It’s been a consequential week for U.S.-China relations, as Xi Jinping and Donald Trump finally held their long-awaited summit in Beijing amid ongoing trade tensions, export control battles, and the fallout from the Iran war.
On the first half of this week’s Trivium China Podcast, host Andrew Polk is joined by special guest Jon Czin — the Michael H. Armacost Chair in Foreign Policy Studies and a fellow in the John L. Thornton China Center at the Brookings Institution — to unpack what came out of the Xi-Trump meeting, what both sides were trying to accomplish, and where the relationship may go next.
Jon gets into:
Why the current U.S.-China situation is more temporary stalemate than budding stability
China’s evolving strategy for managing Trump and the broader bilateral relationship
The significance of Beijing’s proposed framework for “Constructive Strategic Stability”
How China views US leverage — and its own leverage — in trade, critical minerals, and supply chains
How the Iran war is shaping the broader geopolitical context for US-China diplomacy
Then in the second half of the pod, Andrew is joined by Trivium’s lead macroeconomic analyst Joe Peissel to break down the latest batch of Chinese macro data, which showed a sharp slowdown in economic activity in April.
The two discuss:
How the Iran war and supply chain disruptions are weighing on China’s industrial sector
Why investment activity weakened more than expected last month
The hidden policy changes dragging on infrastructure investment
Continued weakness in Chinese consumption and consumer confidence
What the latest data means for Beijing’s broader economic outlook
Transcript
Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder, Andrew Polk. And I’ve got a very special guest on the podcast today. He is the Michael H. Armacost Chair in Foreign Policy Studies and a fellow at the John L. Thornton China Center, both at Brookings Institution. He’s also a former member of the Senior Analytics Service at the CIA, where he was one of the intelligence community’s top China experts. And he was also on the National Security Council at the White House in charge of China policy from 2021 to 2023. Most people will not need that long introduction to be familiar with the guest today — It’s Jon Czin. Jon, how are you doing?
Jon Czin: I’m great, thanks. Thanks for having me on, Andrew.
Andrew: Yeah, so glad to finally get this together. For anyone who hasn’t seen it, Jon was so kind as to have me on his podcast at the Brookings Institution, excellent new podcast called The Beijing Brief. Everyone should be on the lookout for that. Really, really good stuff. And you should also be on the lookout for Jon’s work in Foreign Affairs magazine. He publishes pretty frequently there, pretty regularly. Has had some great pieces recently and an upcoming piece Anything I’m missing, Jon, in terms of work that you want to highlight?
Jon: No, I think that’s good for the podcast.
Andrew: Great. Okay. Awesome. Well, we are going to talk today, so I flagged this last week that we’re going to have Jon on to talk through the latest around the Xi Jinping-Dong Trump meeting. Obviously, the meeting happened at the end of last week. We’re recording on May 20th, 1 P.M. in the afternoon, just to timestamp this for folks. So, it’s been a few days since the meeting, but it’s a perfect time to talk about this because there’s really been kind of a trickle of ongoing developments in terms of what happened at that meeting.
So, it’s nice to have had a few days to let the dust settle. We even got some extra comments from the Ministry of Commerce this morning that we’ll go through. So, with a few days’ perspective, Jon and I will talk about kind of what’s the latest, what we think it means, what it means for U.S.-China going forward. Going to be a great conversation. And then for listeners, the second half of the pod, stick around. I talk to Trivium’s Lead Macroeconomic Analyst, Joe Peissel.
We just got the latest monthly macro data out of China. So, we do a quick update on that at the end of the pod. So, stick around for that. So, it’s going to be a lot of meaty content again, as always today. But before we get into it, Jon was so kind to join us for the customary vibe check today. Jon, how’s your vibe going into this podcast?
Jon: You know, after the past week we’ve had, and just how much follow-up there’s been in the ensuing week, my vibe is extremely well caffeinated.
Andrew: That’s a great vibe. Great energy to bring to this pod. You were just saying like my vibe is usually pretty chill. So, I’ll stick with the chill vibe, even though there’s a lot going on. Hopefully we’ll be a little bit of yin and yang here. You can bring the energy and I’ll just be asking the questions. How does that sound?
Jon: I am always impressed by your composure and equanimity on this show, Andrew. And I feel like, especially in Washington, that’s a precious commodity. I don’t know. After this, maybe you can write self-help books for China Hand.
Andrew: Yeah, that’ll be my second act. You’ve also got young kids. But having young kids, running a business, you got to find Zen anywhere you can take it. So that’s what I try to do.
Jon: Amen.
Andrew: Well, we will touch on all the latest here on U.S. China here in a moment. But first, I also have to quickly go through the housekeeping for listeners. Just a quick reminder to folks out there, 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 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’ve got a bunch of subscription options for people to stay on top of ongoing policy developments out of China. We’ve got paid options, free options, options related to technology policy, markets policy, whatever you need in terms of options for staying on top of China policy analysis, China policy intelligence, you will get that on our website, so check that out.
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All right, Jon, with that, you’re ready to get into it?
Jon: I am.
Andrew: Awesome. Well, as I said, so we’ve had a few days to let the dust settle. Out of the meeting initially, there was literally no announcement, right? Or at least when Donald Trump was wheels up from Beijing, I was talking to clients and saying, I’m not trying to make the argument this is a nothing burger. There’s literally been no announcements. There is nothing to say. But as we kind of surmised at the time, there might be some developments or some confirmations of what was discussed in the coming days. That has, of course, been the case.
We, this morning, finally got the Chinese confirmation, for example, around the purchase of Boeing airplanes. Chinese confirmed that they’ve done some stuff on the agricultural side in terms of both purchases and greater market access, both into China and into the U.S. So, it seems like everybody’s pretty much on the same page, which we’ll get into kind of the differing details of the readouts. But let me just start with, now that we’ve had a few days, has your view of what happened at the Xi Trump meeting evolved at all since Friday?
Jon: Yeah, I mean, I think to take one step back, Going into this meeting, I had very low expectations going into it for a couple of different reasons. I mean, I think part of it was just some of the reporting that we saw about how little staffing there was for this, especially on the U.S. side, which I think is unsurprising. I mean, I think especially on this set of issues on China policy, you really see President Trump acting as his own China desk officer. I’m very mindful that even people like Steve Witkoff or Jared Kushner, who are influential on other major foreign policy portfolio items like Russia or the Middle East, don’t really seem to be engaged on this set of issues and were not part of the delegation.
But I think even though he’s so focused on it, a big part of it goes back to my sense of what Beijing was trying to accomplish in this meeting. And I don’t think that there was really a clear affirmative agenda from Beijing’s perspective or something that they were looking to accomplish. People keep talking during this meeting and in the aftermath of it about the focus on stability from both sides. And I kind of think that’s a misnomer. I think what there really is in the wake of last year’s trade war is a stalemate between the two sides. And I think that’s a more helpful way to think about it because the stability, such as it is, it’s pretty shallow and it’s pretty thin.
And I think from the Chinese side, I think what they’re looking to accomplish in a meeting like this is basically try to buy themselves time and space and relief from U.S. pressure so that they can fortify themselves for the next round of the contest. So, I think the game that Beijing is playing is trying to figure out what is the minimum price point for purchasing that. And I think for this meeting, I think that’s why there was such a heavy focus on the optics of this, right, rather than the outcomes. I think that was a lot of what drove the approach and why we saw so little of substance coming out of this.
Andrew: Yeah, that makes a lot of sense and helps to frame sort of, you know, one reason why the Chinese weren’t pushing harder for very concrete deliverables. Would you say, kind of based on where we are today, that you think the Chinese are pretty satisfied with the outcome?
Jon: I think so. I think they probably are. I mean, it is interesting already in the days after you can already see some of those structural friction points start to resurface. So, Secretary Bessent, just this morning, and this is again Wednesday, May 20th, was talking about corralling the G7 to push back against Chinese overcapacity. I think, again, it shows how shallow and tentative this progress is so far. I will say from my perspective as an American, I would say, coming, I had low expectations going in. And then at the end of the summit, my bumper sticker for it was no escalation, no concessions.
And I think at this moment, given the competition that is in fact underway between the two sides and given how fraught the relationship has been, I kind of felt like that was not a bad place to land. It’s hard to land the plane on this. But I will say, I think from the U.S. side, the quality of the outcomes and my assessment of the quality outcomes has actually degraded just over the last few days. I think a lot of that is driven by two things. I think it’s, number one, the interview that President Trump did with Fox News after he got back to the United States, where he said, “We’ll use Taiwan as negotiating leverage with China,” which is a major departure from the six assurances promulgated in 1982 back in the Reagan administration.
And I think sends exactly the wrong signal, not just to Taipei, but I think to our allies and partners in the region. And I think, to its credit, while they were on the ground in Beijing, the administration, like Secretary Rubio and the president himself, they were at pains, it seemed like, to emphasize continuity in American Taiwan policy. And I gave them credit for it. And they didn’t always do the liturgy in the precise way, but that’s fine. I think the main thrust of it was to emphasize that continuity. So, I think it’s been troubling in the days since, that that discipline that they had on messaging seemed to go slack.
So that’s number one. The other thing that was floating around out there, and I think maybe we’ll talk about this later in the conversation, is what the Chinese had proposed, this new vision of constructive strategic stability, right? Which clearly came from the Central Party School and not from Madison Avenue, really just rolls right off the tongue for an American audience. But I think my view is it sounds innocuous, but I think this is one of these Chinese rhetorical traps that looks innocuous on the surface, but it’s really a trap to try to box the U.S. in.
And again, I think it’s about that allies and partners piece of the equation. I think the signal that it sends is that the United States is prioritizing stability with China over the interests of our allies and partners in the region. Right?
Andrew: Yeah. Well, I mean, let’s just dive into that a little bit further because I do think it’s a key point. I’ve been talking with folks because I remember during the Obama administration, actually, when the Chinese came over, they met in California, and the Chinese tried to float this sort of new great power relationship.
Jon: New type of great power relations. Yep. Exactly.
Andrew: Yep. And I remember at the time the Obama administration really pushing back on that for exactly this purpose to say, “We don’t want to sort of elevate China to our status. We’ll deal with them, but we’re not going to say we’re the two leading powers.” It sort of gives China, like I said, some kind of elevated status that the Obama administration didn’t want to impart on them. So, just talk to me a little bit more about kind of why China would want to put forth something like this. What do you think the “constructive strategic stability relationship” means from the Chinese side? And then we can kind of talk a little bit more from the U.S. side about whether or not it was a good or bad idea and how it might impact things from the U.S. framework on China going forward.
Jon: Yeah. Yeah. I mean, I think from my perspective, I think you’re quite right to go back to that genealogy, right? This is kind of a recapitulation of new type of great power relations in a different formulation, right? So, it’s like, oh, you know, same bottle, new wine, or same wine, new bottle, however the saying goes. So, they’re really trying to repackage the same thing. And I think part of it is just reflective of how their system operates, right? Like they like to have put forward these kind of high-minded principles before getting down into some of the nitty gritty and the policy substance, right? Like they want to have some kind of conceptual wraparound to put on the relationship.
And I think it’s a difference in approach from how we approach things in the United States where we want to get down to business right away and talk about things that are front of mind. And I think especially in this administration, it’s even more accentuated, things you can actually touch and feel, like the deals you talked about that MOFCOM had talked about this morning, right? Like purchasing agreements, that sort of thing, fentanyl, other related issues. Some of it is symptomatic about how their system works. And I think they want to have that framing. I think it is about managing the competition with the United States in some ways.
And I think what they want to do with this is I think, number one, they find it beneficial to send that signal to the region that the U.S. is elevating not just Beijing, but stability with Beijing over other interests and consideration. I think they do feel like that gives them, you know, some leverage or juice with other countries in the region. But I think, number two, I think, my understanding is the expectation is Beijing that at some point, maybe sooner rather than later, but at some point down the road, they fully expect there to be some kind of reversion to a more overtly competitive posture from the United States.
Like they can see what’s going on on Capitol Hill, and they can see that, you know, President Trump is an important anomaly, but he’s kind of anomalous in the conventional wisdom in Washington about China policy in particular. And so, I think this is a little bit of a setup, right? The next time the U.S. takes some kind of competitive action, whether it’s a tightening of export controls, or does another arms sale to Taiwan, which was a major topic of consideration, it allows them to put the onus on the United States and say, “You broke our gentleman’s agreement. We wanted to stabilize the relationship, but those nasty Americans undertook these egregious actions, and it puts the onus on us.”
And I think that matters less here in Washington, necessarily. I think it’s more useful for them in terms of signaling to third parties, especially in the global South, where you have a lot of countries that would be more sympathetic to Beijing, but I think also for potentially other U.S. allies and partners in other parts of the globe outside of Asia.
Andrew: Yeah, those are all great points and totally sort of aligns with how I see China approaching this relationship as well. Now, let’s kind of look at it from the U.S. side. I mean, again, dialing back to the Obama administration, I sort of understood at the time and still understand why they would push back on kind of this new framework. I guess my thinking now is that China is sort of a more idiosyncratic relationship with the U.S., a more consequential, more complicated relationship. So, I guess a two-parter. One is, should we be treating China as sort of in a standalone category in terms of our diplomacy with them?
And if the answer to that is yes, does that mean we should go along with something like the constructive stability relationship? Or should we just kind of acknowledge that from a U.S. policy standpoint and not buy into the Chinese framework?
Jon: I mean, I think from my perspective, right, and I know this is more prescriptive than analytical, I think the answer is no, that we should not be treating China differently. I mean, we have other longstanding relationships, especially in that part of the world. And I don’t think we should necessarily elevate China above those considerations. I’m thinking of Japan in particular, the Philippines, Australia, right? people that where we really have deep and longstanding ties and when there is an alignment of interest. So, I think we should absolutely be engaged in diplomacy with China. But I think this is part of the game. And it’s a little abstract. It’s not like war in the Middle East. I think we have to be cautious about accepting their framing.
And this goes back to the earlier comment. So, when the president was wheels up on Friday, we had not accepted that framing. And I thought that was to the administration’s credit. But then when we get to the actual statement, then it was embedded in there. And I think, again, what was striking to me, once the fact sheet was released from the White House about the meeting, it was a very truncated document. It was really focused on trade and commercial issues. And really the only nod to strategic or security issues was the statement about constructive strategic stability.
So, no mention of the current kerfuffle that’s going on between China and Japan. Nothing about any of their other problematic activity, even vis-à-vis Iran, which has been such a priority for the administration in the China context and going into this meeting. That’s part of why my assessment has downgraded, right? I felt like at first it was a do-no-harm kind of summit. And now I feel like there’s actually harm that’s been done. So yeah, to circle back to this particular question, it’s not clear to me that we should be elevating diplomacy with China at this point. That’s just my own view and how I balance out these other considerations. Because it’s not just about what does it mean in the China context, but what is it going to mean more broadly? What are going to be kind of the second, and how is this going to be perceived by other parties around the world?
Andrew: Sure. That makes a lot of sense. And especially, I mean, you’ve been in these conversations, you’ve been in these negotiations and staffed them, as we were talking about before we came on. And so, I take your view on this with a lot of respect. And, you know, having not been in the government myself, I don’t always understand some of the nuances of how these fit together. So, point’s very well taken. I wanted to sort of dive in a little bit deeper in terms of, so there’s the high-level kind of framework we just talked about, but then we’re getting some clarity on what seems to have been agreed between the two.
Can you talk a little bit more about any read on the more concrete developments that have come out? So, it sounds like they have not agreed to extend the Busan understanding, but it does seem that they have decided they’re definitely going to cap tariff rates, for example, at the Busan rate. They don’t seem to have made any headway on critical minerals or export controls, but there is the Boeing purchases that they talked about and the ag stuff. How do you grade that mix of now somewhat more concrete outcomes?
Jon: Yeah, I mean, to the extent that we have concrete outcomes, I think that’s all fine and well and good. But what’s striking to me is that when you think about the broader U.S.-China relationship, even just the economic relationship, I think, as important and consequential as these deals are for the particular sectors that are involved or particular firms like Boeing, in the context of the broader economic relationship and the overall relationship, I have to say this is kind of small ball stuff in the big scheme of things.
And I think this reflects a successful negotiating tactic by the Chinese since Liberation Day. When the Trump administration came in in the first term, they were talking about big structural macroeconomic issues and about how to address those. And understandably, Trump had his own idiosyncratic view about this, but the U.S. side has been griping about these since the George W. Bush administration, almost since China was admitted to the WTO about their non-market unfair trade practices. And I think what the Chinese have done in the ensuing months is whittle down the scope of the conversation intentionally, right? So that we’re not talking about those big imbalances. We’re talking about particular sectors, particular firms, and particular products.
I think the administration has been clear that they’ve kind of jettisoned those bigger ambitions. I think they also would point out too, like I heard Jamieson Greer saying this right after, you know, the U.S. trade representative saying this right after the meeting, pointing out that Chinese exports to the United States are down 33% or roughly a third from where they were a year ago. And I’ve heard this elsewhere, right? They point to this as a sign of progress in remedying those trade imbalances, right? But the problem with that, of course, is that it’s like putting pressure on a balloon. Those goods have all gone somewhere else. A lot of them seem to have gone to Europe in particular, which seems to be the next big turn of the crank.
But in terms of directly negotiating with China, I appreciate why that’s the case. We seem to have given up on trying to address the issues that animated Liberation Day and the de facto embargo that we had in place 15 months ago. And just to dwell on this point, it is breathtaking when you think that 15 months ago, we had just come out of the United States having a de facto embargo on China.
And now we’re talking about how much of our stuff are they going to buy and what the Board of Trade and what the Board of Investment is going to look like. So again, if you think about this from the Chinese perspective, think about how they would have thought about this coming into 2025 and dealing with a new Trump administration, thinking about trade war 2.0. And now we’re on the back end of it. And if the question really is, have they bought themselves time and space? The answer has to be a resounding yes from Beijing’s perspective.
Andrew: Yeah, that’s interesting. It’s funny. Even as you say, the administration bragging about how much less we’re buying from China. As someone who’s generally still one of the few free traders still standing, it just seems like a, you know, what do they say? Weird flex, bro. You know, it’s like such a weird thing to brag about because, A, those goods are just going elsewhere in the world. And B, most of it’s kind of low-end stuff that we’re not buying from China. So, it just seems strange to me. I understand it’s a goal of the administration. So, in some ways, goal achieved, but I just don’t quite get it.
Jon: Yeah. And also, where there are those friction points, it’s not clear that it’s really been resolved. Like on the critical minerals, right? There’s no extension of Busan. Scott Bessent was playing it cool and saying, “We’re not looking for an extension right away.” But, well, I thought it was interesting from the initial readouts. There was zero mention in the initial MOFCOM readout about rare earths or critical minerals, but it was mentioned in the U.S. side. And on the U.S. side, it wasn’t that the issue was resolved. It actually showed that this was still a real problem and that basically when it came down to particular items, basically the Chinese were still playing games, I think was the subtext of that document, which again is remarkable that that’s coming out of a presidential engagement, right? That there’s still a funnel point there and it’s difficult for U.S. companies to get what they want.
Andrew: Yeah, I actually want to come back to the discrepancy piece between the two readouts and the two sort of characterizations of the meeting in just a second. But before I do that, I just want to ask you, I mean, how big of an issue do you think it is that we didn’t extend the Busan agreement? I mean, as you said, Scott Bessent is out there saying, “No big deal. We have plenty of time to renew this.” But that to me was kind of the one thing I personally wanted to see, and I know a lot of my clients, as companies, wanted to have some clarity on their ability to get rare earths and rare earth magnets from China.
To me, it’s a pretty glaring absence because that seems like an easy thing to say, “Okay, we’re just going to extend this agreement from a year to two years or 18 months or whatever.” What’s your thought on why that didn’t happen, or how big of a deal it is?
Jon: It’s interesting because in the final run-up to the meeting, I was hearing that the Chinese side was interested in extending it. And I could see, you know, it wasn’t just the rumors. It’s always about how you contextualize them, too. I could see the rationale for that, that they would kind of want to prop up this fragile stability through the midterm elections and into next year because nobody knows how the political dynamic on these issues could change in the next year or so. But I think it shows just how little of substance was accomplished, because if that is your one… and I think you are not wrong to use that as a benchmark, right, for gauging progress in these meetings.
And if we weren’t able to clear that, just an extension, no new agreement. I mean, that’s a pretty low bar to not clear coming out of a presidential meeting, right? Because this is going to be a real issue going forward, and it’s not going to go away. And I think what it shows, too, is how much leverage China still has given the set of issue, right? Like the administration was saying at some point, “Well, now they’ve played their Trump card, no pun intended.” And now it’s been revealed, and we all know this, first of all, we’ve all known about this, like you said, since 2010 when they did this to the Japanese.
But number two, it doesn’t really seem to be subject to the same kind of half-life that the administration might hope. And I think that’s going to be an important element of how this dynamic plays out through the summer. From my perspective, we’ve got two potential big oil slicks in the road ahead. Number one is the arms sale to Taiwan and what the Trump administration decides to do with it. You know, unfortunately, I think there’s no good options at this point.
Either the Trump administration, now that it’s out there, either President Trump postpones it, and then that sends the wrong signal to Taipei and our allies and partners in the region, and to Beijing as well. Or he goes forward with it and then, I think, we potentially find ourselves in another cycle of escalation and de-escalation, and it’s back to the future. And I think it’s the same thing with the 301 investigation.
Andrew: Oh, interesting. Okay.
Jon: Just a quick bracket. I didn’t see the MOFCOM statements this morning. Did they say they would be okay with it going back to the 45% average tariff rate?
Andrew: That’s how we’ve been reading it, basically. It sounds like, yeah, they have kind of acquiesced to the idea of we’re going to allow the 301s to go forward as long as they don’t go above Busan. That’s how we read the MOFCOM statements.
Jon: Okay.
Andrew: I don’t know. React to that. That’s interesting.
Jon: Yeah. So sliding back in, I mean, I think that that is interesting and that’s notable, right? If that is, in fact, the signal. Because for a while, I was skeptical, right? The Chinese do not tend to be magnanimous negotiators, as you know. And I could easily have envisioned a scenario where they say, “No, no, no, this is different from the tariffs that preceded this,” and that that could end up being an issue down the road as well. So, I mean, if we’re interpreting it the right way, I mean, I think it does show that China does have an interest in at least maintaining the stability, if not advancing things further.
Andrew: Yeah. And just for listeners who don’t know, what we’re talking about here is basically after the Supreme Court shot down some of Trump’s tariffs under the emergency powers, the administration is expected to use a different avenue to raise tariffs back up to that level through these so-called 301 investigations. And the administration has always said, “Well, this just gets us back to where we were with China when we paused the cessation of hostilities in Busan.” But China has said, “No, no, no, those will be new tariffs. And we don’t even want you to go back to the original rate because these are new facilities.”
Seems like maybe the two sides have agreed, “Okay, you can use this new facility to get us back to the Busan level. We won’t push back against that.” But I’m with you, Jon. I thought the Chinese would press that advantage, but it is kind of an easy thing to give, especially, I guess, last piece on this, insofar as at this point in the negotiations, do they really care about tariffs all that much? I feel like they sort of looked into the abyss on tariffs and kind came out relatively unscathed and said, “Actually, we’re not that worried about tariffs anymore.” Do you think that’s right?
Jon: I think that’s right. I think they looked into the abyss and realized they could ford across it. The abyss was not bottomless. Right?
Andrew: Totally. So, speaking of discrepancies between the two sides on how they were going to proceed with things, there have been discrepancies in the communication on the back end of this meeting. That’s, of course, to be expected in a way. Some of the discrepancy, for example, was just even the amount of time it took the Chinese to confirm that they were going to do the Boeing purchase. The language around agriculture has differed from both sides, the language around rare earths, the language even a little bit around Taiwan. And I would say, in previous rounds of negotiations since Liberation Day, those discrepancies on what was agreed to out of these various meetings has caused major, major problems, right?
Because both sides came out saying, “We agreed to this.” And then the other side saying, “We agreed to that.” And like, actually they weren’t on the same page. Our read of this is that both sides seem to generally be on the same page, and the discrepancies are a little bit more about each side kind of choosing to emphasize the more positive aspects for their narrative. But what do you think about that? Is our reading of it right? When I say our, I mean Trivium. Or do you think these discrepancies could lead to sort of another kind of backtrack and substantial misunderstanding on where we are in these negotiations?
Jon: Yeah. I mean, I think it depends on the set of issues in some ways, right? Like I think, especially on the economic issues, it’s so about the particulars, right? So, in terms of potentially disrupting the overall relationship, I think there’s less capacity for that because the two sides can continue negotiating. I think it’s possible that both sides left themselves enough base to kind of tout their victories at home. That’s one theory that I’ve heard espoused. And I think there might be some merit to that. I think some of it might be just be symptomatic, too, of how the Trump administration conducts diplomacy broadly, where you announce the agreement and then the negotiations get underway, which is the reverse of how these things normally go.
But I think there probably is an element of that going on here, especially given just how distracted the administration was and focused on the war on Iran, as we saw with the post moment coming into this. So, I think that’s an element. I think where it could be more consequential and where I worry that maybe the administration heard what it wanted to in some ways was on issues like Iran or on North Korea, where they said the Chinese support denuclearization, which has always been a code word for South Korea and other parts of this, right? That is not what we mean. And I think on Iran, too, in particular.
I think that’s intentional from Beijing’s perspective. And I think it’s no accident just to highlight for listeners that the week before this meeting, Beijing hosted Iran’s foreign minister. And I don’t think that was coincidental or an accident. I think what it allowed them to do was deflect U.S. pressure on this issue because they’ve said for a long time now that they want to see the Strait of Hormuz reopened. So, my suspicion would be that when this issue came up, Xi would have then been positioned to say, “Yeah, we supported opening the Strait of Hormuz too. We’re all on the same page.”
So, I think that that is one of those things where the divergence in substance might be different. But just to dwell on one point, it is really striking as a longtime observer of U.S.-China relations, how far we’ve come in these kind of documents, just in terms of the mechanics of these meetings. I mean, it used to be, in the early days of the relationship, as we were normalizing, we would have joint communiques, right? Like the canonical three communiques, right? And then we did joint statements for a long period of time until basically the middle of the Obama administration, if I recall correctly, where it became clear it was too frustrating and not worth the effort to issue these kind of joint statements.
And then what we had for a long time was parallel statements that were coordinated so that we weren’t talking past each other. And now it seems like we’ve entered the phase of like, we just use statements, but it’s not clear that they’re coordinated. Like the phrase I kept thinking of as I was going through the statements over the weekend was it’s like that old Chinese aphorism about a chicken talking to a duck.
Andrew: Yeah.
Jon: There was a strong element of that vibe in perusing the readouts, right? Especially until we got a little bit more of the details.
Andrew: Yeah. And that does seem to be a feature of, I guess, I mean, you’re saying it’s been happening for a few years now, but the past 18 months in particular. Obviously, both sides are incentivized to kind of play up their narrative. I think for now, it doesn’t seem like it’s going to blow up on us, but we’ll see if there’s any backsliding because of those different communication strategies. I want to talk a little bit about, going forward, what you see kind of over the rest of this year and kind of the rest of the Trump administration at least.
But maybe, obviously, Iran war continues to be the big kind of geopolitical context for this. Can you talk to me a little bit more about China’s perspective on that and what you think, how they would have characterized that in the meeting, and whether or not the U.S. wanted more from China on that? Or how do you think that all played in?
Jon: Yeah, I mean, it’s been really interesting to listen to both the president and Secretary Rubio coming out of the meeting, where they said, “We don’t want China’s help on this.” And they were very explicit about the point. They said, “Well, if we ask them to do something, there’s going to be a cost associated with that,” which is not wrong. I think that’s the way these things usually go. But the problem with that is if you don’t ask them to do something very specific and concrete, then they’re not going to do anything. And again, I think the Chinese tried to position themselves to deflect US pressure, both because of the meeting, but also Trump was touting Xi’s statement that they wouldn’t provide military equipment to the Iranians, but the Chinese have also denied providing aid to Russia’s war against Ukraine.
And there’s been this kind of huge fudge factor about, well, it’s dual use. Is it really military equipment? What is the nature of what they’re really providing? And Beijing is, I think, content to play that kind of game all day long. And I think the real question is, from Beijing’s perspective, are they going to bestir themselves to actually do anything meaningful in reopening the Strait of Hormuz or bringing this conflict to some kind of conclusion? The answer seems to be no. I’m happy to be surprised, but I feel like we’ve seen this movie before, not just in the Russia-Ukraine context, but also with North Korea. What’s really striking to me is that we all in Washington are preoccupied with every gyration of what’s going on in the Strait of Hormuz.
But I think coming into this meeting, I think for the Chinese side, it was more in their peripheral vision than central. And I was actually in a conversation with a Chinese colleague who said, and it was very bracing to hear it, because they said in the run to this meeting that, “It would be a waste of time for the two presidents to spend a lot of time talking about the Iran issue because the U.S.-China relationship is so much bigger and more consequential than this one regional issue in the Middle East.”
Andrew: Interesting.
Jon: I take it with a grain of salt because, of course, they want to deflect attention. But I think it also captured a kernel of truth, right? And this is something you and I have talked about before. It’s always important to think like, okay, how does this look from Beijing’s perspective and how large does this loom? And I think there’s a tendency to think that if it’s on the front page of The New York Times, if it’s blowing up your Twitter feed, that of course it must also be important to China. And I think this just kind of underscores that’s not necessarily the case.
Andrew: I think that’s right. But I think it’s also probably true that they do want the Strait of Hormuz open. And so why do you think they’re not doing more? I know there’s a little bit of a dogleg to the conversation here.
Jon: I think you’re right. I mean, I think they do want it open, right? I think it is a headache for them. And I think the longer this drags on, they’ll start to feel the energy crunch. And my take on this has been it’s less the energy crunch per se, because ironically, the United States and China are probably the most well positioned to weather the energy crisis despite or the energy crunch despite rising gas prices here in the U.S. I think the bigger problem for them is that is if this instigates some kind of global or regional economic contraction or recession, because then that really impinges on their export driven model. Demand starts to dry up in Europe and Southeast Asia, and other parts of the globe as well.
I think part of it is I think what they’ve learned from watching us, honestly, though, over the last quarter century, is that it’s a mistake to get too heavily involved in the Middle East, right? And I have this pet theory, too. This is kind of illustrative how things have shifted just broadly in international relations, that the Middle East is not the locus of great power relations and great power competition the way it was when Kissinger was doing shuttle diplomacy back in the 70s because we were worried about the Soviets and the U.S. brushing up against each other in that part of the world, or even 10 years ago when Russia supported intervene in and we had to do deconflection, right?
I think it’s obviously an important part of the world, but for supply chain reasons. The last thing that I’ll mention, Andrew, just while we’re talking about Iran too, one of the things that’s striking to me is that I do think there is a parallel narrative arc for how the war in Iran is playing out and how the trade war played out with China, which is basically that the administration comes in, you know, metaphorically in the case of China and literally in the case of Iran, guns blazing, right? And they think they have the advantage. And the other side, to use Secretary Bessent’s unfortunate turn of phrase, is just playing with a pair of twos.
And then they discover not that the other side is necessarily as formidable as the United States, but that there’s a lot of resilience there that they didn’t expect and that they can hold out in ways that will be challenging for us to do it politically at home. And then ultimately conclude by seeking some kind of diplomatic denouement, which is where the direction of travel seems to be in the Iran case. Not a Middle East expert, of course, but that seems to be where this is all going.
So, it’s striking to me because it feels like year one was following this narrative arc vis-à-vis China, and year two of the administration is now following the same narrative arc in a different geography.
Andrew: Totally agree with you. Actually, I was thinking a similar thought when you mentioned the rare earths piece and people saying, “Well, China’s not going to pull the rare earths card because then they start the clock and everyone’s going to start diversifying.” But one of the consistent themes between the China situation and the Iran situation is both sides were willing to play their major trump card, rare earths in China’s side and Hormuz on Iran’s side, to their own detriment in some ways, and to stick out the pain of that just to prove their leverage point.
And I think in both cases, the administration underestimated the willingness of both sides to not only play that card, but to stick with it.
Jon: Yeah. Even before the war with Iran, I had a Chinese colleague make a really striking statement to me at the end of last year after the Busan meeting. And we were talking about this very issue of leverage between the two sides. This colleague said, “It’s not that we don’t think the United States does not have leverage over China. You do. The real issue is we don’t think you have the stomach to use it.”
Andrew: Yeah. Interesting. Very interesting point. Yeah. Some of those nuggets from Chinese interlocutors that kind of display how they think are pretty interesting. The one I always use is somebody from the Chinese embassy said to me when we were talking about kind of choke points versus choke points. So, the choke point on the U.S. side being the critical minerals and rare earths reliance on China and the choke point on the Chinese side being chips, right? Reliance on the U.S.
And he said, “We only have to go from 80% to 100% to close the chips gap. You have to go from 0% to 100% to close the errors gap.” And I was like, wow, that’s right. And I think it really gets to something fundamental about how they think about that dichotomy.
Jon: Yeah, I think that’s right. And I’ve heard, you know, my colleague here at Brookings, Kyle Chan, make a similar point. For us to diversify away from China and to remediate these vulnerabilities that we have and these reliances that they have, it’s going to require, in some ways, if not quite starting from scratch, starting from a pretty low baseline.
Andrew: Yeah, yeah, for sure. Well, I’ve got a couple more things I want to get your thoughts on before I let you go. We touched on this a little bit. I want to dive a little bit further onto it is the Taiwan piece. You talked about that there’s no real good options in terms of kind of specifically the potential arms package, arms sale package to Taiwan. I just wanted to run this by you. It strikes me that in phone calls in particular, and in this meeting as well, that Xi Jinping, specifically with Donald Trump, has been a little bit more forceful in kind of sort of trying to grab Trump’s attention and say, “I want to make it clear to you that we are not messing around on the Taiwan piece. That’s the one thing where you can’t do the kind of crazy man theory and keep us guessing. You need to know that is…” It just seems like Trump’s been more forceful on a kind of person-to-person interaction level. Am I reading that wrong? Or do you think there’s something to that?
Jon: Yeah, you’re not alone in that. But I actually think it’s less forceful than what we saw in the Biden administration.
Andrew: Oh, interesting.
Jon: When I was in the Biden administration, we saw this in the Chinese readout from the virtual encounter that Biden and Xi had back in November 2021. I mean, the language in that readout was very striking, where Xi said, “If you play with fire, you’re going to get burned.”
Andrew: Oh, yeah. That’s pretty striking.
Jon: It’s praising. It’s praising when you hear that from the head of the second superpower. And I think it was designed to be, right? So I actually think of anything in general, in aggregate, it seems like Xi may have been a little bit softer in the run-up to this meeting on some of the Taiwan points, maybe until this year. I think they probably felt like they did have to put a very clear marker down, both because the U.S. side put out after the meeting of Busan that Taiwan did not come up, which I pretty remarkable. And then because you had the almost $11 billion arms sale package that was announced after the Busan meeting, which the Chinese were clearly very upset about.
And I think part of what they were trying to do is foreclose the possibility of that happening again in the wake of this meeting. They didn’t want to have a tête-à-tête between the two leaders and then another historic arms sale package announced in the wake of that. I think part of it too is just, again, it’s about choreography surrounding the meeting. This is on Xi’s home turf. And so the Chinese side gets more over the agenda and how to frame things and how to put their own spin on the ball. And so, I think it was always going to be the case that they were going to push very hard on this issue.
And again, this gets to the question of grading the outcomes from the summit. I mean, I was very struck when the president was flying back home. He said on Air Force One, “Well, I listened and I didn’t push back,” which at the very least is a missed opportunity. The better way to handle it would be to reassert firm, longstanding U.S. policy on Taiwan, rather than just let this be a lecture that goes unanswered from the Chinese side. And I think that’s part of what’s been disconcerting, and why I talk about this deterioration, and the outcome is that Trump in some ways is now echoing Beijing’s framing on this issue.
Andrew: How so? Can you elaborate?
Jon: Yeah. I mean, I think it’s not just about talking about the negotiating point, but also talking about, number two, talking about how far away Taiwan is and how hard it would be to fight a war over Taiwan, which seems like it’s more of him thinking out loud on this set of issues. But I think talking about independence on Taiwan. He said, “Both sides have to cool it, but we don’t want people on the island seeking dependence,” which is kind of Trump’s own way, I think, of channeling Xi’s explication of what’s going on, on the island.
Andrew: Were you surprised that Taiwan didn’t play more of a role in this meeting, or is that to be expected?
Jon: I think that’s to be expected. I think it’s not surprising that the Chinese leaned really heavily into this. I think, as we saw with these comments we were just talking about, Trump is not personally invested in this set of issues. And he’s made comments since coming back into office, kind of similar to what he said about other allies and partners, viewing them more as a liability than an asset that they’ve stolen or chips production, and that that’s problematic. So, it’s all consistent. So I’m not surprised, which is why I was really hoping for, and kind of relieved on Friday before these follow-on comments that at least no harm seemed to have been done. So I think that is the big question going forward.
Andrew: Well, speaking of going forward, first of all, thank you for being so generous with your time. It’s been a great conversation. But the thing I want to end on is, you know, what’s next? You know, the Chinese side now seem, I think, to confirm that Xi Jinping will come to the U.S. for a state visit. There’s obviously the also two other opportunities for the leaders to meet bilaterally in November in China at APEC and then December G20 in Miami. We’ll see whether one or both those happens. But beyond just whether or not the two leaders will meet, how do you think China in particular is thinking about the next phase? And if I can just expound a little bit, so the way I see it is China has like played, stuck very, very close to its playbook. Like they had a playbook with Trump coming in a second time.
They knew some tariffs were coming. They may have not known it was going to be global tariffs and the extent of the tariff levels and all that stuff, but they had a playbook, they stuck with it, and it, I think, has been pretty effective. But I’m not sure they had a playbook for where we are now in terms of like, okay, now how do we proactively manage the relationship going forward now that we’ve gotten the stalemate, as you call it? Am I wrong there? Or what do you think the playbook is if they have one?
Jon: Yeah, it’s a good question. I mean, I think part of what’s going on on the Chinese side, I mean, you’re right, they’ve been dealing with Trump or thinking about how to deal with Trump now for almost a decade. I think they did develop a reasonably effective playbook. I don’t know if they feel like it has to change much going forward, maybe more kind of adjusted and recalibrated now that we have entered this kind of stalemate/fragile stability. But I think the key thing from Beijing’s perspective is it’s more on the negative side than the affirmative side. They still feel like they have that leverage.
They have other sources of leverage. Like my colleague Ryan Hass was in Beijing at the end of last year, and he came back saying that he had heard a disconcerting number of references in his engagements in Beijing to the U.S. supply chain that run through China for the pharmaceutical industry. So critical minerals is kind of a beast to take on and get our arms around it on its own. But they have other sources of leverage. I think the playbook right now coming out of this meeting, and I think this has been true ever since the post-liberation day walkdown from the U.S. side, it’s not that the Chinese think in terms of dynastic cycles. They have outlook calendar like the rest of us.
And so the deal in Busan was agreed to in November, and it runs through the following November, which is right around the time of our own midterm elections. And I think that has been a focal point for organizing their negotiations and posture towards the United States. They are working backwards from that moment, which is why I think they conceded so little of substance in this initial encounter between the two leaders. I think Secretary Besson argued that this would be stabilizing for the relationship to have multiple encounters, but it also provided a big disincentive for Beijing to offer much to the U.S. side.
Andrew: Great point.
Jon: Especially because I think what they learned from the first trade war is that as this goes on, Trump is going to get antsy for a deal, especially in the run-up to our midterm elections. And that whatever concessions they do make, Trump will have every incentive then to tout that as loudly as possible as being an awesome sweetheart deal. And so, I think that is their calculation that whatever they do end up giving in that next encounter, they will get more bang for the buck for it. And I think it gets back to this theory that I had at the outset. They are trying to buy time and space and being effective, you know, hardscrabble negotiators. They’re trying to find the lowest price point for doing that. So why pay now when you can get the same or even an outsized impact six months from now?
And so I think that is their playbook through the election at least. And on the point about the other two meetings, I am personally skeptical that those other two meetings and multilateral engagements will happen. These guys are both septuagenarians who I don’t think like to travel much. Xi has, you know, as Neil Thomas has documented, is not traveling as much as he used to. Our president’s going to be 80 next month. And so, it’s a big schlep across the Pacific as you appreciate more than most people. And the other element, too, is that the timing of those meetings are awkward. It’s always hard for U.S. presidents to get away either around election season or in the aftermath.
I mean, I think this happened even during the Obama administration when we were trying to pivot to Asia. And, you know, President Trump is not particularly fond of multilateral forests. So is he really going to make the trip or is he going to be focused on other things? And same thing for Xi Jinping. My suspicion is we’ll probably get one more touchpoint this year. And then I think it’s an open question about how this plays out as we go into next year. I think what Beijing will want, at the very least, is to take a minute to pause in the last quarter of the year, hopefully extend the stability, but try to sort out what’s going on in the United States politically and how this is all shaking out.
They’re not the most politically salient issue in U.S. politics, but to the extent they need to recalibrate, take it from there. But I think that’s kind of the next big pivot point.
Andrew: Yeah. I mean, you make a ton of great points. We can’t expound on them too much. I just want to make a couple of reactions. One is a great point about November/December. I mean, we looked at it, and if Xi Jinping comes back to the U.S., it’ll be the first time any Chinese president, general secretary, has come to the U.S. twice in one year, in one calendar year, which would be pretty remarkable. And I was already thinking around December. It’s just everybody’s in holiday season at that point or holiday mindset. So, you’re the first person I’ve heard say, “I really just think it’s going to be one more meeting,” but I think that’s a good shout and a kind of an out-of-the-money call. So, I like it.
On China, like waiting to press their advantage, I also think that’s interesting because just as somebody who personally does some negotiating just in the life of our business, I have experienced, especially on our own side, people really get uncomfortable. They want a resolution. And so, the longer you’re able to make someone else sweat it out, if you’re willing to be the patient party, you very, very often get a better outcome because people just get antsy, exactly like you said. And so, that’s a really good point. And of course, that’s something that the Chinese, we are the same, we don’t necessarily see the Chinese as thinking in dynastic cycles, but they do have some kind of strategic patience, right?
And so, that might be interesting to see how that plays in. Last question. So, you made a good case that they’re basically thinking backwards from November. Is there a plan for the rest of the Trump administration or beyond? Or is it just kind of like get to November and then see what happens?
Jon: I think there is a plan. I think they do feel like they have leverage and they will continue to use that. And I think this is part of the genesis for this idea of a new vision for constructive strategic stability. I mean, they said, they were explicit, they said this would run through the course of President Trump’s time in office.
Andrew: Yes. Right.
Jon: I think that was Wang Yi’s comments. So ,like that’s pretty clear like — this is the plan. Sign here and we are good to go for the next two and a half years or so. So I think that is kind of the game plan, to keep this locked in as much as possible. And then I think what they need to do with President Trump in particular is they need to do just enough after the midterm elections to keep Trump invested in the diplomatic process and to keep him from lashing out, which is basically what happened in the first term. So, that is going to be the real trick for them. I think that’s already the trick for them. They are trying to find the lowest price point, but the limiting factor is don’t let Trump get impatient or feel like this is never going to come to resolution. Give him just enough so that he’s willing to do the next meeting.
And I think it’s an interesting point about Trump too, because I think it is something, I don’t want to stereotype, there’s something quintessentially American about this, that you just want to resolve the problem and move on to the next thing. And I think the Chinese are willing just to wait a couple of weeks longer and sweat it out a little bit.
Andrew: 100%. Well, and one thing that adds to that is, of course, our sort of media cycles, right? Is we want the resolution, we want the story. What have you done for me lately kind of attitude, which just adds to kind of the political narrative and the pressure. Obviously, the Chinese don’t have that since they don’t have free and open press to be putting that kind of pressure on them.
Jon: You don’t count the whole party democracy that we’re going to experience next year in the run for the party Congress as part of that?
Andrew: No, yeah, well-
Jon: Whole process democracy. Whole process, sorry.
Andrew: Yeah, that’s a debate we can have another time for sure. Yeah.
Jon: One concluding thought in that vein, Andrew, is, as idiosyncratic as President Trump is and as different as he thinks of himself as being from his predecessors and as different as he actually is, there are some ways in which he’s very much classic second-term U.S. president, where he has put foreign policy front and center on the agenda. I was already thinking about this this time last year when it was clear that he was not very hands-on about the one big, beautiful bill that was working its way through Congress.
He is really thinking about… and you see this in Iran, too, right, where he wants to be the president who could fix this problem that nobody else could really get their arms around. And I think it’s the same thing with China. He’s very much focused not just on foreign policy, but on his place in history. And China, I think, for any U.S. president, is an important part of that puzzle. And I don’t want to psychoanalyze the guy, but like I said, he’s going to be 80 in a few weeks. This question of legacy and his place in history, I think that is very much at the forefront of his mind right now.
Andrew: Well, that’s a great point. And I would just say, without making a judgment one way or the other, I am confident that Donald Trump is going to feature quite prominently when historians write about this epic in global and American history. So, maybe he doesn’t have to worry about legacy too much because there’s no doubt to me that he’s going to be prominent.
Jon: Future history textbooks will have the Gilded Age, and then they’ll have the Gilded Pages.
Andrew: Yeah, exactly right. Exactly right.
Jon: Although they won’t have books anymore. They probably don’t already.
Andrew: Yeah. It’ll all just be AI piped straight into our brains.
Jon: Yeah, exactly. It’ll be Neuralink straight to the brain, right? Then we’ll all get our Renmin Ribao that way in the morning.
Andrew: Yeah, exactly. Oh my gosh. Well, that’s a really dark turn. Jon, thank you so much. This has been a great conversation. It’s great to have you on, and I hope you’ll come back soon as well.
Jon: Absolutely. Absolutely. I really enjoy this. I am not just a contributor now. I’m a longtime fan and I’ve got you guys in my earbuds on a weekly basis. Though I will confess, when we get the rundown of the economic stats, it’s really hard to do on a run. I have to actually be on my desk or doing something less distracting to ingest all that.
Andrew: Fair enough.
Jon: But it’s great. It’s great.
Andrew: Well, that’s kind words. We really appreciate it. And I’m actually the same. It’s like when I listen to political podcasts, once they start going through the polling numbers, I just tune out because the numbers, when I’m on our own, it’s hard to do. So, good note. Good note. Jon, thanks so much. Appreciate it, man.
Jon: My pleasure. My pleasure, Andrew. Anytime.
Andrew: And listeners, please stick around for my conversation, speaking of macro numbers, with Joe Peissel, coming up now.
I’m joined now by Joe Peissel, our lead macroeconomic analyst on China, to talk about the latest data from China’s macroeconomy that came out, I guess, just a few days ago. We’re recording May 20th in the morning Eastern time. And this would be the monthly data from April. So, the data is released about two weeks after the month ends. And the big story, Joe, from this last month is that April really showed a downshift in Chinese economic growth, China’s economic trajectory, largely, I think, due to impacts from the Iran war, but also due to some other factors going on in the economy. So, why don’t you just walk us through it? What’s the headline takeaway from this latest batch of data that you saw?
Joe Peissel: Yeah, thanks, Andrew. The headline takeaway is that China’s economy slowed significantly. We actually flagged in March’s data that there was early signs of a slowdown, and this intensified in April. So, industrial output grew at a much slower pace than it has previously. Investment actually declined. Consumption indicators were really, really weak. So, as a general takeaway, the economy performed poorly in April. Most of this is linked to the Iran war. So, there’s a very clear economic fallout from the Iran war. But also, there are some domestic drivers, especially behind the decline in investment as well.
Andrew: Well, let’s dig into all this a little bit. We’ll start with the supply side of China’s economy, particularly looking at the industrial sector. The main indicator we watch there is industrial value added or the growth of industrial value added, which you talked about slowed. But what’s going on? What caused that to happen?
Joe: Yeah, so industrial value added, that grew by just over 4% in April. That’s the weakest reading in almost three years, in almost 36 months. And it’s the third or the fourth consecutive month of slowing growth. So, there’s a clear trend here, which is the rate of expansion of China’s industrial base is slowing. So, for comparison, in March, it actually grew by almost 6%. So, a really sharp drop down to this 4.1% growth we saw in April. And this dropping growth, this is really concentrated in sectors that are exposed to the Iran war. So first and foremost, energy-intensive sectors, things like mining or metal manufacturing, things that have huge energy inputs, production of concrete, glass, things like this.
Output on these energy-intensive sectors actually declined year on year. And then other parts of China’s industrial base, which are also exposed to the Middle East and supply chain disruptions. So we can think of things like plastics, which rely on hydrocarbon inputs, chemicals, they also rely on all different sort of feed stocks, which are sourced from the Middle East. Growth in these areas also slowed really quite sharply, quite drastically. So, this exposure of China’s industrial base to the Iran war, that’s a theme we’re also seeing in the inflation data. So PPI, that’s producer price inflation, that increased in April.
That’s the second month of PPI growth. But the price increases, again, were concentrated in energy and other areas with Middle Eastern exposure, while broader PPI, so PPI in other areas of the economy, which aren’t quite so exposed, grew at a much more moderate pace, or in some cases actually continued to decline. So, I’ll give you an example. Overall headline PPI was, I think, 3.8%, but PPI in consumer goods actually declined 1%. So, we can think about that’s the price that factories that manufacture these consumer goods are selling to retailers or to wholesalers.
And that disparity between headline PPI and PPI at a sub-sectoral level is actually really concerning because for these producers of consumer goods, what we’re seeing is the price of their inputs are increasing, but the price they’re selling their outputs is continuing to decrease. So, we’re actually seeing a real compression in their margins, and that’s going to impact things like investment decisions, production decisions, headcount at the factories, things like this.
Andrew: As a business owner, seeing your costs go up and your sales price go down is definitely not something you want to see.
Joe: Some nasty combination.
Andrew: Yeah. We’ll get into sort of the knock-on effects of that. I’m going to throw you a little bit of a curveball. So, if you don’t have a great answer at hand, that’s fine. I’ve been thinking about this because clients keep asking, “When are the effects of the Iran more really going to show up in terms of China’s overall economic output, industrial output, economic trajectory?” This is the first like big sign in April. But I guess my question is, in terms of the slowdown in industrial output linked to the Iran-linked supply chain disruptions, is this straight-up shortages like industrial producers in China can’t get their hands on the goods that they need?
Or is it prices are going up so they’re just choosing to buy less? Or is it a combination of kind of a preemptive slowdown in industrial output kind of to manage what could be a future shortage? Does that latter one kind of make sense or is it kind of combination of all three? I’ve kind of got my sense of what might be happening, but where do you think we are in that dynamic?
Joe: Yeah. So, I mean, that’s a great question. The data suggests it’s more of a price issue rather than actually that manufacturers can still, or importers can still access these goods, but they’re paying a premium for that. And we see that in China’s import data, like imports have surged. In volume terms, they’re pretty healthy. In value terms, they’ve gone up massively because, well, firstly, importers are kind of scrambling to secure supply chains before there’s any more disruption, but also because the price of imports has also increased for raw materials across the board.
So, the data would suggest it’s mainly an issue of this increase in the cost of sourcing goods rather than actually being able to obtain them. In volume terms, supplies okay. In value terms, that’s where it’s really hurting manufacturers.
Andrew: Cool. That’s great to know because I always talk to clients, and I’m like, “The price action is going to make or going to have an impact and it’ll have one impact. We’re seeing it, right? As costs go up, you’re going to… basically, you can buy less. If you’re a business and you’ve got a pot of money for importing supplies, let’s say, you know, you’ve got a million dollars, well, you’re still going to spend a million dollars, but that’s going to buy you fewer items, right? But the game changes when you actually can’t get the goods.
A supply shortage is way different than a supply disruption that causes increased prices. And we don’t seem to be at the full-on shortage for a lot of these industrial goods yet. Am I hearing that right?
Joe: Yeah, correct. China also has purchasing power or monopoly power as a massive importer, and it’s able to diversify its supply chains as well. So, you think, for example, that energy imports from the Gulf states has absolutely plummeted. But at the same time, China’s increasing import, diversifying, right? So increasing imports from Russia, for example. I’m not necessarily saying that that’s going to replace totally the decrease in imports from the Gulf states, but it helps to mitigate the supply chain disruptions.
Andrew: Super helpful. Okay, awesome. Or maybe not awesome, but excellent explanation. Let’s move on to kind of the knock-on effects of a lot of these movements in the industrial sector, which is kind of, as you pointed out, you’re causing companies to invest less. Specifically, manufacturing fixed asset investment declined 4.3% year on year in April. What’s happening in the broader investment dynamics in China’s economy?
Joe: Yeah, so it’s not just manufacturing investment, although you rightly said that did fall in April, but broader investments, aggregate investment across the economy, fixed asset investment, that fell by over 9% in April, which is a huge decline. And this was primarily driven by a collapse in real estate investment, which we know real estate investment has been declining. That decline accelerated in April. It fell by over 20%. But there’s also a surprise decline in infrastructure investment. Now, on the surface, this is really unexpected because central government has been emphasizing how important infrastructure investment is going to be this year and make commitments to ramp up infrastructure investment, increase the value of investment and also the speed with which it rolls out investment projects and the efficiency of the investments.
So, this decline in April really kind of this was unexpected and markets were surprised by this. There are broadly three factors behind this. So, the first is that local governments, they issue what are called special purpose bonds. So, this is a debt instrument that traditionally was earmarked just to fund infrastructure investments. But the amount of special purpose bonds local governments are issuing to fund infrastructure has actually declined. So, it declined by about 20% in April. And that’s because instead, these SPBs, special purpose bonds, they’re being repurposed for other uses, in particular, paying down hidden debt or purchasing back unused land from property developers.
So, as local governments ramp up or increase these efforts to either pay down debt or buy back unused land, this is crowding out or replacing capital that would otherwise be invested in infrastructure projects. So that’s the first factor here. There’s been a decline in SPBs that are earmarked for infrastructure. The second factor is a decline in a facility, a mechanism used by the central bank that provides cheap credit to policy banks, which then use that to fund infrastructure. So, the PBOC, that’s China’s central bank, they have a mechanism that’s known as the pledged supplementary loan facility, the PSL facility. This provides cheap credit. And in April, lending under the PSL actually contracted by about 200 billion.
So, there’s less of this cheap credit available to invest in infrastructure. And the third factor, which I think is the most significant, and it’s certainly been the one that’s been least talked about, is reforms to the way state-owned enterprises remit profits to the central government. So this is quite archaic. I’ll try and explain it simply. And by the way, I should also add that this isn’t just my research. A colleague of ours, a senior analyst called [Wenyi Sun 01:03:23], she’s done a load of research into this as well. So I don’t want to take credit for this solely. This has really been a joint research project between us.
So state-owned enterprises, they’re obligated to turn a portion of their profits, to give a portion of their profits to central government. And this is used for different purposes. Some of it’s actually re-injected back into the SOEs via equity injections. Some of these remitted profits are transferred to other parts of the government’s balance sheet and used for various spending obligations. And this system has been in place since at least 2007. Now, late last year, in late 2025, the finance ministry reformed the way that state-owned enterprises remit their profits.
So the main thing, the biggest change from these reforms was it ramped up the profit remittance ratios. So, for example, SOEs that operate in strategically important industries like telecommunications or electricity generation or coal supply, their profit remittance ratio increased from 20% to 35%. That’s a huge increase. That’s almost, overnight, a doubling in the amount of retained earnings that SOEs have to turn over to central government. And this has a significant impact on SOEs’ investment decisions because typically they would fund a portion of an investment with retained earnings.
As a general rule, this really varies across industries and infrastructure projects, but as a general rule, infrastructure investments with about 20% equity and the remaining would come from debt. So, we can think every one RMB reduction in SOE retained earnings translates into a five RMB reduction in fixed asset investment. So actually, the increased profit remittance ratio has an exponential or disproportionate impact on fixed asset investment. And our modelling of this issue suggests that the increase in profit remittance ratios implemented by the finance ministry late last year could lead to up to a 1 trillion reduction in fixed asset investment.
That’s about two and a half percentage points of fixed asset investment growth in 2026. So it’s a massive issue. It hasn’t really been talked about much. And we think this is one of the major drivers of this kind of surprise decline in fixed asset in April.
Andrew: Yeah, thanks for walking us through that. I know you’ve been doing that great research. I know you’re going to publish a piece on it soon. We could do a whole pod on that, or at least a segment of a pod. We should get that. Make sure we put that on the book soon so listeners can kind of hear the full story there. And also, we should look at putting out a public piece so listeners can be on the lookout for more details on that. But it really is great work you guys have been doing and kind of at the forefront of an underappreciated dynamic, I think. Just to dig in a little bit on everything you just said, so what I heard was the pullback in manufacturing investment largely impacted by sort of overall industrial activity and impacts of the Iran war.
But then the other parts of investment, infrastructure in particular, and property, of course, both being pulled back for sort of more idiosyncratic domestically related issues. Is that right?
Joe: Yeah, that’s exactly it. That’s exactly it. So, it’s not just when we talk about the slowdown in economic activity in April, to a large extent, that’s due to the fallout from the Iran war. But there are also these domestic issues going on as well. It’s not just an Iran war story here.
Andrew: Yeah, that’s good to know because, I mean, it’s easy to look at it and just say, “Oh, China’s economy is being impacted negatively by the fallout of the disruptions from the Middle East.” But really, there’s a lot more going on. So you’ve got a sort of, I don’t know if it’s cyclical, but some sort of fundamental domestic slowdown on top of an external shock, which is never a great place to be in. But sort of speaking of the domestic part of the economy, we’ve gone through industrial activity and investment. Another big one on the domestic side is consumption. What are you seeing there?
Joe: Also bad. Yeah, sorry, man.
Andrew: I think that’s exactly what you said last month when we talked about this.
Joe: Yeah, yeah. Nothing changes, man. I’m sorry to be such a Debbie Downer.
Andrew: That’s okay.
Joe: Yeah, so I mean, retail sales of consumer goods, I think they grew by 0.2% in April year on year. So, it’s next to no growth. And part of this, again, was due to the Iran war. So, we can think of some retail sales categories which are more exposed to impacts of the Iran war, like the sale of petroleum products, for example. I mean, that declined massively. But there were also other categories which fell. So, for example, the sale of cultural goods or sports equipment or leisure equipment. All of these, in terms of retail sales, were declining year on year, which really suggests just a broader issue with consumer confidence and consumer willingness to spend.
What I found most concerning in the data was actually the decline of big-ticket item sales. So, this is kind of more expensive consumer durables, things like autos, home appliances, furniture. Sales of these goods, these big-ticket items, they fell by double digits year on year. And why that’s so concerning is because these are exactly the retail sales categories which are being subsidized by the central government. So, there’s a central government initiative, the Consumer Goods Trading Program, to boost sales of these products. And they’re falling by double digits. And that tells us that the stimulus impact of this trading program has really run out of steam.
So, this program has been in implementation for several years now. And what it does is, because there’s these subsidies, it incentivizes consumers to essentially pull forward future consumption. So, if I’m a Chinese consumer and I’m planning to buy a car in the next few years, why not buy it now and take advantage of these subsidies? It’s borrowing future demand and realizing it in the present. Well, of course, you can only do that for so long until you run out of future demand, until you kind of exhaust this demand.
Andrew: You’re not going to buy a new refrigerator every year for the next five years?
Joe: I’m not, no, no. Even if it is subsidized. So this is what we’ve seen. Kind of the stimulus has now been exhausted. And so, we’re now seeing a decline in the sale of big-ticket items as well. Now, in theory, Beijing could double down on this. It could increase subsidies even more or expand the program scope. But given the diminishing returns and kind of the fiscal constraints the government faces, this doesn’t look likely. And so, it’s a pretty negative outlook for consumption in the coming months.
Andrew: Okay, well, you know, I gave you a pass for being Debbie Downer today, but that brings up the question, if you’re Beijing, you’ve got a lot of down arrows when it comes to your economic indicators. Basically, nothing on the horizon that looks great. How do you respond to all these headwinds?
Joe: Yeah. I mean, from a policy perspective, it’s really tricky because Beijing’s standard policy response is ill-equipped to deal with this. We can think about what would policymakers, what would they normally do? Well, infrastructure investment is a go-to policy response, right? But we’ve already seen there’s really this gap between Beijing’s spending ambitions, what it said it’s going to do to infrastructure spending this year, and the reality on the ground because infrastructure investment actually declined in April. When we think about infrastructure stimulus, it’s not as simple as central government spends more, economy grows more. As we’ve seen, we need to think about what is the central bank doing in terms of its PSL, its pledge supplementary lending facility?
How much cheap credit is it providing? How are local governments prioritizing paying back hidden debt over infrastructure stimulus? What is the behavioral response of SOEs as they have to ramp up profit remittances? So, there are variables when we think about infrastructure stimulus that are outside of central government’s control. And so, simply to spend more doesn’t necessarily mean that infrastructure is going to grow or it’s going to stimulate the economy. Another typical policy response could be supply-side support. We see this usually when the economy slows down, Beijing tries to support its manufacturing base. But the effectiveness of this support is contingent on manufacturers being able to export what they produce.
And this is now uncertain. And maybe we can talk about why in a minute. But because of the Iran war, maintaining export growth is no longer a certainty. And so, that kind of puts question marks over the impact of any supply-side support. And of course, consumption support, what we’ve just talked about, the consumer goods trade-in program is running out of steam. So, in many respects, Beijing’s hands are almost tied when it looks about what it can do domestically. I think the best economic response it probably has is actually a geopolitical one in trying to leverage an end to the Iran war.
And there’s huge question marks about how much leverage it actually has. But trying to support or accelerate a quick end into the Iran war, this would reduce inflationary pressures and it would remove headwinds against export growth. That’s probably the best thing it can actually do at the moment is rather than thinking about domestic policy, what can it do from a geopolitical one?
Andrew: Yeah, as a policymaker, it’s never good when it’s like your best option is, what can we do to support the economy? End a war that someone else started. That’s not a great policy option to have as your top choice, but I’m glad you brought up the export piece. We should dig into that a little bit as well. I mean, basically, it sounds like what you’re saying is continued reliance on export growth is pretty much the key to navigating out of the current economic funk. Talk us through where we are on exports in terms of the latest data and what the trajectory currently looks like, say, absent any kind of resolution from the Iran war.
Joe: Yeah, I said this, I think, last month when we spoke. When we think about the outlook for China’s economy in the next, say, six months, there are some certainties. We can be sure China’s industrial base will continue to grow, even if there’s been a slowdown; it’s still going to expand. We can be sure consumption is not going to perform very well. The one big question mark, one of the most decisive factors for China’s economic performance this year is exports. And there is a lot of uncertainty about how they’re going to perform. So, in April, they surged, they grew by double digits. I think it was about 14% or slightly over. Really strong growth. And this was received well by the markets because it was a sharp reversal from what we saw in March. So, exports in March grew by about 2.5%.
And so, at the time, there was a lot of panic in the investment and analyst circles that this 2.5% growth in March is evident that the Iran war is starting to weigh on China’s exports. And actually, at the time, I mean, I don’t want to blow our trumpet too much, Andrew, but we actually argued against this at the time and said March’s weak growth wasn’t an Iran war-driven deterioration in trade. It’s a combination of base effects because exports in March 2025 were really high. And so just mathematically, March 2026 growth is going to be a little bit lower because it’s coming off a high base. And there’s seasonal effects because Chinese New Year was longer than normal, and it happened later than normal as well.
So, there’s kind of an impact on factory production. So, April’s rebound in export growth to us was really no surprise. We expected it. What that means over the coming months is less certain. There are clear headwinds, the main one being that China’s key export markets. So we can think about Africa, South Asia, Southeast Asia. These economies are highly reliant on energy imports. And so this explosion in energy prices is hammering household purchasing power. And that’s going to reduce their demand for Chinese consumer goods. That’s a clear headwind to export growth in the coming months.
But there are also potential upsides, which we’ve talked about before. One of the main ones being Chinese manufacturers are more insulated from global energy prices than other countries. And that actually makes manufacturers more competitive relative to foreign counterparts. I’m also expecting a rise in export of Chinese new energy technologies, so things like solar panels, EVs, batteries. I mean, I put my hands up. It hasn’t really materialized in April’s data, but I’m expecting that to happen in the coming months.
Sometimes these things can take a few months to work their way through. But this rise in oil prices is going to provide a clear incentive for governments to accelerate the energy transition, and that means more demand for Chinese clean tech. This is a kind of a long-winded answer, all that to say there’s up and downsides. It’s kind of unclear, but it’s certainly one of the most important factors to look out for when trying to understand how China’s economy is going to perform this year.
Andrew: Yeah. On that last point on the electrification, I’ve got friends in Texas, where I’m from, even talking about buying electric vehicles, which if the Texans are moving to electric vehicles because gas is too expensive, you know something’s changed. But to your point kind of on the relative performance of Chinese exports, I mean, that’s an important thing, I think, to keep in mind. Like there’s a lot of very obvious headwinds to overall Chinese exports because of the Iran war. But if Chinese exporters can still do better on a relative basis, then they can continue to gain market share.
And even in sort of a down market or potentially even sort of global recessionary type environment, they can still do okay compared to other economies, which is kind of all you can do in a situation like that. And improving on a relative basis is still sort of a win in that kind of context, right?
Joe: Yeah, I think conventional economic analysis would tell us a global recession or a slowdown in global economic growth is going to be bad for Chinese exporters. But I agree. I think there are actually potential exceptions this time round, which means exports could surprise to the upside. It’s not out of the realm of impossibility for them to surprise to the upside.
Andrew: Well, thanks for running us through all those dynamics from the latest data and kind of what it all means. We can wrap up here, but I guess, you know, what listeners always want to know is, you know, what’s next? So, basically, does this data fundamentally change or impact your view on what China’s economy looks like six months, a year, two years from now? Where are we headed here?
Joe: I mean, certainly not two years from now. Policymakers have been very consistent in achieving this long-term structural transformation. So, growth of high-value manufacturing and tech self-sufficiency and all this sort of stuff. And the short-term, the cyclical impact from the Iran war doesn’t change any of that. But certainly over the short-term, we’re starting to see that we flagged in March, there were signs of a slowdown, mainly driven by disruptions in the Middle East. And this has become more clear, more concrete in April. So, over the short-term, there’s definitely some turbulence for the economy.
But those thinking about the long-term picture, the short-term cyclical impact doesn’t change that.
Andrew: Yeah, good to know. So, everyone writing about the death of the Chinese economy and the Chinese economic growth model might once again be a little bit premature.
Joe: I’ve heard that before.
Andrew: Yeah. I mean, the medium-term trends do tend to assert themselves over time.
Joe: That’s it, yeah. Well, listen, Joe, this was excellent. Thanks so much, as always, for catching us up on this stuff. I appreciate you taking the time today.
Joe: Yeah. Cheers for having me, Andrew.
Andrew: Thanks, everybody, for listening. We’ll see you next time. Bye, everybody.
