China’s economy started the year off on the front foot – but fragilities remain just below the surface, and the war in Iran may put that early positive momentum to the test.
To discuss the latest dynamics driving the economy, and the potential…erm…hiccups it may face in the coming months, Trivium China Podcast host Andrew Polk is joined this week by two seasoned economists:
Beijing-based China Economist at the Standard Bank Group, Jeremy Stevens
And Trivium’s own lead macro-econ analyst, Joe Peissel
The three run through the latest monthly macro data, discuss where key vulnerabilities are lurking, and look ahead to how the Iran situation may upend things, if and as it drags on.
Transcript
Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Tribune co-founder, Andrew Polk, and I am joined today by our Head of Macro Research, Joe Peissel. Joe, how are you doing, man? Good to see you.
Joe Peissel: Hey. Good, Andrew. Glad to be here as always.
Andrew: Yeah, great to have you on. And we have a very special guest with us today, a pal of mine from my Beijing days, where I am currently, and a very seasoned economist on China. He is a China economist for the Standard Bank Group, which is South Africa’s biggest bank, partially owned by ICBC, been based in China now for about 16 years or so. It’s Jeremy Stevens. Jeremy, how are you doing, man?
Jeremy Stevens: Hi, thanks for having me today. I’m really excited to be joining you guys. I’ve been watching your podcast for a long time, and I have been pretty annoyed that I haven’t been invited until now. So, I’m pleased to finally get the nod.
Andrew: Well, it’s good to have you, Jeremy. We are going to talk with these guys about the general state of China’s economy now that we’re three months into the year, and we finally have a little bit of data to understand what’s going on. So, take our monthly check on the state and health of the Chinese economy. I thought Jeremy would be a great person to discuss that with. Of course, Joe walks us through his views about once a month. And so, that will be the main part of the conversation. And then at the end, we’ll also do a little bit on kind of implications of, of course, the biggest geopolitical story of the past several weeks, which is the war in Iran.
So, what kind of implications that has for China’s economy as well but before we get started with content of course we have to start with the customary vibe check. Jeremy, you’re one of the few external guests who we have on early enough in the pod to do the vibe check, so I’ll start with you. How’s your vibe today, man?
Jeremy: Apart from this thrilled invite, which I’m grateful for I would say, so yesterday, I’m obviously going to South Africa tomorrow to see some clients for about 10 days. And so, this morning, my wife asked my son, who’s nine years old, “Will you miss your dad?” And he thought about it. And he said, “I’ll miss kicking the ball with him.” And then my wife then said, “Is that all you’ll miss?” And he said, “Yes, that’s all.” And then I said, “Well, then just kick the ball against the wall.” And then my son said, “Yeah, actually, that’s the same.” So, I feel domestic relegation and then I feel, as I’ve said, umbrage at this; it’s your millionth podcast, and I’m only finally getting invited. So, it’s a bad start. I’m on the back foot here, but I’m open to see how this thing goes.
Andrew: Well, that’s a perfect vibe check — very classic Jeremy Stevens for our listeners who know him, and so well executed. Joe, how about yourself, how’s your vibe?
Joe: Yeah. Also, Jeremy, it speaks volumes about your football skills as well. My vibes are good, Andrew. I don’t have any kids, so I’m shielded from the humiliation of children, thankfully.
Andrew: For now.
Joe: I’m in sunny Brighton in the UK. The weather’s getting warmer. So, my vibes are pretty good, man. Enjoying the warm weather.
Andrew: Great to hear. My vibe is super upbeat. I’m in Beijing. It’s been a super short trip. I’m about to head off. But I’m seeing a couple of my business partners in Balmy, Bali, Indonesia next week. So, excited about that. A nice strategic retreat in Bali, can’t beat it. So, it looks like we’re kind of all over the place on the vibe, but I think we’re bringing some good energy here. So, last thing we have to do before we get into the full meat of the discussion is the quick housekeeping.
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All right. So, with that, let’s get into it. Joe, I’m going to start with you. You just wrote a note beginning of the week that laid out the story on where China’s economy is after the first couple of months of the year. We got, for listeners who don’t know, January data never really comes out because of the Chinese New Year. Makes it volatile from a seasonal perspective. So, mid-March, we get January, February data combined.
So, Joe, you took a look at that, and what’s your headline takeaway in terms of what the data tells us about where the economy started off in 2026?
Joe: Sure. Thanks, Andrew. I mean, big picture takeaway based on the first two months of data is really China started this year much as it ended last, but just a little bit better, which by that I mean growth has picked up pretty much across the board. I think every single metric from industrial activity to investment to consumption metrics, everything’s improved a little bit relative to what we’re seeing towards the end of 2025. But we’re still seeing the same structural challenges. They still all exist — The supply-demand gap, sluggish consumption, huge reliance on exports, declining property sector. So, very much similar to what we’ve been seeing, but slight improvement in terms of economic momentum.
Andrew: So, picking up in the beginning of the year, Jeremy, you’ve been talking with clients over the past few days, I know. What’s your headline takeaway when you talk to clients right now about what you’re seeing in the data?
Jeremy: Yeah, I totally agree with Joe. It’s pretty much more of the same. I think it justifies from what I sort of read from the Two Sessions as well is that Beijing seems to have made the… They’ve adjudicated that even though the economy is facing downward pressure and is sort of operating at a relatively low level, the challenges aren’t rising. And like Joe said, I think that the latest data very much confirms that.
It’s granted weak by historical standards, but I think for them, this would be arguably within what they’re calling that relative stability or that operating range that they’re comfortable with. I think when you look at consumer sentiment, business sentiment, they’re stable. It’s kind of like we’re accepting a new reality and moving on. And I think that’s why macro policies adopted this year have been relatively conservative.
And I think that recognizes that both monetary and fiscal policy space is more limited than before. And I think the fundamental point, Andrew, is that probably for the first time, I mean, the most since I’ve been here, is that Beijing’s threshold for subdued economic activity and weak data has probably never been higher. And they remain very, very focused on shifting resources, both labor and capital, from mature sectors towards these emerging sectors.
And they’re betting that this will deliver producer power, this will deliver global leadership, this will indirectly restructure our incomes and wages, and profits are distributed, and that’s how they’re going to restructure the economy towards consumption. So, nothing that’s happened in the first two months changes that. And I think it really does justify where they are in terms of their relative ease at which the economy is slowing down.
Andrew: Yeah, I want you to pick up on the point you made on business and consumer sentiment because that’s something authorities have been sort of worried about or focused on. And certainly, people outside of China, you know, the weak consumption story. But you said they’re sort of settling into this new environment. Previously, when you and I were talking before the podcast, a couple days ago, you kind of made the observation that you feel like people have just adjusted their lifestyle and they’re kind of fine with the new normal. Can you speak a little bit more about kind of how you think about what’s happening on that side in terms of consumption and sentiment overall?
Jeremy: Yeah, sure. So, I think for the last 10 years, and obviously Joe and yourself and your team has been reporting it for a while, I mean, basically consistently, is that the economy is on a structural downtrend, which is largely manifesting in the sort of traditional drivers of economic growth have matured. And in the process of trying to find new avenues of growth, the transition towards that’s not particularly easy. And so, there’s like an issue with the climate. 10 years ago, when I used to speak to Chinese clients about the Chinese economy, the vibe was always, well, China’s different, and you don’t really understand how China’s economic model is different.
And gradually, what’s happened is a lot of the issues that we’ve been speaking about for a long time have manifested in weaker and weaker economic growth. And so, the climate is one where upward social mobility is slowing down, the pace of change has slowed down, the idea that you can never have a bad year and every year gets better, albeit at different speeds, that’s no longer the case. And I think people have learned to realize that. And then at the same time, you have the climate that’s declining, and then you have the weather patterns and the hurricanes from the housing crisis, COVID, Iran, the trade war. That’s all impacted on sentiment at the same time.
And I feel like the fundamental adjustment, the recognition that rapid economic growth and every year is going to get better for everyone, that’s now settled. And now we’re seeing behavior change accordingly. And I think that that process is sort of three years in. And I think that right now we’re at a stable point where nobody’s expecting things to improve very quickly. They’re expecting this to be a gradual grind.
Andrew: And they seem to be increasingly okay with it, I guess. Once you adjust your lifestyle downwards to, I’m not buying the new phone or whatever every six months, and instead, I’m going to only buy one every couple of years, you kind of realize, actually, this isn’t so bad. This is an adjustment I can make. Joe, I want to bring you in. What are you seeing in the data on the consumption side in terms of where we are? Is your view in line with what Jeremy said? How are you thinking about the consumer piece of this?
Joe: Yeah, totally, totally right. So, as Jeremy said, I mean, the signals in the Two Sessions show policymakers have an appetite or a willingness for lower growth. And there’s no real ambition in the short term to juice consumption. There’s no exciting policy dynamics going on at play. There’s nothing at the Two Sessions. I mean, it’s quite telling that the consumer goods trading program, which is like one of the main consumption boosting measures, was actually scaled back in terms of funding. So, Beijing has a willingness, particularly at the short term, to accept sluggish consumption growth. And if we look at the policy dynamics, there’s actually very little upside for consumption in the short to medium term. I think over the longer run, I’m slightly more bullish.
I think there’s a very slow policy movement to lay the administrative or bureaucratic infrastructure to expand the welfare state. So, slowly, slowly, we’re seeing things like increases in minimum wages, expansion of pension, expansion of healthcare coverage. But these sort of measures take years to implement and to extend full coverage. So, in the short term, consumption is going to remain sluggish. If we look specifically at January and February data, there was a slight pickup.
So, retail sales of consumer goods grew, I mean, close to 3%, which is hardly anything to shout about, but massive improvement from what we’ve seen towards the end of 2025 when there’s a sharp slowdown in consumption. But nevertheless, 3% is hardly anything to shout about. On the consumption picture, I think the one area where I do feel more bullish is expenditure on services. So, retail sales of services have grown much faster. That’s somewhere between 5% and 6% every single month.
And we see this in terms of consumers’ willingness to spend on consumer durables has dropped massively, but consumers’ willingness to go things like traveling, spend on education or healthcare has actually grown pretty well. And we saw that in the Chinese New Year spending data, which was also quite robust. So, overall consumption picture, not particularly positive. It’s going to remain slow and sluggish for the foreseeable future because the nature of the policies Beijing is rolling out take time to have an effect. But there are pockets of strength, particularly in the services side of the consumption picture.
Andrew: Yeah. So, I mean, and consistent with what you said at the top, which is the overall picture is basically the same as last year, more of the same, but slightly better. I was having a meeting today with someone from one of the embassies in town who was talking about just how wildly things have changed over the past five years since the pandemic, just how everyone’s saying, “Oh, great, 3% growth in retail sales of goods. That’s a really good picture to start the year.”
Whereas, you know, in 2019, that’s dismal, like, you know, low, single-digit growth. So, it speaks to kind of the new world we’re in quite a bit. But let’s pivot a bit now to, we kind of covered the consumption piece, the parts of the economy that are particularly strong. You talked about how, Joe, how the data for January, February has shown this ongoing supply-demand mismatch. And the supply side of the economy is still doing really, really well. We’ve got industrial production really humming, 6.3% year over year growth, and industrial value added. Talk to us about what you’re seeing on the industry side in any specific areas of positivity within that.
Joe: Yeah. So, what’s quite interesting on China’s industrial side, but particularly manufacturing, which I’m going to talk about, and that manufacturing specifically grew by 6.6% in the first two months of the year. That’s pre-pandemic levels of growth. So, when we think of the structural slowdown that China’s facing, that’s only happened on one side of the economy. Consumption is structurally slow in consumption growth. But manufacturers continue to increase their output at the same rates as before the pandemic. And this is exacerbating this huge supply-demand gap we’re seeing, which leads to all these issues like overcapacity, deflationary pressures, and over-reliance on exports.
But nevertheless, I mean, manufacturing is a really strong point in the data. So, as I said, 6.6%. That’s the same sort of growth we’d have seen five, six, seven, eight years ago. And as always, it’s concentrated in these high-value-added goods, things like industrial equipment, rail, shipbuilding, electrical machinery. And what we’re seeing is this seems to be spilling over into the investment data. So, as I’m sure our listeners will know, China’s investment data was terrible last year. This kind of unprecedented decline in fixed asset investment. That seems to have reversed in the first two months of this year.
And part of that reason is because of the surge in manufacturing. So, as manufacturing in these specific areas has increased, which I just mentioned, rail and electric machinery, industrial equipment, and so forth, we’ve actually seen an increase in manufacturing fixed asset investment in these exact same sectors. So, that suggests to me, looking at the data, that this surge in manufacturing is actually having a positive spillover into China’s broader investment economy. So, in that sense, it’s a really good thing, real positive. That said, there’s this strong correlation between investment data and manufacturing data. It suggests that this is a cyclical pickup in investment.
And that also means it’s highly vulnerable if there’s any sort of shock, like, I don’t know, a war in the Middle East, for example. I mean, this cyclical pickup could quickly peter out and we could see a decline in the manufacturing investment again.
Andrew: Yeah, that’s a great point. We’ll circle back to the Iran piece and how that may impact the short-term cyclical picture in China. But Jeremy, let me throw back to you. What are you telling your clients on the industry investment side? I mean, obviously, investment was terrible last year, and your clients, many of whom are funds in South Africa, are very attuned to commodities from industry. What’s your message on that side?
Jeremy: Yeah, I’m slightly less optimistic. I mean, everything Joe said is totally right. When you look at where the growth has been, even in the first two months of this year, the fastest-growing sectors have been those sectors where the proportion of their revenue coming from external markets is the highest. So, there’s a clear correlation there. And I worry it’s now $32 trillion in manufacturing investment, up from $21 trillion in 2021. Now, purely just maintaining the speed at which that has been expanding has become very, very difficult. And even the sort of one-third of manufacturing that you could consider sort of advanced manufacturing after years of double-digit growth, they started to slow last year to a crawl. I am watching the interbank markets, the DR77, that’s climbed. And some are arguing, at least some in the sort of domestic economist space, they’re saying that banks are starting to tap the interbank markets because enterprises are finally starting to borrow. At this juncture, I don’t fully buy it yet. I think that it’s got a lot to do with front-loaded policy stimulus and seasonal factors, and the fact that depleted bank excess reserves, they’re currently at about 1.2%.
So, I think that it’s more a seasonal thing that’s caused that. I note that the profit recovery that we saw in the industrial sector last year in Q3 was really just base effects, and those dissipated as the year unfolded. You also look at loss-making enterprises that accelerated through the second half of the year. Inventory growth accelerated across the board.
When you look at loan demand coming from the PBOC surveys, they’ve stabilized, but they’re well below where they were a couple of years ago. And so, I think it’s still going to be this new productive forces part that’s growing at an okay speed, but slower than before. So grid, high tech manufacturing, EV, that stuff. And then I think that the traditional manufacturing base is likely to sort of flatline and continue to struggle. That’s at least where I’m at, and I’ll wait and see how that plays out as the year unfolds, I think.
Andrew: So, what you just said reminds me of the balance sheet recession type argument that a lot of people made trying to say that China is effectively facing a balance sheet recession. And it sounds like maybe you buy into that idea a little bit, although you’re saying that some of those dynamics would have alleviated. Do you think China’s in a balance sheet recession, or do you think that some elements of that are holding back investment growth in industry and profitability like we were just talking about?
Jeremy: Well, I think that what we’re seeing is a feature, not a bug of China’s system. I think the policymakers, like I mentioned at the start, they really are trying to mobilize resources to those parts of the economy that they think can generate productivity gains, right? And what they’re trying to do is make sure that those productivity gains, rather than cascade, or those surpluses that they created, rather than cascade to shareholders and into profits, they want them to cascade down to households through an adjustment in value to cost, better quality, better featured, cheaper products.
Or they want those gains to be reinvested into equipment upgrades and automation and R&D. And so, this supply-demand mismatch is a natural byproducts. And I think that it’s very, very clear that even though the rhetoric speaks to boosting consumption, I think that how they understand boosting domestic demand has to do with, yes, it means proportionately more resources will go towards helping social services and trying to unlock the large share of savings that households tend to accrue in China. But at the same time, it means less roads, bridges and ports, but significantly more investment in renewable energy, for example.
And then it also means within sectors, more investment still. So less in ICE vehicles, but more in NEVs. And I think this is the model that they’re embracing. And like I say, I think that when you think about what they’re trying to do, it’s almost like we see consumption as a part of the GDP composition, but they see it as a byproduct of success elsewhere. So if they can incentivize and rejig the allocation of resources pre-production and incentivize those areas where They think they can generate high-skilled jobs that university graduates can eventually be employed and absorbed by. And then those people who are getting paid a lot can then go and travel and cut their hair, and go to restaurants. This is a 10, 20-year program to restructure their economy.
And I think that’s what they’re trying to achieve. Whether or not they get there or not, it’s going to be tough. But I think all of that lends itself to pushing harder on the supply. And when you look at previous years in supply-side structural reform, which you guys will all know about, 2015 was much more about cutting out capacity. Whereas this time, and I know you guys have written about it, a number of the sort of thought leaders here in China are saying, “We’re going to be much more gradual this time around,” because I think that they believe that crowding in resources and that cascading effect in those sectors is what will deliver the breakthroughs in the technological leadership.
And so they can’t pull back. And so you’re just going to see more and more push from that side. And that’s why the supply overhang and the deflationary pressures are so problematic is because I don’t see anything that’s saying, “We’re walking back the supply side orientation,” even when they talk about boosting domestic demand.
Andrew: Yeah, all great points. And I actually, I want to come back to that in a minute, because the China Development Forum was this week, and kind of your point about their commitment to the model, the message very much out of the China Development Forum, as far as I understand it, I wasn’t there, but from people who were there and were sort of, was that the message of the government was, this is the model, get used to it. We’re not going to change. We’re focused on innovation and tech upgrading or industrial upgrading and technological innovation.
And that’s going to result in exports, and that it is what it is. So, I just thought that was an interesting change in rhetoric that underscores that they are saying, not only… they’re just saying more forcefully, “This is the model and we’re committed to it, get used to it.” We’ll come back to that, but I do want to pick up on something you said on the manufacturing side-
Jeremy: Before you move on, sorry, Andrew, can I just jump in there?
Andrew: Yeah, please.
Jeremy: Because one of the things that we’ve seen recently is there’s quite a strong conversation domestically around the fact that even though household consumption per capita is reasonably low, they’re starting to argue quite forcefully that the reason China’s consumption as a share of GDP is low is largely because of healthcare, for example, is much more expensive in the United States. And if you carve that out, that’s about a third of the difference. Along with homeowners in the United States, they have that paying themselves rent, which is excluded from China’s household consumption data. There’s also a conversation that they’re saying, if you compare, yes, per capita spending compared to the United States is maybe 20% or compared to Germany.
But when you look at individual product ownership of shoes, of protein, of all of that stuff, actually China’s catch-up potential is much more limited than the data would suggest. And so, the reason they’re pushing that conversation, and I agree with Joe and Dini’s analysis that they do think that there’s latent demand in the services sector, but one, you’ve already said previously many, many times that Xi Jinping has said he’s not going to allow the Latin Americanization of China.
And so, they can’t use debt to fund social welfare, and it has to come through the tax system. But at the same time, they don’t think that there’s that much catch-up potential as it stands right now. And so, they are looking at how the economy restructures in a different way to how a number of Western or offshore analysts are seeing the problems facing China.
Andrew: Yeah, I think that’s a great point. And it’s something I’ve actually been talking with folks a lot about this week, which is just understanding how Chinese leaders are diagnosing their own economic challenges or economic opportunities and trying to understand exactly what they’re trying to achieve. To your point, they are thinking about consumption in a very different way. And so we’ve been banging on like the whole rebalancing toward to consumption conversation. It’s just kind of a non-starter when you talk to people on the Chinese side about it for not only the reason that you talked about, but for many others.
The problem, though, of course, is the supply-demand, even though they’re not focused as much on raising domestic demand, raising consumption, the supply-demand mismatch persists. And what that results in, Joe, is a ton of exports on them, you know, flooding the global market. I want you to talk to me about the export data from January, February, and just what you’re seeing on the export side. I’ll front-run you a little bit by saying the numbers were huge in terms of export performance. But I will say, I was talking to somebody earlier this week, he has some insight into the shipping industry. He was saying that his perspective on one of the reasons that exports might have done so well at the beginning of the year is because of the very late Chinese New Year.
A lot of companies try to get as much inventory out the door ahead of the Chinese New Year as possible. So, the Chinese New Year moving around always mess with the year-on-year numbers. Having a particularly late Chinese New Year meant you had a particularly long period to front run as much production as you can as an export. So anyway, I just wanted to throw that little anecdote in there to maybe color what you’re about to say. Tell us about the export numbers and what we’re seeing there, Joe.
Joe: Sure. I just want to circle back really quickly to the conversation you and Jeremy just had about the consumption stuff. And I mean, totally agree with what you guys are saying. I think understanding how Beijing views consumption is really important and is very different from a typical Western economic analysis.
And I think what’s really interesting is, and we see this in the policy talk coming out of Beijing, Beijing almost wants to stimulate consumption through supply-side stimulus, which is very non-conventional. And I think they kind of see this in two ways. The first is, if you can increase supply of good-quality goods and services, you unlock what’s called latent demand. So, policymakers in China are convinced that households have this huge amount of latent demand, which is essentially households want to spend, but there isn’t the supply of goods and services to spend on.
And so, we see things like policymakers encouraging investment in the silver economy. So, building care homes, increasing the provision and quality of elder care. The idea being loads of people want to spend on elder care. It’s just the supply doesn’t exist. And so, the approach is, well, if we increase investment, if we have this supply side stimulus, by doing that, we’re going to increase consumption. The other way of supply side stimulus can increase consumption is through industrial upgrading because this creates well-paid jobs. And so over time, you see an increase in salary and then households have stronger purchasing power.
So again, it’s unconventional compared to what we’re used to. It’s just a very different approach to consumption. And understanding that approach helps us see why, particularly in the short term, there’s very little upside for consumption. Just by the very nature of Beijing wants to go about stimulating it. And of course, one of the consequences, as you say, is you’re going to have a huge, if you try and achieve consumption through supply side stimulus, guess what? You’re going to have too much supply, which leads to these exports. Yeah, so exports surged.
I mean, it’s again, it’s really a continuation of what we saw in 2025. Huge reliance on external sector to offload excess production. The Jan-Feb data was particularly, I think it’s about 22% growth in exports But as you rightly point out, it’s really hard to discern any sort of trend behavior across January and February because there’s seasonal impacts. The timing of the Chinese New Year really matters as well as the length. So, this year is a day longer than last year. 21.8% in the first two months of the year doesn’t mean we’re going to see 21.8% in the rest of the year. But I think the dynamics are still important. It signals to us still this really huge reliance on the external sector to offload this production because the domestic sector isn’t consuming it.
Maybe the one interesting thing to talk about is the diversification in export markets. So, exports to Africa during the first two months of the year grew by 50%. To the U.S., they dropped by 11%. Total change in where exports are going. And of course, Some of this is about reshipping to U.S. markets to try and avoid tariffs. But there’s also a genuine structural shift in who China is selling to. And this diversification, as a general rule, is a good thing. And what we’re seeing in China’s policy, especially in Africa and parts of Latin America, is to try and lock in export supply by accompanying exports with investment. So, for example, take Africa.
China’s building all the infrastructure in Africa. And by doing so, it’s increasing exports of everything from raw materials to intermediate goods to capital goods, as well as consumer durables. So, it’s quite a sustainable way of re-diversifying who they export to. Maybe the last thing I’ll say on this, the one potential downside from this diversification or exposure to developing economies is, as a general rule, developing economies fluctuate much more in terms of the business cycle and economic growth.
And so, if we see a continuation of this diversification, then at some point we may find that China’s exports are even more vulnerable to global changes in the economy. Because developing economies, their economies shoot up and shoot down a lot more than you’d expect from advanced developed economies in the West.
Andrew: Yeah, I’ve said it before, I’ll say it again, you know, I think I’ve been writing or saying every month for 10 years, they can’t keep pulling out the export, you know, trick, and yet they keep doing it even in the face of a global trade war, in the face of a trade war with the U.S. And so, they clearly have more capacity to diversify than many people thought. The question continues to be, how long is that runway? Jeremy, what is your thinking on sort of the export diversification generally? But also, you know, Joe just talked about some of the stuff going on with trade with Africa. I mean, you do a lot of China-Africa analysis. What are you seeing in that space particularly… a key question I keep getting is, what is the global south?
So, we’ll talk about Africa specifically. What is their capacity to continue absorbing this massive amount of Chinese exports? Joe just said China is trying to maintain that capacity through investment. Does that work? What is your thought on all that?
Jeremy: So, I think that’s an important starting point for this is that previously exports used to be foreign-owned companies that were sort of employing, you know, embracing China’s first world infrastructure to build labor-intensive goods. And then those products were being designed almost entirely for the developed market. And they really crossed over into the domestic market. But this new era that we’re seeing, it seems to me it’s being driven by private companies, by domestic brands. It seems like product’s being designed for the domestic market, and then the secondary priority is exports. And increasingly, that’s going to the developing countries because China’s price point is so competitive.
We’ve seen this in the trade surplus. We mentioned it in dinner the other day, but China’s trade surplus with emerging markets has gone from 150 billion to 500 billion since 2022. It shows us, and like Joe said, I mean, China’s exports to Africa up 50%, but also I think half of China’s fastest growing export markets since basically the pandemic have been in Africa. They’re gaining crazy market share. It’s like 40% of Nigeria’s imports, 40% of Kenya’s imports are coming from China. Just over a quarter of everything Africa imports is now coming from China. They’re gaining market share because, in part, because of the productivity gains that we’ve discussed already. They’re also designing these products for 1.4 billion price-sensitive Chinese people.
They’re benefiting from a weaker currency. So, over the past five years, you would say that on a trade-weighted basis, China’s currency has been relatively weak. There’s been aggressive pricing. There’s been falling PPI. They’ve had domestic subsidies. And so, all of that has meant that they are managing to carve out massive positions in the global south, in emerging market countries. And I did a presentation last week to the European Union because obviously, you know, the idea is that, are they hollowing out Africa’s manufacturing base? Probably not, because outside of South Africa and Nigeria, we don’t really have a manufacturing base. But what it is doing is it’s hollowing out European sales to Africa.
And so, I looked at the data. And when you look at heavy industrial goods, so machinery and equipment and so on, China’s share has gone from 15% in 2015 to 30% last year. And the EU’s share has gone from 18% to 12%. And like Joe’s rightly said, the move is calculated. So, what wasn’t on my bingo card this year was China’s construction contracts were going to accelerate. Because, you know, with the end of checkbook diplomacy, de-risking the financial sector, what they did in Belt and Road, there’s actually been a paring back of lending into Africa. And obviously, Africa has also run into its own sovereign debt fragilities.
And so, there was a narrowing of China’s focus that was sort of predating the pandemic. But last year, construction contracts hit, I think, $62 billion, which is up 40% from year on year. And why that matters is because obviously that means construction, machinery, exports, which are Sany, Zoomlion are all killing it in Africa. And it also advertises China as a development first partner and juxtapose itself against the chaotic West. Remember, you’ve spoken about this in the past, but China’s trying to pivot away from a sort of universal value international relation order to a sort of economic growth jobs income kind of agenda.
I would say that what’s interesting, though, because on this trip to South Africa now, one of the things I’m doing is talking to our chief executives about their strategy. And so, I’ve tracked the top 200 Chinese companies’ revenues in Africa over the last five years and their growth rates. And all the big players, the biggest guys are all in construction, infrastructure, and so on. But they’re growing the most slowly, despite what I’ve just said, they’re growing slower, apart from financial services, they’re basically growing the slowest, even though it’s relatively fast. And when you compare it to autos, ICE autos, pharmaceuticals, e-commerce, household appliances, those things are growing even faster.
And so, it’s not only about this construction, sort of exporting capsule goods. It’s actually they’re finding their ways into our markets and gaining an amazing market share. So, it’s real.
Andrew: So, follow-up question, two-parter. One is, what is the ongoing absorption capacity of Africa for these goods? Are the economies growing quickly enough to continue supporting ongoing growth in Chinese exports from a macro level? Or can China eat further into European and U.S. market share and move European market share from 12% down to 15%? And then thirdly, is there any pushback among African countries from the state leadership of Chinese goods?
Jeremy: Yeah, so I’ll be brief. Africa is growing at a decent clip, nothing special, around 4%. So, okay, in the context of Africa. Your question around whether this is sustainable and speed at which China’s exports are growing, I would say probably not. But I’ve fallen into the trap you’ve fallen into before as well, where I’ve said this has to slow, this has to slow, and it continues to expand. The game is definitely market share, and that’s going to continue. So, the degree to which they can continue to gain market share, I think, is still quite large. The biggest issue is obviously this geopolitical story.
We saw pushback before the pandemic from the African side. We saw Xi Jinping came out in 2019 promising to triple imports from Africa precisely because of the trade deficits were becoming problematic. Since then, imports have stayed flat, and it’s only going to continue to be the case when you think that shifting away from oil, for example, the economic model shifting away from the kinds of drivers that used to push them towards the kinds of commodities that Africa could export, with the exception of critical minerals.
So, structurally, the China-Africa story has that limitation, I would argue. But at the same time, they are continuing to find their way into African markets and gaining this incredible market share. So, the trade deficit went from 66 in 2024 to 102 billion last year. It is going to be on the radar for all the African leaders because it’s the most visible and obvious imbalance. And it does undermine Beijing’s bona fides as a sort of development partner in Africa.
And clearly, they want to have these relationships that at least give the veneer of being win-win. But bear in mind that it’s very difficult for a president of South Africa or Nigeria to fight with Donald Trump and Xi Jinping at the same time. And so this sort of more tense environment geopolitically that Trump’s generated since that April Independence Day tariffs has really given China more time to continue this model. But at some point, the pushback is going to come. And we saw Mexico, Turkey, South Africa putting up some barriers before the pandemic.
And I think that that will come back as the year unfolds. And obviously, the sensitivity of China’s economic activity is gradually moving towards the global south, which is new. So, how they navigate, it’s going to matter.
Andrew: Yeah, well, and I guess the story that you’re talking about in Africa has also been replicated in South America, a market share game, along with investment that supports Chinese exports to the continent. Joe, Jeremy mentioned something interesting in terms of the European displacement in Africa. I know you’ve done a little bit of work on China versus European exports globally, and did Japan a little bit in that regard. Any thoughts on what you see happening there?
Joe: Yeah, I mean, it’s not just Africa. Yeah, we did some research about this for a client. So, China’s displacing European exports in every market, including China’s domestic market. So, EU exports to China are dropping because China’s producing a lot of the goods domestically, and vice versa. Consumption of EU-manufactured goods is declining because they’re importing Chinese goods. So, yeah, it’s not just an Africa phenomenon, it’s global, so around the world. Specifically on the exports to Africa and the sustainability point, I mean, as Jeremy says, There’s a structural ceiling at some point, right?
Particularly because of the asymmetry because China exports so much more to African buyers. One thing in China’s favor, and this isn’t just an Africa story, this is a general global export story is … the proportion of exports which are intermediate goods, these are goods involved in the manufacturing process, they’re not final products, nor are they raw materials, that’s shot up. I can’t remember the exact figures, but it’s something like 40% to 50% of what China now exports is an intermediate good. It’s involved in the manufacturing of something else.
And a lot of the time, China’s the only economy in the world that has the scale to produce these intermediate goods at such a vast scale and a competitive price point, which essentially locks them into supply chains. So, even if we do see some of these trade frictions re-emerging later in the year, we talked, again, Jeremy mentioned things like Mexico and Turkey trying to push back, and a lot of the case, or in some instances, these countries don’t really have a choice. They have to, they’re locked into Chinese supply chains. And I think that’s kind of one upside for China’s export story, which suggests that maybe growth to an extent can continue for the foreseeable future.
Andrew: Great point. I want to touch on one other big weakness in the economy before we talk about potential shocks from Iran, which is property. It seems like we write it every month. And by we, I mean me and Joe, that the big drag in the economy is the property sector. What’s the latest on that front?
Joe: I mean, yeah, so it’s still the biggest drag on economic growth. I don’t have a whole lot of interesting stuff to say about this. I think maybe there’s two points. So, the first is one of the major issues with the property sectors, this kind of supply-demand gap, it mirrors broader structural economic challenges China faces, but the property sector still has a huge surplus of stock of unsold properties. Until they can start shifting those, the sector is going to continue to decline. The second thing is these dynamics are really going to be guided by the price. So, as long as house prices keep falling, households are going to have these deflationary expectations and they’re not going to jump into the market.
Why would they buy a house now if they think in six months’ time it’s going to be even cheaper? So, the dynamics we’re really hoping to see is at some point, prices bottom out because the market hits a low. At that point, consumers adjust their deflationary expectations and then they buy back into the market. At that point, the property sector can then start to shift all this surplus stock. Once that happens, then property developers have the confidence to start investment and construction, and the property sector can start to grow a little bit. Obviously, we’re never going to get back to the heydays of double-digit growth. But at some point, in years to come, the property sector can be a slow, sustainable part of China’s growth story. That’s not going to happen in 2026. I can tell you that.
The only positive story we saw in the data is that a lot of the key real estate metrics, so prices, sales, investment, the decline has slowed for two or three consecutive months. It’s way too early to conclude that the sector’s actually bottoming out. We’ve seen this before. We’ve seen a slowdown in the decline and then it’s accelerated again. So, from my perspective, it’s unclear whether or not this is a genuine sustainable slowdown in the decline. But it’s something we’re keeping an eye on. And if we get a few more months of data of this consecutive slowdown, then maybe we can readjust our assessment of the sector. But for now, it’s really the same old.
Andrew: Yeah, this slog just seems like it’s going to continue for the foreseeable. I was talking about this with another person throughout this week in the media. Just saying they obviously are not in a hurry to do much about this. In the 15th-5-year plan, they had moved basically the housing policy section from the growth section of the plan to the social section of the plan. So, housing seemed more as a social good rather than a growth drive. But also my comment to the person I was talking to about this recently was the majority of the pain has already been experienced. So, why panic now?
You know you can make the adjustment, 90% or 80% or whatever if the adjustments are even made. Jeremy, how are you thinking about property and how it fits into everything you’re seeing?
Jeremy: Yeah, it’s funny. What Joe said resonates with me. I also don’t have particularly much news simply because I think that the Party is reasonably happy with the manner in which they’re metabolizing this correction. I think if you had asked any analyst five years ago, what’s the biggest risk to the Chinese economy? Everyone and their dog would have said, you know, real estate collapse. And now they’re sort of four or five years in, and I feel like they’re reasonably comfortable with the manner in which that it’s being eaten up by the broader economy.
And I think that they’re not really showing any signs of changing their property playbook. I would just say that I do think that tier one markets are likely to see improvement this year and stabilization. And why I watch it so closely, because one of the issues that China’s had is that when you look at sort of sentiment indicators from the household sector, you see the biggest hits from the pandemic was to low-income households, but they were the fastest to recover and every year their outlooks improved. And as you move up the income cohorts, that hasn’t actually been the case. The wealthier the households, actually they’ve seen deterioration in sentiment.
And so, what you’re seeing in the spending data is that poorer people are spending, but the wealthier people are holding back. And I think that if the stabilization can occur in tier one markets, as well as potentially a sort of rallying, gradual rallying in the stock market, where it’s predominantly wealthier families that have exposure to that, you could see a slight improvement in their sentiment, which would make quite a big difference in the consumption story because I think the top 20% income owners have about 50% of household consumption and about 65% of household wealth. And so, you just need a small change in their movements to actually see it in the data. And so, I do think there’s a reasonable chance, but I agree.
I think 80% of new starts after 2015 were in tier three and four cities. I mean, those places are dead forever. And so, the idea that construction can come back online like it had in the past is just not realistic. And I agree with what Joe’s saying in terms of his overarching analysis of where they are and how they’re handling it.
Andrew: Yeah, not a pretty picture. So, I think we’re all agreed that we’re pretty pessimistic on properly for the foreseeable. We’re getting closer to sort of time here. So, I want to make sure we spend a little bit of time on kind of vulnerabilities that we see from news of the day, which is the ongoing situation in Iran. Jeremy, again, I know you’ve kind of been thinking about this. Let me start with you. What do you see as the big vulnerabilities that China either has currently or that might sort of become more and more or larger and larger potential issues as and if the confrontation drags on?
Jeremy: I thought it was basically over. I thought President Trump had started his negotiations and it’s basically done.
Andrew: Yeah. I mean, well, just on the off chance that the Iranians decide…
Jeremy: So, a couple of points on Iran. I think it certainly reinforces Beijing’s instincts to focus on making China strong and more resilient and self-sufficient, right? So, it doesn’t do anything from that point of view in terms of undermining where they’re going. I had a conversation with a client in Hong Kong not that long ago. I said, “If America wants to compete with China they have to be willing to send their kids to do 12 hours of maths a day for 12 years, and if they’re not willing to do it, they’re going to lose.” So, there’s a vibe here of clearly we’re competing and we’re competing to win.
And so, I think that you know this just reinforces their instincts to look inwards and make sure that they’re competitive and that they’re doing the right things. It also makes it, again, referring to what we spoke about earlier, it makes it pretty easy, position yourself in the global south as a partner that’s stable, that’s constructive rather than chaotic. And I think that that serves China long term. I mean, of course, I think that China would rather a benign external environment and not a contested one with the United States or with the European Union. But as it stands right now, then the next best is for them to look good and the rest of the Western world to look a little bit more chaotic.
I think that the degree to which Trump is undermining the Western institutions is profound and meaningful, and it makes a big difference in the global south. So that’s not nothing. From an economic point of view, I think you guys have done a lot of good research on the vulnerabilities as it relates to oil and the most immediate shock. So, I won’t rehash that. I would just say that obviously beyond oil disruptions for other agricultural inputs, industrial chemicals, and those things, aluminum, those are all real. But I would just say that given what we’ve spoken about already, if you imagine a situation where suddenly oil’s at $130 or something, it’s going to cause an additional cost squeeze at a time where firms don’t yet have pricing power.
And that obviously means more margin compression. Then obviously, given the importance of exports, if import demand from Europe and Asia and Latin America and Africa is all impacted, that’s not going to help China at all. And then exporters will have, sort of they’ll have falling volumes, or they’ll have to further cut prices, which is obviously going to dent capacity utilization rates, add to the deflationary pressure. So, there’s a lot going on there that makes a lot of the vulnerabilities that China is trying to, as Joe said, they’re gradually trying to grind their way out of those situation. This would make it a hell of a lot more difficult.
And then at some point then, the Chinese leadership have to choose between market clearing bankruptcies, which you know they’re not going to do, or sustaining excess capacity and zombie capacity through forbearance. And that obviously eats into the sort of viability of the financial system, which is something that’s already reasonably vulnerable, which is why the central bank, for example, doesn’t want to cut interest rates because the banking sector can’t really accommodate it. So, there’s that. And then you add, given the climates and the hurricanes that we spoke about earlier, you add, this doesn’t help consider sentiment, right? So, then suddenly you have households that were maybe starting to feel like, okay, maybe we should go travel or whatever. Maybe they say, “No, let’s save.”
And that makes things even worse. So, there’s a lot to digest in terms of the impact. But of course, from a direct point of view, in terms of vulnerability, they’re reasonably self-sufficient and reasonably comfortable.
Andrew: Yeah. Joe, pick up on Jeremy’s comments there. You sort of intimated earlier, talking about the potential fragility of the industrial cycle and investment cycle that the next real shock of your challenge. Where do you think the vulnerabilities are?
Joe: Yeah. I mean, it’s a stress test at the worst possible moment for China’s economy. I mean, and Jeremy’s talked about the two big macroeconomic implications.
Andrew: Let me just say, I think we just got our episode title. Nice work.
Jeremy: Yeah, I also think Joe did really well there. Well done, Joe.
Joe: There’s obviously the energy hit. Jeremy’s talked about that. And then maybe the less obvious, but still pretty obvious channel is to China’s export base. So, China ships a lot of goods to the Gulf, to Southeast Asia, lots of consumer durable to Southeast Asia, to Europe. And households, their purchasing power is going to decline because of the energy crisis. So, I think to make all this worse, fiscal tools, which would generally be the best policy tool to try and manage this issue, are limited because China has constrained fiscal space. And we see that not only through things like really sluggish tax revenue growth, but also policymakers are prioritizing trying to reduce hidden levels of debt, not generate even more. So, it’s like a perfect storm of bad things. Sorry, that’s not quite so articulate. I don’t think that’ll-
Jeremy: No, I prefer that one.
Joe: It’s a perfect storm of bad economic outcomes coming from every angle. So, it’s the worst possible moment for China, I think.
Andrew: Well, and an interesting one is, so obviously everything you just said, both of you, just kind of the stakes and the compounding potential impacts grow and grow and grow as the conflict drags on. So, it does matter how quickly it’s resolved, although as many people pointed out, the global economic ramifications of the conflict will be long lasting, even just if everything stops tomorrow and everybody ceasefire tomorrow and everybody puts down their weapons. But one thing that I was just talking to Cory Combs, who is also in Beijing this week and is our Head of Supply Chain Research, he was mentioning a lot of people are asking us about helium coming out of the middle East, which is also shipped through the Strait of Hormuz.
About, I guess, a third of global helium, I believe, comes from, I believe, Qatar, and definitely is shipped through that channel and it’s one of the things that’s used in the production semiconductors. And he was saying one thing that people don’t think a lot about, I’m just going to steal his thunder, is inventory bugs. And what he means by that is when have an inventory of something, if there’s a buffer, it takes a certain amount of time for you to see this disruption So, for example, if you need a part, but you’ve got two months’ worth of it, and that part is suddenly unavailable, you don’t see this shortage for two months later.
And that moves all the way down the supply chain. So, if you have something that’s very high upstream and you’ve got inventory buffers at one level, it takes a couple of months or a couple of weeks, however much inventory you have for this shortage to show up, and then however much before you to have it. The next part of the supply chain takes a couple months, and then the next part of the supply chain takes a couple months. So, his point was helium is very far upstream when it comes to semiconductor production, and so we may not see if there’s a shortage of helium tomorrow, which, I mean, the prices have gone up.
I don’t believe there’s a global shortage yet, but to the extent there is a shortage of some of these key materials, we’re not probably going to see it for six months, And then it’s just going to kind of slam everything all at the same time. So, I think that’s another sort of element of this that China feeds into the idea that you both said, where China’s like pretty well placed now. But the trickle down effect of some of these disruptions may come in unexpected times, may come in unexpected places. Again, no one would, I think, automatically think, oh, semiconductor production is going to be disrupted because of helium in Qatar. So, I don’t know if either of you has any thoughts on the back of that.
Jeremy: I mean, I was really worried because Jasper’s birthday is in January. And so, I just wanted to make sure there were going to be enough helium balloons for his birthday party. Sounds like he should be okay, I think.
Andrew: Well, actually, we were laughing because, you know, helium is kind of one of these things, it has a bunch of these like low value uses like that. But then it just so happens that it is also a very high upstream piece and a very critical part of the technology supply chain. But I’m glad to know that Jasper’s birthday is going to be okay.
Jeremy: It should be fine. I want to ask you, Andrew, before you go, about two meetings, right? Because a lot of what we’re talking about is the shock, the bad news, etc. And I think that this pain threshold story from the authorities matters quite a great deal because how they interpret and what they’re willing to do and prioritize as data maybe deteriorates through this shock, if it plays out, I’m arguing that I think that they’re going to be conservative. And like Joe said, part of that’s because of fiscal and monetary policy space is more limited. And what they’re prioritizing is different to in the past. But I did notice that the stock market in the two meetings, as a result of this Iran war, were down.
Can you remember any time that there’s been two meetings where the stock market has fallen off the top of your head?
Andrew: No, not off the top of my head. But to be honest, I don’t think I’ve been following the correlation all that closely. I mean, is that unusual in your mind?
Jeremy: Yeah, I always thought that they did something to prop up the market around the time of big meetings. And I can’t recall a time where that hasn’t happened, but I haven’t actually gone and checked.
Andrew: But what do you read from that?
Jeremy: I just think that they are accepting that they’re not sort of the be-all and end-all controlling all outcomes like they thought they were in the past. And actually because people’s tolerance for accepting bad news or weaker data is now higher, as long as the wheels aren’t absolutely falling off. I think that they’re deciding to be more conservative and more constrained.
Andrew: And not sort of freak out at every little thing, I guess, which I think is right. I mean, again, part of my consistent sort of theme, one consistent theme of my meetings this week has been kind of saying, you know, maybe the authorities are wrong. But I watched the reaction function, and I’ve been in Beijing when they are worried about growth. And what do they do? They stimulate. And so, you know, they know how to do that. And so maybe they’re wrong for not being worried. But I think that’s a really good way to put it is their pain threshold is much higher. And I think that it’s permanently higher. And that has fundamentally changed how they manage the economy going forward.
Jeremy: Andrew, last point. You said years ago, and it stuck with me, where you said that Chinese policymakers are really effective when they’re on the front foot and they’re less effective when they’re on the back foot and reacting. And I think that if they pivoted towards being more... And it seems like when you look at the plenum last year, if you look at the two meetings, if you look at the 15-Five year plan, it seems like there’s a coherency and coordination and a focus around what they need to prioritize. And everything else is not a distraction, but they’re not actually that eager to kind of pivot away from what they’re actually trying to achieve.
And so, that kind of lends itself to, you know, I think that you should expect continuity, and you should expect them to continue to focus on the things that they’ve been prioritizing for the past two or three years, basically irrespective of the cyclical economic data. And I think that that puts them in a better stead than previously when they were reacting to everything with the national team to support the stock or whatever it was, which just doesn’t really help them in the long term.
Andrew: That’s a great point. It’s interesting because the way I’ve been sort of characterizing the 15th five-year plan and the government work report for this year is that it is kind of all over the map when it comes to economic growth, like there’s not a clear plan, like, is it 4%, is it 5%, is it more? It just doesn’t seem like they’re sending a clear signal. And so, I’ve kind of talked about it in that context like policy is usually better when they’re very clear on what they want to do. Buti hadn’t tied it to that point on innovation which is they’re absolutely clear that innovation is the number one thing. And it’s sort of like, when you think about it that way, they’re very clearly saying, “Listen, if we get the innovation piece, the growth will take care of itself.”
And maybe they’re wrong about that. But I think that is how they’re thinking about it. And I think you nailed it there by saying they have very, very clearly said there is one clear top priority. That’s — we’ve got to continue innovating, close the innovation gap with the West generally and the States. And we’re not going to worry about growth. We’re not going to worry about the property market, at least not to the same extent. And so, when policy is geared like that, it does tend to produce the outcomes that they want. So, I think it suggests that they’re going to be pretty successful on the innovation front. Joe, any last thought from you before we wrap up?
Joe: Yeah, really quick. I mean, to just kind of jump into what you guys are saying, it does seem like Beijing’s willingness to accept lower growth gives them the space to focus on either national priorities or these structural issues. Yeah. So, it makes sense. I kind of totally agree with what you guys are saying. It makes a lot of sense to me.
Andrew: Well, listen, guys, this has been great. Really appreciate the time. Joe, thanks for joining us as always. And Jeremy, appreciate your time. You’ve been very generous with your time. Great to have you on and hope to have you on again sometime soon.
Jeremy: Thanks for having me. It was nice to be part of it for a change.
Joe: Yeah, it’s been fun.
Andrew: All right. Thanks, guys. Look forward to doing it again soon. Thanks for listening, everybody. Bye, everybody.
