In this week’s podcast, Trivium co-founders Andrew Polk and Trey McArver examine Beijing’s latest thinking on trade tensions with the U.S. as both sides settle in for a sustained confrontation. The two discuss:
Whether Beijing has Trump’s number
The shifting narrative on China’s ability to sustain hostilities
Conflicting reports as to whether China and the US are actively negotiating
China’s patient approach to stimulus – with the recent Politburo meeting opting not to provide additional domestic economic support
The Politburo study session on AI – and how China is trying to position itself globally
As always, there’s lots to chew on! Full transcript below:
Andrew Polk (00:10): 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, coming to you again today from Washington, D.C. And I’m joined once again by my Trivium Co-founder, Trey McArver from London. Trey, it’s great to see you, man. How’re you doing?
Trey McArver (00:27): Yeah, doing good. Excited to be on the pod.
Andrew (00:30): Yeah, good to jump back into it. So, listeners may have noticed that we didn’t have a pod last week. Trey and I were actually both off work for the past two weeks, which was pretty amazing. And, luckily, nothing really happened on the China front or the U.S.-China front while we were gone. So, really, there’s not much to catch up on. There’s not much to be catching up on this week — Of course, that is a joke. I’m being facetious. I will say that I spent one week in Harry Potter World in Florida with my family, and the next week I spent in Scotland on a big golf trip. So, it was sort of like being in these two very magical, far away from normal life places, far away from the news cycle. It’s been a bit of a kick in the teeth to come back.
(01:13):
But we’re here and we’re glad to be doing it. And I even got to see Trey on Friday in London, which was awesome. I mean, it’s pretty insane that we run this business together, and that was the first time we’ve seen each other in like a year. But after our outing on Friday and your weekend and two weeks off before that, let’s just start off this time with the vibe check. How’s your vibe as you’re getting back into the swing of things?
Trey (01:37): Is it okay to say tired again? I mean, I’m actually not even kidding. I think, with so much going on, on one level, it’s very exciting, and I’m excited to talk through some of the latest developments with you, but it’s also, it’s tiring, you know? And so, I think, especially after having a couple weeks off, you just come back and it’s just kind of full on. Never a dull moment. But yeah, so I’m not even sure, but maybe overwhelmed is my vibe check.
Andrew (02:04): Yeah, I kind of did the thing over the past two weeks where I just kind of triaged my email as I went so didn’t have too much of at least communications deluge to come back to. I’ve come back to D.C., trying to take a little bit more of a Zen mindset. I live in the northern part of D.C., so far away from the Capitol, about as far as away from the Capitol and the White House as you can get and still be in D.C. And although I’m downtown today doing some meetings, I have committed to just trying to hunker down in my corner of the city and be away from some of the craziness on the day-to-day basis. So, I’m actually coming back with a little bit of Zen in my life, and hopefully I can impart some of that to you, Trey, and some of the listeners as well.
(02:53):
But with that out of the way, we’ll get to the agenda for today. So, shockingly, we’re, once again, going to talk about the U.S.-China trade war, and specifically we’ll discuss the conflicting reports as to whether the U.S. and China have actually been undertaking tariff negotiations or not. We will also discuss China’s strategy at this stage, it’s kind of been not evolving in any major way, but certainly the incentives are changing and we’ll talk about that and how the strategy seems to be becoming clearer and that clarity seems to be around them, very much looking to hold the line, not back down to Trump, and prepare the domestic populous for a protracted trade battle. So, we’ll get into that. And next we’ll touch on Friday’s Politburo meeting, which was focused on the economy, and saw officials opt not to provide more aggressive economic stimulus to offset the looming headwinds, economic headwinds from the trade war.
(03:47):
And finally, we’ll talk a little bit about the Politburo study session, which also took place on Friday after the monthly Politburo meeting, and that focused on AI development and AI policy. We’ll get into some of the implications of that. Trey, how does that sound? Ready to dive in?
Trey (04:03): Yeah, let’s get to it.
Andrew (04:04): All right, well, we’ll do it. First, though, some quick housekeeping. Just a quick reminder — We’re not just a podcast here. Trivium China’s a strategic advisory firm that helps businesses and investors navigate the China policy landscape, which includes policy towards China in D.C., London, Brussels, and other Western capitals. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. That’s hq@triviumchina.com. We’d love to have a conversation about how we can support your business or fund. Otherwise, if you’re interested in receiving more great trivium content, please check out our website, triviumchina.com, where we have a bunch of different subscription options, both free and paid.
(04:42):
And finally, tell your friends and colleagues about trivia — helps us grow the business — and tell them about the podcast so we can get the word out on that as well. So, I appreciate everybody supporting us, telling your friends and colleagues about us. All right, Trey, let’s get into it. I actually, even though I flipped this in the intro, I actually want to start before we get into the sort of, are they talking or aren’t they talking piece of this? Start by diving into where we think Beijing’s head is at right now, now that we’re four weeks out from Liberation Day, which is insane. It somehow seems much longer and much shorter than that. But we’re four weeks out from the Liberation Day tariff announcement, the subsequent volley of back and forth tariff moves that have raised tariffs on both sides to well of 100%. So, this week, we saw a state media running op-eds, calling on the Chinese people to prepare for a “protracted war.”
(05:34):
This term is a reference to a series of speeches on “protracted war” called On Protracted War by Mao Zedong during the Second Sino-Japanese War. And these commentaries have channeled Chairman Mao and argued that China shouldn’t either compromise with the U.S. in hopes of getting a good deal or assume that a trade war victory is imminent. Instead, China should leverage its strengths to resist U.S. bullying. And there’s been a number of pretty evocative phrases, provocative, evocative phrases from state media and official outlets. Probably my favorite line came from a video published on Tuesday yesterday by the Foreign Ministry, which, at one part, said, “Compromise won’t earn you mercy. Kneeling only invites more bullying.” So, I actually love that phrase. I think I might just get it as a tattoo, although if I get it in Chinese characters, I think my wife will divorce me. So, maybe I’ll rethink that.
(06:28):
But anyway, I actually think with that kind of mentality, in a way, Beijing kind of has Donald Trump’s number with that line, right? That the more you give in, the more he bullies. I think is probably the right way to think about it. But let me throw this to you, Trey. Two questions to start. Am I right in saying that Beijing has a good read on Trump, and that quote, kneeling, only invites more bullying? And secondly, is there any other way to read what Beijing’s saying other than to assume that we are really in for a month, if not years, long extreme trade war?
Trey (07:03): Yeah, so I mean I think what is clear to me is that, as you said, we’re almost a month in, right? And I think the dust has settled a little bit. The initial shock of liberation day has faded a little bit. And so I think to answer your second question first, it’s definitely, you know, China realizes that this is not going away and they are digging in. And I think that’s why you see state media kind of pumping out the quotes from On Protracted War. And so, yeah, I mean I think we’re obviously kind of in this for the long haul now. As far as whether or not Beijing has Trump’s number, I think that is still to be determined, right? The proof will be in the pudding, but I think they certainly think they have his number, and I think they have good reason to think they have his number.
(07:55):
And I think that is because Trump has already shown… There are a lot of chinks in the armor that have kind of appeared since Liberation Day, right? I mean, you can kind of sense, I think, with some of the statements and the messaging coming out of the White House, coming out of the administration more broadly, that there is some discomfort with the effect that Liberation Day has had on the markets and on sentiment more broadly. I also think it’s really interesting, I think it took a couple weeks, but I would say also the narrative, at least in major Western and American media, is also that China is well placed to weather this trade war that they certainly are not going to cave and that this is actually going to hurt the U.S. a lot more. And so, I think the combination of the kind of western narrative on this changing a little bit and the kind of signs of skittishness within the Trump administration. So, the electronics carve out and the, “Oh, yeah, we’re going to get a deal,” and, “Oh, it won’t actually be that high in the end,” and just kind of, you know, these efforts to walk back some of the moves thus far, I think, gives Beijing confidence that taking a tough stance is going to play to their favor in the end.
So, whether or not that’s right, I don’t know, but I don’t think they’re changing their stance, and I definitely think that this is not going to be resolved quickly.
Andrew (09:27): Yeah, so a few things. First to follow up is, it’s interesting you point out that the Western narrative is that China can dig it. I agree that that’s sort of been the narrative in the past maybe 10 days, but I don’t know if that’s how this narrative started. And it definitely didn’t start that way in the Trump team’s mind, right? The narrative in D.C. where I am, and definitely within the Trump administration has been China’s economically weak. We got them right where we want them. I think that was a lot of the analysis even in the media going in. So, the idea that China is well placed to withstand this back and forth is kind of a new idea. It’s not new for Trivium because we’ve been saying since the beginning — China’s been the only country in the world who has been very well prepared for this.
But what do you think is behind that shift in the media? That’s interesting. It’s a good point that it may start to impact the Trump administration’s view. I don’t think it has to date. I think the Trump administration still very much thinks they have the upper hand. But what is behind that view? And do you still, I guess then I’d add on, so I think we’re making a case, basically, that the Trump administration is misreading China’s incentives and resolve. Where do you think China might be misreading the Trump team?
Trey (10:43): Well, so I mean to your first question about how the narrative has flipped and really I think the question there is why was the narrative ever that this would decimate China in the first place? I mean, I think the narrative that China would kind of crumble under these tariffs, I think, has a long history going back to the late ’90s that the Chinese economy is a house of cards. And that’s been a persistent theme in some areas of China watching an officialdom in the U.S. for three decades.
Andrew (11:13): They’re on the edge, we just have to give them a push. Yeah.
Trey (11:15): Exactly. And I think China has economy, as we know very well, has struggled over the past couple years. Like it has not been a good two and a half years for the Chinese economy. And so I think whenever the Chinese economy goes through a down cycle like it has been, I think those voices, the kind of permabear voices become louder and that narrative becomes more prominent in D.C. And I think that was very much the case this time. Now, the reason it changed is because reality is starting to set in. I think there’s just this funny thing where part of the… this goes back actually to the first trade war. There’s always been this idea that it’s like, well, because the U.S. imports more from China, the tariffs on China will hurt China more because China exports more, right?
(12:03):
Because China sells more. But I think frankly that’s just an over-simplistic way. I mean, not even overs simplistic, it’s just, frankly, probably a dumb way to look at what happens when you put tariffs on goods. A tariff on a good is also a tax on U.S. consumers and companies. And so you can flip that, it’s just as true to say that the U.S. is imposing huge taxes on itself and is imposing much bigger taxes on the U.S. economy than China is imposing on the Chinese economy through its tariffs, which are on a smaller subset of goods because it imports less from the United States. So, I think that the reality of trade wars is just a little bit more complicated than everybody set it out to be at the beginning. And that the narrative shift is, we probably haven’t gotten to the actual reality yet, but I think the narrative is we are getting closer to an understanding that this is going to be painful for the United States. And I think that is really starting to sink in. That’s why we’ve seen the narrative shift.
Andrew (13:03): Yeah. And any thoughts on where China might be misreading Trump?
Trey (13:08): No, because I don’t know what Trump’s going to do. That is the central difficulty with all of this is the unpredictability of Trump and the U.S. administration more broadly. And so, again, and we’ll get to this I think when we get to the Politburo meeting, but I think what we see from Beijing is they’re still kind of waiting to see how this all shakes out, and they’re trying to keep some powder dry to be flexible, to be aware. And so, in that sense, I think that’s because there’s a fundamental reality that it’s difficult to tell what’s going on within the Trump administration. And so, in that sense, I think they suffer from the same kind of analytical challenges that all of us do.
Andrew (13:47): Yeah. I mean, I will say I guess part of my thinking that China, my view being that China has a pretty good read on Trump, is not necessarily that he’s going to fold. As you say, we don’t know what he is going to do, but obviously, as you said, they do see some skittishness. But, more generally, that much like China, Trump really only respects strict. He wants people to grovel, but he doesn’t respect the groveling, right? And then he smells blood and tries to see what else he can get. Just another great line from Chinese media, state media, Beijing says bowing to a bully is like drinking poison to quench a thirst. So, these are the kinds of ways that they’re conceptualizing this, which I think, in a way, is right. Now, to your point also about kind of the uncertainty, one of our analysts in China, one of our Chinese analysts, was saying to me, or saying in our Slack chat, “I’m worried that this is going to backfire, that they’re going to push Trump too far, he’s going to be cornered, and then he’s going to lash out.”
(14:48):
And then he said, “It just seems really risky.” And my response was, “Everything’s risky at this stage.” You’re really just trying to do, and Beijing very much is trying to do what they, or choose the option that they think is the least bad path, right? And they think that the least bad path for them is showing resolve. And there are obviously domestic political considerations there. But I think, at the very least, you put all this together, and it’s hard for me to see even negotiations starting within a couple of months, let alone an actual negotiated settlement. I mean, with that, I think we’ll get into the, are they talking? Aren’t they talking? But my view is like settle in folks and listen to the Chinese officials who are saying this is going to be a protracted trade war.
Trey (15:36): Yeah, I agree. But I would just caveat and say that things can change, right?
Andrew (15:41): Yeah, totally.
Trey (15:42): I do think it’s just kind of a mug’s game these days trying to figure out what’s going to happen. And I would also say, I mean I don’t think we’re really going to dive into this or have the time or space to dive into it today, but we also get so focused on the U.S.-China aspect, but this is a global trade war. And I think a lot of the dynamics that will affect the U.S.-China relationship are going to be U.S. relations with third countries, are going to be Chinese relations with third companies, and a lot of the economic impacts are also going to be determined by China and the U.S.’s economic relations with third countries. So, I think, not only can we not figure out, I mean this is again why I think it’s just a very difficult time right now, unfortunately, if you are a company or an investor, is that it’s not just the U.S.-China that you have to figure out, but you have to figure out kind of U.S. relations with 120 other countries and Chinese relations with 120 other countries. And when you start putting those together, there’s so many variables that I think it makes it very difficult to confidently forecast outcomes.
Andrew (16:44): Totally. I was having a conversation yesterday with my cousin, who reached out, we hadn’t talked in a few years, and he saw us quoted in Bloomberg, Trivium quoted in Bloomberg, and was like, “Hey, I just thought I might pick your brain on this stuff.” He’s an oil and petrochemicals derivatives trader in Houston. And he just said, “Normally volatility is good for us.” But he said, “Now, we’re just not making any trades, we’re just doing nothing. We don’t know what to do." And he’s like, “Now I’m just becoming a call center because I’m not making any trades. I’m not making any money for the company." That and a couple other conversations I’ve had, you know, companies telling me they’re putting major billion dollar investments basically on hold in the U.S., the U.S. companies doing this.
(17:26):
And I talked to a construction company last week, a guy who, you know, is desperate for residential construction in the U.S., saying, he’s calling up the CEOs of aluminum companies who are saying, “We don’t know how much product we’re going to be able to get you, what the price will be, and when it’ll happen.” And so a few anecdotes to say, like to underline your point, that the economic uncertainty is huge, but also that we just keep reminding ourselves, everyone’s looking at the stock market, but we haven’t even really begun to see the real economic fallout of any of this. People are, I don’t know if it’s on your like social media chats and things like that, but everyone’s looking at like these ports in Shanghai and Los Angeles and Seattle, and showing like the slow movement. Some are saying no ships that are there, some are saying only a few. A lot of the ships appear to be docked or anchored. But that’s just the first sign, and we’re not really feeling it as consumers yet. Do you have any thoughts on all of that?
Trey (18:23): Well, first off, you’re going to have to tell me about this social media thing because I hadn’t heard of that. But yeah, you kind of stole my thunder here a little bit. I hate to be a super bummer, but I was in a discussion earlier today about what the impact of the trade war is going to be on the Chinese economy. And, basically, I was kind of, don’t want to go into the details of it, but I was getting pushback from somebody who was just saying like, “Oh, you know…” We were just talking about some of the estimates that are out there, right? And somebody was saying, “Oh yeah, but those upper end estimates are kind of crazy because, look, like U.S. exports, a percent of total exports are only the… this isn’t really going to… yeah, it’s going to hurt, but like it’s not going to be awful.”
(19:05):
But I actually have the exact opposite view, where I think even the kind of upper estimates of the potential negative consequences of this trade war, you know, more are greatly underestimated. Because, again, I think everybody’s just looking and trying to figure out trade flows and how that’s going to affect everything.
Andrew (19:27): The first-order effect, not second, third.
Trey (19:29): Exactly. But it’s the second-order effects, right? And even the third-order effects, right? Like I said, I mean, you talk about your cousin or you talk about the guy in real estate, I also am talking with funds and companies that have just stopped investment decisions, right? They’re just like, oh, we were going to do this, now we’re not going to do it. We don’t know when we’re going to do it. We’re waiting for the dust to settle. Like you and I just said, I don’t know when the dust is going to settle, right? I mean, this is not going to be over next week. And so, I think that has really negative consequences. And I fear that the U.S. economy, the global economy, the Chinese economy, many economies were basically getting into that kind of negative doom loop that we have seen in the Chinese economy over the past two and a half years, right? Where sentiment really becomes a kind of self-fulfilling prophecy where negative sentiment leads to less investment, which then leads to less economic activity, which then makes everybody more pessimistic. And I think that is, actually, it is the pullback on investment and the uncertainty that all of this is causing that is going to be the real damage, not the tariffs themselves.
Andrew (20:43): Well, and that sort of circles back to your point about, I mean, I think we’re basically in agreement that we’re here for a while, but as you said, things can change quickly. And one of the variables that might change things is the economic pain on both sides and how that manifests once it starts to happen. And so, the next thing I wanted to talk about was, at least on the Chinese side, well, and we’ve seen this on the U.S. side too, you know, we’re putting tariffs on each other at these insane levels — but both sides are also trying to take moves to kind of offset some of that pain on themselves. And what we’ve seen on the Chinese side, particularly over the last few days, is a move to put forth some pretty significant tariff exemptions for their own importers of goods from the U.S.
(21:29):
So, the FT this week reported that China plans to exempt certain U.S. products from its 125% tariffs. Specifically, the FT said healthcare imports to China are under review for possible tariff exemptions. Companies in sectors including aviation and industrial chemicals, said that some of their products had already been granted to reprieve while local media report that some semiconductors had been spared tariffs. So, that report was from, I think, early this week Monday, and again I should have done this earlier, but to timestamp this, as we always should do, it’s 11:00 AM right now on April 30th. So, if anything we say is outdated, that’s beyond our control. So, that report was from Monday, we’re on Wednesday today. And then that’s on the back of last week, as of Thursday last week, there was this rumored list. A lot of people will have seen a potential tariff exemptions that have been circulating widely online in China.
(22:22):
Those items once again include pharmaceutical products, semiconductors and related equipment, jet engines and other key industrial materials. That list covers goods worth around USD 45 billion, or roughly 30% of China’s imports from the U.S. last year. So, you’re looking at a carve out of almost a third for a lot of the tariffs. What do you make of that? Some people are interpreting this as, “Oh, China’s talking tough about protracted trade war, but actually you could tell they’re running scared because they’re doing all these exemptions.” So that’s one way to look at it. Or is this just smart policy to just like be tough and say, but actually, we’re going to blunt the impacts because we know that this is going to hurt us by terrifying everything.
Trey (23:06): Yeah. Well, I think that’s a great point. Having I think made the bear case, I’ll now make the bull case, right? Which is that these moves show what any economist could have told them, which is that the tariffs are economically painful, not just to the country that you’re tariffing, but also to your own economy. And so I think you see both sides looking to remove tariffs when they come. It’s kind of like we talked a little bit about the narrative shifting 10 days ago as well. Yeah, I think there is an optimistic case that, as the economic effects of all of this start to hit home, that we see a dramatic U-turn. What I’m waiting for, and I don’t think it’s the most likely outcome, but I do think it’s possible. I mean, I think this trade war is showing everybody that tariffs are bad, right?
(23:58):
Where like everybody’s kind of like, “Oh, tariffs aren’t good.” And I’m not just talking about U.S.-China, I’m talking about the whole world. And so I do think you could make the argument that this trade war actually will usher in some sort of new round of trade liberalization, maybe ex-U.S. But I think people could see just how, if this gets painful enough or if the prospects of the pain are clear enough, that perhaps things turn around really quickly and you start to see barriers removed in China in other major markets on both trade and investment. And I don’t know if that completely offsets having walls around the U.S., but it certainly partly offsets it. And, of course, the big question is does the U.S. also then join in in that in some way or? And, again, I do think the one thing about Trump is that he can sell anything. He could have just taken the EU’s zero-for-zero deal, right? And said, “Hey, look, I won.” And I still think he could do that, right? So, he could actually end up reducing trade and investment barriers and saying, “Hey, yeah, that’s what I was trying to do all along.”
Andrew (25:08): You made the bull and the bear case both quite persuasively, I thought. I guess the one caveat is, yes, Trump can pivot on anything. This does seem to be the one thing that he truly has believed for 30 years. So, I’m a little bit more skeptical. But you’re right, if he does decide to go down that route, he’s the one person, probably in U.S. politics, who could just say, “Well, I won, I got what I wanted, this is the best deal ever. And off we go.” But maybe to pivot to the, are they talking or aren’t they talking? Obviously, the best way to get a positive outcome is for the U.S. and China to negotiate with each other. But there’s the question of whether or not the two sides can come to the table or whether they’re actually already negotiating.
(25:52):
So, there have been conflicting claims on both sides here. On April 17th, Trump claimed the two sides were already talking trade. But then that assertion was contradicted by Treasury Secretary Scott Bessent, who said negotiations haven’t started, and China’s foreign ministry dismissed Trump’s claims as fake news and has since consistently said that no talks are happening. Then, again, just on Friday, April 25th, Trump claimed that Xi Jinping had called him, a claim which the Chinese embassy and the U.S. denied. Also on Friday, South Korean media reported that a delegation led by an unidentified “high-ranking official” from the Chinese Ministry of Finance had entered the U.S. Treasury Department. We know that Central Bank Governor Pan Gongsheng and Finance Minister Lan Fo’an were in Washington last week for the G20 finance ministers and Central Bank Governor’s meeting. So, they could have easily gone over to the treasury for some talks, some quiet talks. Whether or not that actually represents like official negotiations, who knows? Or whether this meeting was about something else entirely, terrorist financing, who knows? We don’t know. But what do you think? Who’s telling the truth here? Or if both sides are putting spin on the ball, which side do you think is closer to the truth?
Trey (27:05): I mean, the only person, including in the Trump administration, who has said that there are talks going on is Trump. And he’s just not the most reliable narrator, right?
Andrew (27:16): Understatement. No, it’s a good way to put it.
Trey (27:20): Yeah. The fact that Bessent then comes out and says, “I don’t know about that,” would seem to be, I mean, I’m sure if’s Bessent saying I don’t know about any talks, which would be pretty surprising if the treasury secretary did not know that Trump had talked to Xi Jinping, or that talks more broadly were going on, right? I don’t think that there are any meaningful talks going on. I saw the report on the Chinese officials at the Treasury. I believe that report. I saw the pictures. And I’m sure these are two vast government bureaucracies that have over time established many different touch points. I’m sure that some Chinese and American officials somewhere are talking to each other about something. But I don’t think that substantive trade talks are going on.
Andrew (28:11): Yeah, our business partner in China, Ether Yin, who’s been on the podcast, he actually made the point that he thinks part of why China’s being so vocal about saying that no talks are happening is, one, they want to set the record straight. But secondly, he thinks that they want to upend the narrative that this is all going to end quickly, not just us China, but U.S. global, and basically slow down the negotiation process globally between the U.S. and everybody so that the U.S. doesn’t make a bunch of deals that have negative impacts on Chinese interests. And so they’re saying, “Not only are we not negotiating, but we don’t think much is happening here at all,” and really kind of try to counteract the narrative that this is going to end quickly in big beautiful deals between the U.S. and everyone at China’s expense. What do you make of that narrative or that point of view?
Trey (29:07): Yeah, could be.
Andrew (29:09): Well, I thought it was a good point. We’ll see, we’ll see. I guess we may never know, but I think there may be something to that. I think it would be pretty savvy of the Chinese to take that tack. But we’ll leave all the trade stuff there. We’ll sort of leave it there momentarily. But given that we’re going to be in this place potentially for months or even years, and we’ve now said that this is going to be a protracted event, this kind of brings us to the bureau meeting on Friday, where a lot of investors and analysts hope, and expected that Chinese officials would signal more aggressive economic support measures to offset the impending economic challenges from the tariffs. It’s important to note it was good timing because April is one of the three monthly Politburo meetings that specifically focuses on the economy each year.
(29:54):
And so I think people had high hopes that they’d use this as an opportunity to sort of pivot to more aggressive stimulus. Of course, people hope that for every econ-focused policy Politburo bureau meeting. But leaving that aside, that didn’t happen. More stimulus did not happen. In fact, no new economic policies were announced at all. All the Politburo really did was promised to speed up implementation of fiscal and monetary policies, including by accelerating the issuance and use of government bonds and cutting interest rates in the reserve requirement ratio of banks “when appropriate.” It also pledged to continue supporting consumption, most notably through “increasing financial support and expanding and enhancing implementation of the consumer trade-in programs and the industrial trade-in programs,” which we’ve touched on this podcast about before. And Politburo also promised to promote consumption and services. And thirdly, the Politburo announced targeted support for businesses hurt by the trade war, including increased unemployment insurance, fund rebates, and providing access to cheap credit.
(30:58):
So, basically, all things that were already on the table, basically trying to mitigate a little bit of the pain for exporters. Otherwise, we’re just talking about same story on consumer support through the trading program and accelerating fiscal monetary policies that were already in place. That said, the leadership did signal willingness to roll out additional stimulus if needed, saying, “We will introduce additional policies in a timely manner in response to changing circumstances and strengthen counter-cyclical adjustments.” So, here I’ll say, I mean, this is pretty much exactly what we expected going into the Politburo meeting. A lot of folks, like I said, were expecting maybe they jump into action. But we didn’t think they jumped the gun, and we still think that they’ll want to see what the real world impacts, what the actual data flows on the back of the tariffs look like before adjusting their policy stance.
(31:50):
I mean the Q1 GDP data, the real GDP growth for Q1 on a year-over-year basis, came in at 5.4%. I think real nominal GDP growth was 4.6. So, a little bit of a deflationary impact there. But overall, that’s a pretty strong print, which gives them a little breathing space so that they had economic momentum, at least going into the tariff four, so that they can kind of hold fire for now. Trey, what do you make of all that, and what should we expect next from China’s economic authorities, in your view?
Trey (32:18): Yeah. Well, basically, three things stood out to me from the Politburo meeting. And the first was obviously the trade war is top of mind for everybody. In the readout, kind of at the top of the readout when they discussed the overall things, the conceptual frameworks that needed to be guiding economic thought, they added a line about coordinating domestic economic work with international economic and trade struggle. And there were some other kind of hat tips to the trade war as well, right? So, talking about uncertainty of drastic changes in the external environment, and that they should also oppose unilateral bullying, i.e. stand up to the United States. As you know, Politburo readouts are pretty dry things. I think those phrases count as pretty saucy in this context. I also thought the move is, I guess, predictably been panned for not offering any new measures, but I thought that there were a few specifics in there, right?
(33:15):
I think the credit to the export sector and some of that support for consumption was new and relatively specific for a Politburo readout. So, it’s not like they’re not doing anything. But I think most importantly is that they signaled very clearly that they are prepared to do something. And so you just quoted this line — but we’ll introduce additional policies in a timely manner in response to changing circumstances and strengthen countercyclical adjustments, right? I mean, they said that. They also said that they needed to continually refine the policy toolbox for stabilizing employment and the economy, right? So, these statements taken together say, “Hey, look, it’s not good. We’re facing some challenges. We’re going to have to act here. We need to be prepared to act, we need to be thinking about it, and we need to be prepared to roll out the big guns if we need to.”
(34:09):
Again, I thought it was all pretty sensible, and I think part of the narrative has been like, oh, it’s like, “Oh, they’re not doing anything. They’re not that worried.” I do think they’re worried, and I think they’re doing a lot. And I think it was a very kind of proactive, “Hey, big stuff is going on and we’re going to take care of it, but it’s not going to be a knee-jerk reaction, but we’re thinking about how we’re going to react here.” So, I certainly don’t think that kind of more aggressive moves might not be on the table in the kind of weeks and months to come.
Andrew (34:36): Yeah, that’s all good points. And I think, in my mind, it kind of is very much in line with how they’re approaching the trade back and forth with the U.S. more specifically, which is, despite Trump claiming that they panicked after the liberation day tariffs, they’re taking a very patient methodical approach that they laid out months, if not years ago, right? Based on a wide range of scenario planning. Just like they’re not going to panic and come try to make a deal with Trump immediately. They’re sticking to their playbook on proportionate retaliation on that side. They’re also not going to panic and throw open the credit gates and all this stuff on the econ side. They’re going to wait and see. And so, I think they’re just sticking to the playbook very much. I think this has been the case, it’s always the case, but it’s been the case, especially since Trump came back into office is like everyone wants to know the answers immediately.
(35:33):
Like, he was days at the office, and we had clients calling us and being like, “What’s he going to do on delisting of Chinese listed companies on U.S. markets? What’s he going to do on this? What’s he going to do on this?” And I’d say we’re three weeks in. he still doesn’t even have his team around him. But everybody kind of wants the answer now. And I think everybody wants China to react now. I almost view it as like if you’re a football coach and you’re in the first quarter and it’s zero to zero, so you haven’t scored anything, but you haven’t given up any big plays or any goals and you’ve got your playbook and you’re just sticking with it. Now, by the end of the first quarter, already the fans are saying, “Throw the hell Mary, go deep. Take a chance.” But the coach has to just stick with the playbook and believe in the game plan that they put together.
(36:20):
And I kind of think that’s where we are. It’s a bit of a tortured sports analogy, but I’m just going to throw it out there. I already have. So, it’s there, it’s lingering. But anyway, I just think they’re being very patient. And part of that sort of patience and long view really was also reflected on Friday’s Politburo study session, which is they do this, pretty much every month at the Politburo meeting, just talk about kind of specific shorter-term policy developments or policy trajectory. And then they talk about a bit of a longer-term bigger picture type thing. But they stuck with that overall formulation. And instead of having Politburo meeting on trade or study session on trade or something like that, they had a study session on AI, and specifically sort of AI development and AI policy. Interestingly, this is the second time that AI has been the focus of a Politburo study session, and it’s the only SciTech issue to receive this accolade.
(37:16):
So, the only SciTech issue to have two dedicated sessions at the very top of the political and policy structure to focus on this issue. So, it underlines its strategic importance. And at the meeting, Xi Jinping really kind of hammered home the message of the importance of AI, saying AI, as a strategic technology leading a new round of scientific and technological revolution and industrial transformation, is profoundly changing the way humans produce and live. The Party attaches great importance to the development of AI. So, being very clear about that as a long-term issue. He also called for strengthening basic research, achieving breakthroughs in core technologies like high-end chips and foundational software, leveraging tax incentives and government procurement to support AI development, formulating AI regulations and standards, and finally seeking international cooperation. So, that’s interesting, that last one in particular. So, Trey, neither of you are AI experts, but what do you make of this? What’s the message from Xi Jinping here? What should we expect on this front? Does it tell us anything about the longer-term view that they’re taking?
Trey (38:24): Yeah. I mean, well, I love a Politburo study session. And so, yeah, I actually think this is pretty fascinating. I think it’s hard not to look at everything, and AI in particular, not in the context of U.S.-China relations. And so I think that is, as I kind of read through the readout, I couldn’t help but look at how different the way, at least in a Politburo study session readout, China is talking about AI from the way that the U.S. approaches it, right? Where the U.S. is very much — this is a technology that we, the United States, must control and dominate, and that we also very explicitly must not let China control and dominate. This goes back to the Biden administration, right? This is not the Trump administration. But that’s aggressive stuff, I would say, for any country except for the United States, right?
(39:15):
But even if you’re in Europe, it’s kind of like, man, America — so intense. And so I think China is smartly pragmatically positioning itself in a very different space, right? Where it says, actually, no, like, “AI could be a global public good, and we want to contribute to global AI governance. And yeah, we must vigorously engage in international cooperation on AI, help global south countries enhance their technological capabilities and contribute China’s efforts toward bridging the global intelligence divide. Efforts should be made to promote greater alignment and coordination among all parties in terms of development strategies, governance rules and technical standards, and to form a global governance framework and standards with extensive consensus as early as possible.” And we’ve actually seen that Wang Yi, the foreign minister, was in Brazil earlier this week for the Bris foreign ministers meeting where he said the same thing.
(40:15):
He talked about wanting to make sure that AI was universally beneficial and that AI was safe. I think, to me, that’s a really interesting approach that China’s taking. I think a very savvy approach in a moment where I think kind of skepticism of the U.S. is probably, I think it’s safe to say, kind of sky-high levels throughout the world, both in the allies and in the global south. I think China positioning itself as kind of benign AI actor is a smart move. And so, there’s kind of an interesting debate going on about, is China actually even trying to dominate AI? That’s very much a narrative that comes out of the U.S. because, obviously, the U.S. is trying to dominate AI very explicitly. And so I think the assumption then, as so often, is that you just kind of mirror your intentions back onto the other party.
(41:08):
And so there’s been an assumption in the U.S., which I then think spreads throughout kind of the wider Western world that China obviously is also trying to dominate AI. And maybe they are, and they’re not saying it, but certainly in their public statements, in their policies, they talk about it the way they talk about pretty much every other technology, right? Which is like, “We want to be really good at this. It’s really important. And we’re trying to develop it.” Not, “We must develop it and make sure that nobody else is as good as us at this, and we’ll even restrict other people from using our AI because da, da, da.” I think that’s what kind of stood out to me from the readout. Otherwise, again, like you said, we’re not AI experts, so the kind of policy pieces in there seem to be of a piece of things that they’ve said for a long time. This isn’t even the first study session they’ve had on AI. So, clearly, they, like everybody else, sees this as a foundational technology going forward. And so, there’s clearly going to be a lot more government support for it.
Andrew (42:02): Yeah. No, I think that’s a great take. It’s interesting that you bring up that conversation about whether China’s trying to dominate AI. I saw a piece in The FT arguing, basically, that China’s not trying to dominate. That they, kind of, even be comfortable with or even like to be sort of second place, be good at it — not have to necessarily be the global leader. I will say that that is a conversation that cuts against obviously what D.C. thinks, right? Because, as you said, everyone in D.C. assumes, one, that China’s trying to dominate AI. Two, that they’re trying to dominate AI so that they can improve their military capability. And three, so that they can do that so that they can take Taiwan. It all kind of comes back to the Taiwan issue. I mean, that kind of brain-dead thinking permeates this town.
(42:46):
So it’s actually really good to hear you say that. Yeah, I feel like I’d like to acknowledge what would be heresy in D.C. but actually strikes me as just sound thinking. So, that’s good context. I think that is, again, indicative of they are kind of walking and chewing gum. They’re in this trade war, they’re fighting it, they’re trying to make sure they’re sticking to their playbook. But they’re also thinking about these longer-term issues and how they’re going to position themselves globally, domestically, and vis-à-vis the U.S. And so we’ll see a lot more on this front for sure going forward. But I think that’s probably a good place to leave it for the week. As always, a lot of ground coverage of a lot of issues that we’ll definitely be covering on an ongoing basis over the next weeks, months, years, lifetime. So, Trey, thanks a bunch for the time. Great to see you, man.
Trey (43:37): Great to see you. Thanks, Andrew.
Andrew (43:39): Thanks everybody for listening. We’ll see you next time. Bye.
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