situation, but more importantly, what we’re talking about going forward? Like, if we say China overreached, as having seen that in the instance of rare earths, will that create any policy impetus or a policy roadmap to avoid more dependencies in the future at all, in your view?

Gerard: So, the response function that Beijing has to watch for is not so much what companies do, it’s what governments do to facilitate diversification for companies. And that’s because for things like rare earths, if there is no state support, if there is no industrial policy, there’s pretty clearly a limit on what companies are going to be able to do on their own, because it just doesn’t make any sense for any one of them at least to pay for it. So, basically, I think they do have to be careful to not provoke a massive industrial policy response against them.

However, because there’s only so much industrial policy capacity in the West, and they’re quite focused on critical minerals at the moment, I think the risk of overreach there is currently pretty low. If you ask the question in the other direction, I think the U.S. export controls on China, or at least the early entity listing, and then later export controls, particularly what happened after 2022 with chips, that clearly has triggered a massive industrial policy response. And so, insofar as you’re seeing this as sort of an industrial policy race on both sides, it’s advantaged China for basically institutional reasons. And I think they are playing that to their advantage.

Andrew: Cory, I see vigorous thing that in your head. What are your thoughts?

Cory: Yep, absolutely that. And tying it to the biggest points on intermediate goods and kind of the limitations of Western industrial policy more broadly, I think one exactly, companies cannot replicate these production chains. I had conversations before this even blew up about companies who considered it, said it’s not worth it, spoke with the same companies after gallium, germanium, tungsten, all these, and finally rare earth controls, and they said, “Yeah, still can’t do it, still not worth it.” And these are some of the biggest companies in the world. They need the support. It just doesn’t make economic sense otherwise.

And, as that conversation happens, you know, we start thinking ahead companies, like, how do we not get in this position again? How do we de-risk and diversify our supply chains before the next action, which is why everyone’s asking, “What’s next?” Because they want to get ahead of it. But the calculus doesn’t change. They’re even less able to get around some of these other things than they are where it’s in many cases from the financial perspective, right?

And to tie in Gerard’s point from earlier, this gets even more difficult the further down you go into intermediate goods. There are too many of them, right? And I think exactly right. I see the same thing where the U.S. is able to focus industrial policy attention on maybe a couple of things. We see it on rare earths for sure. We’ve seen a couple of other things, but pretty modest, honestly, overall. And you frankly don’t see any industrial policy, meaningful industrial policy actions, even where there’s attention when it comes to certain critical minerals that definitely need diversification today or already controlled, but they just aren’t Earth since they don’t get a type of attention.

So, I think when it comes to has Beijing overreach, is Beijing going to face a slew of industrial policies that erode future leverage? The U.S. is struggling to erode the leverage it already has in rare earths, and it’s going to be harder to erode the future types of leverage on intermediate goods. The U.S. is going to be even less able to do that for the future goods than is for the current. So yeah, that’s my take here.

Gerard: Can I make a political point? I know this show is about China, but we’re talking about U.S. and China, so I’ll make a point about the U.S. We keep saying, or I keep saying, that and the U.S. is not as responsive, not as sweeping with industrial policy compared to China, which is true. And there are many reasons for that. But I think one important thing to focus on now is that the U.S. institutionally and legally has a bias towards mechanisms that give executive-level discretion, particularly when it comes to banning things.

That’s things like export controls or ICTS rule or things like what the FCC just did. It does not have the same level of discretion on the fiscal side, which is to say it doesn’t have the means of greatly empowering industrial policy in the way the Chinese system does. So, to take an example of critical minerals, and Cory, correct me if I’m wrong on this, apart for some small sort of top-up measures that were part of NDAAs or the One Big Beautiful Bill, there is no sort of sweeping congressional legislation that has been passed on critical minerals.

It’s mostly running through executive discretion, largely through the Department of War and the Department of energy, but there’s no comprehensive plan. There’s not a lot of actual money behind it, even though fiscally speaking, the U.S. could afford it. And I think it’s really revealed preference. And so, there’s a lot of talk in this town, there has been really for the past eight years or so about industrial policy for various reasons, including climate change. But my point is revealed preference is pretty important.

And the U.S. is actually just not all that disposed to do industrial policy that has any real fiscal outlays, except for rare exceptions like the IRA or CHIPS. And that’s basically the only ones I could think of, except for a few things on the defense side. And so even if we identify these goods, unless there’s going to be some mechanism to actually fund the response to them, it’s not just a question of, oh, do we have enough expertise or do we not know what those goods are?

Is there’s a literally fiscal authority to make it work. The U.S. does not have the equivalent of the Chinese state-owned financial sector to direct credit or government guidance funds at scale. And so, there is sort of an instrument in a political economy disadvantage here.

Cory: Absolutely. And I’d add to that, they’ve revealed preference. Obviously, there’s party line, there’s other ideology, this administration, etc. But when it comes to supply versus demand side, there’s a lot of focus on let’s keep feedstock here so we can get recycling all of black mass and all these other materials. What would be more productive, I would argue, for developing a battery industry would be to help support demand for batteries, which would be an EV policy, which was under the IRA, right?

So, there’s obviously a lot of complexity to what happened with IRA rollbacks and everything. But I’d argue that there’s a problem. It’s a supply problem. We can fix it with this targeted thing. And even within that, it’s very restricted, as you said. And I’d argue that’s another aspect of the reveal preference.

Andrew: Yeah. And Dinny, why don’t you talk a little bit? You just made a great point on the demand side, Cory, on the back of Gerard’s comments, which is, you know, not only is the U.S. policy not good at incentivizing, it’s really bad at creating demand for goods, which is what Chinese industrial policy is particularly good at. Dinny, wouldn’t you say?

Dinny: Yeah, look, I wanted to go back to this question about overreach, actually, because I think what Gerard and Cory were saying is spot on when it comes to specific issues, instances of lawfare. I mean, so far, we probably haven’t seen China overreach. And as Gerard said, I mean, what the U.S. did in terms of the CHIPS Act and whatnot sort of ended up in a massive industrial response in China.

But I think if we’re talking about Chinese overreach, I don’t think it’s with specific industries or specific instances of lawfare or protections or whatever. I think perhaps what we’re looking at is a more macro level, and it’s kind of what we were talking about a couple of weeks ago, or was it even just last week, Andrew, with the Ministry of Commerce’s essay about how China isn’t dealing with overcapacity and a kind of defense of its trade surplus and whatnot.

And I think if we’re looking at overreach or we’re looking for instances of overreach, that might be where to find it. I mean, China in its full-throated defense of its trade surplus saying, “Yeah, sure, we use subsidies, but so do you. We adhere to WTO rules. We are the defenders of the free trade regime.” But then you look at sort of Europe, for example, you know, and other parts of the world, you know, developed world where increasingly, if you’re kind of looking at the free trade regimes that currently stands, European nations in particular must be looking at and going, “This isn’t what we originally signed up for,” right?

Because free trade, more or less, was supposed to be a win-win situation, not a Chinese win-win, but a win-win for everybody, right? Where you sign up and you bring down your tariff barriers and your protectionist barriers, and sure, some of your industries are going to suffer, but you’re going to come out the front because that’s why everybody got involved in it.

And for a lot of countries in the world at the moment, there isn’t any clear benefit from the free trade regime as it currently stands because of just the sheer overwhelming power of China’s export machine. So, I think for me, the space to watch is more that kind of macro level of overreach. China says it’s sort of the defender of free trade and clearly sort of supports the current trade regime because it gets so much out of it.

But is it potentially undermining the sustainability of that system because more and more countries are going to find that they’re actually not benefiting in a way that they intended, that they thought they would from this regime and wake up one morning and go, you know, we want out because we’re not getting anything from it?

And I think the EU will be the proverbial canary in the coal mine because of China 2.0. Now, of course, you know, China shot 2.0 with the Europeans, it’s probably a slow moving response or a reaction given the sort of the way the EU works. But I think, to the extent we’re talking overreach, that’s the place to watch rather than sort of China’s management of individual industries or products.

Andrew: Yeah, and Gerard, I know you’ll have thoughts on this, so I want to let you cook on it for a minute. But I guess the way I bring it together in my mind is we talk about the overreach on weaponization of export controls and Dinny making the case that China’s overreaching in terms of, you know, its overall current account and trade surplus. We’re kind of getting to a situation which you can understand why other countries are frustrated with is China’s basically saying, “You have to buy all of our stuff, except you can’t buy certain stuff.”

And really kind of weaponizing the surplus in a way, saying we’re going to deluge your economies with all of these goods, except for really high value stuff or really stuff that goes into military applications. And that you can’t buy from us, and we’re dominant in it. I mean, that’s not a tenable situation at all. Gerard, what’s your thought on all of it?

Gerard: There’s maybe a dark irony that for years, Western companies saw China as being the market of the future. So, there was sort of a demand side narrative, but it turns out that China’s power is on a producer side. If only someone had been paying attention to Marxism, maybe that would be a little more predictable. That’s clearly where the policy has been driving at, right? And so, they are weaponizing it to some extent.

I would say to Dinny’s comment, maybe there’s different layers of overreach. So, I think Beijing more routinely commits types of diplomatic overreach. I think having a paper that says, “Basically, we deny all charges when it comes to industrial overcapacity, it doesn’t exist, blah, blah, blah.” Or telling the IMF, “No, our undervalued exchange rate has no bearing because prices basically don’t matter and our subsidies are actually in no way boosting our competitiveness, which raises the question, why do you have subsidies at all? But okay.”

I think that stuff enables the environment that is happening now in Brussels, where there’s serious discussion of finally doing something. However, it doesn’t operate on the layer of triggering a specific response function to get those countries to do something, particularly on the supply chain side, to target those goods. So, I think China has a pretty good read on other countries’ political economies in terms of their ability to actually respond meaningfully.

They don’t seem to be all that concerned of whether they’ve made the Europeans that upset. It’s more of, are they going to do something that is actually going to cause problems? And there, the threshold is much higher. So it might be true that China has committed diplomatic overreach in various instances. I just don’t think they’ve caused the same sort of specific policy overreach that’s triggered a response function that is that much of a problem for them.

Andrew: Wholeheartedly agree. My pet peeve is when prognosticators describe some action China has taken or position China has taken and describe it as untenable because it’s awkward, as if China is a person and they can’t stand awkwardness. And so, at some point, they’ll have to relent because the situation is just too awkward. We can’t deal with the awkwardness.

But actually, China have to have these dynamics be quite uncomfortable, even I would say awkward for other countries, and it might even prefer that because that’s the kind of situation where it’s uncomfortable, but it’s not so extreme that a country or a block of countries is actually going to push back. And that’s sort of the sweet spot for China in terms of exactly what you’re saying, sort of ruffling feathers, but not to the point where it actually spurs action a lot of times.

Well, Cory, you’ve got something. I do want to get to some of the specific, like what we think the upcoming choke points will be. And I want to give us a little bit of time for that because I know Gerard pointed out a lot of these in his paper, and I know Cory’s in a lot of work. But Cory, jump in on your thoughts here.

Cory: No, I agree. I think trying to hit that sweet spot seems to be the objective in many domains, politically and technically on the controls of export technology, as well as on the material goods. And I think you saw this, for example, I think the most robust overreach focused conversations I’ve had were early on after the rare earth export controls, when it became, again, this is reading between the lines, but I say it with fair confidence that Beijing did not intend to cause quite as much fear and anxiety in Europe with the rare earth export controls as they actually they did.

And they had to then have those conversations around, do we whitelist, do we green channel, etc. And eventually they got to the point where like, okay, yeah, Europe is angry, but not in a position to do that much more about it. And then rare earth, enough things got through that. It kind of held at this exact, that awkward, but not like Europe is going to do anything major over this. And I think that’s an example where when we talk about leverage, we talk about the dimensionality of leverage. That’s why it’s so important that China has the ability to make certain efforts more intense or less intense.

So, whether they move from a restriction to a prohibition, allow more exports or less exports, I think that, in large part, is the way that it’s able to calibrate and try to hit that sweet spot without going too far. And sometimes it does go a bit too far and then it dials it back a little bit. And actually, I agree on the diplomatic. I mean, the last several trips to Beijing this year, back and forth, was shocking to me how the level of technical depth of so many officials, and some of the, what I felt personally were ham-fisted diplomatic analyses of like, no, do you understand how big a deal certain things are diplomatically?

And so, while there’s a much greater, I feel, and again, this is not a definitive statement, the sample size is modest, but it does strike me that the average bureaucrat has a much deeper understanding of supply chain issues, industrial security, and all this stuff than you have, say, for example, in the U.S., where the U.S. has much less experience with industrial policy. But the diplomatic capabilities are not comparable in my view, at least in terms of what they were, certainly what they’re messaging, how they’re handling that.

I think, for example, the degree of concern around the cutoff of Japan, which Beijing, others have said this before, but Beijing seems to view the cutoff of rare earth exports and other critical matter exports to Japan as a bilateral issue. The entire world is now getting really, I’ll be polite with it, in a hard state, in a hard position, because Japan is not able to process things or to produce things that everyone else depends on.

So, this bilateral thing for China and Japan is not bilateral at all to the rest of the world, including Japan, including the U.S., including the EU. And that’s the case where I think if Beijing were listening or were acting more on the diplomatic side, diplomats have been saying this. This is not a surprise. This is something that diplomatic efforts have been trying to signal a message, but Beijing is not taking that seriously. And so, that’s where I think we could get into issues where it’s got a lot of tools to hit the sweet spot, technically, but maybe diplomatically it’s missing where the sweet spot really lives. I’m not sure, but that’s where I’d see it this day.

Andrew: Yeah, nuance certainly is not always the Chinese Communist Party’s forte. Great discussion so far. I do want to, as I mentioned a couple of times, drill down a little bit. We’ve talked about really the motivations, the current weaponization centered around critical minerals and rare earths. We’ve dug into the intermediates good piece at kind of the, call it 10,000 foot level. Let’s go a little bit closer to 5,000 foot level.

Gerard, you did a lot of work looking at what’s coming next. So critical minerals are really the tip of the iceberg. And you looked at, for example, Chinese dominance in battery active materials, super hard materials, power electronics, grid inverters, chemical intermediaries like fluorine chemicals, you mentioned pharmaceutical starting materials. What’s on your list for kind of, even just if it’s one or two things, that really are at the top of your list for where Beijing might zero in in the future that, you know, companies should be looking for, policymakers should be looking for? Where do you start with that?

Gerard: So, I would separate the question between what are goods that China might impose export controls on narrowly for sort of defensive reasons where it doesn’t want to allow its technology to go offshore for, you know, offshoring capabilities, right? But those are not meant necessarily to be retaliatory or necessarily to impose pain. That’s one set. The set we were looking at is one of the things that could replace critical minerals as a coercive tool for leverage. And there, it’s those five buckets you just mentioned.

So, it’s things related to batteries, super hard materials, power-related things, chemical things, and pharmaceutical things, right? I don’t know which one China is going to use. It thus far has not really had to use any others and won’t need to for at least several years. My guess is, of those groups, chemicals are going to be kind of an obvious one or certain materials because they are so upstream for reasons we already discussed, going after pharmaceutical APIs, while technically possible, is politically suboptimal.

And batteries are things where there is a real economic cost. Although you could imagine if China maintains its dominance of the technology, particularly with, say, Europe and the global south, not so much with the U.S. because it has more protective measures. Those could be weaponized. But I actually, I don’t know if they have a list of like what’s ready to go next.

I mean, they probably do for specific countries, but, by and large, I think the sort of magazine has some depth left in it on the critical mineral side.

Andrew: Yeah, maybe they’re like a coach in a football game that has, you know, he’s got a list of five to ten fourth-down plays that he can pull from, but he doesn’t know which one he’s going to pull until the actual situation arrives. As you can tell, I love sports metaphors, and they’re always very good, as is this one.

Gerard: Everyone understands American football. It’s a great reference.

Andrew: Cory, what are your thoughts on what’s next and how Gerard’s thinking about it?

Cory: My thought is that then you should introduce the cricket and rugby metaphors and watch them go everyone’s head. I think that’ll be the next best stuff here. No, in terms of predicting, I completely agree with all that. And I think chemicals in particular, I mean, it’s such a broad space. And so, I mean, more than saying, “Hey, we’re going after gallium nitride, I think one of the most approximate risks is probably riders where you start expanding existing controls a little bit further down the production chain, right?

It wouldn’t be hard to extend some of the existing controls to some of the, like, two production steps down from that. So, that’s one proximate thing, right? So, that’s one set of materials that we already track because they’re already impacted, but they could be much more impacted.

Andrew: Can you give a concrete example of one of those? I hate to put you on the spot, but just...

Cory: No, not at all, not at all. Yeah, so you have super hard materials, right, for example. That mostly is looking at tungsten carbide, and you’re looking at carbon-boron nitride, and then you have diamond windows which are using semiconductors. You also have things like types of silicon carbide that most of their applications are not actually controlled like just very specific ones. You could expand that, and that would be important in photonics and all these other applications. You have a lot of the gallium substrates, but you don’t have all of them, right?

So, you notice I’m focused on semiconductor. Guess what? We’ve been thinking about that a lot lately. Well, now on the flip side, you also have the potential, and Gerard, I’m not going to plant my flag on this piece, but when it comes to some mineral categories, there are certain types of control, I think, would be very difficult, very risky. So, lithium, for example, it’s kind of the canonical, why didn’t China do lithium? And it’s like China produces most of the world’s lithium and the cathodes and the batteries, and what they don’t control is the actual upstream supply of Spodumene, which come from mostly Latin America, specifically lithium triangle specifically Chile, and then Australia, U.S. treaty ally on the other side is where China’s getting most of its lithium.

So, you see them, this thing I mentioned before, increased domestic development of lithium, which is kind of a terrible source. It’s a lepidolite, which is not commercially attractive, and China’s investing in it just to have it. But I think that’s an example where Beijing’s going to be very careful about a blanket ban on lithium exports because they’re so upstream and upstream dependent. But there’s some really interesting intermediates, CAM, the cathode active materials, and pCAM which is the precursor cathode active material that stuff I feel like you could mess with that market if you wanted to, maybe more subtle than an export restriction.

China has a lot of control over those markets, right? So, the main thing that I would flag is that the whole response playbook has become much more diversified, obviously, in terms of tools available. It’s also become more creative within those tools. I think we’ve seen much more creativity within the application. And so, that’s why I’m thinking more broadly about rather than just it’s magnesium, it’s titanium, right? Yes. But what else?

I would just flag that there’s more space, that the possibility space is broadening. And that’s what makes it so difficult. And that’s why we go through, not just at a high level, but we literally do this mapping on a component and input basis because there’s so much stuff that parts. There’s a lot of possibility space there.

Andrew: Well, thanks for these kind of more detailed looks at what may be coming. We’re at over an hour already. And I want to make sure that I respect everybody’s time, especially our guest, Gerard. But I want to sort of give you a last word here, Gerard. We’ve kind of been thinking about what’s coming down the pike. And one other interesting argument you made in your paper, I thought, was that the threshold for usage of these various economic coercion measures is falling. And then you specifically pointed to the 1260H list, which is a Defense Department list that the Defense Department expanded and China responded to.

Talk to us about your thinking about sort of that lowering threshold and what you think that means going forward in terms of how China approaches these issues.

Gerard: Over the past year or two, China has been responding in a tit-for-tat way to pretty much everything the U.S. or the Europeans, to some extent the Japanese are doing, there’s more to a political side to that, with measures that it’s designed to be somewhat parallel. So it used to be, say, 10 years ago, China did retaliate in certain cases, but it was typically through import restrictions. So, messing with Australian wine exports to China, for example. They now have a parallel legal architecture, and the threshold for using it is basically if the West does anything it thinks crosses the line, it has a parallel response.

This has happened even in the past few weeks, with the U.S. adding Entities for the Uyghur Forced Labor Protection Act, and then China having a parallel act. They’re not necessarily doing it to pose massive cost. What they’re trying to do is signal for everything you do, we have a response. And that response is becoming more powerful. And if you take the intermediate goods argument seriously, as I think you should, over the medium term, it becomes more forceful and more responsive to those actions, which means that the big sort of geopolitical so-one of all of this is that China is trying to teach the West and has, I think, to some extent, taught President Trump, that they don’t have unilateral freedom of action when it comes to imposing offensive measures on China.

And it has real bearing on policy debates even now. So, I think there’s an actual debate in the administration of what to do about the Chinese open-weight models, particularly after Moonshot and K3, I think you guys had a separate episode on this, and people were expecting, and we are expecting some response to that, but it’s not clear what the response is. And part of the reason for that is, there’s maybe some commercial reasons, but it’s also that the U.S. White House is aware if they do something as aggressive as, say, banning Chinese models, then China is going to respond. And we know what they’re going to do.

They’re going to probably do something with rare earths, and then the U.S. will probably have to back down. And so, expect that equilibrium. Think of it as like an arms race where now both sides have demonstrated weapons. Both sides have shown they can shoot as weapons. And now it’s new equilibrium. Now, maybe the positive spin on this is like an arms race. If both sides know the other is armed, then it actually could be stabilizing somewhat perversely, right? It’s a little bit of mutually assured destruction.

But both sides can misread each other. I think the U.S. certainly misread China’s response to the 50% BIS rule last September, and they were not expecting China to respond so forcefully with its own rare earth export patrols, which were later shelved as part of the Busan truce. So, I think both sides are sort of learning, and they’re trying to teach the U.S. and Europe, basically, like, “Don’t mess with us, we’re going to punch back.”

And if that is accepted, or to the extent that it is accepted, it just means that policy in the West going forward has to be more careful and probably has to rely less on things like export controls and maybe to some extent tariffs than it has so far. And that means what’s left is more domestic industrial policy, which is still more or less in play for the West. But for reasons I already expressed, that’s not the comparative advantage of the West. So, that is it’s overall tilting the field towards China’s advantages.

Andrew: Yeah, great points. I think we should leave it there.

I’ll just, you know, speaker’s or host’s prerogative, make one final point, which is I would love it if the U.S. moved in that direction without getting too much on the soapbox. I think we should compete with China, right? You know, instead of complaining about China cheating and trying to hold them back and all this stuff. Yeah, we need a multifaceted toolkit, of course. But China’s on the playing field and they’re competing, and they’re trying to assert their interests.

Let’s assert ours by trying to invest at home, make sure that our companies are world-leading, that we’ve got the supplies we need. I don’t know if you call that more offensive or defensive in this context, but just kind of investing in our own capabilities, I think, is a longer-term and more sort of productive and proactive approach.

Hopefully, that’s a lesson we learned, and we can evolve and maybe become better at kind of that domestic investment that, as you say, we’re kind of currently disadvantaged at. So, that’s my hope. I’ll leave that hopefully for everyone on an optimistic note. But with that, Gerard, thanks so much for the time. Great discussion as always. Great to have you back on, man.

Gerard: Thank you for having me.

Andrew: And Dinny and Cory, thanks as always, fellas. Good to see you.

Cory: Cheers.

Andrew: And of course, thanks to the listeners. We appreciate it. We’ll see you next time. Bye, everybody.

• And this time, officials did something they rarely do – naming exactly which US actions they were responding to and why.

On this episode of the Trivium China Podcast, Andrew Polk sits down with Cory Combs (Head of Supply Chain and Critical Minerals Research) to unpack:

• What exactly landed in MofCom’s four-part policy package — from countersanctions on US biotech and compliance firms to China’s first ever foreign-trade national security investigation

• Why this round of retaliation was aimed squarely at the FCC and DHS, and how it traces back to actions on robotics, drones, and forced-labor sanctions

• Whether Beijing’s unusually direct language about the Busan detente is a warning shot or a sign the deal is really at risk

• Why neither side seems ready to blow up the agreement just yet, even as both keep testing its edges

Transcript

Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk. And today we’re doing another quick reaction episode. I’m going to be talking with Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs, about the latest economic coercion measures or retaliation measures, as they would see it, taken by China. But first, you know, Cory, how are you doing today, man?

Cory Combs: Doing very well. Thank you. Yeah. Happy to get into this.

Andrew: Yeah. Good to have you back. So, I already teased it — China dropped a large batch of retaliatory economic restrictions on August 5th. These were kind of against a range of U.S. actors and entities. The measures included some formal counter-sanctions and a spate of other things that we’re going to walk through. We’re going to talk about exactly what was done, what actions were taken by the Ministry of Commerce, which was the one officially putting these measures forth, the context that provoked these actions, and then talk about what it all means both for the short-term in U.S.-China relations and more broadly for that economic relationship. So, let’s get into it.

All right, Cory, like I said, August 5th. So, we’re recording this on August 10th in the afternoon, East Coast time, 5.45 p.m. It’s been a few days, but I was on vacation last week. So, I wanted to get you on the horn as quickly as I could once we were back to work. But why don’t you just start by walking us through what actually landed here? What actions did MOFCOM announce?

Cory: Yeah. So, on August 5th, we have two sets of documents. We have two orders and two announcements. And the orders are these kind of overarching orders signed by the minister. And the announcements are largely implementation of policy. So, I’ll kind of walk through all four documents in order. Order No. 2 has six counter sanctions. Specifically, these appear to be direct responses to the UFLPA, or Uyghur Forced Labor Prevention Act sanctions from the U.S. side.

And so, they’re applied to six different entities, including Applied Sciences DNA, Stratum Reservoir, Altana, folks in bio might recognize some of these names, as well as some compliance and human rights groups. So, we have Responsible Business Alliance, Verite Group, which is a labor practices group, among other things, and then Human Rights in China, HRiC. So, the order sanctions their business activities within China. So, they’re basically, they’re not on the ground anymore. It’s a sudden abrupt change, direct countermeasure against UFLPA.

We have Order No. 3, which is a countermeasure under the Anti-Foreign Sanctions Law. So this is, again, quite literally, a counter-sanction against the FCC measures in the U.S. Specifically, these are applied to U.S. Compliance Testing LLC. Beijing has accused this company, and let’s just be very clear, I’ve seen a couple places, it’s like someone has mistranslated this is applied to U.S. compliance testing companies. It is the name of an actual company, an actual LLC, Compliance Testing, right? Beijing has accused them of assisting in the FCC’s investigation and ultimate actions that in China’s, this is translated verbatim, ‘actions that harm China’s sovereignty, security, and development interests,’ right?

And so, these compliance efforts are deemed anti-China, right? So, the broad question here is, first, you have all the Chinese entities are now prohibited from engaging with that LLC in any business activity. That obviously means they can’t do much on compliance work of Chinese companies or anyone working with Chinese companies. So, one of the questions immediately is, is this going to be a broader issue with compliance? So, we’ll get to that. So, those are the orders. The announcements: the first is Announcement 33 of 2026. These are numbered annually.

And this starts a national security investigation into foreign trade regarding, and this is a really interesting one, imported printing, copying, and office equipment. So, this is not exactly what you’d think of, at least for me, as kind of a national security imperative, but it’s under the hood. What’s really targeting is foreign-developed software. And that software is used in imported office equipment. They’re not naming specific entities, but there’s a lot of prime candidates here. I mean, in the U.S., you have things like HP, you have Lexmark under Ninestar, you have Xerox.

In Japan, you’d have entities like Canon, Ricoh, Kyocera, Konica, right? So, just to be clear, it didn’t name those entities. I don’t want everyone to be like, “Okay, this is happening to this company.” But this is a broad national security investigation into foreign trade associated with those foreign office equipment and other products. So, it sounds a little bit niche, but I want to flag, this is China’s first-ever foreign trade national security investigation of this type. So, it’s kind of an odd one, but it’s also the first in this front.

So, very notable. I think it’ll be referenced a lot as we move forward as we’re trying to piece… trying to take out the lessons from this will be tricky. And then finally, you have announcement 34, which strengthens the export control specifically on dual-use items “related to drones,” right? So that’s pretty broad. You might imagine a few things. You have propellers, you have the batteries, you have all that stuff. Every affected export to the U.S., specifically, will undergo strict review.

And it also makes very clear there’ll be no fast-tracking or simplified approvals. Basically, we’re looking at a very high-friction process.

Andrew: Okay, great. Thanks for laying out the details. I want to get into the implications of each of those, but maybe before we do that, we start with the trigger. Why did this happen now? Why did China take these actions? Walk us through the thinking there. I mean, this isn’t conjecture. They were pretty forthright about this, right?

Cory: Yeah, MOFCOM’s spokesperson, they had a press conference and they were very clear that these are all responses to, again, China’s language, ‘negative China-related measures,’ and particularly the FCC and DHS. So I’ll talk about those two in particular. But the concerns here from China’s part, from Beijing’s part, date back to a number of things, a number of actions on drones, optical cables, and others. So, the FCC regulations in particular, it’s the July 28 ban on imports of Chinese humanoid robots, quadruped robots, power inverters, etc. Basically, the FCC has build this as a way to protect the U.S. AI industry, including not just power inverters is really talking about batteries and energy supply for data centers, but then you have the embodied AI, the humanoid robots and all that stuff.

So, the FCC is explicitly targeting this to “protect” the U.S. from Chinese capabilities there. This is also, by the way, there are reports that the administration is drafting a much broader ban on Chinese data center components and various other things. Of course, this is very problematic for China from its view, because those are very high-value exports in things it’s very good at and trying to develop. So again, very much in China’s economic model is increasing exports of these high-value things. Then you have July 31st, you have the Department of Homeland Security announced an expansion of the UFLPA entity list.

And again, that’s the Uyghur Forced Labor Prevention Act entity list. And so, these are companies that the U.S. alleges are involved in human rights abuses in Xinjiang, basically. It added 43 companies, and they span a whole bunch of different areas, a lot of them in minerals. I mean, we have steel, copper, lithium, caustic soda, and some other stuff. Also, notably, there are several biopharma and biochemicals companies as well. So, bio is in the list for the first time ever, but it is a notable issue.

Anytime you’re targeting Chinese bio right now, it’s very sensitive because that is one of the future industries that Beijing is really looking to develop. Those are the two main sets of actions that I think triggered all of this.

Andrew: Yeah. And we’ll get into this a little bit more in a minute in terms of how this may impact the Busan Agreement that occurred in November of last year and is expected to be renewed in the upcoming, you know, talks between the U.S. and China with Xi Jinping coming to Washington, D.C. in September, of course, next month. I will just say, I think from the U.S. side, I had heard that various parts of the U.S. government were looking for ways to continue pressing China that was “outside the eye of Sauron,” by which they mean, frankly, the White House.

The White House has been, I mean, this public reporting, very, or has taking a strong interest in tamping down any actions towards China in order to maintain stability, to maintain the Busan Agreement, to have a productive and well-received trip to the U.S. by Xi Jinping. And I think the thinking was basically the FCC’s a little bit more ancillary. It’s not a big legislative move. It’s not a tariff. It’s not an export control. So maybe we can get away with this, right? Both get away with this by effectively end-running the White House’s desire or, you know, command for more stability. And sort of same on DHS, right?

This is kind of like, it’s not a new action per se. The legislation’s already been put in force, and they’re just adding a few more names to the list. So these are not kind of what we-

Cory: Which happens regularly.

Andrew: Yeah. It’s kind of like, these aren’t the big lead moves. They’re the AAA moves, if you will. And that’s, I think, what the people who were kind of in charge of these were thinking, right?

Cory: Were thinking, yeah.

Andrew: There are ways we can continue to press China without kind of disrupting the core of what was agreed to in Busan and the core of the ongoing negotiations. China saw it differently, which we’ll get into in a minute. So, you know, people thought they were being nuanced, maybe, or I don’t know, being, I don’t know what the right word is, that they were able to get around kind of the White House desire. And I think some of them may have thought, you know, also China wouldn’t respond.

Or maybe there are elements out there that want China to respond because they don’t like the stability, but that’s conjecture.

Cory: But one can imagine that there’s this view that you can be tough without being provocative. And maybe that’s, you know.

Andrew: Yeah. Good point. Good point. You can imagine that.

Cory: I’m not sure I’d buy that, but one could imagine.

Andrew: I’m with you. Yes. Okay. But we’ll get more into that in a second. Before we do that, talk to us about the real ramifications of this. So, there’s MOFCOM Order No.2, which sanctioned the six entities you talked about. Then there’s the counter-sanctions order, which was in response to the FCC enforcement. Then there’s the Announcement 33, which is the national security investigation on foreign software or in the printing industry. And then there’s the tightened export controls on drugs. So, those are the four things. Start with thus No. 1, MOFCOM Order No.2 on those six entities. What are the real-world implications here?

Cory: Yeah, I think a couple of the main ones for a lot of MNCs is just that, I mean, some of these entities are essential to getting facts on the ground for their compliance efforts. And so, I mean, at risk of stating the very obvious, a lot of the entities or several of the entities in question were involved in UFLPA compliance. And so, if they’re not on the ground, they probably can’t be involved in compliance.

And so, all these American companies and anyone else operating in the U.S. who has to comply, they to figure out, if they’re working with some of these entities, what their backup plan is. So, that’s a very concrete, and it is distinct from the type of counter-sanction out of the Anti-Foreign Sanctions Law, but effectively, it is a means to undercut the ability of foreign companies to comply with American law. I mean, that’s effectively what this does. And obviously, it makes things a little harder for the bio side on those companies that are affected on that side as well.

Andrew: Okay. What about Order No.2, the compliance testing LLC piece?

Cory: You know, still working through this one, but I mean, long and short is that I think the medium-term risk here is that compliance itself becomes a battleground. That is not good for anyone because compliance, by necessity, when it comes to this type of trade, you need… the whole point of compliance is to verify what’s happening on one side from the other side. I mean, it’s probably not going to work for most countries outside of China to be like, well, we had a local Chinese body, you know, certified compliance with something that like you copy or whatever else.

So, you need reciprocity, bilateral access when it comes to this type of compliance. And so, if compliance and testing types of companies are getting squeezed by counter sanctions, that’s a dangerous path to go down. And so, the implications aren’t super clear to me yet, honestly. I’m sure someone in an office somewhere is, “This is what it means for me.” And I know there are going to be specifics that we’re still working through, but I’m mostly concerned about that medium term.

And to be very clear, I do not see this as Beijing trying to systematically target compliance or testing or anything like that. This is a specifically targeted thing. But if this becomes a center point of U.S.-China lawfare and economic coercion and counter-sanctions of anything, that becomes rather dangerous very quickly. So, I’d rather we not go down that particular route.

Andrew: Okay. So before we move to the other two pieces, how big, scale of one to 10 in terms of real-world implications are these first two things we’re talking about? I guess another way to say it is, you know, what’s Beijing’s intention here? Is Beijing really trying to hit back with full force? Or is this something that’s marginally disruptive for some companies?

Kind of like not symbolic, but a little bit of a more sort of protest type retaliation to throw some further friction in the works, but not fundamentally make it so that… I mean, Beijing doesn’t want these companies to leave. They’re going to have to do compliance. Is it more of a disruption or how do you see it?

Cory: Yeah, no, I think on one hand, these are intended to demonstrate that China’s very serious. I mean, Beijing did not view this as tough, but not provocative. This was very clearly provocative. These FCC and DHS actions at the same time, exactly as you said, they’re not trying to escalate the situation per se, and they’re not looking to destroy the Busan truce or détente, right? And so that’s a fine line to walk or find a kind of tightrope there.

But I do think that is the intent. Not escalate, but show that we take this very seriously. I think it shows the willingness. In some ways, you could argue it’s increasingly creative. I know creative is probably too positive a term for this kind of action. I’m not trying to, you know, it’s not a good thing. But in terms of it’s not so straightforward as, well, if you do this, we’ll just hit the next rare earth. You know, it’s much more dynamic. It’s much more involved. There’s much more optionality, basically, so I’d put it. And I think that demonstrates that willingness to be serious, but also not escalating.

Andrew: Yeah, I think the challenge with these moves, as we’ve seen in our work, is almost by design, not almost by design, by design- these moves have asymmetric impact. And I don’t just mean asymmetric to U.S. moves. What I mean is they impact you as a company. They impact you pretty significantly, potentially. But if you’re not dealing with one of the compliance testing LLC, maybe it has no impact on you whatsoever. And so, unlike a tariff that kind of impacts all companies in that industry equally, these kinds of moves impact companies disproportionately. And that’s the challenge, I think, for companies.

I think, originally, Beijing was trying to use that as leverage. When I say originally, like months ago in the U.S., China back and forth to try to get the U.S. business community to go to the White House and say, listen, “We as X company are getting absolutely hammered here.” I think Beijing now realized that doesn’t work as a piece of leverage per se to get companies to change the White House’s approach. But the ultimate impact for companies is still quite disproportionate, depending on where you happen to land on that.

Cory: Absolutely. You know, there’s not perfect visibility on Beijing’s side either. You can’t guarantee anything, but I would nearly guarantee that Beijing does not have a perfect mapping of all the companies that rely on… right? And so, all their consumers and clients and everything. So, I think in that kind of environment of uncertainty about like, how serious is this? One counterfactual that is helpful for understanding Beijing’s positioning is if Beijing wants to do more, what could it have done?

And it could have done after everyone who does publicly work with the Responsible Business Alliance. It did not. And I do not anticipate it doing that. So, that’s a good example, I think, of just kind of ordinal ranking of actions it could have taken and kind of contextualizing. But absolutely. And this is not equally deployed. And it is a huge problem for individuals. But at a macro level, we tend to, and I recognize, that as you’re saying, you’re absolutely right, we tend to think of these things in terms of kind of broad macroeconomic impacts.

And a lot of the times they aren’t. These particular moves won’t have that type of impact, but that doesn’t mean they’re not incredibly impactful for individual. Yeah. A hundred percent with you.

Andrew: Yeah. And I mean, I think additionally, like Beijing is probably trying to limit the collateral damage to the extent it can, but kind of probably is like, there’s going to be some collateral damage. If you’re going to make an omelet, we have to break some eggs kind of thing. So, I think, you know, they’re going to probably try to map it out best they can, but they’re not going to do a ton of work to make sure no major company’s impacted. It’s just going to whack some folks, right? And that’s just part of it.

Okay. So quickly, the last two, practical impacts of Announcement 33, which is national security investigation into the software piece, and then Announcement 34, the export controls and drone-related. Both of these strike me as, as you said, the foreign trade national security or investigation is a brand-new mechanism, but both of these strike me as pretty tame. Yeah. Real world impacts. Tell me if I’m wrong.

Andrew: No, I agree. And I think, I think specifically we’ve seen a number of national security investigations and other types, or other types of commercial investigations, pardon me, that tend to get used as leverage, right? This is the kind of thing that Beijing is willing to trade more of. When it comes to a counter-sanction, that’s serious. So, like, okay, as long as the sanctions in place, the counter sanctions in place is the default presumption.

Whereas investigations, obviously with commercial investigations, trade investigations, that is obviously a little bit less… I mean, we don’t really have precedent for this, as noted. So, it’s hard to say with too much confidence, but I do think that, one, the national security investigation is inherently a bit more serious, frankly, than some of the trade investigations. But at the same time, most of these investigations have been opened in response to something, and then once that issue is kind of tamped down or there’s discussion, negotiation, those investigations tend to lead nowhere or be repealed or formally or informally. Assuming things don’t get worse, that’s what this strikes me as. And that could be proven otherwise, but that’s my default.

Andrew: Right. Well, that’s assuming things don’t get worse is an important caveat.

Cory: Right. Always a caveat.

Andrew: Yeah. Well, a couple of things. One is Beijing has shown a clear pattern, putting up countermeasures so that it can roll them back, right? Like putting entities on the Unreliable Entity List so that it can take them off as part of a negotiation, opening investigations so that it can roll them back as part of a negotiation. I think that might be part of it here. But your other question, again, we’ll get to your point that we’ll get to again later on, assuming things don’t get worse. A lot of our clients are saying, “Well, is this the first in a series of moves?” And the answer is totally path dependent.

Does the U.S. ramp things up? Do the FCC take more moves? China is not trying to, in my view, up the ante. Officials feel compelled to respond. But the point is we don’t really know where things go from here. Beijing is highly unlikely to continue ratcheting up without further provocation from the U.S., we can say that, I think.

Cory: Yes, I agree with that.

Andrew: Okay, so let’s talk through some of this stuff. So, you’ve written in some of your work, writing about some of this stuff, just how Beijing’s being more direct. They didn’t hold punches, they were very clear, this is retaliation. Talk to us about how you kind of think about that piece.

Cory: Yeah, I mean, I think there’s a couple ways to look at this. I mean, I think fundamentally, the strategy around messaging has become, the clearer, the better, not in every single instance, right? There’s definitely some obfuscated policymaking. I don’t want to overstate that argument. But when it comes specifically to countermeasures against the U.S., I mean, we used to have, you know, well, no, the export controls aren’t retaliatory. You know, they’re in the interest of national security, and say, okay, given three days after the action that you’re very symbolically nearing, okay, sure.

And now we have the MOFCOM spokesperson saying, since Busan, I’m paraphrasing from my personal translation here, the FCC has ignored strong opposition from China, right? Continuously broadening the concept of national security, and particularly the U.S. has repeatedly ignoring China’s negotiations, yada, yada. And so, we’re doing this, you know, these actions. And direct quote, “I want to emphasize that China’s countermeasures have generally been restrained. China values the hard-won stability of China-U.S. economic and trade relations,” referring to Busan on that list.

So, I mean, there’s no playing coy there. It’s like, “Hey, we’ve worked really hard for stability. You’re only screwing it up.” I mean, you don’t have to agree with it, but that is the messaging, right? And it’s just such a turn. And I think a logical turn. I mean, this is probably, I think I’ve been saying this for a long time. I think we’ve all on the side been saying, if you want to get through to the White House, don’t play coy. Tell them exactly what you’re trying to do and what you’re mad about. And I don’t think subtlety is the name of the game in this context.

And they seem to have gotten a memo. At least MOFCOM has been very straightforward in this case.

Andrew: Yeah. And I think that’s a really important piece to point out. We had been hearing that Beijing was frustrated about these ancillary moves, the moves outside of the eye of Sauron, as we said. And, again, you know, whatever the motivations were, it was pretty clear this was coming to a head, and Beijing felt as though it had to respond. So, let’s talk a little bit then about how you think this impacts the Busan détente. I mean, how seriously should we take Beijing’s claim that the U.S. is abrogating the Busan agreement? And what should we expect moves like this to mean for that agreement, which is, up until last week, kind of expected to be pretty smoothly rolled over for at least six months, if not to the end of Trump’s term?

Cory: Yeah, I think bottom line, there are positions on both the optimistic and pessimistic side of the spectrum that I think would be reasonable here. For me personally, I’ll be very curious to get your view. I take this very seriously. I think Beijing genuinely views, you and I have discussed this before, Beijing views these types of affairs out of the U.S., whether by the White House or not, whether with a direct approval or not, they view this as directly violating the spirits of the stability that the U.S. and China have formed. And they view this as a direct attack on, especially when it comes to like biotech and things like that. These are direct attacks against China’s economy in the perception of Beijing.

And so, the motivation there doesn’t really matter. They have to hit back. And that phrase, the relationship that undercuts the spirit of Hussain. Now that said, I don’t think we’re at the breaking point yet. Personally, I think it’s quite clear to me that Beijing is very broadly committed to, or really wants the stability to be maintained. They want to have an agreement to postpone export controls further by November. They want to move forward with more constructive trade and economic relations. And they’d really like to see the relationship not fray further. And in fact, that it will get better.

And I think in the White House, you see a lot of interest in that direction too. And so structurally, I think the case for optimism is that both sides have structural strategic interests in maintaining the state option. I think that is essential. If we didn’t have that, there wouldn’t be much room for optimism, but I do think that is still there. The question now is, to me, and there’s many other ways of looking at it, but my question is, first and foremost, do we continue forward with FCC and some congressionally directed actions that just fray the relationship too far where Beijing kind of, it’s like, “Look, we’ve had enough. We need to start from scratch. We’re not playing this game anymore.” Do we hit that or not?

And I think that’s largely, but not entirely in the White House’s control as of right now. That could change. Obviously, Trump can be more or less personally involved in things. But I take it very seriously. Beijing is putting up a warning flare. It’s saying, “If this path continues, we will not end up where we want to be.” So, I take it seriously, but not a doomer about it. So anyway, I’m curious of your take here.

Andrew: Yeah, yeah. I think that’s all right. I mean, I would say it’ll be really interesting to see if we start to get some reporting that the White House is putting the FCC on a tighter leash, and maybe DHS as well. DHS has its own political challenges among the leadership with MAGA and all the immigration stuff that’s happening. So, you know, that might be one way to… even another reason to rein in DHS. I don’t know, just speculation.

But I guess the way I think about it is the White House, as far as we understand, has been very clear to Treasury, not that they need to be as clear with Treasury, but to USTR, to the Department of Commerce — hey, we are putting actions against China on pause while we try to negotiate some kind of stability. So, all the entities, the U.S. government entities that were told explicitly, hey, it’s time to pause have paused. But now it’s the ones just outside the circle, right? Who weren’t explicitly told that are now moving.

And so, do those folks get slapped down a little bit and said, “Hey, we didn’t tell you before, but now we’re just making it crystal clear.” So, I wouldn’t be shocked if we saw some kind of messaging or reporting about that kind of messaging from the White House. And then the other thing I was just thinking as you were talking was, you know, for anybody who thinks that China might be trying to blow up the deal, I mean, this just wouldn’t be the path they would take. If they, for some reason, wanted Busan to blow up, they would just reinstitute export controls.

That’s the path of least resistance. They don’t need to create some kind of cover for blowing the deal up. They don’t need to create some reasoning, some rationale. They would just blame the U.S. no matter what and say, “Guess what? You guys are being jerks. We don’t think you’re living up to what we agreed and we’re reinstating export controls.” They wouldn’t be coy about it.

Cory: Yeah. I’d say they already have enough, like, if that were the path they’re going to do, they’d say that what we’ve seen so far is enough to do that. And they’re actively trying to say, again, you don’t have to agree with the statement, but they’re like, China’s measures or countermeasures have been restrained, right? Like they’re trying to, you know… they wouldn’t say that. They would just go for it.

Andrew: Yeah. They’re trying to be as clear as possible. I think that’s right. So, I mean, all that is to say, of course, you have to… with any government readout from China or many places, but China in particular, you got to sort of understand the Party speak and the goals and kind of what the angles are. But I think this one’s pretty straightforward. They’re trying to say…

Cory: Usually, yeah.

Andrew: Yeah, yeah. We don’t want this to blow up, but we feel compelled to respond. And so, this is the response. So, I think we can leave it there. I’ve already taken up more of your time than I expected, so I appreciate that. Just one quick 30 seconds if you’ve got it. The next day after these announcements on August 5th, on August 6th, the cybersecurity regulator announced an investigation, or not an investigation, a review of products sold by Palo Alto Networks, a cybersecurity firm. Do you think that’s related to this or is that separate?

Cory: I think that probably is separate. I mean, this is very similar to the CAC’s cybersecurity review into Micron in 2023, right? It fits a different pattern. It is very confusing when these things overlap, obviously. But I think broadly, Beijing has been expanding its reviews into foreign technology it considers risky to use. And so, there’s a lot of different motivations for that kind of review. And the tech team, I think Kendra will have so much to say about that. That’s beyond me, but I do think that’s kind of separate.

But on the other side, I mean, one thing that you do see as, I think, very specifically interesting about where Beijing retaliated and why Beijing retaliated against these efforts were, one, again, the MOFCOM spokesperson specifically singled out U.S.-restricted measures against China covering telecoms, covering consumer-grade routers. These are pure kind of core tech when we think of tech. And then submarine optical cables, right?

These are more a little bit further afield, but also kind of in that core space. And then AI. The other side of it is biotech. And so, I think there’s going to be a lot more overlap. There are going to be these cybersecurity reviews, these kind of broad technology reviews. For much the same way that FCC is arguing that Chinese technologies pose a risk to the U.S., I mean, a lot of Chinese authorities are looking at this the same way. Like, yeah, U.S. technologies that China’s dependent on have back doors, right?

We’re going to start being a bit more cautious about that and reviewing this stuff more carefully. And so again, Kendra and the tech team have much more to say about that than I will. But on that, you have that piece of it, which is a whole separate dimension of tech review, in addition to these retaliatory kind of actions. And then on biotech, it’s probably up there with embodied AI in terms of… I think embodied AI is certainly the sexiest, if you will, in terms of getting the most attention. But biotech is an industry that Beijing hopes is on the precipice of a massive development spurt, with huge TFP gains and just total value add for the economy.

And if it starts facing tight restrictions that either undermine development of the domestic biotech industry or that prohibit or prevent the export of key technologies or key products really using those technologies, Beijing’s going to hit back very hard against those because they’re such strategic industries. And that’s going to overlap with all the cybersecurity, data protection, all these other governance regimes. They’re going to all be stacking up on each other. And it’s probably going to get difficult to tell some of them apart. And it’s going to be essential that we do because those reviews will all serve different functions. It’s going to be important that we don’t mix the signal there.

Andrew: Yeah, great points. I’m glad that you pointed out that you think that the Palo Alto networks thing is separate. I think that’s an important point. We may or may not have a chance to pick that up with Kendra at some point. But it just also brings up the point that China is still also hitting back in certain ways. Like that Palo Alto thing may have happened even absent this retaliatory back and forth. And so, both sides are trying to test the limits of where they can continue to assert their interests without blowing up the Busan deal.

So, that’s an interesting dynamic. And then the other piece I was just thinking is, I also wonder if, to an extent, maybe taking the action against the FCC on the back of their move against robotics. The reporting is that the FCC is also looking at a ban for certain inputs into data centers. Right?

Cory: Yes, it is. That’s correct.

Andrew: And once you take these actions into the realm of AI, which is one of the key things propping up the Chinese economy and exports of those components into data centers are a real big driver, or one key driver, China’s export performance recently. Maybe China’s trying to head that off. Like, hey, we can see more and more coming out of the FCC. We want to nip this in the bud. I don’t know. Maybe that’s part of it as well.

Cory: No, I think that that stands to reason. And it’s especially because the reporting, the public reporting around this has been so clear that it seems like there’s a much broader interest in not even decoupling, but preemptively making sure that Chinese tech is not throughout the data centers, which on the energy side, at least, is difficult because a lot of what you need is made best and cheapest by China. And so, that is just a difficulty for hyperscalers. And it’s a practical challenge and a security challenge and all this stuff.

And the problem is when we decouple the technical and security reviews, like the legitimate kind of teardowns and then figuring out any backdoor issues, that’s stuff you just do as a matter of course, versus kind of general narrative and geopolitical. There are a lot of things that frankly do not need to be banned, right? But there are things that do, right? We’re in that middle space where your value set kind of dictates. But if everything gets lumped together, that would definitely be viewed as excessive harm to China’s economy and an ideological as opposed to market-driven approach.

And so, that’s where things start to get very complicated. And unfortunately, policy, one, often doesn’t play with that type of nuance in many cases for political reasons. But also, even if it does, it can be very difficult to actually execute in a nuanced way. I understand that. And I know it’s very easy for us analysts to kind of be like, “Well, actually, you really should have a 17-point framework for analyzing every component.” That’s not realistic. We get that. For all the policymakers listening to the naive people, we get that, right? At the same time, separating out things that bear technical risk and need to be handled on a technical basis versus things that we don’t want it because we don’t want it, those are different things.

And so, I think for Beijing, being able to signal which actions are on which side is very geopolitically and practically important in terms of how they might counteract, what measures they might respond with.

Andrew: Yeah. Yeah. All good points. All good points. Well, we’ve already, like I said, gone over a little bit longer than we…

Cory: Sorry.

Andrew: No, no, not you. This is a great discussion. The only other thing to talk about is sort of where all this goes. But I think time will tell and we’ll have plenty of chances to kind of discuss that with the Xi Jinping meeting coming up. I think we’ve already touched on enough to say we still think both sides, despite showing some cracks, have a strategic interest in maintaining the Busan deal, extending the Busan deal. Whether or not someone on either side decides we want to blow this thing up, we don’t seem to be at that point yet.

Cory: 100%.

Cory: So, I think we can say that with confidence. Great. And also, I think the main point here was just to lay out the key details of what happened for listeners. And this was all kind of a complicated mishmash of stuff. So, I appreciate you just laying out the details and making it clear as to what exactly happened and what the likely near-term impacts are. So, thanks for that, Cory. I really appreciate it, man.

Cory: Absolutely. Always a pleasure.

Andrew: Yeah. Well, this has been great. Thanks for your time, Cory, and thanks, everybody, for listening. We’ll see you next time, everybody. Bye.

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

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

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

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

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

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

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

Transcript

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: This is the way of the world.

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

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

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

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

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

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

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

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

Andrew: You don’t say!

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

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

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

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

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

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

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

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

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

Andrew: Decide between the lines.

Dinny: It’s all the subtext.

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

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

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

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

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

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

Dinny: Absolutely.

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

Dinny: Yeah, no worries, mate.

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

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

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

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

Here’s why.

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

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

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

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

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

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

The first lever is inflation.

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

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

The second is exports.

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

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

The third is enforced fiscal discipline.

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

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

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

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

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

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

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

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

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

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

Dinny McMahon, Head of China Markets Research

What you missed

US-China

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

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

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

Foreign affairs

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

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

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

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

Econ and finance

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

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

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

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

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

Tech

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

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

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

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

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

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

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

Net zero

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

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

Politics

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

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

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

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

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

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

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

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

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

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

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network.

I’m your host, Trivium Co-Founder, Andrew Polk, and today we are trying our second go at our quick turnaround, shorter format pods where we grab one of our analysts and get their unfiltered reaction to something that’s happening in the news.

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

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

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

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

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

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

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

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

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

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

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

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

We will fully leverage the effectiveness of existing policies.

We will introduce incremental policies.

We will increase counter-cyclical adjustments.

We will intensify efforts to expand domestic demand.

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

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

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

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

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

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

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

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

Andrew: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dinny: Cheers, mate.

Andrew: All right. Bye, everybody.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What you missed

US-China

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

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

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

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

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

Foreign affairs

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

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

Econ and finance

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

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

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

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

Commodities

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

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

Business environment

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

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

Tech

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

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

Net zero

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

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

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

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

As always, it was a busy week in China.

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

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

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

• Look for more of these in your feed soon.

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

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

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

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

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

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

Transcript

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

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

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

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

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

Kendra: Yes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Kendra: That’s the competitiveness piece, exactly.

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

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

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

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

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

Andrew: Insane.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: Yes.

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

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

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

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

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

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

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

Kendra: Exactly. Yeah.

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

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

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

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

Andrew: Or it must have cheated.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: Totally. It does make sense.

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

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

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

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

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

Andrew: Thanks. Bye, everybody.

• Coincidence? We don’t think so.

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

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

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

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

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

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

Transcript

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

Joe, how are you doing today, man?

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: Oh, right.

Joe: England’s depressing performance against Argentina.

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

Dinny: Yeah, France too.

Joe: Yeah, well…

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

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

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

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

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

Joe: For sure. Yep, let’s do it.

Dinny: Yep, let’s do it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dinny: Who are these people?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dinny: That’s right.

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe: I’m anything but pure, Andrew.

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: Yeah.

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

Andrew: Absolutely. We will do that for sure.

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

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

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

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

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

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

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

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

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

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

Andrew: Yeah, yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe: Sweet. All right.

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

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

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

Bye, everybody.

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

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

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

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

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

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

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

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

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

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

Beijing, to its credit, has taken note.

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Peissel, Senior Macroeconomic Analyst, Trivium China

What you missed

US-China

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

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

Foreign affairs

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

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

Econ and finance

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

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

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

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

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

Commodities

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

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

Tech

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

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

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

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

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

Politics

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

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

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

As always, it was a busy week in China.

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

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

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

The two discuss:

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

• How restricting access to those models could undermine US competitiveness

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

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

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

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

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

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

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I am joined today once again by a pod favorite, or a pod fan favorite, Trivium’s Head of Tech Policy Research, Kendra Schaefer.

Kendra, how are you doing?

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

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

Kendra: Of course.

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

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

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

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

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

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

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

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

Kendra: Okay.

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

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

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

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

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

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

Kendra: I’m ready. Let’s go.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: Yeah.

Kendra: So this is difficult to enforce.

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

Kendra: It’s where you hang out.

Andrew: Yeah, yeah, exactly.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrew: Oh, no. Look at the time.

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

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

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

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

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

Kendra: Right, right, right.

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

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

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

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

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

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

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

Andrew: Dude.

Kendra: But in the digital economy… a dude, a dude. But now, in the digital economy in the modern age, you need data as an input, or your company needs data as an input in the same way that they need financing. And so that sounds abstract, but it actually has these enormous practical implications because like, think about what that means. It means the state is taking responsibility. If the state names something a factor of production, they’re basically saying the state is responsible for making sure that companies can get this thing.

Andrew: Yeah, that does make sense. And I mean, in a way, with agriculture being such an important part of kind of how Chinese policymakers think of the economy, they would never actually drop land as a factor of production. But you can see for most modern economies, land is sort of less and less an important one. So, it’s almost like you could add data and take away land. Like, for our business, we don’t need land, but we do need data. But that’s just a quick point. But more like, what do you mean like in terms of people or companies getting data? What do you mean by getting it?

Kendra: Well, so, okay. So, it’s the state’s job to create a market environment where businesses can access the inputs they need to grow and contribute to GDP, right? So, if companies need labor, that’s fine. It’s on the state, then to kind of build an education system that produces the right workers or to write employment laws that like balance the needs of employers and employees so that talent can flow smoothly between firms and hiring and firing can happen while balancing everybody’s needs. So, it’s kind of on the state to create the background, the environment in which labor can get to companies, where they can acquire it and use it well.

And then if companies need land to build a factory, it’s kind of the same thing, right? It’s on the state to run zoning, to run deeds and titles, to write property and ownership laws. Those are things that we take completely for granted. It’s like invisible infrastructure of the market. We never even think of it. But those systems are basically what keeps factors of production moving throughout the economy and keeps them flowing into…

Andrew: Companies and enterprises. Yeah, that makes sense. So you’re saying basically that this same logic, at least in the Chinese context, now applies to data. The state is taking a role in making sure there’s an ecosystem that sort of curates and feeds data into companies, broadly speaking. Is that right? Do I have it right or is it different than that?

Kendra: Yeah, yeah, exactly. Exactly. The state’s saying, “Look, there’s already a capital market. There’s already markets for land and natural resources. There’s a labor market. And now it’s on us to build a data market, the systems, the regulations, the standards that basically govern how data gets bought and sold and traded so that it can sort of circulate through the economy and so that businesses can get our hands on it.” And in order to describe that idea, the state has basically formulated or coined this term data factors, meaning data when we view it as a factor of production, data as an economic input.

Andrew: Okay. Yeah, that makes sense. I guess the question then for me is when you talk about “building a data market,” you know, strikes me that data gets bought and sold all the time without the intervention of the state, right? And there are data brokers, there are entire industries already existing around this, both in China and elsewhere. So, why does the state need to build anything? Like, what specifically does it need to build?

Kendra: I mean, actually, that’s such a great question because I think there actually is a big open question about whether or not the state needs to do anything or needs to take an interventionist approach to this at all. But I think if you asked Beijing what the issue was, they’d say that for every other factor of production, humans have been trading it for, in some cases, hundreds of years, right? We’ve been trading land for hundreds of years. And so, the rules of the road are kind of ancient. I mean, we solved the fundamental plumbing problems that make those markets run to the point we don’t even see them anymore.

But none of that plumbing is there for data. Okay, so that all sounds squishy. We’ve been very squishy. Let me get very concrete. Let’s do a concrete example. So, imagine that you wake up today and you decide, I want to buy an acre of forest land in Washington state. So, what is the first thing you do after you’ve decided to do this?

Andrew: Well, either Google or ask an LLM or a ChatGPT, where do I buy land in Washington? I mean, no, I guess you sign on to some third-party site, like a Zillow for land.

Kendra: Right. You would know exactly what to do. You want to buy real estate, you open a real estate website. There’s a real estate market at your fingertips. You would open one of a dozen well-known sites, all of which are kind of pulling from these centralized property listing systems that have been there forever and you just browse what’s available. Consumers know where to shop, no bigs. Now, imagine you want to go buy access to regularly updated shipping container movement data. Now what do you do?

Andrew: Same answer, right? Google, ask ChatGPT. I don’t know. I mean, truly, that’s where I’d start.

Kendra: But there’s not like containerdata.com. Like containerdata.com is not like It’s a common marketplace where all data sales are happening.

Andrew: Website idea.

Kendra: Oh, there we go. We can just quit what we’re doing right now. So, there’s like, the real estate, there are well-worn pathways for discoverable real estate and not so much for other kinds of data, right? You’d like, you’d poke around online, you’d Google it, but there’s no… a business can’t wake up and say, I need this very specific kind of data and I know where to acquire it in most cases. Does the supply of data you want even exist? Who has it, right? And so, the reason data brokers exist is because you go hire these people to find data for you because there is no place that you can just simply go find it yourself in most cases, right? So, that’s one problem, discoverability. How do I discover the supply? Where is it? How do I get it? Does it even exist?

Problem number two, okay, you’re back on Zillow. You’re buying your acre of forest. How do you figure out what you should expect to pay for that data?

Andrew: Compare… well, see what’s out there, right? Look at what’s on the market and compare them to, I guess, decide the parameters of what you want and compare them to other comparable acres of land, houses, etc., whatever you’re trying to buy there.

Kendra: Yes, exactly. You look at comps, or you look at a house with the same… if you’re buying real estate, you look at a house with the same number of bedrooms and bathrooms that you’re looking for in the same street. And you’ll say, “Oh, with the same square footage,” and you’ll say, “oh, it usually sells at this particular price.” You found your million-dollar parcel, right? Whatever.

And then the value, whether or not that value is correct, basically gets confirmed through an appraisal in the process of buying your property. And it’s the same with the labor market. If you want to hire a senior engineer with 10 years of experience, you check Indeed or ZipRecruiter or Glassdoor, and you see what everyone else is paying for the same set of skills. And of course, capital markets have decades of these sort of established valuation methodologies. So, you can find the price for similar items easily, whether you’re buying or selling.

Now, if you’re buying or selling that shipping container data, what should you expect to pay for that? How would you know that you’re paying fair market value if somebody does quote you a cost? And if you are selling data, how do you even know what it’s worth or what you should be charging for it at all?

Andrew: Yeah, I mean, I guess no real answer. I don’t really know. But I mean, fundamentally, I guess it’s worth whatever someone’s willing to pay for it.

Kendra: Right. Yeah. 100%. There’s no real standard metric for valuation. This type of data is valued at this amount of money in general. Right? It’s very hard to do that. A, there are so many different types of data. But B, we just haven’t been selling it that long. And it’s hard to compare one data transaction to another data transaction right now. And so, I mean, I think this is very interesting, but the inability to put a very clear standardized value on data actually creates this sort of cascading set of downstream problems.

And here’s my favorite one. Let’s say you’re a small tech startup. You don’t really own that much physically. You don’t have any equipment, you don’t have real estate, you don’t have tractors or anything. But you’re sitting on a genuinely valuable data set, or you’ve collected or made some data that is worth a lot. You think it’s worth a lot. That data is your most valuable asset. Now you go ask a bank for a loan.

Andrew: And of course, They want like collateral or something to back the loan.

Kendra: Right. They want collateral. You don’t have physical assets. Physical assets work in collateral in part because they’ve got a clear value. The bank knows it can resell your equipment for a million dollars if you default. But if it takes your data, which is your only asset as collateral, what are they going to recoup on that? Where are they even going to put it? How would they offer it to…? They can’t price it. They don’t know what it’s worth.

And so, that creates this situation where data-rich companies that don’t have a lot of assets, which is to say like a lot of tech startups, become a sort of structural advantage when they’re looking for financing. They can’t use this valuable thing that they have.

Andrew: Yeah, I guess I had not thought about it from that aspect in terms of becoming a structural challenge for capital allocation. I mean, I think maybe the U.S. and the West broadly may be a little bit better at that through venture capital, but that’s like, basically, gambling is the wrong word, but you’re taking big bets on something you have no idea about. And China has obviously a venture capital ecosystem, but there’s a long-term problem that small companies, innovative companies can’t get capital. So this makes sense that it would feed into this issue of lending issues, capital allocation issues.

Kendra: Yeah, exactly. I’m going to give one more example just to give a little bit more meat on the bones. So let’s say you bought your land, you have purchased it, and now you go to closing, and it’s time to take ownership of that land, right? There’s a mechanism for doing that that is very well worn. The deed gets transferred into your name, and that transaction and whose name is on the deed gets registered with some kind of county recorder’s office so that forever after, if anybody needs to verify who owns that land right now, they can check the registry.

There’s nothing like that for data. We don’t really even conceive of data as something you would need to register in that way, right? That you would need to kind of confirm that you have the rights to buy and sell and the right to own and the right to use, that there would need to be some kind of allocation. Beijing does think that that is probably necessary. So, you can kind of see these four issues pulling back a little bit, right? All of these things are related to trade, these kind of invisible pieces of it, discoverability, valuation, can you figure out how much it’s worth? Collateralization, can you turn something into an asset that can be used as collateral?

And registering or confirming ownership or rights to ownership over some kind of property. Those are four of the many unglamorous, invisible plumbing problems that have basically been solved for every other factor of production and just don’t exist at all for data.

Andrew: So, you’re saying that basically establishing those four things for data is the underlying project that the Chinese state or policy apparatus is trying to achieve here? Do I have that right?

Kendra: Yeah, that’s the whole project. I mean, not just those four. There’s probably about 20 different unglamorous plumbing problems like that, that the state has identified and gone, OK, we’re going to have to launch a sort of policy initiative to do that. But yeah, I mean, when Chinese policymakers say data is a factor of production, what they’re really committing to is just what we said, define the fundamental rules and processes and systems surrounding transactions so the market can grow.

And the theory of the case is if we make data easy to find, if we make pricing standard and predictable, if we let companies legally sort of establish and protect their rights to data so that they can trade it, then more companies will want to sell data. More companies will buy data. That means more companies will acquire and use data, empowering the data economy and share data and trade data. And so, supply goes up, and circulation goes up. That’s generally, that’s the fundamental data theory.

Andrew: Okay. Yeah, makes sense. All right. So, thanks for laying that out. I think that kind of sets the sort of theoretical and sort of contextual piece of this. But let’s kind of go a layer down. What can you talk about, like an actual policy here, something sort of more concrete that solves one of these problems that the Chinese policy apparatus is putting forth?

Kendra: Yeah, actually, I’ll give you three. I’ll talk a little bit about how the state is actually trying to solve those three problems, like those couple of the problems we just talked about. So, first, the registration and ownership problem, right? How do you confirm you have the right to sort of use a specific data set in a specific way? What we’re seeing now is that the NDRC, China’s big sort of macroeconomic agency, is piloting what they’re calling a data property registration system.

So, you can think of that, well, the way they’ve described it is a land registry or like a patent office, a securities depository, but for data, where data owners and users can register their claims, log rights to use, and then trace the history of ownership of specific types of data. So, in other words, I could basically say I made this data set. I’m putting it on this registry. I think they’re talking about the underlayer maybe being built on blockchain or something like that.

But I’ve got this registered that I’m the owner of this data set. And then let’s say I’m transferring… It’s not really actually with data about transferring ownership. It’s, I’m going to allow you to use my data set for the following purposes. And the right to use the data in that way is then logged in this registry. And the end user can then take that data and use it without worrying that there’s going to be some kind of… you know, there’s like a clear transaction that they can point to and a clear rights document that they can point to that is sort of part of a sort of central depository.

So, that’s the general idea with that. And they’re already kind of trialing that at the local level. Shenzhen in particular is actually running a trial that’s supposed to go national in a couple of months. And last year, we actually saw the NDRC’s National Data Administration put out this call for research proposals on how to construct, basically asking researchers for ideas on how the base construction of that system should be run nationally. So, we see a lot of movement, right? Early movement on constructing a system like that, meaning that companies in China in five years, three years that acquire data, that sell data, that use data, that leverage data in any way, will probably have to transact with this registry.

Andrew: So, this is like the county recorder office registration system, but for data sets, you’re saying?

Kendra: Yeah, exactly. That’s exactly right. So, the second issue, right, discoverability, the where do I even shop problem? This one’s pretty simple. We’ve been watching this for many years. There’s been this sort of wave after wave of state-backed data trading platforms established. They call them data exchanges. Usually, it’s a local government that stands one up. It’s basically a platform where you can browse available data sets.

Most of the companies listing data sets on there are state-owned companies, indicating that the private market is not really that interested in transacting on these state exchanges. So, I don’t know that they’re the best idea, you know, but the state has been essentially doing that. There’s one in Shanghai, there’s one in Beijing, there’s one in Shenzhen, there’s one in I think Guiyang still, where it’s essentially just a centralized marketplace where people can go and kind of shop for the data that they need, or at least that’s the fundamental idea.

Andrew: Okay, got that. But I guess a follow-up question would be, what are they doing, that sort of resource allocation issue that we talked about before, or how to get a bank loan based on your data assets? How are they looking to solve that issue?

Kendra: Oh, well, this one’s actually my favorite because it’s really concrete. State banks are running pilots that let companies use their data as loan collateral. And so, we’ve studied quite closely the structure of those pilots because I think they’re pretty interesting. It’s a three-party structure. So you have the bank that’s making the loan. You have a data-heavy and asset-light company that wants a loan. And then the third party is usually one of those state-backed data trading institutions, so like a data exchange, that independently certifies the value of the company’s data assets, like an appraiser or a data appraiser.

And so, then the bank sets the loan rates based on the value of the company’s data assets. So, there’s like one example, I think from August 2024, when the Chongqing branch of Huaxia Bank partnered with this data trading platform locally and offered a 1.3 million renminbi, so not a big loan, to a company in Chongqing that was doing smart city development. And so then the trading institutions certified the data’s value, the bank priced the loan’s interest rate off the certified value. And that’s how the money was issued. So, these aren’t big numbers. 1.3 million renminbi is not like a massive loan or anything like that. But it’s interesting just to watch them kind of see, does this work? Can we proceed here? Yeah.

Andrew: I mean, that strikes me that that whole system depends on the bank or someone else, some third party, whatever it is, being able to credibly say what the data is actually worth, right?

Kendra: Yeah, yeah, exactly. So there’s another piece, right? Another piece of unglamorous policy plumbing. So, the Ministry of Finance has basically been supporting research into standardized data valuation methods. And we saw a couple years ago in like 2023, there’s this body called the China Appraisal Society, which is like an industry association tied to the Ministry of Finance.

They usually just do physical asset appraisals. And so now they’ve been publishing guidance on conducting data asset appraisals, right? And so, they ask people to look at basically creating a sort of framework for determining for how an appraiser should be able to set a price on data. It’s very interesting stuff.

Andrew: Okay, let me step back for a second. So that all makes sense in terms of domestic flow of data, right? Kind of trying to boost the infrastructure behind the pricing of data, how data can be used as collateral, where and how you can sell it, where and how you can exercise the rights to data. But, I mean, as we talked about before, foreign companies who we work with, non-Chinese companies, are primarily interested in cross-border data, right?

Getting their data, in particular, out of China. And China’s regulatory regime on that front is incredibly strict. So, we’ve worked with these companies trying to get their data out of China for months and months and months. So, it strikes me as actually quite normal for China. But talk to us about that dichotomy where, yeah, we want stuff flowing freely internally, but we don’t want it to go across the border. What’s going on with that?

Kendra: Well, so I’m glad you brought that up, right? Because actually, I think this is the single biggest miscalculation in how D.C. reads China’s data security regime. I mean, the D.C. read is China’s data security rules are digital protectionism and that’s it. China wants to build a wall to hoard data inside of China’s borders while they steal data from everybody else’s. That’s kind of the standard, right?. That’s kind of the standard framing. But from Beijing’s perspective, the data security regime isn’t a wall around the market. It’s actually the guardrails that make the market possible.

Like, it’s not unusual for markets to have guardrails, even really, really heavy handed guardrails for cross-border trade. Capital markets have a zillion guardrails for cross-border trade. Labor markets have a zillion guardrails. I’m not necessarily cross-border, but there’s some. And so, the logic runs if the state clearly establishes what kind of trading is not allowed and where the safety risks are, and a lot of those risks are bigger in cross-border trade, and if it clearly defines which categories of data cannot be traded and starts there, then everything outside of those lines can sort of flow more freely and with more confidence.

I urge listeners, anybody who cares enough to, after you finish this episode, go read the actual text of China’s data security law. Go read it. I think DigiChina has a really good English translation. And I promise you it will read differently than you remember if you’ve read it before. There’s all this language in there about how data security is the fundamental building block of data trade, and that security has to be strong before data trading can occur. And that’s how all these data security rules are about enabling the safe trade of data, and the state’s job is to enable the safe trade of data.

And I think we just kind of gloss over that because we don’t, again, it’s not really on our radar that this is the plan. I do actually want to say one other thing, though. So that’s the plan. But China’s data security regime is still over-calibrated. I think they do want trade, but they have significantly overshot on the let’s secure this before we allow trade to the point where the current regime is not serving its own goals. There’s like a genuine desire to enable safe data flows, but the state is kind of its own worst enemy with this like, knee-jerk over-securitization. And so, what we’re watching right now is the state kind of actively hunt for a balance point.

How do we balance development and security? We heard that a thousand times, right? And we’ve watched the pendulum swing really hard towards security. We’ve watched it swing back a couple of times. It’s a live negotiation.

Andrew: Yeah. I mean, that’s not shocking, right? Like the security versus development debate, to the extent that it’s even a debate or finding that balance is an ongoing endeavor among Chinese policymakers, like in a range of areas, right? Data, technology, supply chains, you name it. They’re always trying to strike that balance. So, that’s not shocking to me. And it’s also not shocking to me that they’ve leaned a little bit further into the security side than the development side, which also is normal for governments everywhere, but also in particular for China.

But I think you’ve done a really good job here of laying out kind of the main rationale that China is using to put forth this data governance regime. Some of the specifics around the very concrete plumbing and flowing issues or flow issues that Beijing’s trying to solve. But flip that around. What do we as people who are in the policy community in the U.S. to make of that, what should Western policymakers or policy thinkers take away from this discussion?

Kendra: Yeah, I mean, I definitely don’t think that the United States needs to adopt the idea that data is a factor of production and rush into Beijing’s footsteps and do exactly as they have been doing. That’s definitely not the point. I think the biggest takeaway is that like when you lay China’s approach to data policy next to America’s approach to data policy, on our side, there’s this kind of massive gaping hole where a proactive pro-growth U.S. style data strategy ought to be. China has a pro-growth strategy, so we need a pro-growth strategy.

Every major U.S. ally has already done this. We are the outlier, right? The UK, Japan, the EU, Canada, Australia, all of them have looked at this issue. How can we use data to foster growth? What are the problems we need to solve? What are the pathways we need to take? What are the incentives we need to put in place? And we simply have not done that. And I think it’s because, as I mentioned earlier, when the U.S. talks about data, it’s almost exclusively as a security issue. And when security is all we talk about, then security is all we do.

I mean, just look at the last five years. We’ve done a ton on security. We have secured telecom equipment, smart car software, port cranes, cellular modules. There was the TikTok fiasco. We went after WeChat. We’re doing ICVs, preventing Chinese cars from coming into the U.S. because they collect data on this. So all of those actions was fundamentally about preventing the exfiltration of sensitive American data. And that’s just the entire American policy portfolio right now.

Andrew: Yeah. Okay. So I understand that. I guess the question then to me, actually, I was thinking of this, as you were talking through the Chinese side, is it that the U.S. has just decided like we don’t need a growth strategy for data per se? Or is it like, does the government need to be involved to the extent that China is involving itself here, meaning like our U.S. policymakers just saying like the market will figure this out or which I think it would be…? You know, that might be also an appropriate way to go. I don’t know. How is that conversation happening in the States? Is it just like a growth strategy is nice to have? Should it be left to the market? And where do you land on all of that?

Kendra: I think every time I have heard policymakers talk about this kind of sort of pro-growth strategy in the U.S., it has been talked about like, like those are the Montessori kids. Like that is a kumbaya, get out the guitars and sing together. Let’s all talk about data sharing. Let’s all talk about… like almost it’s taken on this like hard left kind of, I don’t know, let’s all hold hands and share data kind of initiative, right? It’s just got this very strange overlay in the U.S. that I haven’t really seen it take on anywhere else. I’m exaggerating.

There are certain initiatives that have made some progress. But there’s been a lot of that. I mean, there was some government data sharing initiatives where the U.S. decided to try to push more government agencies, is another thing China’s doing, to release more of their data in a format that researchers could use to the general public. And that was treated as this like… you know, there’s some open data laws about what research was supposed to do. Get government departments to share more data with each other so that they could be more, you know, efficient and improve bureaucratic efficiency, all this kind of stuff. But these don’t have any staying power. They die. They go to the back burner.

They get treated as not important. I think because, my personal take on that is that in order to see the value of initiatives like this, you’re looking at a 20-year investment. You’re looking at a 20-year investment in research. You’re looking at a 20-year investment in changing the way that the bureaucracy functions, you’re looking at a 20-year investment before you see any returns. And in a four year or an eight year administration. We’re not good at that, we’re not good at making… I mean, that’s one of the US’s weak points unfortunately. We’re just not great at making investments that we hope will, you know, prioritizing investments that we’re going to reap the dividends in two decades.

We’re great at let’s reap the dividends next year, but we’re just not really good at those kind of long-term goals. And so, I think that’s why, security strategy, you can implement within the span of a single administration. You can ban TikTok in two years. Or I guess not. I guess you can’t. You can try to ban TikTok in two years.

Andrew: Yeah. That took three administrations, technically.

Kendra: That was a bad idea. You can institute semiconductor export controls or whatever. You know, you can put out an executive order in a minute. Generating more efficiency and growth economically from data is like a little bit of a squishy idea and it’s a little bit of, it’s too long-term. And actually, I just want to say, this is real money. This isn’t just a sort of wishy-washy, oh, gross. But there are actually numbers there, right?

The OECD kind of concluded back in 2019 that data access and sharing, if you increase the supply of data in the economy, that it can generate benefits worth 1.5% of GDP if you’re just talking about public sector data. In other words, if you just make governments release more data, then you can really generate a bunch of significant economic benefit out of that because companies will jump on that data and they’ll make new businesses out of it. There’s more data available, let’s make an app that like uses that data to do something, and then that creates jobs and then that creates productivity.

And then if you also account for private sector data, if you basically get companies moving their data around between market actors more than they do, instead of sitting on it or hoarding it or being afraid to share it or can’t be bothered to sell it or whatever it is, then, you know, the range gets a lot bigger. You can get a bump of like between 1% and 4% of GDP. So, it’s like really leaving, actually leaving potential gains on the table in a way that’s pretty detrimental, I think.

Andrew: Yeah. Can you talk actually just a little bit more about the channels through which you see and, again, Chinese policymakers or others, non-Chinese policymakers see like what avenues are there for data to be a growth driver, generally speaking? I think that’d be interesting for listeners as well.

Kendra: Yeah, I’ll give a couple more examples. So, I just kind of mentioned one of them, which is job creation, right? I mean, I think some of the studies that are coming out now are basically showing, as I just said, data is available to startups, to innovators, to entrepreneurs. They come up with cool ideas for creating businesses with the data. If the data is not available, then they don’t do that, right? And that’s especially interesting because you have a lot of situations where the government or a large company or a collective of companies is the only body capable of putting that data together.

I’ve got one example I cite a lot, which is, so in 2017, Deloitte did a cool study. They looked at what happened when Transport for London released real-time transit data through APIs. And I think it was free. If I recall correctly, I don’t remember exactly, but I don’t think they charged for it. But like Transport for London put this out. 600 apps got built off the back of that data. 500 jobs were produced. And the economic savings for the city were like 130 million pounds. That was one data set.

This is one data set on the market. And if you aggregate that across the entire economy, what you could do with that is like pretty cool. There’s some early research indicating that you will get a small productivity boost when firms invest in collecting and using their own data. So, if you basically encourage a company to go acquire data and then transform that data and make, I mean, we’re seeing that in our company right now. We’re using data more than we did before. And there’s a lot more, like we’re doing bigger things faster, right?

We can see it kind of in the way that we’re working at the moment. So, the productivity is a way that you can kind of get growth out of that. And then third, it’s like the government itself kind of gets better. The bureaucracy gets more responsive. People get better public services, right? And China’s a really good example here too. Nobody really liked how China responded to COVID, but they responded really fast. And that, you know, epidemic control was all totally data-driven, built on 20 years of investment in data sets for public health, for transportation, that they just leveraged the minute this disease kind of appeared.

They took all these existing data sets and they pulled them, and started drawing insights on disease spread. And that’s kind of how they did the entire epidemic control measures. And they did that in just a couple of weeks because they’d made that investment already. Right? And finally, now it’s, of course, it’s talking about this a bit, but it’s AI. The big issue in AI is like AI researchers and small AI startups, like specialized AI startups and niche industries really need a steady supply of this high quality data, especially data that’s hard to get.

So, that would be things like, imagine what you could do if you had an entire data set of all of the mechanical equipment failures in smart factories across manufacturers, not just one manufacturer’s data, but every manufacturer’s data. Could you improve uptime, productivity, production speed of machinery? You know, what insights could you gain from that? So, tons of things like that across in almost every sector. And so, you know, health care, another great example. Hard to get good health care data because of various privacy restrictions, etc. But you get tons of benefit from that.

You can cure diseases with that kind of stuff. And so China’s made that producing that supply, this is where we come back to factors of production.

If data is a factor of production, then making sure that supply exists so that these things can happen, it’s a state’s job now. It’s a state’s priority. They’ve taken on that responsibility. They’ve decided to move that ball forward. Right? So anyway, that’s the game.

Andrew: China is obviously pursuing that. And you would say that U.S. policymakers are just kind of leaving that on the table in terms of not having a national strategy for data development and supply.

Kendra: There was a couple of mentions of data in the Trump administration’s America’s AI Action Plan. And when I read those, I got real excited about them. Some of those are really good, right? They’re actually really good ideas. And they have not at all been prioritized as much as all of the securitization stuff in that plan, right? The funding has not gone to those initiatives yet. Tick tock, tick tock. It’s that kind of stuff. It’s like somebody will recognize that, yes, mostly those initiatives were about funding consortiums that pool sort of high-quality data and compute for leading-edge researchers so that researchers were solving that access to research data problem for AI specialists and stuff.

So, it’s not that somebody hasn’t written it down. It’s not that somebody hasn’t said, hey, we ought to do this. It’s that when you look at where policymakers’ time and energy and attention is going, that’s not what anyone’s talking about. When you walk into a room where they’re talking about AI and DC, nobody’s sitting around saying, “How can we really squeeze economic value out of data? What proactive, positive, long-term roads can we lay down so that we really get benefit from data?” That’s not the conversation that’s happening. So, it’s not that it’s not recognized. It’s just not prioritized.

Andrew: Yeah. Well, and again, I just sort of anticipate listeners saying, you know, “Well, that’s not the state’s job.” And I guess my thought would be, of course, the U.S. is never going to take the same state-heavy interventionist approach that China is.

Kendra: Totally.

Andrew: But that doesn’t mean there’s no role for the government to help kind of build this ecosystem. I mean, of course, like as you talked about, the government, whether it’s city government, county government, national government, has taken a role in governing and overseeing transactions and putting guardrails around all the other factors of production, but we just don’t seem… I mean, you know, we haven’t caught up in terms of kind of treating data fundamentally as so structurally important to the economy. I mean, you know, the old, obviously, cliche is data is the new oil, but we’re certainly not acting like it, right?

Kendra: Yeah, yeah, exactly. Exactly.

Andrew: Well, this has been super, super interesting. Obviously, a ton of work that you’ve done on this. And just in case it’s not clear, the work that Kendra has done on this, in case it’s not clear to listeners, was specifically with an eye towards informing U.S. policy. So, everything we do at Trivium is kind of trying to understand China, but this was like an effort to understand what China’s doing in order to kind of make strategic recommendations on how the US might want to be thinking about these issues. And so that’s one of the reasons that we kind of leaned so heavily in the last part of the conversation on what the U.S. is not doing here. I think this is great.

I hope that this work gets some uptake from policymakers and people in that space. We will keep sounding the drum or pounding the drum, sounding the alarm. I don’t know.

Kendra: Sounding the gong.

Andrew: Yeah. And yeah, well, I’m sure there will be a lot more opportunities to talk about these kinds of things. It’s always good to kind of take a step back and do kind of a wonkier, a higher-level… wonky higher level; those are maybe at odds. Anyway, I’m rambling now. But this was amazing. We’ll just leave it at that. Thank you, Kendra, for the time and for walking us through that. I found it super helpful and fascinating. I’m sure our listeners did as well.

Kendra: Awesome. Well, always good to be here.

Andrew: All right. Well, thanks so much. And thanks, everybody, for listening. We’ll see you next time. Bye, everybody.

• But while many analysts are asking why Beijing isn’t doing more to stimulate growth, this week’s Trivium China Podcast explores a different question: why are policymakers deliberately choosing not to?

Pod host Andrew Polk is joined by Trivium’s Head of Markets Research Dinny McMahon to examine why Beijing may be quietly embarking on its first genuine economy-wide deleveraging effort in years, and what that could mean for China’s growth model.

The two discuss:

• Why recent weakness in investment, consumption, and the property sector won’t trigger a major stimulus package

• Whether Beijing’s annual fiscal “stimulus” has become more theater than meaningful economic support

• How slowing credit growth could signal a deliberate shift in macroeconomic strategy

• Why strong exports and rising inflation may have created a rare opportunity to reduce leverage

• Why policymakers appear to be prioritizing future borrowing capacity over stronger short-term growth

Andrew and Dinny also explore what slower credit growth means for businesses and investors and how Beijing’s evolving priorities could complicate trade negotiations with Europe and other major trade partners.

Transcript

Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I’m joined today by Trivium’s Head of Markets Research, Dinny McMahon. Dinny, great to have you back on the pod. How are you doing, brother?

Dinny McMahon: Doing good, mate. Great, as always, to be here.

Andrew: Yeah, it’s been a couple of weeks since we’ve had a podcast. So, I was on vacation with my in Hawaii. Nice to get away. Come back to the very, very hot DC weather, although it’s cooling off a bit now, but I’m glad to be back in the groove and glad to have a fan favorite here, Dinny, to kick off the second half of the year with me. We are going to talk, of course, about the Chinese economy. And specifically, we’re going to talk about what’s happening with credit growth in the economy, which may sound, I don’t know, wonky, but it’s hugely important to the overall trajectory and pace of growth in the Chinese economy.

And it’s traditionally how the Chinese policymakers either stimulate growth or sort of pull back on growth rather than using the monetary lever per se. It’s really more of the credit impulse. That, of course, has changed more towards a fiscal impulse in the past, say, four or five years. But credit growth is hugely still important to the, like I said, the overall management of the economy, the trajectory of the economy. Dinny has some really unique, and I think… well, I mean, unique in a good way, like out of consensus views on what’s-

Dinny: Sounds like unique and courageous.

Andrew: Yeah, yeah, yeah. Shall we say unique views? No, I think really thoughtful views on what’s happening here, how credit policy relates to overall macroeconomic growth, and kind of what that means around economic performance in the second half of the year. So we’re going to get into all of that. And it’s going to be an exciting conversation.

But of course, before we do that, got to start with the customary vibe check. Dinny, it’s July 9th, 3.20 pm in the afternoon Eastern time. And you are recording from the Eastern time zone, which is not normally the case. You used to be in the Central Time Zone. How’s your vibe? Welcome to the East Coast.

Dinny: Mate, I mean, look, no shade on Chicago. I was there for nine years, and I love the city. But dude, North Carolina is doing good things for my vibe. I mean, no one can see this. We’d hope to record this, but we haven’t kind of got our act together yet. But like my back window opens onto a forest. I mean, I’m loving the warmth. I’m loving the humidity. I’m loving the greenery. This place is doing some good things for my soul. So, I might still be in the honeymoon period, but I’m doing great, mate.

Andrew: Well, that’s great to hear, dude. I’m glad you like it down there. And a chilled Dinny is a happy Dinny is a happy Trivium is a happy Andrew. So, I love it. And you can bring your chilled but still intensely thoughtful vibes to the podcast. And I, meanwhile, super rested, had a couple of good weeks off with the family, just no work, all relaxation. So ready to get back to it, second half of the year. I had a good night out with a handful of my China nerd friends last night in D.C., which was good to catch up with people.

So, I’m ready to get back to it. That’s my vibe is raring to go. So, with that out of the way, we also have to quickly do the housekeeping up top. Just firstly, a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes domestic policy in China in a range of areas — autos, tech, macro, econ, as we’re going to talk about today, commodities — you name it, we do it.

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All right. With that out of the way, Dinny, we are going to get into the latest on the macroeconomic front, and specifically what’s happening with credit growth and the credit environment, I think we can sort of safely say that after a really good start to the year, the past few months, so really Q2 have been pretty terrible for China’s economy. Fixed asset investment. So overall kind of capex in the economy fell 12.5% year over year in May. So negative growth, actually significant contraction of 12.5% year over year. Last month, May is the most recent data we have. That was a sharper contraction than April’s 9.4% decline. So, not only is the economy weak, it seems to be weakening. And one of the key issues is that deterioration is broad-based.

So, it’s manufacturing investment down 4%, infrastructure down 9.5%. And the property sector, where we had been sort of hopeful that the worst was over, even it took a pretty clear return for the worst in May with new home sales by floor space falling about 12%. That was down from the 9% year-over-year drop in April. So, just kind of across the board looking terrible. On the retail\consumer side of things, the dynamics are just as bad. Auto sales down 16% year-over-year last month. Home appliances sales down about 16%, furniture down 9%, even mobile phone sales, which people replace pretty regularly, and which had been holding up in recent months, they just eked out 0.7% year-over-year growth.

So, pretty terrible profile after a good start to the year, but it all sort of raises the question, why aren’t policymakers doing more to support or stimulate the economy? And I know you’ve got a lot of thoughts on this, specifically, as I said, when it comes to the credit side of things. So, Dinny, I’ll just throw it over to you. Can we expect more support, lay the land on kind of what you’re thinking here in terms of what policymakers’ approach is?

Dinny: Well, I think the real question isn’t exactly support because, I mean, we’ve held the position for ages that interest rate cuts aren’t coming. I mean, monetary policy isn’t really in the toolkit at the moment in terms of sort of dealing with economic weakness. They’ll tweak here and there, but that’s not really what’s going on. The question is, are we going to see stimulus, straight up fiscal stimulus? And I think the answer is yes and no. So, every year for the last few years, in the last few months of the years, we’ve got some sort of stimulus.

So, what we had last year in October was an extra 500 billion RMB worth of special purpose bonds for local governments to issue. And some of that had to go into infrastructure. And some of that was just broad fiscal support to help local governments with their budgets. Some of it was for paying down arrears. And I think it’s likely we’ll get something like that again, probably around 500 billion again. The question is, though, should we consider that as being stimulus? Now, what I mean by that is that last year, local governments were permitted to issue 4.9 trillion RMB worth of special purpose bonds, And that was broken up into a 4.5 trillion RMB quota that they got in March at the legislative session, the government work report.

And then they got that additional 500 billion at the end of the year I was talking about. Now, this year, they got the same 4.4 trillion quota in March. So, we could get an additional 500 billion top up by the end of the year. And that would be the same as last year’s total. So, the question then becomes, is that stimulus or is that just the bare minimum necessary to maintain economic activity at last year’s level, right? For local governments just to be spending as much as they did in 2025, do you need an additional 500 billion RMB? And I think in this economic environment, the answer is probably yes.

So, it’s also, the other question here in addition to that is, is it stimulus if the government’s doing the same thing every year, if it’s providing that same top-up on government spending in October every year? Which is what it’s been doing. To me, that doesn’t strike me as stimulus. That strikes me as state management, right? They kind of lay the expectations earlier at the beginning of the year. We’re going to let government borrow this much. And then, lo and behold, everybody chill. We’re going to provide stimulus in the last few months of the year.

But if they’re doing that every year on a comparable amount, that doesn’t really feel like stimulus. That kind of feels like drum roll, please, everybody. Everybody chill. There’s more stimulus. Everybody be cool. It feels like smoke and mirrors as opposed to a real injection into the economy. And I think that’s particularly pertinent this year because I don’t think we should be watching the stimulus because I think it is smoke and mirrors.

I think what we need to be watching is what happens with total social financing, which is the government’s measure of the total amount of credit being put into the economy. Because I think what’s happening this year is that Beijing is striving to start deleveraging. So, regardless of whether we get stimulus, the amount of credit being pumped into the economy this year, I think is likely to fall pretty significantly. And what Beijing is trying to embark on is a conscious effort to start deleveraging the economy.

Andrew: Okay, well, so you’ve broken it out well. It’s a good point around if stimulus is every year, is it truly stimulus, right? Or is that just the new baseline? I mean, I’m trying to go back to my economics 101, macro 101, a permanent expansion in aggregate demand versus a temporary expansion in aggregate demand via fiscal stimulus. Very Keynesian idea. And the short-term stimulus tends to have more of a policy effect, whereas longer-term perpetual stimulus, typically prices just adjust, right? And people adjust to this new level without really seeing it as a way to kind of boost their short-term economic prospects.

So, without getting way too into that, and I’m sure someone will call me out on that. I’m sure I got part of that wrong. But point being, if it’s permanent, people and businesses, which matter ultimately in the economy, think about it differently. And it doesn’t really provide that stimulatory effect exactly that you’re talking about. On the credit side, which is so important, I want you to get into that a little bit more. The last piece you talked about was sort of deleveraging, which I think a lot of people argue about is, we’ve been arguing really since 2017 when China first started its financial prudence or financial cleanup efforts, now a decade ago. What is deleveraging in China? Are they truly trying to outright reduce leverage?

Where in the economy are they trying to reduce leverage? Talk to us about what you mean by that concept.

Dinny: The thing that it isn’t, it is not the total amount of debt declining. It’s not having $100 worth of debt yesterday and having $90 worth of debt today. What it’s about is we’re talking about reducing the debt to GDP ratio. So, GDP here is nominal GDP. And that is the important thing because it reflects the capacity of the economy to sustain and service its debt. So, it’s about the size of the debt pile relative to the size of the economy. And Beijing has wanted to bring that down or at the very least stop it from growing for a very long time.

So that cleanup campaign that you mentioned, I mean, that was called explicitly a deleveraging campaign. And they launched at what, a tail end of 2016, really sort of launched, got going in earnest 2017. And at the end of the day, it was more of a de-risking campaign than a de-leveraging campaign. But that said, over the, about an 18 month period over 2017 and ‘18, That debt to GDP ratio did come down. And that’s because they were unraveling shadow banking. And there was a lot of additional debt in the system that was just unnecessary. It was kind of like just layers of debt to kind of obscure what was really going on in the heart of the financial system. And about that time, the debt to GDP ratio was about 240%.

And then it started rising again in late 2018. And in early 2019, the then Premier Li Keqiang, he set a formal target for deleveraging. He said that on a year-on-year basis, what they were aiming for is for credit growth, as measured by total social financing, to roughly, the expansion of credit, as in TSF, to roughly equal the growth of nominal GDP. So those two things would be expanding roughly at the same time. If nominal GDP was growing at 8%, then total social financing would be growing at that pace as well. Now, according to the official data, we did get a period, a short stint of deleveraging in 2020 and 2021.

I mean that was during the pandemic. Credit demand collapsed. But I mean at the time, the GDP data during that period is a little bit sus. I mean, I think there’s a bit of a consensus that the economy probably went into recession in that period but it doesn’t really get borne out by the data. So, whether there was deleveraging then or not, the data says there was. It’s probably fair to assume that there perhaps wasn’t. but what is clear is that the ratio started rising again in a very meaningful way after the housing market peaked in the middle of 2021.

Now, back then, the debt to GDP ratio was about 255%. And by the end of last year, according to the Bank for International Settlements Data, they reckon it had gone up to 300.1%. So that’s an increase of about 45 percentage points. Now, there’s a think tank inside Peking University, which also keeps track of this. It puts out its own numbers. It’s put out more recent data than the BIS. It reckons at the end of the first quarter, the debt to GDP ratio was already at 309%. So, anything over 300% is really high.

I mean, this is a club that includes Japan, Canada, France, the Netherlands, some global financial hubs because they’re doing a lot more sort of financial activity globally relative to the size of their economies, but it’s a pretty small club. And certainly, for developing economies, I mean, you have India’s, Brazil’s, they’re well below 200%. So, over 300% is way, way up there. But as I said, we’ve had this real increase since the housing market peaked. And frankly, that’s perfectly reasonable.

A collapse of economic activity of that scale really requires borrowing to ramp up, usually borrowing by the state. Now, in China, it wasn’t purely by the state. It was the government, and it was also corporations who borrowed and pumped a huge amount of money into manufacturing and industry, particularly around the time, really kicking off just as the pandemic was starting. And that increase in credit, it wasn’t just about making up the shortfall because there was this shortfall of economic activity as investment in property, the property sector contracted. But it was also in aid of achieving Beijing’s growth target, which the economy has consistently been able to do over the last few years.

But here’s the thing. Governments of economies that have experienced a crisis, they often want to pare back their support, their fiscal support, prematurely because they freak out after they see the fiscal burden rising. They start to worry they’re borrowing too much money. They start to worry about overall debt levels. And so, they cut back before the economy can sustain itself. Now, I don’t think Beijing is necessarily freaking out.

I think it’s being a little bit more opportunistic. I think they believe they can… This is a moment in which they can start deleveraging on a sustainable basis because of resurgent inflation and because of strong net export growth.

Andrew: Yeah, thanks for that explanation. I want to get into the inflation and export piece, but I do have to say my piece on the 2017 de-risking campaign. I think you nailed it. That’s the right way to describe it. In fact, I had to train myself for years to call it a de-risking campaign, not a de-leveraging campaign, because every time I call it de-leveraging, people would say, “Ah, they’re not actually de-leveraging. Their total credit’s rising.” I’d be like, yeah, okay. Well, it’s growing more slowly.

And the most important thing I would always point out is as they were de-risking the riskiest, most vulnerable parts of the system, which primarily was the interbank market, that part of the economy, that part of the financial system did deleverage, right? The interbank market, total lending in the interbank market contracted for, I think, 18 months or so. And that was really the riskiest part of the system. So, it was a deleveraging campaign, but just for semantics, probably easier to call it a de-risking campaign.

It was quite successful, and that’s put us in this sort of new world. Sorry, just that point of privilege that I had to touch on. But back to inflation and net exports, talk to us about how those two pieces fit into this deleveraging picture you’re talking about.

Dinny: So the way to think about it is this. As I said, you achieve deleveraging when credit growth is slower than the growth of nominal GDP. So, nominal GDP is real GDP, which is the number that we care about every quarter or so, plus inflation. So, if prices go up, nominal GDP goes up. So, in this current environment, nominal GDP is going up because inflation is back. But credit growth, even at that same moment, credit growth is slowing because credit demand is weak. So, total social financing growth was 7.7% in May year on year.

And that is the slowest pace step ever. So, credit growth is coming down even as nominal GDP is going up because of inflation. So that’s why inflation is such an important part of this picture. The other important condition here is exports. Now, exports are important because deleveraging really requires a growth driver that doesn’t require much debt. The old economic growth model in China, the old property-driven growth model, it was all about debt. You couldn’t drive the economy through property without more and more borrowing.

I mean, people borrowed to buy homes. And the expansion of that borrowing, that was kind of the bedrock of economic growth model. But exports are different. They rely on global demand. It doesn’t require anyone inside of China borrowing more. So, with exports, growth can increase without exporters needing to take on really much additional debt. And so that’s why Beijing feels like it has a moment here to de-lever because it can add growth through exports without taking on much additional debt and inflation is pushing up nominal GDP.

So, if we break down the numbers and what Beijing might be sort of aiming for by the end of the year, it has a real GDP growth target of between 4.5 and 5%. So, if full-year growth comes in at the upper end at 5% and inflation comes in at, I mean, say 2%, then deleveraging starts once total social financing growth gets down to 7%. As I said in May, it was 7%. So, if it gets down to 7, maybe 6.8, 6.9, well, it’s conceivable that that’s the point at which deleveraging begins. Now, of course, if the real economy only grows at 4.5% and inflation is 1%, then total social financing would need to slow to 5.5% by the end of the year, which is far less feasible.

So, the real question is what pace of inflation is likely? I mean, in June, CPI, commercial prices were up 1%, but producer prices were up 4.1%. So, it’s really a bit of a toss-up as to where it’s going to land by year-end.

Andrew: Well, that’s a pretty big call, I mean, especially given how bad the domestic economy is. So, when you think about it, I mean, now doesn’t seem like the time to start deleveraging. You want to deleverage when you’ve got a tailwind to your economy, an upward economic trajectory. So, can you kind of, I don’t know, justify a little bit further or not justify, but expound on why you think they’re not going to kind of try to come in and pump things up?

I mean, I know we haven’t seen much of it in the rhetoric, but typically, even when they’ve been pretty reticent on stimulus or pretty measured on stimulus, when things get this bad, they usually step in with some kind of additional support, as you talked about at the beginning of the podcast. I mean, you know, the debt-to-GDP ratio has been rising for years, right? And they haven’t undertaken a concerted deleveraging campaign. So, just talk to us a little bit more about why you think that term is coming now.

Dinny: Yeah, I think it’s a combination. So, on one level, they’re being opportunistic because of what I said about exports and inflation. They’ve got a moment, they’ve got an opportunity to do something that they’ve always found quite difficult to do. But I think they’ve also got one eye on the long term. And here, the real issue is China’s demography. Because sometime in the next 60 years, the number of retirees in China are going to exceed the working age population.

And I mean, that’s 60 years in the future, but the burden on the state from the transition to that point, as the balance moves against the working-age population, the state is going to need to borrow more and more to fund the healthcare and pension needs of retirees. Now, I’m not sure when Beijing is going to have to sort of start borrowing to meet those obligations, but it’s almost inevitable. And when it does start, borrowing will go on for decades and it will just keep increasing.

So, when that day comes, when Beijing needs to start borrowing to meet the welfare needs of the retirees, it needs as much fiscal space as possible. So, if it starts borrowing when the debt-to-GDP ratio is at 300%, it will have far less runway than if it starts at 250%. But crucially, it’s not about where the level is at the moment. It’s where the level will be if they don’t start deleveraging now, right? Because if the ratio keeps increasing at the pace it has since the housing market peaked, it’ll hit something like 240% within a decade by 2035.

So, something has to give. They either, at the very least, need to stop that ratio increasing as soon as possible because the more it goes up now, the more they really need to pull it back or put it to reverse to kind of prepare for that sort of that demographic decline that’s on the horizon. And that’s far more costly than sort of putting a line under it now and then sort of incrementally pull it back over time. So, something has to give. And, you know, I know I’m talking about total economy-wide debt to GDP ratio. I’m talking about the 300%. And perhaps the more relevant ratio to talk about is the government debt to GDP ratio, because by BIS calculations, it’s about 100%, which, relative to the U.S., is pretty decent. I mean, the US level is 120%.

But the problem is with China, when you’re talking about government debt levels, you’re wading into a morass, because so much of the corporate borrowing is in some way state-related. Most of the corporate debt is either borrowed by state-owned enterprises or it’s borrowed by some local government financing vehicle or some other entity borrowing on behalf of some level of the state. And so, these are implicit liabilities. And we’ve seen over the last few years that implicit liabilities do become explicit in times of financial stress. I mean, we’ve seen this migration of local government debt from LGFEs to local governments. It’s ongoing. We don’t know where the end is. So, looking at that formal debt-to-GDP ratio doesn’t really help as much.

So, I think looking at the overall levels of debt in the economy kind of give us a little bit more of a sense of sort of the potential stresses that the economy could be under and what Beijing is dealing with. Now, the irony of all this is that Beijing’s been aware of this for years. I mean, as I said, they called the cleanup campaign in 2016 a deleveraging campaign. Li Keqiang set that target of you know keeping nominal growth and credit growth in line back in 2019. And this whole new economic growth model, new quality productive forces, which we’ve talked about heaps on this podcast, that new model is, by design, supposed to be debt-light, right?

New quality productive forces is all about generating superior sustainable growth that is driven by productivity gains not by borrowing. So, they’re trying to bake it into the system, they’re trying to overhaul the economy in a way that it will grow on a sustainable basis over the long term with less debt. But because Beijing is still dealing with the fallout of the property bust, we’ve still got this debt rising and rising, and so we’re at this point of what does Beijing do about it? Because on one level, it needs to keep borrowing until the fallout of the crisis is properly dealt with.

But if it does allow debt to continue rising, then it’s really storing up real problems for a not-so-distant future when its hands are tied and it is going to have to ramp up borrowing.

Andrew: Yeah, that makes sense. I mean, truly like trying to not borrow from the future or to maintain your headroom for borrowing later. That makes a lot of sense. I think it all makes sense conceptually, right? I think you made a really compelling case, but I guess the follow-on question for me is what are you seeing that really indicates Beijing has pulled the trigger on deleveraging? And I know you’re going to talk a little bit about credit growth slowing.

But I think the natural sort of skeptic of this argument would say, “Well, credit growth is slowing. Maybe that’s more of the balance sheet recession idea. It’s not about Beijing’s desire to reduce leverage. This is just businesses being in such dire straits that they don’t want to put any more new borrowing on their books. And a lot of this is all outside of Beijing’s control,” right? That would be the bare argument that this is all an imposed reality of years and years of overborrowing and financial expansion. So, tell me what you’re seeing in terms of why you think they’ve pulled the trigger and then respond to that kind of preemptive counter argument.

Dinny: Yeah, I mean, it’s a really good point. I mean, if you looked at the debt to GDP ratio of China’s households, I mean, they’ve been falling really since the peak of the, a bit after the peak of the market in 2021. I mean, households are deleveraging. There is certainly an element of a balance sheet recession going on there, at least with Chinese households. Credit demand is incredibly weak. No one wants to borrow. But of course, I mean, China’s response to these sorts of moments when there is weak credit in the past is always for the state to have stepped in with some sort of measure policy shift that results in an expansion of borrowing. In the late 1990s, when China was dealing with the Asian financial crisis, that’s when we got the housing reforms.

And that sparked off a 20-year boom in housing investment. Global financial crisis; China’s response was a massive expansion in investment in infrastructure and public works. And even when we saw the peak of the housing market in 2021, sparked by government policy changes, the three red lines and whatnot in 2020, the response was a state-initiated and led massive expansion of investment in manufacturing and industrial capacity. So, every time a slowdown in one aspect of the economy was met by the government initiating an expansion of credit somewhere else.

So yeah, you can argue, “Oh, this is just inevitable. This is what happens.” The way that Beijing has dealt with such inevitabilities in the past is to find some way to ramp up credit. And yet it feels like it’s different this time. And we’ve talked about this a little bit in terms of Beijing’s increasing focus on services and trying to get more growth out of low debt parts of the economy. But there’s three things that have really struck me this time, and the first is Beijing allocated less money this year to the consumer trade-in program.

Now, we got these numbers back in March at the NPC. Last year, 300 billion renminbi were allocated to support consumer purchases of big ticket items — cars, furniture, white goods, home appliances, and personal electronics. This year the quota came down to 250 billion. But that decline is far more significant than it looks like at face because the way that this program worked was by pulling forward future demand, right? So, to be able to sustain last year’s consumption at 2025 levels, not even expanding it, Beijing would have had to have increased the quota.

So, to ensure sales stayed at last year’s level, that 300 billion in subsidies they provided needed to have gone up. Now, instead, they reduced it to 250 billion. So, they cut and sales plunged. I mean, you outlined the degree to which sales were down in May at the very beginning of this. I mean, I think auto sales are down 16%. Furniture sales, white goods sales are down double digits as well. So, Beijing made a decision not to throw good money after bad and accept a sharp drop in retail spending in favor of less debt. So that’s the first thing. I mean, that’s a conscious decision like, okay, we’re not going to stimulate the way that we used to.

We’re going to pare back debt because this is not doing what we’d hoped it would. Second thing, SOE remittances, state-owned enterprise remittances. Now, I’m not sure we’ve spoken about this on the podcast, but we’ve written a heap about it. At the end of last year, the central government ramped up the remittances that centrally owned state-owned enterprises are required to pay to the government. So, as a percentage of their profits, it went up from almost all centrally owned state-owned enterprises by between 10 and 15 percentage points.

Now, that’s great for government revenue, right? But it is a meaningful hit to investment. And that’s because SOEs, they use profits as seed money for new projects. Any new investment project requires a certain amount of equity before the firm that’s making the investment can go out and borrow. It’s usually about 20% of the value of the project. So, if SOEs have fewer retained profits, it means that they have less seed money for investments. And so that seed money gets massively leveraged up by borrowing.

And so, it means having the government take a bigger share of SOE profits make meaningfully less investment. We estimate it could reduce fixed asset investment this year by 2.3 percentage points. Now, that’s a back of an envelope calculation, and there’s a whole lot of caveats on that. But the point is that Beijing here has chosen to increase fiscal revenue, over boosting economic through investment. In fact, it’s not even about boosting economic activity. It chose fiscal revenue while knowing that the trade-off would be less economic activity through investment.

So, I think the thing to take away from both of these things is that Beijing realizes that the drag on domestic demand is structural. There are no band-aids that will tide things over until the economy recovers. So, the acknowledgement that you need to keep doubling down on the consumer subsidy program because consumption isn’t going to come back until the underlying problems are fixed. Specifically, the property bust is over, that local government fiscal shortfall is dealt with, and perhaps industrial overcapacity is dealt with.

And so I think that’s where it is, there’s this recognition of like, well, look, borrowing more and more, it’s not fixing anything. All it is, is it’s good money after bad. It’s just about trying to get an extra percentage point of growth, and ultimately it doesn’t really fix anything. And so, yeah, those are my first two, which kind of brings me to the last thing.

Andrew: Well, what’s your last thing?

Dinny: So my last point is it’s less about government policy and it’s more about what the PBOC Pan Gongsheng, PBOC Governor Pan Gongsheng said at the Lujiazui Forum in June. So, you know, Pan has given a speech at this thing annually for the last few years and he usually uses it partly to make some big policy decision announcements, a real shift in the way that the central bank is doing things, and/or to kind of outline a shift in the way government is approaching a particular issue. Last year, it was all about renminbi internationalization. It kind of very much was a signal that Beijing was kind of seeing a significant shift in the way that the world perceived the dollar and kind of saw, okay, this is now a moment for us to do more to promote the RMB’s internationalization.

And in the year, since then, we’ve seen a huge amount of new changes sort of supporting that effort. Now, the really interesting thing, I think, that came out of Pan’s speech this time round were his comments about credit. Now, the first thing he did was that he noted that the severity of the decline in borrowing by property developers and local government financing vehicles since the peak of the property bubble makes it difficult to maintain the pace of growth.

And he said the remaining loans must first fill this decline before they can be considered as incremental growth. And this is, I thought, was really important. He’s like maintaining the previous growth rate for all credit is difficult and unnecessary. And so, rather, this is what he said, rather than trying to maintain high levels of new credit which inevitably leads to some wasteful investment, Pan said this slowing down and improving the quality of loans may become one of the new normal modes of macroeconomic operation.

So, in short, Pan seems to be laying the groundwork for even slower credit growth and acknowledging that the payoff for keeping credit growth high is declining.

Andrew: Well, so, you know, I guess the final question, so you’ve made the case, right? I think, again, convincingly, like this sort of needs to happen. There are structural drivers that the government sees, pushing them to act now. You even have people like Pan Gongsheng, PBOC governor saying like, “This is what we’re trying to do.” But what’s your view in terms of the consequences of all this in terms of short-term economic growth?

Because we have seen, of course, before policymakers enact deleveraging, that was actually the one of the unintended consequences of the last deleveraging campaign was private sector credit growth, private sector borrowing cratered in a way that policymakers didn’t expect. And then they spent years trying to get more credit resources to the SMEs in the small private sector. What do you see as the outcomes, the major outcomes of this effort that you’re arguing is starting to take shape now?

Dinny: Well, I think it’s more of what we’ve already got. So, so far, we’ve got Chinese economists increasingly calling it a K-shaped economy. The up leg of that K is incredibly strong exports. The down leg is domestic demand. And I think domestic demand will stay weak and it will potentially get weaker. It also means export growth is going to become even more important, right? Because the only way for deleveraging to be successful is if China can maintain robust economic growth through robust expansion of net exports.

Now, I think what that means is that that’s going to make it even harder for the EU to get the trade deal they want out of China. I mean, China is going to be even less willing to make concessions. The question is, though, is whether China blinks. So, it might want deleveraging and it might think it’s kind of got this perfect environment in which to do it. But what it means is that weakness in the domestic economy is going to be with us for longer, potentially for quite some time, maybe even forever. And the question is whether ordinary people are willing to tolerate it.

Whether the Chinese public can take the pain, is willing to accept this chronically weak domestic demand environment. So, I think that’s really the question. I think what we’re going to have is weak ongoing domestic demand. Net exports are going to become more and more important. The question is just how long is Beijing willing to endure it?

Andrew: Yeah, that is the key question. And I think that will be the determining factor in terms of how long they’re willing to stick with the policy. And, you know, whether the policy of trying to maintain some level of what we’ll call balance sheet integrity for the economy is worth weaker demand, right? So that you can maintain some headroom for borrowing to support demand in the future. It’s all kind of trying to figure out when you want to kind of play that card to support growth because you’re going to have to do it at some point.

But, Dinny, we got to wrap up. This is all super fascinating. We will see kind of the effects on the economy. We will see how this nascent deleveraging effort plays out. I think you’re early on this. You know, you’ve been kind of looking at this for a while, testing it out. I think hearing people again, like Pan Gongsheng say it, doing our own analysis of various policy tools that have been sort of being deployed. Again, you make the strong case. So, I think it’s a good call. We’ll see kind of how it plays out, whether it’s a good early call.

And I think, like I said, you’ve convinced me. So, I appreciate you walking us through this today. Really fascinating stuff as always, man.

Dinny: No worries, mate. It’s a pleasure as always.

Andrew: All right. Yeah. Good to see you. Good to be back on the pod. And thanks, everybody, for listening. We’ll see you next time, everybody. Bye.