On this week’s Trivium China Podcast, host Andrew Polk speaks with our lead macro-econ analyst, Joe Peissel, to take a quick temperature check of China’s latest macro data.
The two discuss:
What the full-year 2025 data (released in mid-Jan) tells us about the state of play and the likely economic trajectory for 2026
How the constituent parts of the economy – consumption, investment, and exports – are faring
Whether the export machine can possibly go from strength to strength in 2026
Then Andrew is joined by pod regulars Dinny McMahon (Head of Markets Research) and Cory Combs (Head of Supply Chain and Critical Minerals Research) to examine the enduring headwinds to capital expenditure in China.
They get into:
Whether the cratering in fixed asset investment (FAI) growth in H2 2025 was a one-off or is the new normal (spoiler alert: it’s probably the latter)
Prospects for investment in a couple of key industries – autos and renewable energy
How government policy might address the investment slide
And where infrastructure spending fits in – particularly energy infrastructure, as it relates to the recently released massive spending plan from State Grid
It’s another wonk-fest, so lap it up you China nerds.
Transcript:
Andrew Polk: Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk, and I am joined today once again by Trivium’s Lead Macroeconomic Analyst, Joe Peissel. Joe, how are you doing, man?
Joe Peissel: Hey, Andrew. Really good, man. Happy to be here.
Andrew: Yeah. Great to have you on, as always. I’m going to check in with Joe today on the macro numbers on China that were released about a week and a half, two weeks ago. So, we’re a little bit behind of when we normally record a pod like this; we usually do it within a week of the numbers coming out. But just for listeners’ kind of knowledge, this is going to be a regular segment on the podcast. Just once a month, a quick check in with Joe on the latest econ numbers. It won’t be an extended dissection of the economy each time, but just looking at the monthly data and kind of saying, what’s new? How is the narrative changing? How is the trajectory changing?
So, we’re going to start doing this on a regular basis because it’s something we do internally. We think a quick update on it will be helpful for listeners. This will be especially interesting this week. It’ll be a little different than our normal look because the data that came out in January is not only the December monthly data, but also the Q4 data and the 2025 annual data. So, we’ll look back a little bit at 2025 and some of the key themes that we saw in the economy. And more importantly, look ahead to the rest of 2026 and what we expect the trajectory to look like. And then, on a monthly basis, we’ll just do a quick check-in kind of what is the monthly data telling us? Any change?
For those of you who are less familiar with econ analysis, you know, not a ton changes month to month, but there’s usually one or two things that jump out that kind of help you tell how the economy is evolving, how the trajectory is evolving. And then over 2 or 3 months, you start to see patterns in the data that are saying — okay, this is going up, this is going down, this is looking healthy, this is looking less healthy. So, that will be kind of the vibe for this. And then on the second half of the pod today, I’m going to speak with our head of markets research, Dinny McMahon, and our head of supply chain and critical mineral research, Cory Combs, about investment in China. We’ve talked a lot about sort of the fall off and FAI, fixed asset investments, but we’re going to specifically dig into why it’s struggling and why it will likely continue to struggle in 2026.
Look at some of the structural headwinds, specifically in investment in the auto sector and renewable energy, which are both hitting some sort of structural or, I guess, at least extended constraints as we see it. And that’s, of course, related to the involution dynamics or anti-involution policies that China is putting forth. So, we’ll kind of get into all of that later in the pod. So, make sure to stick around for that. But before we get into any of it, we have to start, of course, Joe, with the customary vibe check. How’s your vibe, man?
Joe: My vibes are good, Andrew. You know, we made it through the post-Christmas, early gen slump. So yeah, I’m looking forward to the rest of the year, and nothing but good vibes from me.
Andrew: Right? Great. Glad to hear it. My vibe is cold. I’m in Washington, D.C. I mean, much of the U.S. got hit with this massive snowstorm over the past week or so, but in D.C., the temperatures just have been in the single digits Fahrenheit and never really going above freezing. So, we got eight inches of snow dumped on us. Then everything froze. Everyone’s complaining because they have plowed the streets, but the streets are supposed to be two streets. They’ve mostly plowed and only one kind of lane in all the streets and, on the sides, there are these huge mounds of snow that have now turned into ice. So, getting your car out of the parking on the side of the street means you have to basically chip through a foot and a half of ice. Anyway, it’s, it’s remarkable. I’ve never seen anything quite like it in D.C. Of course, that has meant the kids have been home from school all week as well, so that makes things a little bit more interesting and complicated when you’re working from home.
Joe: I thought we had miserable weather in the UK, but you guys have it way worse than we did here.
Andrew: Oh, no, no, no. you guys still have very much worse weather. Yeah, I’d rather live in D.C. All right. Well, we also have to go through some housekeeping quickly. As usual. We’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape, which includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front on policy towards China and other Western capitals or on domestic policy in China, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more great Trivium content, check out our website — triviumchina.com — where we have a bunch of different subscription options, both free and paid.
You will definitely find the China policy intel option that you need on our website. And finally, as always, tell your friends and colleagues about Trivium and about the podcast. Helps us grow our business and grow our listenership. And if you would be so kind to leave us a rating when you download the pod, also boosts our visibility. All right, Joe. You’re ready to get into it?
Joe: I’m ready, Andrew.
Andrew: All right, well, I’ll just throw it straight to you. Talk us through sort of the most important or interesting takeaways from your parsing of sort of the annual 2025 data. Let’s start there. The GDP data and other economic data that came out in mid-January.
Joe: Yeah, sure. As you said, we’re a little bit late to the races with this,s o I’m not going to go through it line by line. I guess most of us have seen a lot of the big takeaways. But there are, I think, two important or interesting dynamics that I want to talk about briefly from the 2025 data. So, the first is China’s trade performance. Everyone knows exports are performing well, but the extent to which they’re performing well was really quite remarkable. So, China’s trade surplus, that’s exports less imports, accounted for about one-third of China’s GDP growth. That’s the highest level in about three decades. It’s quite incredible how reliant the economy was in 2025 on exports to drive growth.
And of course, what makes this all the more remarkable is that China also faced this unprecedented trade war with the U.S., facing huge tariffs. The U.S. tariffs have really driven two dynamics in China’s exports. The first is it’s led to an acceleration in price cuts. So, Chinese manufacturers have been slashing prices on their exports since about 2023, early 2023. But by late 2024, early 2025, these price cuts were starting to bottom out. They were slowing down. Now, of course, across Q1 and Q2 of last year, the trade war with the U.S. really kicked off. And in response to try and remain competitive against these sky-high tariffs, manufacturers have been accelerating price cuts of their exports again. So, we saw a temporary slowdown in price cuts.
Then starting in Q3, so basically after the trade war kicked off, these price cuts accelerated again. I think that’s the first quite interesting, almost unintended consequence we’ve seen from the U.S. tariffs is an acceleration in price cuts. And the second is, of course, new markets. Chinese exporters are finding new markets. So we saw growth in exports to Africa and Southeast Asia growing by double digits, to the EU and Latin America by high single digits. And these new markets are penetrating. They’re mainly selling high-tech, high-value-added goods. So, there’s a real shift in China’s export composition. This is quite an interesting statistic that during 2025, exports of autos, of ships, of semiconductors, of car parts like engines all grew by double digits. At the same time, exports of cheaper, lower value-added goods like textiles or finished clothing, garments or toys, actually declined.
So a real what I would term a structural shift in China’s export composition as well. That’s the first thing that I think is quite-
Andrew: Before you go on to the second thing, I’ve got a couple of follow up questions. I mean, it’s been interesting to me. So, maybe dive into a little bit further those price cuts you’re talking about. You wrote today about how Q4 was the biggest price decline in Chinese exports in four quarters. So that’s interesting. And secondly, the biggest cuts were in those lower value added exports, largely because a big chunk of those go to the U.S. And I think that’s an interesting thing that… I mean maybe people know this, but I guess, and maybe I sort of knew it somewhere in my mind, but I was a little bit surprised that China’s exports to the U.S. are so concentrated and low value added. It really is the Christmas toys, the office, you know, supplies, the handy work type stuff.
And so, part of that, the outcome of that to me is saying, you know, U.S. tariffs on China’s exports don’t really fundamentally hurt the export engine that China is trying to achieve, which is this higher value export engine. They’re interested in selling more sophisticated goods. And yes, they want the money. Individual companies want the money, especially from selling to the U.S. But if you have to let go of part of your export sector, the lower value added one is the one you’re probably a little bit uncomfortable seeing slide. So talk me through those two things, the maybe a little bit on the numbers on the price side. And then just your general view on this kind of composition of exports to the U.S. and what that might mean for U.S.- China dynamics.
Joe: Yeah. So much, as you said, the fastest price cuts we saw were exports of low value added goods — furniture, toys, clothing, garments, all this sort of stuff, basically cheap or cheap-ish consumer durables for which the U.S. is the biggest importer in the world of. U.S. consumers want to buy cheap Chinese finished goods. So that’s predominantly what China sells to the U.S. And in response to these sky-high tariffs, that’s where we’ve seen the biggest price cuts, cuts of up to 20%. Exporters have reduced prices by up to 20% for these finished goods they ship to the US to try and offset some of the impact of the tariffs. Now to your second point, it’s true the U.S. tariffs on Chinese goods, I mean, long-term isn’t a big threat to China’s export strategy.
If anything, it’s kind of acting as a catalyst to help China shift its export composition away from cheaper goods towards higher value-added high-tech goods.
Andrew: Yeah, it’s the decline in fixed asset investment, which we’ve talked about at length in previous podcasts. So, I won’t spend long talking about it, but it is remarkable. So fixed asset investment declined by 3.8% in 2025. It’s the first time on record annual fixed asset investment has ever declined. And it’s just, it’s mind-blowing. We’re not facing a global financial crisis. We’re no longer facing a pandemic. And yet fixed asset investment declined for the first time ever.
I think from a research perspective, it’s really interesting and it encompasses all the structural issues that China is facing. So fixed asset investment in property declined. That’s a reflection of this excessive structural oversupply in China’s real estate market. Fixed asset investment of government infrastructure declined. And that’s reflective of the structural or excessive local government debt that China’s facing, these debt problems. And fixed asset investment in manufacturing grew by something like 0.6%, something and nothing. And this is really reflective of the structural challenges China’s facing in terms of overcapacity. So, it’s like all these problems kind of coming together and really started to hammer levels of investment in the Chinese economy. Well, I don’t think people spend enough time thinking about it or talking about it. It really is a big deal, this drop in FAI.
Andrew: Yeah. And what you mentioned that we’ve talked about it a little bit on previous cards, and we’re going to get into it even more in the back after this break with Dinny and Cory. But I think it’s worth extended examination because it’s so remarkable, as you said. And it is, I mean, fundamental to sort of leveling out the pace of investment growth or putting some kind of forward under it is fundamental to China’s ability to transition from the old growth model to the new one, meaning they’re moving away from property to these new drivers of growth and more tech driven, innovation driven — EVs, batteries, all that stuff.
But they have to maintain some level of growth momentum to successfully make the transition, right? And investment is going to be a big part of that, specifically infrastructure investment and even manufacturing investment. But there are these headwinds, as you say, that are kind of complicating the story. So, many times laid out, okay, here’s China’s plan to go from the old model to the new model, but just because they have a plan doesn’t mean they can necessarily execute it. And there will certainly be speed bumps along the way. And this FAI is a big speed bump. So we’ll get further into that. Okay. Thanks for laying out the big themes from 2025. But also, you know, the other thing top of mind for everybody is this idea, is China rebalancing towards consumption or not?
We’ve talked a lot about that as well, that we think fundamentally that’s not necessarily the goal or that boosting consumption at least is expected to be the outcome of a separate process that starts with the manufacturing sector and boosts wages and profits and shippers and all that stuff. So, I won’t get into that. But still, consumption remains an important part of the growth story. What did you see in the data in terms of your thinking around consumption?
Joe: Yeah. So, China’s consumption story is actually pretty interesting. And there’s like this sort of, I kind of think of it as like a two-track dynamic, short-term and long-term dynamics. So, in the short term, I mean, as listeners or our subscribers will know, China’s facing pretty sluggish consumption, but it’s not necessarily as bad as the media headlines are telling us. So, consumption of consumer goods of consumer durables is really sluggish. Retail sales of consumer goods grew by 3.8% last year. That’s pretty low growth. But at the same time, consumption of services is much more bullish. Retail sales of services grew 5.5% last year. So, China’s consumption story in the short term, it’s not a tragedy. It’s not something to panic about.
It’s sluggish. But it’s not as sluggish as the headlines may suggest. Per capita consumption, so this is kind of incorporating consumption expenditure on goods and services grew by 4.4% last year, which is okay. It’s not a tragedy. It’s not something to panic about. In fact, if we look at it in nominal terms, so incorporating price effects, then per capita consumption actually grew faster than GDP growth. So consumption’s kind of coming along. It’s okay.
Now, longer term, Beijing’s laying the foundations for strong consumption growth by investing quite heavily, or at least implementing policies or talking about policies that it wants to implement to invest in social security. And I mean that in the broadest sense. So things like expanding healthcare coverage, introducing free preschool education, increasing national minimum wage, all these sort of policies. Long term, that’s a really positive sign because this will reduce financial burdens on households. It means they can spend less on whatever it is, preschool education or spend less on healthcare. And it frees up their disposable income to spend on other things, thereby boosting consumption. So, again, short-term, it’s not great. It’s a little bit sluggish, but not as bad as the headlines suggest. Longer term, a lot of positive policy talk, but whether or not these policies are implemented effectively is a whole nother story.
00:16:21
Andrew: Yeah. Just so one quick comment on the short-term piece. This is the classic China consumption conundrum, which is that it’s true that consumption is growing more slowly than it has in the past, especially in pre-endemic trends. But it’s still reasonably robust. And as you said, on a per capita basis, still outpacing GDP growth. So, you actually have pretty high rates of consumption growth. And you have for many, many years in China. The challenge is that other aspects of the economy are growing even more quickly often, right? Investments, and particularly as you talked about exports. So, in terms of the structure of the economy, it continues to feed into this supply-demand mismatch. And that’s kind of the issue people have is in a way, when people are saying China needs more consumption, what they’re actually saying is China needs less investment, needs less supply, needs less overspill of selling goods into the rest of the world.
It’s actually, consumption, you could say is pretty decent. So, it’s just that’s another piece of that conversation that people, I think, don’t necessarily get right. When they say China needs more consumption, what they’re really saying is China needs more consumption in relation to the overall structure of the economy, which can happen in many different ways. And it could just mean, okay, we grow more slowly because we bring investment down. I don’t know any thoughts on there.
Joe: Yeah, yeah, for sure. For sure. I mean, in absolute terms consumption, as I said, consumption is doing okay. It’s not remarkable. But it’s also not terrible. But to exports or industrial output, or even government expenditure, it’s growing slower than those. And so, its proportion or its role in the economy is still getting relatively smaller, which is exacerbating the supply-demand mismatch, which you talked about.
Andrew: Yeah. And again, just one other piece is often people talk about the China story needing more consumption because they kind of implicitly are assuming that China’s economy will eventually evolve to look more like the U.S., which is a very a consumption driven economy. But Chinese policymakers have said we don’t want an economy that looks like the U.S. because the U.S. has hollowed out it’s manufacturing industry, and we’re not interested in doing that. So there’s a lot of different aspects of this just for listeners to kind of be aware of when you hear people talking about consumption in China and the need potentially to rebalance. That’s kind of a framework people often put onto China, rather than a framework that Chinese leaders use themselves.
But talking about the longer term piece about growing incomes, growing consumption by kind of alleviating other costs like health care costs, pre-school costs, all that stuff, these are long term policies, as you mentioned. So talk to us about sort of the implications of that, how quickly we might actually see some kind of outcome of those policies.
Joe: Yeah, they’re long-term. I mean, I’m intentionally being vague because so much of it depends on the efficacy of policy implementation. But it can take years, not just to implement these policies, such as expanded healthcare coverage or universal preschool education. Not only does it take years to implement, but it then takes years to change consumer behavior. And I think this is one of the challenges that policymakers have in terms of trying to engineer a short-term boost in consumption is that household saving rates are high. Their propensity to consume is low. And so Beijing can implement policies that are going to increase household disposable income, such as the policies we just talked about.
Really, what is essentially in the broadest sense an expansion of social security. But households may have a higher disposable income, but their savings rates are also increasing as well. So, they have more money, but they also save more of it. And short term, that sort of consumer behavior is very hard to influence, particularly when we’re in the middle of a property downturn. And so, even if households have a higher disposable income, their overall wealth is distinctly less than it was four or five years ago. And because most of their wealth is tied up in property, and the price of property has collapsed.
Andrew: Yeah, for some reason, that popped into my mind. I don’t know if you remember this, but it may have been a little bit before the time that you were really paying attention. But in the Obama administration, so starting in 2009, they paid a lot of attention to this book called Nudge, which was about how you influence an entire group of people’s either policy preferences or economic preferences. And it’s about very slowly kind of pushing them in one direction over time and kind of being patient and looking for the outcomes of that over an extended period. And that strikes me that this is very much a nudge situation where you’re trying to slowly get people’s costs down and then have them become more comfortable spending more because they feel that they have a broader safety net and that they don’t need to just keep socking away cash for a rainy day.
This is very much a nudge situation. We should recommend, next time you see Xi Jinping, you should recognize, or you should recommend the book Nudge to him.
Joe: Yeah, I’ll recommend it in my next meeting with him.
Andrew: Okay, cool.
Joe: I mean, it’s very hard to influence or convince consumers to part of their money when they’ve spent their whole lives thinking that they should be saving.
Andrew: Yeah, totally, totally. All right. I mean, we’ve covered the 2025 kind of all most aspects of what the data tells us. Let’s put all that together and look ahead. What does that layout, that dive into the data tell us about what to expect for the next 11 months in 2026.
Joe: I mean, I think it’s going to be a really tough year from a macroeconomic perspective. Because the question I’m asking myself and that I’m spending time looking into is where’s the growth going to come from? I mean, we’ve talked about them all already, but let’s just think about China’s key growth drivers. So real estate, well, of course, that’s going to continue to decline. There’s no sign of it bottoming out, let alone actually growing. So, real estate is going to be a drag on the economy. Fixed asset investment. As I said, last year’s decline was unprecedented, and it really reflects all these long-term structural problems that China’s facing. So, it’s not a cyclical issue. It’s not a short-term drop in investment. It’s what’s likely going to be a long-term slowdown in investment.
So that’s not going to be a major growth driver. What about consumption? Well, as we’ve talked about, I mean, China’s consumption picture isn’t terrible, but it’s also not great. But given these really high household saving rates, there’s kind of no way that consumption is going to be the main growth driver of the economy. So, it can’t be real estate. It can’t be fixed asset investment. It can’t be consumption. That really leaves us with exports, again, as the main growth driver.
And it’s going to be really hard to top 2025. China’s trade surplus was something like 1.2 trillion, right? It’s a record-breaking trade surplus. The trade surplus, as I mentioned, accounted for a third of GDP, the highest proportion in three decades. Just our export is going to continue to be able to expand at the same pace they did last year. And it’s going to be really hard. But also, because that seems to be the only real growth potential, given all the other areas of the economy I just discussed, there’s very little upside growth for them.
Then that also means that China’s trade dynamics are kind of make or break for China’s macro economy this year. If exports do well, the economy can eke out growth. If they don’t do well, it’s going to be a really rough year.
Andrew: Yeah. I mean, a dire picture you paint there. I mean obviously like qualified dire like it is going to be tough to eke out growth. We do, I think generally, expect that… your analysis tends to be quite sobering and kind of not being to exuberant when things are good and not being too pessimistic when things are bad. The reporting is that they’re going to lower the growth target to 4.5% to 5%. That really matters all that much, although it does send a signal to the system. So even they are expecting lower growth. It will be a challenge to even hit that lower growth. But they, of course, are going to find a way to hit the official members, but they do continue to find ways to eke out growth in some way.
I will say two things. One, the lever, it’s implicit in fixed asset investment, but the one kind of specific lever, or at least identity or variable in the national income account identity that we didn’t really touch on is government consumption. That’s another thing that they could do, right? They could boost fiscal spending and central government led infrastructure investment. They have signaled that they’re going to maintain relatively high rates of fiscal spending, but it doesn’t seem like they are yet at a place where they really want to go full bore on that. So, it’s another lever that they could pull but are unlikely to. So, I’m with you on that still kind of growth negative, at least at the margin.
But on the export piece, you know, I’m just going to throw it out there. You know, we’ve been saying for years China’s export machine is going to sputter. And I’m just not convinced. I mean, yes, there are numerical and theoretical limits to what China can sell abroad. And obviously increasing limits based on trade protection from other countries. But I’m just going to throw it out there. I think China’s probably going to have another record world beating historical trade surplus this year.
Joe: Yeah. That’s fair. I think in favor of that monument is they’re going to have pretty favorable base rates in terms of the exports to the U.S., particularly as tariffs are lower than they faced throughout Q2. So, I imagine there’s going to be year on year growth in exports to the U.S., and still huge growth potential, particularly in developing economies, so across Asia and across Africa. Oh yeah, I’m with you. I think exports are going to grow again. What I’m dubious about is whether they can grow at the same pace, whether there’s going to be as much juice, as much growth juice from exports this year as there was last. And I’m a little bit dubious about that. And the implications for me, I think the indications are that GDP growth is going to slow as a consequence because there’s no other obvious growth drivers in the economy.
Andrew: Yeah. Great point. I guess we don’t have to get too wonky on this. But then that brings in the question when it comes to the trade surplus. So, what happens to imports, right?
Joe: Yeah.
Andrew: In terms of both a growth identity, in terms of how much net exports as to GDP growth, and also in terms of the trade surplus. So, if exports grow more slowly than they did last year, but also imports grow more slowly, has implications for the overall trade surplus for the currency, which is increasing really important and kind of for broader trade dynamics, because people care less if China’s selling a bunch to the world if it’s also buying a bunch. But I kind of doubt that would be the case. So that’ll be an interesting part of it to watch as well.
Joe: Yeah. I mean, China’s imports, that’s a fascinating story in itself. Actually, they were flat in 2025. They declined for the previous three years. China’s importing less now than it was in 2021. It’s already massively reduced its imports. I mean, part of that is because consumers are spending less. So, there’s less import of finished products. But the main reason is because there’s less imports of raw materials and intermediate products because China’s onshoring so much of that sort of manufacturing base.
Andrew: Yeah. And that’s also a property related story. Right? It’s not important in the upstream materials that would go into the property spending. So, all right. Well, lots to keep our eye on. Definitely going to be a challenging year for the Chinese economy, likely the global economy as well. We’ll see how it all plays out. Be watching it along the way, Joe. Really appreciate you walking us all through it today.
Joe: Yeah, yeah. My pleasure. It’s good fun as always, Andrew. Thanks.
Andrew: Yeah, appreciate it. And everybody should stick around now for my conversation to dive into a little bit more on the investment side with Dinny and Cory coming up right now. Thanks everybody. We’ll see you on the other side.
I’m now joined by two Trivium Podcast veterans who it’s always great to have on, and that is our Head of Markets Research, Dinny McMahon, and our Head of Supply Chains and Critical Minerals Research, Cory Combs. Dinny, welcome back to the pod, man. How’re you doing?
Dinny McMahon: Doing good, mate. Doing good.
Andrew: Always good to have you. Cory, welcome. How are you doing?
Cory Combs: Pleasure. Just back from the East Coast and happy to be back in California.
Andrew: Yeah. Great. Well, it’s good to have you both on. I already spoke a little bit with Joe Peissel about kind of the overarching macro picture as we ended 2025 and into 2026. And as I mentioned to the listeners, we are going to talk a little bit more about the investment picture. We’ve spoken about it before on the pod, but we think it’s really kind of worth diving into insofar as some of the things that are impacting investment are likely to either stay in place or evolve over 2026.
So what happens to investment in 2026, we think, is really one of the most pressing questions facing the economy. Just went through all the main aspects of the economy with Joe. We know headline consumption is maybe not as terrible as the newspaper headlines would say, but it’s still weak and doesn’t look like it’s about to turn around anytime soon. Export growth has been shown, but as Joe just talked about, it’s going to be hard to push growth even further in 2026. We do expect some export growth to happen, but the rate of growth cannot match 2025. And then, of course, there’s the risk that everything goes sideways if more trade barriers get put up.
And so, with those kind of two legs of the stool, largely seeing headwinds or at least some form of headwinds in terms of propping up the headline GDP growth number of what’s likely to be 4.5 to 5%, that leaves us with investment. So, it’s super important that Beijing gets this right because it’s a key lever for them to use to limp over or to achieve, whichever way they get to it, the growth target, not only this year, but every year. Of course, the challenge is that investment fell off cliff, FAI in particular, in the second half of last year. We’ve already kind of gone over this. FAI in December contracted on the order of 15% year-on-year.
Previous two months, so October and November, it was around 12% year-on-year. We’ve walked through kind of the dynamics behind that, the involution push, of course, the property market meltdown, and then the fact that local governments were paying down debt instead of investing in infrastructure. So, the big question, Dinny, is was the past sort of four to six months of the investment environment an anomaly? Or is this a totally new normal for China? And if that is a new normal, I guess we’ll get into that next. But where can the government alleviate some of those headwinds of this new environment?
Dinny: You know, I think the depth of the slowdown that you just described, I mean, 15%, 12% year on year, you can’t imagine that it will continue like that. I mean, for the reasons that you outlined, it’s like, well, look, if the export machine doesn’t keep churning the way it does, if domestic demand remains as weak as it is, the households don’t meaningfully pick up their spending, you can’t really let investment continue to be a drag on the economy in the way that it was in the fourth quarter.
That said, I think it is the new normal in the sense that all those forces that you just outlined, they’re not going anywhere. So, if you take the anti-involution campaign, I mean, if anything, that’s just getting started. I think the biggest impact we’ve seen so far of the anti-involution campaign is on fixed asset investment. We haven’t really started to see the shutdown of existing capacity or stuff like that. So, I think that’s still going to be with us at least for the next year, maybe for two years, and that’ll continue to be a drag on investment.
I mean, it’s important to remember that anti-involution efforts, anti-overcapacity efforts, they’re not just about shutting down investment or stopping new investment. There’s also an element of this, which is like, well, you listen to how Beijing wants to deal with anti-involutionists. Well, we get rid of the low-end stuff, but we want firms to then move into higher-end, greater value-added stuff. So, even as pressure is on, say, the steel industry not to expand or maybe to shut down some of their lower-end facilities, there’s still sort of an official impetus for steel manufacturers to potentially open new production facilities in the higher end where there’s less competition and they can earn high returns.
So, anti-involution isn’t carte blanche about reining in investment, stopping investment, shutting down existing facilities. But taken on aggregate, it’s going to suppress the overall vibrancy of the investment environment. So that’s one thing to keep in mind. The second thing is local government finances are still a mess. And so, last year, I think infrastructure investments shrank by 2.2%. I mean, that’s mind-blowing. I mean, infrastructure investment has always kind of been sort of a very reliable ballast to the economy. You know, each year it goes up and up.
And yet last year, a lot of the debt that the local governments were cleared to issue. Beijing gives local governments a bond quota each year. So much of that went toward either debt swaps, local governments issuing bonds and using the funds to effectively buy out local government financing vehicle debt. So, hidden debt, bringing hidden local government debt onto the balance sheet, making it explicit, and to a lesser extent, paying arrears. So, one of the big drags on the economy has been local governments not paying their contractors and suppliers.
And we’ve had a move towards sort of alleviating some of that stress by local governments issuing bonds and paying the bills, their unpaid bills. So, that was the big trend last year. And clearly, we’re making headway towards dealing with local government finances, but it’s still a mess. And it’s going to be a multi-year effort to clean it up. I think it was last year, the debt swap programs that were introduced, it’s a multi-year program. There’s a quota every year for the next five years.
So, there is a sense that this was never going to take one year to clean up. It’s going to be years. Local government finances are still under a lot of stress. I mean, we’re seeing some encouraging signs. Jilin province, which is one of, until recently, was one of the 12 provinces identified by Beijing has been heavily indebted and so weren’t allowed to invest as much in infrastructure, weren’t allowed to borrow as much in debt — they’ve just come off that list. But still, even though they’re off the list, it doesn’t necessarily mean they can start gearing up again because their finances still need repairing. So, that’s something to keep in mind. Maybe we’ll see infrastructure contract again a little bit this year.
Maybe it’ll come out even. Maybe it’ll be a little bit higher. But overall, as long as local governments are under pressure, you can’t really expect them to be driving infrastructure in the way that they did for the better part of the last 20 years. And then the last thing to keep in mind is the property sector. Now, it is mind-blowing how bad the property sector in the fourth quarter, I think in December, property sector investment fell 36% year on year, which is incredible. I mean, we are in year five of the property crisis and we’re getting that sort of decline in investment.
It’s mind-blowing. But the silver lining to that is that we really shouldn’t expect that we’re going to see 36% decline in investment month on month for the next year or next two years. I mean, that sort of monthly decline really isn’t sustainable. And so, the other thing to keep in mind is that in 2025 property investment was below 2013 levels. So, when you kind of frame things like that, sure, we might not be at the bottom of the property market yet, but things can’t keep falling the way that they are, and they certainly can’t fall at the pace at which we saw in various months last year.
So that kind of suggests that, yes, property will still be weak, but the drag on the economy this year is inconceivable, really, that it could be as bad as it was in 2025. And so, that suggests it will still be a drag, but the overall impact might not be as bad. Now, having said all that, there are a couple of other things worth considering for 2026.Areas of investment that could be materially weaker this year. Now, Cory can speak to this stuff far better than I can, but here’s a quick intro. The first is the auto sector, which has been a great source of growth over the last few years, but the pace of domestic sales growth is going to slow big time this year, and that could have implications for investment. And the second thing is renewable energy. So, there’s been a very aggressive expansion in the installation of renewable energy facilities over the last few years.
In 2025, installed capacity for solar was up 14%, wind turbines up 50%, and it looks increasingly unlikely that the sector can repeat the trick in 2026. Anyway, look, I’ll wrap up there and throw, Cory, do you want to take it from here, give us a bit more detail about what’s going on in auto and renewables?
Cory: Absolutely. So I’ll start with autos. The headline figure here is just the pretty significant drop-off in growth that we expect in 2026. I mean, 2024 was, I mean, successful overall. There’s certainly a split between the NEV, the new energy vehicle, and ICE, or gas-powered auto segments, of course, same as we’ve seen for several years. But all in all, wholesales grew about 9.4% year-over-year last year. So, healthy, especially given the kind of headwinds that some of the ICE makers were facing. But the key issue here is that we just got the latest projection from China Association of Automobile Manufacturers, and they’re expecting something closer to 1% year-over-year growth across the auto sector this year in terms of wholesale sales. And so, there’s a really sharp drop-off. And there’s a couple of reasons for that that I think it’s worth just kind of addressing because this ties back to this is a policy-driven, not market-driven drop-off that we’re anticipating.
And there’s two key issues here. The first is that we had previously the new for old vehicle trade-in subsidies. We have the latest credible estimates on that, suggesting that program probably drove up to 11.5 million trade-ins. Really sizable program. So, it certainly scales very well. And the other key benefit that the auto sector had was the extension, the fourth or fifth extension, of the NEV’s exemption from the typical 10% vehicle purchase tax. Basically, a 10% subsidy, removing the taxes. And that helped support, I don’t have the exact breakdown, but it certainly helped support almost 20% year-over-year growth in NEV sales.
Almost 14 million units sold, driven partly by that support. In 2026, both of those policies are changing dramatically. The first, in the case of the trade-in subsidies, they were fixed amounts before. Now they’re being made proportional to the vehicle price, but on net, the average support is going to be reduced significantly. And obviously, it’ll depend a little bit, aggregate amounts will depend on exactly what autos, what segments people buy, because it’s again pegged to the actual vehicle price. But the overall amount of support is going to decline pretty significantly. The other key thing is that the exemption from the purchase tax of vehicles will be basically half, and that would be a 5% tax. So in some senses, obviously, it’s not game changing in terms of 5% increases.
It’s not great, but it’s not the end of the world, you might argue. The issue is that everyone’s been expecting this. And so everyone’s been buying their cars while they’re exempt from taxes. And so, the consumption is very likely to decrease pretty heavily. Already, it was kind of a gift or a surprise on the upside that that tax exemption was increased the last couple of times or was extended, pardon me, the last couple of times it was. And so now you have, I mean, every one of the auto makers, whether it’s startups, SOE, OEMs, or the kind of big globalizing giants, BYD and Geely in particular, they have expansion plans, but they’re almost entirely overseas. There’s only so much more room for them to gain domestically and expecting a massive slowdown. And so that’s kind of what we’re seeing on the auto sector. Happy to pause there real quick.
Andrew: Yeah. Well thanks for laying that out on the other sector. I appreciate kind of the overarching dynamics here. But what do you think specifically that will translate into new investment? I mean, this is the right way, but we’re getting to is like private sector investment. Do you think that automakers are going to start to pull back? Is it anti-evolution from all the dynamics you already talked about, which are already headwinds, right? And then you add into inflation pressures on top of it, where do you see investment in the sector going?
Cory: I mean, right now, I think a lot of the automakers are trying to get the required returns on existing capacity. And so the idea of new investments and new capacity is it basically boils down to two areas. One is upstream of the automakers. So, some of the automakers that are vertically integrated will see continued investment in batteries and things of that nature. But in terms of the downstream auto manufacturing, I think the investment space for meeting domestic demand is very limited. And so, what we do see instead, though, is investment overseas, investment in overseas manufacturing facilities, which, again, is a kind of a whole different can of worms.
And of course, there are headwinds on the export market, which is part of what’s driving the kind of big giants, Geely and BYD, obviously, but also others, NEO even, to try to compete locally in other markets. I mean, the export headwinds are changing that strategy into we need to just invest overseas. That FDI is going to change the landscape in its own way. So, overall, I mean, there will certainly be some capacity upgrades, but we’re not expecting anything remotely similar to the kind of capacity expansions for the sake of meeting domestic demand that we saw over the last four years.
Andrew: Well, I think that makes sense. And I mean, you’re right. Investment abroad is a totally different can of worms. In fact, we may have touched on it briefly on the pod before. I think there was a good S&P piece on this, South China Morning Post about how China is increasingly investing overseas to help unlock demand for its export related to NEVs and related to other kind of green tech and electrification. And that’s a big theme that we think is interesting and one of the ways that China will help to kind of continue to stoke external demand, and one of the reasons I personally think that the export runway is a little bit longer than most people think.
But you know it’s pretty negative in terms of the story in terms of domestic investment among decent chunk of private sector players. And I guess from my standpoint it just underscores a point that I made when I was talking to Joe P, which is the government has a lever to pull here, which is central government funding for infrastructure spending. But the private sector is not in a mood to dump a bunch of capital into fixed assets in 2026, partly because of the sort of demand and sale dynamics you talked about, partly, again, because of the anti-involution, but this is just not an environment where you’re going to see private sector manufacturing X property hold up particularly well, I don’t think. Dinny, you agree with that? I mean, it seems like you generally agree with that, but I just want to nail you down on that one.
Dinny: Yeah, absolutely. I mean, in this environment, domestic demand has just been incredibly and chronically weak since the end of COVID. I mean, the Chinese know it. They talk about it all the time. But yeah, we haven’t really seen a solution to it. So, I can’t imagine there being this endogenous, spontaneous drive by the private sector to get into additional investment this year unless it is backed in some way or directed by the state.
Andrew: Yeah. And I guess we maybe should touch on, I’m not sure fully if you’re prepared for this, Cory, so we may surprise you later, but kind of the whole AI build out in China and investment and energy infrastructure around that. But we’ll get to that in a second. Let me throw to you on the wider private sector question and then also talk to us about the other thing Dinny was talking about, which is a big question mark, which is what will the renewable energy sector look like? And then we can talk about investment in that sector as well.
Cory: I mean, renewables is really the next giant piece of the private sector investment. I think it’s the next biggest piece of the puzzle. And it did exceedingly well last year. And so, with this, it’s a little bit less of a pessimistic story, but still not a significant growth story either when it comes to fixed asset investment and renewables. And I’ll kind of get into detail what I mean by that. The key thing is that last year in 2025 was an absolute banner year for renewable investments. And I’m talking about capacity growth in both wind and solar.
And for those in the know, that includes the offshore wind sector. The key thing to note there is that this was not guaranteed. 2025 was not guaranteed to be a good year for renewable energy investment. There’s a lot of headwinds that will persist. And the key question is whether 2026 can surprise the upside again, like last year did, or if it’s going to structurally decline in terms of total investment. As of right now, we expect a slow, much less dramatic than the auto sector, but a significant slowdown in capacity growth. That’s what we’re expecting right now. So a little bit of background.
2025, we’ve got the numbers in just a few days ago, actually, the final stats from the National Energy Administration, China added, I mean, just for anyone in the energy sector, these numbers are almost inconceivably large, 315 gigawatts of new solar capacity. I mean, that’s compared to the EU had 68, and the U.S. had a record year of 35 gigawatts added. China added 315 gigawatts of new solar capacity, right? So, just really staggering, the totals there. And that was a 14% year-over-year increase. So, this isn’t just a large scale, this is growth in total investment.
On the flip side, wind was even better. Wind saw a 50% year-over-year jump in capacity installations, which again, those investments take a little bit longer. There’s a little bit of lag between the planning and the actual installation, but needless to say, it is absolutely wild. The key issue here, though, is that the same headwinds that kind of raised question marks last year exist now, but the things that helped last year succeed will not be present this year. So, what that really means is a bit of context — Typically, January to May, most of H1, seasonal cyclical slowdown in investment, just the way China’s energy sector works. We didn’t see that last year. So, H1 was hopping last year in terms of renewable energy investment.
And a simple reason for that was that market reforms had come forward, that by middle of year would suddenly make it a lot more difficult for renewable energy developers to get very favorable guaranteed offtake agreements. So, basically, the returns on those projects was less guaranteed to be favorable. And so, you see a flood of investment in H1 trying to get ahead of that policy change so that everyone could lock in favorable agreements. Cool. That makes sense. So then, the kind of reasonable hypothesis at that stage, again halfway through last year, was that H1 growth would cannibalize some of the H2 potential growth.
And so, the total net year kind of installation would not be that different. That’s not what happened. The whole industry continued to invest like normal in H2 despite the growth in H1. And there’s a bunch of specific dynamics there. And a lot of them are regionally specific. But the big picture is this is the hyper-competitive pressure that we talk about when we talk about involution. This was everyone saying, “If we don’t invest now, we can’t invest later. And if we haven’t invested now and can’t invest later, we’re going to lose market share.” And so, it’s an old story, but it continued to be very relevant in H2 despite the H1 surge. So, can that repeat? Can China do the same thing again this year?
And can we see that scale of fixed asset investment? We don’t think so. We do see continued steady expansion of capacity, i.e. continued investments in fixed assets here. But we agree with the China Wind Energy Association. They’re looking at, you know, this year we saw 119 gigawatts. They’re anticipating somewhere around 120, i.e. flat growth for the next several years. We think that’s a very reasonable hypothesis based on the grid constraints we see. Solar is a different kind of beast. We do see a little bit more growth potential there left in a tank, but not 14% year over year. And the simple issue is that so much of that solar power is in distributed energy assets that are already having trouble connecting to the grid. And so, getting out of the energy speak, what that means is they can’t sell what they produce.
And so we’re already seeing bottlenecks, even central utility scale facilities, their big issue is sending, one of their many big issues is being able to… they generate a lot of power, but they have to send it somewhere. And as the local grid gets saturated with this energy, they need to be able to send it further abroad, not abroad overseas, but outside of the provincial bounds, city bounds, whatever it is, that grid infrastructure is limited, the power markets themselves don’t incentivize it very effectively. And so, we have all these power market reforms going on, we have grid infrastructure investments planned, we’ll get to that with state grid in a bit, but that’s going to take several years. We just don’t see 2026 being able to handle this scale of capacity growth when companies are already having a hard time selling what they produce, which is power.
And if the next year or two outlook looks like half of these assets are going to be completely wildly underutilized, it’s very hard to see the case for new term investments being as significant as it was. So that’s kind of where we’re at on renewables.
Andrew: And what is the central government policy here in terms of I mean, obviously they’re trying to get ahead of this big 2030, 2060 kind of emissions peak and then carbon neutrality. But are they trying to keep… I mean, this buildout just seems like it’s almost too quick, and even maybe too quick for the central government’s own comfortability, especially given the involution piece. What do you think the central policy towards supporting this level of buildout or trying to rein it in will be generally?
Cory: Yeah, I mean, the first kind of top-line takeaway I have is that, and it’s something I talk about a lot with customers or key analysts on the solar and wind sector, a slowdown might even be welcome in terms of fixed asset investment. Not because the government is anti-investment, because it’s killing the profitability these companies. And so there are multiple kind of goals here. And certainly, we have not been optimizing for actual support for companies. And so, a little bit of a slowdown would be very good. Allow the grid infrastructure market reforms time to catch up with the scale of investment. And we’ve talked in various ways and various points about the supply side led kind of nature of a lot of China’s industries.
This is absolutely the case when it comes to renewables, when it comes to the actual generation point. The infrastructure to distribute that is a whole different ball game. And I think right now, I mean, honestly it strikes me that the renewable energy capacity build out was more successful than really anyone, Chinese government or otherwise, would have expected. And you could argue successful to a point of no longer being a success, but actually being a problem. Right? So, now the central issue, and this is kind of the other key takeaway, for most countries, you’re trying to bring on more power. China has too much renewable power at this point in a meaningful sense. The problem is absorption is actually being able to use all of that renewable energy.
So, China continues to use a ton of coal-fired capacity to support renewables. And the question is why. And a lot of the times because there’s insufficient battery storage. But the other key issue is actually just being able to move the energy around the country. Just because you generate it doesn’t mean you can use it wherever. And that’s why we have this big multiyear, you know, national unified electricity grid strategy, which is, I mean, it’s going to be probably decades before that’s fully realized. But in the meantime, the real focus has to be not just getting more power generation capacity online, but getting the infrastructure and reforms and financial reforms in place so that can actually be absorbed.
Once that’s useful, then we can worry about more capacity again. So, we’ve just kind of in terms of left hands, right hands, like one has just gotten a little too far ahead of the other. And the other side needs to catch up, so to speak.
Andrew: Yeah, thanks for that. Let’s broaden this out a bit here, Dinny, just on the policy front, because I think what, at least what we try to do here, is talk about the main headwinds or constraints around investment overall. And we’ve talked about how that’s property. It’s manufacturing investment due to the just kind of general market dynamics and anti-involution dynamics. And then Cory walked us through two of the key ones of those, which are pretty, I would say, representative of what’s happening in key parts of the private sector when it comes to investment, the NEVs and renewable energy.
That leaves us the infrastructure piece. And it’s the one that, again, I think I’ve said it multiple times now, where the government kind of has the most to say. And so if we look ahead to next year, we’ve already talked about like consumption doesn’t look like policy is going to be much to support that, consumers aren’t in the mood to spend anyway so it doesn’t really matter. We’ve talked about the risk to export growth even though exports will probably be a big chunk of growth though there’s main risks there. So, what is Beijing thinking in terms of what I would consider to be its main policy tool at this point, which is fiscal policy specifically as it relates to central funding of infrastructure investment?
Dinny: Well, I think we have to look at what they’ve done in the past, and certainly in recent years in this environment where local governments are increasingly financially constrained. What has Beijing done in the past, recent past to boost infrastructure? And the first thing I think we should be looking for is for the Ministry of Finance to issue more special treasury bonds this year and deploy them towards investment. Now, last year, the central government issued 1.3 trillion RMBs worth of special treasury bonds. Most of that, 800 billion, went directly to infrastructure.
The remaining 500 billion was divided between the consumer trading program Cory was talking about before, and also another program to subsidize firms’ upgrading of their equipment and plants and factories. So that’s effectively a subsidy and a boost to investment there as well. But I think the thing I’d be watching for is when the NPC, the two meetings come around in March, that $800 billion for infrastructure, does that go up? Because, as I said, you can’t lean on local governments to invest in infrastructure the way that they used to. You certainly can’t lean on local government financing vehicles. I mean, the amount of debt, additional debt they issued last year was tiny.
So, if you want more investment in infrastructure, it’s really got to be coming from the central government. So, the main tool there would be special treasury bonds. But the other thing to look for as well is does Beijing lean on the policy banks? And it’s done this periodically before. I think it was in 2015, it leaned on the policy banks to ramp up investment or support for the property sector. A couple of years ago, it did the same thing, but this time focusing on infrastructure. We might see more of that again. The sign would be, does the central bank start increasing the amount of funding it lends to central banks through its pledged supplementary lending facility? Which is just the PBOC making cheap loans to the policy banks.
But for that to really happen, I think the interest rate on that facility would have to come down a little bit lower as well to kind of really ensure that it is cheap funding. Anyway, so those are the two things I’d watch for. More lending through that facility and maybe a cut to the interest rate as well. There’s other things that potentially the policy banks can do as well, but I think that would be the big one because it’s a way to mobilize on pretty short notice a large amount of liquidity, stick it into the policy banks and get them lending at low rates. So those are the two things I’ve looked for.
Now, of course, the other question here is what do they spend it on, right? Because after years, I mean, what, we’ve had 20-25-year infrastructure investments. So, there’s a question of, well, what’s really left to invest in or what’s worth investing in? Because, you know, there’s plenty of bridges to nowhere and eight-lane highways where you might maybe only need four and a half or you have airports that perhaps are underutilized, to say the least. So. where does the money go? So it’s kind of easy from the outside going, “Well, we’ve underinvested in this stuff already. Where could they possibly shovel this money?”
But I think as far as the Party’s concerned, there’s still plenty of scope to invest in infrastructure. So, the CCFEA, which, don’t ask me what it stands for, but it’s the Party’s kind of key policy-making body for the economy.
Andrew: Central Commission on Economic and Financial Affairs.
Dinny: Oh, it’s poetry, isn’t it? So, they recently published a column in the People’s Daily in which it said that per capita infrastructure, that the per capita infrastructure stock in China is still so much slower than it is in developed countries that it could increase four or five times still in order to catch up. So the implication would be, “Hey, we can keep investing in infrastructure for a long time to come before the stock of infrastructure per individual in this country reaches a standard comparable to that in the United States or in Europe.”
So, clearly, the idea is there is still plenty of scope to keep investing in infrastructure. But of course, it’s one thing to say, “Hey, we’ve still got plenty of runway to invest in infrastructure before we catch up with the developed world.” But it’s another thing to be able to pinpoint specific instances of infrastructure which are worth investing in today and for it to have a meaningful contribution to productivity, to the well-being of Chinese people, all this sort of stuff. So, Cory, I’m going to throw it over to you. Devil’s in the detail. Have you got any ideas about where this money might be going?
Cory: Yes.
Andrew: Actually, Cory, before you jump in, I do want to say one quick thing, which is just to respond to the CCFEA, the Central Commission on Economic Financial Affairs. That’s interesting. I hadn’t seen the whole deal about we are way underinvested structurally when it comes to per person, per capita infrastructure. That is an old debate that has been around forever. And I remember working on that in 2011, 2012, a long time ago when I first moved to Beijing, and there was a lot of great work done on that. The conference board, looking at the marginal product of capital, which is how much boost do you get economically from one new unit of capital?
And the challenge for China has always been, China always has these conundrums, which is One, you can argue, as the CCFEA is, that China continues to be structurally under-invested in infrastructure. And yet, I think it’s very hard not to argue that China is cyclically over-invested. That’s all probably super confusing for folks. But structurally under-invested, cyclically over-invested, right? And the idea is like, you can only add capital so quickly for it to be done productively. And so the real challenge for China is that they’ve added too much capital, whether that’s infrastructure or other types of capital, too quickly, basically since the global financial crisis. And the question really is one we’re getting to is, what is the appropriate rate of capital formation that China can undertake and get productive growth from? Currently, that rate seems to be slowing down.
I would just throw that out there to sort of rebut the CCFEA’s point to say, yeah, maybe China does need a ton more capital, but you can’t build it all in 2026. You can’t build it all in 2026 and 2027. So that actually means the pace of capital expenditure matters a ton here. And that’s actually what we’re trying to get to the heart of.
Dinny: I think the CCFEA may in response say, “Hold my beer.”
Andrew: Fair enough. Fair enough. Fair enough. Well, with that, we’ll hand it to Cory. And Cory, jump in on the specifics of what you’re thinking of where some of this infrastructure spending may go, especially on the energy side.
Cory:
Yeah, absolutely. I mean, first of all, that’s fascinating stuff. I’d love to dive further into that. And what I’d like to talk about here real quick is the largest single pool of investment that we’re aware of coming up from the 15-5-year plan is through State Grid. I’ll give you a little bit of context for it. But basically, we’re looking at just incredible scale of investment from a single source. And of course, it’ll be diversified in a bunch of different applications. It’s not all the same type of thing they’re investing in. But I really want to try to offer some comments on unpacking the kinds of things they’ll invest in to try to attack the question of will it be productive investment?
I mean, that’s essentially the question here that I think is both relevant macro wise, but also at an industry level. I mean, whether or not State Grid’s investments over the next five years, whether or not those are truly productive for unlocking the kind of productivity growth that they intend to, whether that succeeds is critical both macro-wise, but it’s also critical to half a dozen very specific industries that are supposed to lead China’s future industrial growth and upgrading. This is really, really essential on multiple fronts. So, kind of background here. State Grid, for those who don’t know, is the world’s largest utility company in terms of coverage area, in terms of assets under management. It’s truly monumental, typically one of the top four companies by revenue in the world, and easily the biggest state-owned enterprise. It serves about 80% of China, including geographically and number of people and businesses.
It’s part of China’s duopoly. The other part’s in the South. Southern Grid, it’s about 20%. And so, this is a large entity, and it is known for sometimes doing what it wants. So, for example, there’s some very famous cases in the past of it being very bullish on certain technologies that really just had some IP returns to it, but did not necessarily benefit China in terms of very early investments in HVDC. Later became a productive investment maybe 20 years after the fact, but was not necessarily, you know… So, just to give a sense of this kind of entity and the kind of sway it has and ability to be something of a, I don’t want to say a maverick, it’s certainly not independent from the state, but it has its interests too.
What’s really interesting is with the latest plans that it has for investment for the 15th-five-year plan, I think its interest and the central government’s interest dovetail just exceedingly well. And I think that you can see this in the types of targets for investment that it’s laid out. So, January 15th, a couple weeks ago, it announced plans to invest $4 trillion renminbi during the 15th-five-year plan, right? That’s the big headline figure — $4 trillion, right? Massive, yes, but is it growth is the first question, of course. And simple answer is absolutely, it’s up 40% compared to the 14th-five-year plan targeted investment figure, which roughly was it. In absolute terms, that’s growth of 1.14 trillion, more or less, in terms of new spending on top of growth in total infrastructure spend.
And that’s separate from money that Beijing has allocated for local infrastructure development through other means, right? And the drivers here, what the spend is ultimately designed to bore is overcoming renewable energy bottlenecks, which again, is there to increase the profitability, the returns on all this new capacity that we talked about earlier. It’s there to drive the costs over time. Right now, there is cheaply produced power that can’t get to the people who would like to buy it. And so, there’s a lot of missed opportunity, economically speaking there.
And it’s also there to support the AI build-out. And Kendra’s been on to talk, for example, about the kind of China’s approach to, if not matching, then approaching AI competitiveness, if not on the basis of specific chip quality, then on the clustering capability. Ultimately, the bottleneck there in terms of cost competitiveness is energy. And so, State Grid is investing very specifically to make sure that there’s ample supplies, there’s no bottlenecking of AI inference capabilities, which obviously is a very broad kind of productivity question, but also to make sure that the costs are low for AI inference, and to make sure that on that basis, it remains competitive globally. So, there’s a bunch of different stuff there.
And critically, the types of investments that this $4 trillion will be spread across, span both traditional build, kind of your typical power lines and stuff like that, advanced infrastructure, notably digital, highly digitalized and automated infrastructure investments, but also electrification of industry and transportation. We talk about the NEV boom. The other side of that coin is the charging infrastructure, and that has to go up everywhere. It’s been pretty successful in the cities. It’s had a harder time penetrating the rural areas, which again is 700 or 800 million people. So, kind of further unlocking those markets is essential.
And state grid serves a critical role there. So, happy to break down just kind of the last piece of my comments here will be to kind of break down some of the specific targets. The first is the biggest single pot of money that we have identified so far is ultra-high voltage power lines. Now, what that really means is exactly what I mentioned earlier, that if you can produce cheap power in the desert, how do you get it somewhere with a high baseload demand, right? So, maybe in Jiangsu or something like that, somewhere coastal that has high rates of industry, industrial production, and you want them to have cheap power.
You have to have the infrastructure, and then you have to have the market reforms. State grid can’t fix the market by itself, that’s ongoing, but it can supply the infrastructure. So that’s the first piece. We’re looking at roughly a billion, maybe 900 million to 1.2 billion in terms of just on that side. Som it’s probably around a quarter of the spend. Beyond that, though, we don’t really have a good breakdown of exact kind of proportions of that 4 trillion. But we know that a lot of the money will go into new energy storage facilities to support the generation and flexibility. And these include, you know, some of the traditional assets like pumped hydropower storage, which is basically a big pond that you lock water, you send water into and then release it later. But it’s not exactly high tech. It’s critical, but not high tech.
The other side will be electrochemical batteries, obviously high tech, high value add, and one of the kind of the key areas of export that China’s had. So this kind of development will help create the demand market domestically that’ll help drive returns to the producers who can then export as they continue to reduce their cost curves on the basis of scaling up to meet domestic demand that state grid will help build. So that’s another huge pocket of it. And it also includes some of the kind of more innovative future facing applications, microgrids, things of that nature, really trying to further electrify the countryside side. There’s another piece here. Let’s get kind of distributions also in there, rural grid reinforcement, microgrids resilience, all that stuff.
The next kind of key piece I think is super interesting. And that’s relatively, it’s not new like conceptually, but I think the scale, I think this being a segment of relevant scale is going to be a new thing, which is highly electrified, low or zero carbon factories, industrial parks. We’ve seen a lot of talk about this for years, but we’re starting to finally see movement when it comes to zero carbon parks, industrial parks. And the whole idea here is to cluster typically high emission industries into, again, certain zones or parks, and then be able to supply them with massive quantities of electricity at low cost, again, for both the carbon goals, but also the power costs, and to kind of drive that industry to be more green and competitive when it comes to exports to the EU.
There’s a lot of investment necessary to keep China’s manufacturing sector, both in line with domestic climate goals and resource efficiency goals, but also to be long-term competitive in global markets, particularly to the EU, given the carbon border adjustment mechanism now in place. So that’s happening. Again, it’s probably not going to be the single biggest, but I think it’s a relatively new one worth looking at. And finally, we have the digital and AI grid infrastructure investments. And there’s two sides, and I want to be very clear about both sides of this. China’s AI plus strategy, which Kendra and you all have talked about in much greater detail, is driving this piece of the investment. And this is a very tangible manifestation of the AI plus strategy. The state grid will be installing massive quantities of grid sensing equipment, ramping up the use of digital twins and other planning tools that are kind of, they’re pretty niche, but they’re high value.
So, a lot of those investments, virtual power plants is kind of software aggregation based, basically ability to move around distributed in other energy sources to increase value contribution there. But the last piece here that I think is probably the most uncertain to me, and so when it comes to the question of, is this investment productive? This is the wild card to me. There’s new language compared to previous iterations of funding for infrastructure development on indigenous innovation. They talk about key core technologies, not inherently a new concept, but its application now, goes beyond the typical like, okay, North sensors and power electronics.
That’s typically what we’re talking about. But now we’re talking about superconducting materials and these other kind of very advanced materials. The fact that State Grid is directly going to increase investment in this, that’s the kind of stuff where you could see massive returns on the R&D investment in years ahead in a way that has a higher upside potential than, say, some of your fixed asset investment in terms of like energy generation capacity, etc. So, long and short, there’s a lot of different segments of investment, a lot of different focuses, some of which are trying to enable existing capacity to be more useful, more valuable. Some are trying to create more profitable manufacturing areas in the future. And the other is R&D that hopefully can start to return innovation R&D returns in the next 5-10 years. But that will all take quite a while to develop.
Andrew: Thanks for laying that out. I think, in most countries, you can’t really point to one single company whose investment profile over the next five years will materially impact the overall investment profile of the country. But I think we can say that in the case of State Grid. As you said, it services 80% of the population of the most populous country in the world. And so, it’s arguably where it may have the biggest impact on global investment rates, frankly, but certainly has an impact on Chinese investment rates. And even more importantly, where it’s investing, others are going to follow.
Obviously, it is the utility, it is the power provider, but there are ancillary pieces of that, whether that be distributed power or whatever else, there will be investments in the wake of where state grid is going. So, I think I just wanted to wrap up by saying, I mean, I think you guys have laid it out. We didn’t even put this at the kind of top of this part of the conversation, but as you’ve been talking, we started this whole conversation with, these are the ongoing headwinds to investment. But it strikes me as we’re talking here that there are at least three potential tailwinds or supports to investment over time.
One is, if you buy the CCFEA’s argument, that China is still structurally underinvested, so there’s still plenty of scope, particularly for infrastructure investment over the next not just five years, but 20 years. Secondly, there’s money. If the central government decides that it wants to fund this stuff, it can do it. So, there’s capacity and scope there. And thirdly, there’s plenty of space to invest in kind of the AI boom, like we’ve seen in the U.S., the energy, AI plus energy boom, as we’ve talked about on a separate pod. The new aspects or the aspects of the new economy that will require these different energy investments also comes with a ton of scope. So maybe those are three potential tailwinds to partially offset the headwinds that we started with. I think those three still aren’t likely to underscore or to promote or to unlock a very high investment rate in 2026. Do you agree with that, Dinny?
Dinny: Yeah, I think that’s a good way of putting it.
Andrew: So, I think this is a good place to wrap it up. Basically, for listeners, what we’re trying to do here is just kind of think through this as a group, somewhat in real time, what are the challenges? What is the seeming new normal of investment in China? But what are some of the offsetting potential positives to really think through this last piece of the economy, not consumption, not export, but this investment piece? Because, again, that’s where the real lever is. And we’ll see what the government does to pull on that lever. There’s a lot of variables to take into account. And I think even though I think our fundamental view would be 2026 can be another challenging year for the economy and for investment in particular, medium-term prospects for investment to pick back up certainly exist. So, I think we’ll leave it there. Great discussion, guys. Dinny, thanks for the time, man. Appreciate it.
Dinny: Pleasure as always.
Andrew: And Cory, thanks as well. Great to have you on.
Cory: Cheers.
Andrew: And thanks, everybody, for listening. We’ll see you next time. Bye, everybody.
