In mid-2024, Beijing rebranded its overcapacity problems as “involution.” Does it matter? As the bard would say, a rose by any other name…
And yet, over time, it’s become clear that this was more than just a rebranding exercise. Along with the change in name came a subtle shift in how Beijing perceives its overcapacity problems — a shift that has important policy implications.
In this podcast, Trivium Co-founder Andrew Polk and Dinny McMahon, Head of Markets Research, talk all things involution. The gents discuss:
How the concept of involution differs from that of overcapacity
Why Beijing doesn’t think overcapacity can exist in a global free market
What Beijing’s anti-involution efforts look like
And what it all means for the rest of the world
Then, Andrew wraps things up with a brief rundown of the most recent developments in the US-China trade truce.
Transcript:
Andrew Polk:
Hi, everybody, and welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder Andrew Polk, and I’m joined today, once again, by our Head of Markets Research, Dinny McMahon. Dinny, how are you doing, man?
Dinny McMahon:
I’m doing good, mate. Good to see you.
Andrew:
Yeah. Always great to have you on. Missed you after taking the week off for Thanksgiving. So, it’s good to be back in the saddle here. It’s been kind of quiet on the news flow really out of China, I would say in terms of macro stuff. I mean, certainly things are happening. There’s a new update for DeepSeek that we’ll get into at some point. It sort of has implications for its competitiveness with the leading U.S. AI models. So, there is stuff happening in China. But today we wanted to dig a little bit deeper into a specific macroeconomic topic, which is to talk about why Beijing uses the term involution instead of overcapacity, and what that means, and how their efforts to address involution have been evolving in recent weeks, and kind of what it will mean for the economy going into 2026 and beyond.
And then we will touch briefly, of course, on the latest developments on the ongoing U.S.-China trade truce. We’ve seen a couple of positive developments on that side over the past couple of weeks. So, we’ll keep this one a little bit shorter today for listeners. We’ve been doing longer pods, but as we’re staring down the end of the year and doing all the end of the year stuff, time is at a premium. So, we’ll keep this one a little bit short. But before we get into all that, Dinny, got to start with the customary vibe check. How’s your vibe, man?
Dinny:
Vibe check — dude, my vibe is layered. It is so cold in Chicago. It’s funny, I’ve been here for eight years now, but every time winter comes around, I forget how cold this city can actually get. I mean, I was walking the kids to school in the like -15 Celsius weather a couple of days ago. So yeah, mate, it’s nice that we kind of get this real divergence in seasons, but god, I’m over it already.
Andrew:
Yeah. Everybody in Chicago loves Chicago for about six weeks in the summer. And then, yeah, the winter settles in and the complaints start. I understand.
Dinny:
I mean, even last weekend was pretty good. I mean the snow really came down and the kids are out dragging the sled along the pavement and building, trying to build snowmen and all this sort of stuff. And then the temperature just dropped. And yeah, it’s over it, mate.
Andrew:
Yeah, well, it’s snowing in D.C. today. Today’s December 5th Friday that we’re recording in the afternoon Eastern Time. So, it’s also getting cold here. Not nearly as bad as Chicago, but it’s getting kind of cozy. I like it, so that’s my vibe. It’s cozy. It’s good to be on this cozy podcast with you today, Dinny. All right. Well, before we get into the meat of the discussion, we have to start with the usual housekeeping as well. A quick reminder — we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes policy towards China out of Western capitals like D.C., London, Brussels and others. So, if you need any help on that front, please do reach out to us at hq@triviumchina.com.
We’d love to have a conversation about how we can support your business or your fund. Otherwise, if you’re interested in receiving more Trivium content, check out our website, again, triviumchina.com, where we have a bunch of different subscription products for our China policy intelligence. We’ve got free options, paid options, options on tech, options on markets. Check out the site. You’ll definitely find the China policy intelligence option you need there. And finally, we’ve seen more of you doing this, so we really appreciate it, please do tell friends and colleagues about Trivium and about the podcast. And, specifically, what I’ve seen people doing is rating the podcast more.
Those ratings really help us move up the ranks in terms of, I guess, not the ranks, but increases visibility in the various podcast platforms that are out there. So, if you liked the pod, please do leave us just a quick rating and that lets us get more listeners, grow the business, and keep bringing you great free content. All right, Dinny, are you ready to get into it?
Dinny:
You mean we’re not being ranked. That was the only reason I was doing it.
Andrew:
I think we are probably being ranked, but we may be outside of the official rankings, so we’ll see.
Dinny:
Unseated.
Andrew:
Exactly, and at-large bid. All right. Well, first, we’re going to get into the involution piece. So, I just want you to start, Dinny, by, as best you can, just giving us kind of a maybe a definition of involution as you understand it when the Chinese talk about it, just so we can level set before we get into kind of what Beijing’s doing on this front.
Dinny:
Yeah, it’s a really unusual word. And certainly, the English translation is a real deep cut. I mean, how they even came up with this is probably a story in and of itself. But the concept of involution as opposed to overcapacity, the idea behind involution is that it’s a situation in which additional inputs don’t yield a proportional increase in outputs. And so you can kind of see how that overlaps with overcapacity, right? Because under a condition of overcapacity, you’ve got industries producing more and more stuff. But because there isn’t demand for it, they’re not able to sell it for as much as I used to. And so, you’re putting as much in as you did before, but the profits, the revenues that you were earning previously are declining.
And so, it overlaps with overcapacity in that way. But Beijing has sort of framed it very differently. And they’re using this word specifically as kind of an implicit way of saying to the rest of the world that this is not overcapacity. And really, we don’t believe that overcapacity really even exists.
Andrew:
Well, okay, before we kind of dig a little further on that, I mean, I think what a lot of listeners are going to be thinking is, well, they’re just using involution because they don’t want to use the word overcapacity because that word has been politicized in a way by, or at least, you know, it started with the Europeans and then the Americans took it on, really kind of bashing China on the overcapacity. There also is overcapacity, by the way, which China has acknowledged. But do you think they’re using more involution or using involution more simply because of the sort of politicized nature of the term overcapacity? Or do you think there’s a fundamental sort of conceptual difference as they understand it?
Dinny:
I think it’s both. So, I think the first time we saw the word overcapacity used by the Chinese is in this cycle, right? Because overcapacity comes and goes. We had it in the mid 2010s. It waxes and wanes. And the first time they started using the term again was 2023 Central Economic Work Conference, I think it was. And within months, you’re right, the Europeans and then the Americans were like — Overcapacity, we’ve got to do something about it. They’d kind of thought they’d sort of found that common ground with China, where like, “Okay, this is an issue you’ve identified. Let’s do something about it.” And then the Chinese, pretty quickly after that, stopped using it.
But it took a little bit longer after that before they settled on this term, involution. So, yeah, there’s definitely a political element of it, but there is definitely a very different framing of the idea of what evolution is as opposed to overcapacity. And we kind of saw this sort of popping up in the middle of last year, I think, kind of as they were sort of working through these issues themselves. I mean, I think there was an essay by the Ministry of Commerce in the middle of last year, which kind of sort of took on the sort of Western economies or Western governments on the grounds of like, look, you know, raising the whole idea of overcapacity is cynical on your part in the first place. What were the examples they gave?
I think it was, you know, in the ‘70s and ‘80s, IBM had 70% to 80% of global market demand for large computers. Germany, until recently, exported 80% of the cars that it made. Japan exported 50% of the cars that they made. Boeing exports 60% of the planes that they produce. So, is this over capacity? And I think from there they kind of developed a more nuanced idea. And I think, increasingly, their understanding of overcapacity is like this that in a global free market economy, overcapacity cannot exist. And the reason is because in a free market economy, demand will adjust to prices.
And, secondly, because demand changes with time. And so, even if there might be an excess of capacity at this particular moment in time, that’s irrelevant because demand will change. And you kind of look at a lot of the industries in which China is struggling with overcapacity, and we’re talking about electric vehicles, solar, wind turbines, batteries, where they seem to be producing more than they necessarily need. But the idea is that demand in this particular moment might not match up factory’s capacity to sort of produce. But these are industries in which there’s going to be rising demand in the not-so-distant future. And the development, what is it? the Development Research Council of the state? It’s not the Council… DRC, the Development Research Commission… Committee? DRC, senior house think tank of the State Council, right in the middle of last year…
Andrew:
That was fun to watch, just let me say that.
Dinny:
When you got to realize, it doesn’t matter. That in the middle of the last year, wrote that so much of the investment, and like explicitly said this, so much of the investment that’s going into electric vehicles in China at the moment, it is mostly about matching expected future demand. And so, this kind of comes down really, I think, to this starting point that, look, overcapacity doesn’t really exist because what we’re doing is we’re servicing a global market. Demand is going to rise in the future. And, of course, price adjust to demand, you put all that together and you can’t really have a sort of overcapacity. And so, involution then is a slightly different idea, which we can get into a sec, if you want.
Andrew:
Yeah. Well, I will just say from my standpoint, I mean, I think part of that is a defensible claim, a defensible way to think about the capacity you’re building, meaning no company or country is going to think, how much capacity do we need just to meet our domestic demand? Like you’re going to try to sell as much as you can, and if you think there’s global demand for your product, you’re going to make it.
That said, the complaint, and I think is fair from a lot of Western policymakers is, yeah, but you build this capacity often with huge subsidies, right? So, such that your companies can compete at this much lower, and global capacity will eventually adjust, but that means higher cost producers everywhere else in the world have to shut down because you’re kind of competing on an unleveled playing field. So, I think that’s a fair critique of Beijing’s articulation of how it thinks about overcapacity or capacity generally.
But it does become more complicated when we talk about the involution piece because it’s one thing if Chinese producers are producing at very low prices because of subsidies, it’s another when they’re producing because they just have extreme cutthroat competition among their own companies, which is more with the involution piece is. Right? How do you think about that?
Dinny:
Yeah. So, when it comes to evolution as opposed to overcapacity, I think the distinction is important because as far as the Chinese can see it is that even though they don’t believe overcapacity exists, they can see a problem with the situation that they’ve got themselves into whereby you’ve got all these Chinese firms with more capacity than they need given current levels of global demand. And, if anything, the real point of competition isn’t between China and the rest of the world. It’s between Chinese firms themselves. And so, I think often when foreigners, the EU in particular, kind of looks at China and sees them talking about involution, there’s a sense of like, look, it doesn’t matter if they’re talking about involution or overcapacity.
It’s the same issue. They’re going to deal with the fact that they’re producing too much stuff, and it’s driving down global prices and it’s uncompetitive. But the way the Chinese see it is that if overcapacity exists, the goal of the exercise isn’t to close factories in China to a degree or to an extent that brings about some sort of global balance, right? Because if you’re trying to meet global future demand, then the goal of dealing with excess capacity in this moment isn’t about bringing things into equilibrium in this moment. It’s still about ensuring that Chinese firms can meet that global demand and even grow into it. And so, when the Chinese talk about involution, the goal here isn’t to bring about a global equilibrium that will reestablish a more equitable playing field for foreign competitors.
The real issue here is they want to stop Chinese firms from eating each other’s lunch. So, going back to what you were saying about the Chinese state putting so much subsidies and effort and policies and all this sort of stuff to create highly competitive Chinese firms, develop the new technology, build up a domestic market that they can go global — They didn’t do all that just so you could end up in a situation where no one’s earning any profits, where employees are struggling under a constant state of uncertainty about their job prospects and, of course, by extension, in a situation where the state isn’t actually generating any taxes from it. And this is something we’ve talked about a fair bit on this podcast. The whole point of the economic transformation envisioned by Beijing, the model that they’re pursuing is that this is about delivering a more affluent, well-off China in the not so distant future.
And the way to do that is through higher corporate profits, higher earnings from the public and, by extension, broader tax base for the state. And we’re in a situation at the moment with involution, where Chinese firms are competing against each other in all of the sectors, all the industries, which we look at and go, wow, they really successful — the EVs, the solar, batteries, wind turbines, potentially coming down the turnpike with flying cars and drones, and just all that stuff. And to the extent that Chinese firms are viciously competing with each other, which I think is the term that the Chinese use, that competition means that when they’re in competition with each other, they drive down the prices that they charge the public in order to be able to secure a greater market share.
And when that happens, China does not realize the benefits that they were trying to generate in the first place from supporting the development of these industries. The corporate profits aren’t there, the job security isn’t there. And Lord knows the tax revenue isn’t there. So, those anti-evolution efforts are really about stopping Chinese firms from undermining the success of Chinese industry. It’s about bringing things back not into global equilibrium, but ensuring that the environment, the competitive environment isn’t about driving prices into the ground. It’s about trying to restore some degree of corporate profitability, rising wages and, ultimately, expanding the tax base. So that’s the goal here. And so, by extension, when Beijing goes about dealing with overcapacity/involution, the goal, as we’ve seen time and time again with these incremental policies we’ve seen coming out, to a degree, it’s about closing down existing capacity.
But time and again, there’s also been this emphasis on like, but we still want you to keep investing, but we want you to move up the value added chain. We want you investing in more advanced products. And so, sort of they want to take away with one hand but still continue investing on the other hand, but in parts of the industry that are going to be higher yielding because that’s kind of the endgame here.
Andrew:
Yeah, we’ll see if they can pull that off. There’s just one kind of additional point I want to make there, which is your point about kind of, especially in the NEVs, about how China thinks about sort of the global landscape. That’s actually when it’s the Chinese companies kind of competing against itself. This is where I think the European and American argument kind of becomes disingenuous because it’s not like Chinese companies are undercutting the development of the electric vehicle industry in the West.
It’s just that they got their first, right? There is no globally competitive electric vehicle company that is not Chinese. You could say Tesla would be the one exception, but a lot of people would even say Tesla is basically a Chinese company, yeah, at this point. And so, it’s just the reality is that the traditional automakers just did not see the pivot coming and did not make the investments and the innovations needed to kind of stay ahead of the curve. And so, now they’re behind. And I think a lot of Western policy is about sort of just figuring out how to protect those players through this transition so that they don’t fully industrialize those parts of their economy. But the reason I think that it’s so important to think through, it may sound like pedantic, like, oh, involution versus overcapacity, but the reason it’s so important to get the concepts right, and to spend a little bit of time on it, is understanding how Chinese policymakers are conceptualizing the problem helps us understand how they’re seeking to address it and what they will do going forward. So, why don’t you talk to us a little bit about the anti-involution efforts that we’ve kind of been seeing kind of really for the past six months.
Dinny:
Yeah. Well, before I jump into that, it’s worth sharing one other anecdote, and again this was from that DRC essay from the middle of last year, when it was talking about the merits or the legitimacy of having an industrial policy that supports meeting future demand. It sort of moved on from the example of like, look at the Germans, they export 80% of their cars, and the Japanese, and it took the example of Korean manufacturers of LCDs, flat panel screens effectively. And it argued that, or it made the point like, this is just coming from the DRC, I haven’t vetted this myself, so I’m not sure if the numbers are 100% correct or not, but it said that from 1997 to 1994, LG massively invested in the production of LCDs, and yet it was generating a loss from that arm of its business of more than 50 million USD a year.
And that Samsung started a little bit later, massively invested from 1990 to 1997, and was averaging losses of $100 million a year. And so, they both built up huge LCD capacity that far exceeded the market’s demand throughout the 1990s. But what they could do is they could see the demand coming in a way that perhaps nobody else could. And then we got to a point in the late ‘90s where there was just a pivot, and everything went from being, you know, I remember growing up with the size of my television. I mean, there was a reason why we called it the Idiot Box. It took up a not insignificant chunk of living room. That’s what computer screens were, and that’s what televisions were for time immemorial, up until the late ‘90s.
And then there was kind of this global pivot to flat screen everything. And the Koreans had positioned themselves to take advantage of what they saw was going to be a huge global industry, and they invested ahead of the curve. And so, the DRC was arguing, it’s like, look, there’s a lot of merit in that. Why shouldn’t we be doing the same sort of thing?
Andrew:
I forget where I said this, and which forums or which platforms, I may have said it on the pod before, but it’s probably worth repeating is that’s also the Silicon Valley model. Everybody in the U.S. points at China and says these companies, they may be innovative and they may have good products, but they’re not profitable. And that’s how, for a decade now, tech companies in the U.S., especially startups that are trying to disrupt various technologies, it’s all about market share. You burn cash, you raise huge amounts of money at exceedingly high valuations that have no realistic tie to your actual profitability, which is usually negative for many years. You try to get as many people using your platform as you can, then you IPO and you start worrying about profitability at that point once you’re a publicly listed company.
So, the DRC gives the example of the Koreans. But I think you can see all kinds of examples where companies act in this way in recent and further back economic history.
Dinny:
No, I think is a fair point. And I think the reason why we’re so vexed about what the Chinese are doing now is because it’s all about the industrial base and it’s about manufacturing jobs. It’s not like a first China shock where it was about existing manufacturing jobs. It’s very much about, if it wasn’t for China, these would be the things that would be manufactured in the EU and the U.S. and South Korea and Japan, like, the next generation of technology. But all of a sudden, China is sort of looking to take over all of that before the rest of the developed world really can establish a foothold in these industries. And so, it’s threatening to be massively disruptive of the future, future industries, thereby undermining existing traditional industries.
Andrew:
Well, and I don’t want to go too far down this rabbit hole because I want to get back to what they’re doing on the involution side, but that’s exactly the research we’re doing now, which is we’ve sort of laid out through your work, particularly through CSIS, that the plan for the new economic growth model to target very cutting edge innovations and try to scale up and commercialize various companies in those areas, but now we’re doing the work of saying, okay, which specific technologies is China looking to invest in and where will they be most likely to be successful, and, around all of that, sort of the nature of an approach of industrial policy is changing.
And it turns out that industrial policy tends to be most effective out of China when they are investing in an area where there’s not an incumbent Western player. So, if they’re identifying the technologies and industries that they think are going to make a huge global macro impact in the next five, ten years and are investing in them ahead of Western companies or Western countries, if they can have that first mover advantage, they could pull the NEV trick and battery tech two or three more times. And there’s huge implications for that. So, that’s forthcoming research. We’ll get actually quite detailed on that. So, listeners and readers can be on the lookout for that. But Dinny, let’s pivot back to okay, so given all this stuff, what are they actually doing on the involution front, and why does it matter?
Dinny:
The thing that’s kind of affecting all industries is we saw this with fixed asset investment data for the last couple of months that it just kind of dropped off a cliff. And part of that seems to be because industries across the board have just stopped adding as much investment as they had in the past. So everything from sort of plastics to steel, it’s like there’s kind of almost been a halt on adding additional capacity. And then, I mean, that’s clearly one part of the picture, but then it’s a question of how do you rein existing capacity in? Every industry is going to be a little bit different. So, so far with the polysilicon industry, which is essential to cell production, you know, for the last few months, there has been efforts by the government to put together effectively a cartel of the six biggest producers that all contribute a little bit of money, put together a fund, use that to buy up small low end, relatively inefficient or old technology capacity.
Again, this kind of goes back to what I was saying before. Like the goal here is to sort of move up the value chain. And so, it’s not just about getting rid of any capacity, it’s kind of getting rid of the more sort of backward technology or inefficient producers. Now, that hasn’t come together yet, because, I mean, it’s such a complicated… I mean, these are mainly private sector producers trying to agree to them on who commits how much to the fund, where does the money come from, what’s the pricing? How do you convince the smaller producers to sell out, particularly if they don’t want to? What price do they offer? What price are they forced to accept? I mean, it’s going to be like pulling teeth indefinitely, but that’s the approach that they’re taking. Then over the last few weeks, NDRC and a bunch of other government agencies got together and published two-year industry stabilization plans for steel, for construction materials.
So, we’re talking mostly cement and flat plate glass, and then also non-ferrous metals. And pretty much all three of those plans had some things in common. This moves to close down some existing capacity, not sort of explicit sort of targets, but certainly, hey, this is something that’s got to be done. But at the same time, there’s also this thing. We will also encourage more investment higher up the value chain, more environmentally friendly facilities, that sort of stuff. So, it’s kind of give and take. It’s like, well, okay, there’s going to be losses because we’re going to force closures, but perhaps we can make that up by moving into higher value goods at the same time. So that’s kind of part of the picture as well.
And then I think it’s also worth keeping in mind that some of the stuff that we’ve seen with, well, not some of the stuff, I think one of the ways of looking at the consumer trade in subsidy program over the last two years is effectively an effort to deal with overcapacity. I said it was the last two years. It was announced in March last year, but the subsidies only came out in the middle of last year. But it was all about providing subsidies to encourage the public to buy furniture, white goods, cars, and a little bit later, they sort of added personal electronics to that as well. But traditionally, furniture and white goods in particular, those two big ticket items, the sale of those sort of items was always linked to the purchase of new housing.
And so, when the housing market started sliding at the beginning of 2021, so did demand for these sorts of large consumer goods. And so, the government’s response to it was providing subsidies to try and get people to exchange old for new. I mean, it’s pretty explicit why they were focusing on upgrading on trade in programs, because it’s like, well, people aren’t buying houses anymore. You don’t really have a demand for new first time buyers going out and getting the dishwasher that they’ve never had before. So, we’ve got to get people trading up, getting rid of the old one, buying something new. And so, this is why it was very much a trade, focused on creating a new market for something that people just weren’t buying anymore because of the housing market was.
And so again, it’s kind of an effort to deal with overcapacity, a little bit different from what we were talking about before. But at the same time, it’s not that different because even though the government’s been talking about subsidies, we’re going to have subsidies trade-in, at the same time, they’ve also been telling all their white good manufacturers — move up the value chain, more digitalization, incorporate AI into your goods. Same sort of idea. We want you producing higher value, more innovative products so that maybe you can create a new market both domestically and overseas. So that has kind of been the idea. It’s one level that’s been let’s shut down some industries, maybe we provide some support, but at the end of the day, it’s also part and parcel of this is like, well, let’s see if we can move up further up the value chain at the same time.
Andrew:
Yeah. Well, it’s important to keep in mind that this is all happening in the bigger context of China trying to move from an economic model that’s very much based on property in particular, but also investment and rising levels of debt, to this more innovative, productivity-led growth model. And we’ve talked about it before, but the very simple way to think about it is, as the property market realignment or melt down or whatever you want to call it, drags on, potentially even deepens, the idea is to buy as much time as you can so that these other, more innovative parts of the economy get bigger and bigger and bigger and bigger and are larger and larger proportion of GDP and increasingly offset the drag from property. But in the meantime, you’ve got these sunset industries, sunset industries, often, many of which are linked to properties — steel, aluminum, copper, all that upstream stuff.
What’s Beijing thinking about the sunset industries as this process unfolds in terms of how to deal with capacity? That they cannot argue in that case is ever going to come back. They can’t say, “Oh, we’re just getting ahead of it.” This is just we had a bunch and now we’ve had a huge negative demand shock. So, how are they thinking about that part of it.
Dinny:
So, if we had to identify Sunset Industries like, as you said, the industries for which will never again experience the sort of demand that they had prior to the peak of the property market, we’re talking steel, cement, glass, construction machinery, white goods, furniture. What am I missing? I mean, that’s a pretty good list, but we were thinking about those in terms of being sunset industries. But I think it was Han Wenxiu, the executive director or the kind of the chief of the CCFEA, which is kind of the party’s primary policymaking body for the economy in the financial sector. I think it was recently had a quote when she said there are no sunset industries, only sunset technologies. I mean, that says it all there.
Andrew:
Do you have that tattoo yet?
Dinny:
Inside my eyeballs, mate. I mean, that just speaks volumes, right? So, they look at something like the steel industry, or even the cement industry. Cement’s probably a better one, right? Because it’s such it’s old technology. China doesn’t need the same amount of infrastructure as it used to. I mean, even the infrastructure that they’re building, it’s less focused on roads, more on that data centers. So the infrastructure, the housing, China’s never going to need as much cement. But in that sort of two-year stabilization plan, it’s about more environmentally friendly cement. It’s about producing it more efficiently. It’s about better quality. And I think that kind of is the theme that runs through everything you see it, as I was saying, with white goods, more AI, more digital technology incorporated into home appliances. We see it in the construction machinery industry.
I mean, the construction machinery industry pivoted very quickly. Demand in in China dropped off a cliff and they just started exporting like it was no tomorrow. I think for the big construction machinery companies in China, most of their sales are now overseas. But even then, they’re not just competing against Caterpillar and Komatsu on the same terms. They’re moving aggressively into electric offerings as well, leveraging the technology that’s being developed domestically to try and create more electric offerings for bulldozers and excavators and trying to create a new market out of that. So, that is really the approach — No Sunset Industries, just technologies, which is about taking those old industries and forcing them up the value added chain.
Andrew:
Yeah. Well, this is one where there’s going to be a lot of energy on the Chinese side to continue addressing this. I don’t think it’s going away. As you said, they have used the term involution before, but we haven’t seen as proactive of efforts to address it, at least in these unique new ways in previous kind of rounds of new policy efforts. And also, like the property market is not coming back. So, figuring out what to do with the sunset industries is going to be an ongoing project as well, for at least the next five years, if not beyond that. And it remains to be seen whether or not they can actually upgrade these industries. It’s nice to say, “Oh, we’re going to innovate and we’re going to apply technology to traditional industries.”
Easy to say, much harder to do. But they will be making efforts on that front. So, at least we kind of understand their conceptual framework. And then our ongoing research, as I said earlier, will be to identify what they’re doing industry by industry, technology by technology, especially areas where they’re investing, where they want to sort of provide the industries and technologies of the future what they call frontier industries. So, we’ll be following all that closely. I’m going to hard pivot now to a second part of the pod, which is just quickly to talk about the latest on the U.S.-China stuff. It’s been about a month since Xi Jinping and Donald Trump made their trade truce in Busan, South Korea. And everyone’s been wondering, including ourselves, how durable is this thing like, especially in the immediate aftermath, it seemed like both sides are messaging differently.
It wasn’t sure they were exactly clear on the details. And it seemed like it was a very fragile truce that could fall apart at any moment. But since the immediate aftermath, actually, we’ve seen quite a bit of significant positive steps towards stability. And that’s included moves to show good faith by rolling back countermeasures and tariffs, lifting sanctions, pausing trade investigations, and reopening communication channels between military and security authorities, for example.
And just over the past week, we saw two pretty big ones. One is that D.C. indicated that its timeline for China to purchase U.S. soybeans would be extended. It was initially a December deadline, and now it’s a February deadline. And then the second thing from Beijing side is that it has all but confirmed it is issuing the general licenses that will cover export controlled rare earth products that all companies have been wanting to see, but that the White House in particular was kind of promoting as an outcome of the Korea meeting in the immediate aftermath of that meeting, in which the Chinese side still has not officially confirmed, all but confirmed.
So, anyway, the point is that we had been worried that the two sides viewed this very differently, but it looks like things are moving in the right direction. I’ll just quickly give a little detail on the soybeans and on the general licenses, kind of what we know on both. Dinny, would love your high-level thoughts. I know the U.S.-China stuff isn’t necessarily your immediate bailiwick, but always good to get a sense check on what you’re thinking. So, first, on the soybean front, U.S. Treasury Secretary Scott Bessent said that China now has until the end of February to purchase 12 million metric tons of U.S. soybeans and is on track to do so. He downplayed the fact that they sort of doubled the original two month timeline, so they said by the end of the year, at the beginning of November, so that gave them two months to buy 12 million tons.
But instead, he was saying that Chinese players are “in a perfect cadence to hit the new deadline.” I think the practical implications of this is that the additional flexibility is actually a pretty huge, it’s not concession, but gift to the Chinese buyers effectively. The deal is structured around volume rather than value. So, China is kind of on the hook to buy the volumes of soybeans no matter what the price is, even if those prices are uncompetitive. Right now, those prices are uncompetitive because you have soybeans are more expensive than Brazilian soybeans, or they have been since late October when markets began pricing the deal.
And so, Chinese state-owned buyers are currently buying purely out of political obligation. And none of the more commercial oriented buyers have really had reason to step in or to bother making purchases. But things are going to change because Brazil’s harvest season is just now beginning, and it’s expected to have a record crop of soybeans expected. So, when this fresh supply hits the market in January, there will be a Brazilian soybeans that should drag down global prices, making US prices more competitive and making it cheaper for the Chinese side to hit their volumes of purchases. So, extending to February is just a smart move, I think, by the Trump administration. It’s not, I don’t think, a concession. I think maybe they made a mistake by saying, at the very beginning, oh, they’ll do this by the end of the year. Because the dynamics, the commercial and price dynamics just didn’t make sense. But they’re now saying sort of by the end of the season or whatever the buying season.
So, the two months is a pretty… we see that is really ongoing good faith effort by the U.S. not to hold the Chinese to an unrealistic timeline, hold their feet to the fire in an unrealistic way. But to say, “Okay, like you’re on track, we see these dynamics don’t make sense. We’ll do a little extension.” Any thoughts on that one, Dinny, in terms of whether or not are we over reading, whether how positive that is, or do you see kind of more tripwires around this kind of stuff?
Dinny:
No, look, I actually think that our read’s been pretty good. Like, my first instinct when I saw it was like, oh, they’ve moved the goalposts. They’ve done it once. They’ll do it again. This is just.. But the thing is, once you kind of get into the weeds and the actual details of the planting season and what’s about to be harvested and all this sort of stuff, it all starts to make a lot more sense. And so, rather than just jumping to the easy conclusion that this is a concession, it’s a cave, it’s this or that, like, you’re right, I mean, it’s a goodwill effort to make sure this gets done. I mean, at the end of the day, all what the U.S. really wants is to sell 12 million tons of soybeans in a reasonably short period of time.
I mean, to throw the American soybean farmers, at least, you know, they’ve been hammered all year. I mean, it’s kind of the lifeline they desperately need. So, yeah, as long as it gets done, I mean, that’s what really matters. Yeah, I think once you kind of wade into the details, it all starts to make a lot of sense.
Andrew:
Yeah. And so that seemed to be the big kind of positive step from the U.S. side this week. And likewise, there was a pretty big positive step from the Chinese side. So, we got a report on December 2nd, a scoop by Reuters saying that the Chinese Ministry of Commerce was issuing general licenses to some of its big domestic rare earths companies specifically that were producing rare earths that would go into magnets. And the idea was, according to the reporting, that they would get this year long license to basically cover all of the shipments to all of their customers globally that are can be proven to be nonmilitary, non-dual use. So purely commercial. And that’s big because previously, you literally had to get a license for every single export shipment. So, it was highly cumbersome, repetitive, and just a total kind of mess on the regulatory and bureaucratic side.
So, these general licenses are pretty huge. And so, we saw that in the reporting, we’ve been hearing from some of our clients that it seems to be moving in the right direction. But then later after December 2nd, I think on the 5th, the Ministry of Commerce spokesman He Yadong essentially confirmed the report and said that Beijing… he didn’t say it outright, but kind of my understanding is that general licenses are being employed where appropriate to ensure compliant trade with the world, or something like that. So, it was not a full scale, yes, we are doing this. And it kind of aligns, that kind of aligns with what we had been hearing, especially from kind of the Chinese side, that our contacts also would not officially confirm, but said, “Yeah, we think that they’ll move in the direction like that.” But then they also said, “But it will never be publicly confirmed because this is an internal process issue. So, we’re not going to just come out and say it.”
So, we’re going to be relying on sort of the word-of-mouth anecdotes of actual companies buying this stuff from China, as well as sort of reporting like the Reuters scoop to understand what’s truly happening because I think the Chinese are never really going to come out and officially say that. But that’s huge because, again, the U.S. side has been saying they committed to general licenses, and because China hadn’t confirmed, and apparently is unlikely to ever fully confirm, we were just skeptical. We were like, are these two sides understanding this issue in the same way? And to me, that was actually the biggest sticking point because it looked like they were rolling back tariffs, they were cooperating on fentanyl, the soybean purchases were happening, but was there a meeting of the minds on the rare earths piece?
And in fact, we’re still not 100% convinced because the push will come to shove when we see how the U.S. is understanding China’s commitments on dual use end users. So, the Chinese have been pretty clear, as far as we can tell, that they still will not sell these to companies that have dual use purposes. Right? So, anyone who’s going to potentially use this for a military purpose, these rare earths, it’s unclear whether the U.S. side understands that or will accept it when and if they do understand it. So, I think there’s still some sticking points. But I guess the biggest point here is that we are moving in the right direction. The broad strokes seem to be coming together, and the Chinese seem to be basically doing what the Americans had characterized them as having promised to.
We’re going to get more into that piece again next week. Talk more about rare earths, what’s happening, the response of China and the globe to sort of shifting supply chains on the back of China’s export controls and how their general licensing might implement that. So, more to come on this. But I think those are the broad strokes and, again, I would say overall quite positive. Dinny, let me bring you in again.
Dinny:
No, mate. Don’t bring me on. It’s not my jam. I got nothing.
Andrew:
Okay. Fair enough. All right. Well, in that case, we’ll just leave it on a positive note. I mean, so I think, like I said, right after the deal was struck, I was cautiously optimistic, but still with a healthy dose of skepticism that the two sides had actually had the same understanding of what they had agreed to. And I think with each passing day, it looks more and more like they do have the same understanding. So, I’m also kind of like if the deal can hold for two months, it can probably hold for a year, but if it can’t hold two months, you know, it’s sort of like the most critical window, a better way to put it, the most critical window is like in the immediate aftermath. And if they can kind of let the dust settle and have a meeting of the minds on the key aspects of this, then I think we can probably settle in and maintain the truce for a while.
So, I guess the last point is I’ll just say I’m having more and more conversations around D.C. with people who were saying the trajectory looks actually quite positive for U.S.-China given this agreement, and we’ll get more into that. We’re going to write about it. We’ll do it on the pod, but kind of a budding optimism around stability in the relationship that I haven’t really heard for several years. Now, that optimism is going to make some people unhappy, particularly the super China hawks in D.C. But I get the sense that we’re at the beginning of a shift onto a different direction that’s potentially more positive between the countries and potentially more stable. So, we’ll see how that goes and we’ll talk more about it, like I said, on the path later. But for now, we’ll leave it on the high note or what I would at least call high note.
Dinny, thanks for your comments on everything, but especially walking me through the involution stuff. I really appreciate that.
Dinny:
No, of course, it’s been a pleasure as always, mate.
Andrew:
All right. Thanks, Dinny, and thanks, everybody, for listening. We’ll see you next time. Bye, everybody.
