• Consumption, investment, and property all deteriorated further last month – and the two props that supported the economy in the first half of the year are now fading fast.

On this episode, Trivium China podcast host Andrew Polk sits down with Joe Peissel (Lead Macro Analyst) to unpack:

• How July’s slowdown was broad-based, across nearly every metric that matters – and why growth looks even worse than the headlines suggest

• How the K-shaped economy has spread from output into investment flows, entrenching the divide between booming and struggling sectors

• Why deflation, not inflation, remains the real danger for a heavily indebted economy like China’s – as officials are having to quietly pick their poison

• Why even China’s 24% y/y export growth print obscures a much less impressive reality, once you separate price from volume

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 today I’m joined again by Trivium’s Lead Macro Analyst, Joe Peissel. Joe, how are you doing, man?

Joe Peissel: Hey, Andrew. I’m good. Thanks, man. Happy to be here as always.

Andrew: Good to have you. Joe is here today to talk us through China’s July macroeconomic data. The title of his most recent note pretty much says it all. It’s titled A Grim Picture. So, we’ll get into that and talk about why consumption, investment, and property all deteriorated further, why the K-shaped economy is now showing up, not just in output, but investment flows as well, and why the deflationary pressures that eased earlier this year look set to make a comeback.

But, of course, before we get into it, we’ve got to start with the customary vibe check. Joe, how’s your vibe today, man?

Joe: Yeah, my vibe’s good. Well, the thing is, my vibes are closely correlated with the Chinese economy by nature of my job. So, I would summarize my vibes, Andrew, as…

Andrew: Grim?

Joe: Gloomy, yeah, but with pockets of strength. That’s how I’m vibing, man.

Andrew: Yeah, well, you’re going to have some critical distance, man. You can’t let the work become your life. You definitely do not want your life dictated by the whims of the Chinese economy, let me tell you that. I’ve been doing this for a long time, and that was something I learned long ago.

Joe: That’s one of the saddest vibe checks I’ve given, I think.

Andrew: Well, my vibe is pretty mellow. This is the last week of summer. My kids are not in camp. So, we got me working from home, my wife working from home, my kids hanging out. It’s always just a little bit all four of us on top of each other at home all day. It gets a little bit much for everybody. I think our kids are going a little bit stir crazy. They do not want to start school on Monday, but I think it will be good for them. And I certainly am looking forward to it.

Joe: Sounds pretty intense, man.

Andrew: Well, we will not let my mellow state and your gloomy state undercut the energy of this podcast. We will still have a good discussion. So, stick with us, listeners. But of course, before we get into the content, we also have to do the quick housekeeping. So, 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 domestic policy in China across a range of issues, including macroeconomic policy, which we’ll talk about today. But it also 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 more Trivium content, go to our website, again, triviumchina.com, to peruse our different subscription options. We’ve got a bunch of different China policy intel options on the site that you can check out, both free and paid, and along several different lines: tech policy, general business policy, China watcher policy, markets, which Joe covers. So, check that out.

You’ll definitely find the China policy intel option you need on the site. And finally, please do tell your friends and colleagues about Trivium, both the business and the podcast. It really helps to grow the company and our listenership. We really, really appreciate the word of mouth recommendations that you all help us out with. So, please continue to do that. It means a lot to us. And finally, if you’ve got a second, leave us a rating on your favorite podcast platform. It really helps to boost the visibility of the pod.

So, with that out of the way, Let’s get into it. You ready, Joe?

Joe: Yeah, I’m ready, Andrew.

Andrew: All right. So, I already started or noted the title of your piece is literally “A Grim Picture.” The July numbers just landed. Talk us through how bad it is and what’s different about this month’s sort of data and the slowdown you’re seeing versus the headwinds that we’ve seen economically all year.

Joe: Sure. Yeah. So yeah, it’s pretty grim. We’ve seen this broad-based slowdown across pretty much every metric that we care about — a slowdown in consumption, continuation of this unprecedented collapse in investment across China’s domestic economy, an acceleration in the property decline. I think there’s actually two things from H1, from the first half of the year, or certainly Q2, the second quarter, that were propping up China’s economy, which is starting to fade, and which make July’s data look even worse than it was earlier this year.

So, one is services consumption. That’s what households spend on services has so far been really resilient, but the growth rate slowed a lot in July, dropped to a two-year low. So, sort of the one final strong point of consumption appears to be waning. And the second area is inflation. There’s been this cost-push inflation from the Iran war. That in and of itself isn’t a good thing.

But what it did do is inflated literally Q2 GDP growth. So, Q2 nominal GDP growth, which incorporates price effects. I mean, it grew at its fastest rate in three years. And while that was mainly just a consequence of cost-push inflation, which we don’t want, there are positive consequences from that high growth. For example, nominal GDP growth is really closely correlated to tax revenues, for example. And we’ve actually seen an increase in government tax revenues. So, there are signs that deflationary pressures are returning, the end of this cost-push inflation, that brings a whole other set of challenges for China’s economy. So, hence the title, it very much was a grim picture.

Andrew: Excellent. Well, thanks for walking us through that. I mean, excellent explanation, not excellent for the Chinese economy, but you get what I mean. Talk to me now about this idea about the K-shape of the trajectory sort of moving beyond output and towards investment flows themselves. First of all, maybe you can kind of remind folks what the K-shape and the output is, and then tell us what you mean by the K-shaped shifting to these investment flows.

Joe: Sure. So the macro note I wrote last month, so that was covering June, and H1 data was creatively named; I think it’s, can you see the K or the K-shaped economy? The idea here, which we really highlighted last month, was China’s economy is diverging. You can see that really clearly if you put it on a graph, all the main economic indicators. A bunch of them are, or a few of them are heading up, very strong growth rates, and a bunch of them are heading down. They’re actually declining, already sluggish growth rates. On a graph, it literally looks like a K, hence the name.

So, what’s been growing strongly so far this year has been exports and high-tech manufacturing. So, that’s the output of EVs, shipbuilding, AI-related products, or semiconductor chips, or AI hardware, things like this. And then the tail end, or the bottom end of the K, are the things that are declining — property, domestic investment, really sluggish consumption growth, things like this. Now, what I highlighted in this month’s note, which I think is quite interesting, is we’re not just seeing the K-shape in China’s broader macroeconomy.

If we drill down into specific data sets, it’s appearing there as well. So, imports is one such example. But in particular, in this month’s note, I talked about it in the investment data. So, if we look at China’s aggregate domestic investment, fixed asset investment that fell by double digits. I think it’s about 13% decline. That’s huge. That is unprecedented. It’s actually accelerating. It was a faster decline than the previous months.

Within that manufacturing investment, that’s a subcomponent of aggregate FAI, manufacturing investment, that fell about four and a half percent. And again, that decline is accelerating. But if we drill into the manufacturing investment, so we disaggregate it by different industries, what we see is there’s still strong growth, but concentrated in a very narrow subset of industries. And these are sectors where manufacturing output is also really high.

So, we can think about computers, AI-related components, AI hardware, really, various different areas of transport, equipment, specialized machinery. All of these areas from a manufacturing output perspective are grown by double digits. And so, manufacturing investment in these areas has also grown really strongly. But meanwhile, investment in the broader or in other areas or other manufacturing subsectors is pulling back really fast. So investment in things related to property. So you can think of things like in furniture, in cement production, glass manufacturing, metal output, both manufacturing output and manufacturing investment is pulling back.

Actually, there’s this K-shape within the investment data where we’re seeing investment growth in some subsectors growing really fast, but in the majority declining. So, there’s really tight correlation between manufacturing investment and manufacturing output disaggregated at the individual industry level. The problem with that is that it entrenches this K-shape. It exacerbates this discrepancy, because if you have some part of the sectors, you almost have this positive feedback loop.

So, they’re investing lots, they’re producing lots, they invest more. But the flip side is that also applies to the sectors which are declining. They invest less, they produce less, and, as a consequence, they also invest less. So it exacerbates the K-shape in China’s economy.

Andrew: And talk to me just a little bit on this about sort of the relative scale between the upper end of the K and the lower end of the K. My impression is that the pieces of the economy that are doing well, particularly the AI-linked high-tech type stuff, are growing very fast, but are a relatively small portion of manufacturing and of overall industrial manufacturing output.

And I would guess that it’s the same for investment, right? That these parts of the economy make up a smaller part of overall investment. And thus, you put it all together and you’ve still got a pretty weak investment environment, even though some areas are doing really well. Is that right?

Joe: Yeah, that’s exactly it. We spend a lot of time talking about China’s high-tech or high-value manufacturing, and it is an important part of the economy, but it’s still the minority of economic activity. China’s manufacturing base still involves a lot of lower-value or medium-value output that is not related to the things we talk a lot about, like AI or EVs or clean energy. And so, a consequence of that is, well, we see investment in AI manufacturing facilities grown by double digits, but overall, manufacturing investment still declined by 4.5% because it’s dominated by these other parts of the economy which aren’t performing as well.

Andrew: Yeah, and I say this pretty regularly, but my sense is that, I mean, based on everything that we write and everything that we read about both the Chinese economy and what Chinese officials are saying is that top policymakers kind of approach is to kind of wait it out and allow these smaller portions of the economy that are growing very fast to get bigger and bigger and bigger and bigger and bigger, and eventually carry the weight for economic growth or carry the load.

That’s just a process that’s going to play out. So, that’s one thing that I kind of always remind people of. I think that’s a key part of what they’re thinking. And then the second piece related to that is that one of the biggest chunks of the economy, even though it’s shrinking, is still the property sector. And so, if you’re trying to wean the economy off of property as a growth driver, that’s also going to take time. And it just means that you still have this massive chunk of the economy struggling, contracting.

And while you’ve got new growth drivers, they are, or budding growth drivers, we shall say, they remain still very small, especially compared to the property sector. And so, this is a process that the party seems pretty committed to that they’re going to let play out over time. And so, in a way, that explains, one, why they’re not panicking, but also it underscores that this is going to be a pretty extended transition process.

And also, I would say, it seems to me that this is a path that is at least partially intentional, so that officials have made themselves comfortable with the idea that overall growth is going to be sluggish throughout this transition process. And I, again, just would say, you know, for people looking at the Chinese economy, everyone keeps saying, oh, the Chinese economy is terrible, is terrible, is terrible.

Well, a big chunk of that is simply down to the real estate market, which they are purposefully shrinking and purposely trying to move away from. Do you agree with those kind of framing ideas?

Joe: Yeah, I agree with everything you said. Nothing to add. Beijing is like very aware that they have a painful transition ahead of them. And they’re willing to tolerate that pain to support this structural change in the economy.

Andrew: So don’t expect any big transitions in policy terms anytime soon, I don’t think, but we’ll get to that piece in a minute. Before we do that, I want to now pivot to sort of the price action and the economy. You mentioned in your piece that there is a risk, and I would say it’s probably more than a risk. It’s virtual certainty at this point that China’s deflationary pressures will return in the coming months. Can you talk more about what’s happening in that space?

Joe: Yeah, sure. I would just say, I mean, I’m not convinced it’s a certainty because so much of it is dependent on the outcome of conflict in the Middle East. So, I think it’s plausible. There’s a scenario where commodity prices, oil prices in particular, spike for a sustained period. And I think that could spill over into kind of broader inflation in China’s economy. I don’t know whether that’s likely, but I think it’s possible. But I agree. I think the more likely outcome is a return of deflationary pressures.

So, over the past few months, we’ve seen this rebound really in producer prices and, to a lesser extent, in consumer prices. And this has totally been a cost-per-shock. It’s not a domestic demand story at all. So, input prices for manufacturers, oil and other commodities, just various manufacturing inputs, these have increased mainly because of the Iran war. And so, as a consequence, we saw a reversal in like three plus years of PPI deflation. What manufacturers have been selling their goods for at the factory gate has been declining for over three years, and finally reversed a few months ago.

And there was a slight spillover impact on consumer prices as well, which picked up. But we’re seeing a slowdown in both CPI and PPI inflation. So, in July, consumer price inflation, it slowed sharply to half a percentage point, down from 1% the previous month. So, a really sharp slowdown. And if we look at it on a month-to-month basis, so generally when we talk about changes in inflation, we’re thinking about year-to-year. So, what were prices in July 2026 relative to July 2025?

But if we look at it on a month-to-month basis, so what were prices in July relative to June of the same year? Well, then CPI has actually been declining for three consecutive months. So, in many respects, consumer price inflation has already returned. We’re just not seeing it in the headline, the year-on-year growth figures yet, but it’s very likely that there’s going to be a return of deflationary pressures. Now, this really isn’t a demand story, aside from the fact that there is no demand. That’s why prices have fallen, but prices have been falling for a long time.

There was simply a short interval of cost-push inflation, predominantly caused by the Iran war. Now, that is fading away. We’re seeing this unmasking of deflationary pressures, which have been sitting there all along. It’s really no change from what we’ve been tracking over the past few years. Of course, the return of deflation is really problematic for China.

I mentioned earlier, nominal growth was boosted in Q2 because of these inflationary pressures. And again, I’ll say this again, we don’t like cost-push inflation. It’s not a good thing in and of itself, but it does lead to a boost in nominal economic activity, and that is associated with some benefits. Increase in tax revenue is the most obvious one. And so now we have a return of deflationary pressures, we’re going to have all the associated problems. That’s going to hammer corporate revenue. That’s going to hammer government tax receipts. That’s going to undermine consumer confidence. So, it’s just another headwind to an already struggling economy.

Andrew: Yeah. I want to throw a little bit of a curveball at you. So yeah, congratulations, or get ready for this one. I think you’ll be fine for it. But just as you’re talking through that, I was thinking, I mean, for any policymaker, you really want kind of inflation to be in a sweet spot, right? You want mild inflation that kind of is indicative of expanding domestic demand, but isn’t growing so quickly that it’s reducing people’s real wages, real wealth, that kind of thing.

Traditionally, over decades, Chinese policymakers have been very wary of inflation, specifically consumer price inflation, because in the ‘70s and ‘80s, huge inflationary pressures in a lot of emerging markets led to economic and social instability. And so, officials have really been very focused on kind of trying to keep that contained for a long time. Yet, at the same time, deflation is also not a good situation to be in. And it underscores other vulnerabilities with the economy, specifically the overcapacity, overproduction type issues.

So, neither high inflation nor deflation is particularly good. You’re kind of looking for that sweet spot. And so, the reason I bring this up is we talk about deflation as insidious and difficult to do, and I think that’s true. But then we also say, well, this inflationary impulse that they have is also not ideal because, like you said, it’s cost-push inflation through an external shock that is just rising or driving up commodities prices, which is reducing margins for industrial producers.

But my sense is that officials have sort of, if they had to choose, they might choose the cost-push inflation. And even if that’s not the case, I would say they’re sort of like taking advantage of the cost-push inflation to sort of make some adjustments. Dinny has written about how they’re kind of using that inflationary environment plus strong exports to start a little bit of deleveraging in order to sort of cap debt growth with the idea that several years down the road, five, 10 years down the road, they’re probably going to have to raise more debt to build up their social security framework.

But do I have that right? Do you think they’re sort of like, well, this isn’t the best option, but we will kind of take advantage of inflation while we have it? Or do you think both options are bad? Or what do you think, I don’t know, Chinese policymakers would almost prefer when it comes to the inflationary?

Joe: They have to pick their poison.

Andrew: Yeah, yeah.

Joe: Right. Yeah, yeah. I think there’s no doubt deflation is the more dangerous problem for China’s economy. I can think of two main reasons. And I think the first, probably the most important, is that China is a highly indebted economy. And as you just mentioned, China’s trying to use inflationary pressures to try and deleverage the economy, to try and reduce its debt-to-GDP ratio. Well, deflation achieves the opposite of that.

Deflation raises the real value of debt while incomes or tax revenues stagnate. So, for a highly indebted economy, which China is, deflation is a real problem and makes it very difficult to tackle rising debt stocks. And then I think the second problem, there’s many, I’m just picking the main two, is that there’s this idea, there’s this risk of self-reinforcing expectations. So, consumers delay purchases, waiting for lower prices, which in turn harms the economy even further.

And we see this most clearly in the property data. Property prices have fallen. We’ve long argued that a prerequisite for an increase in property activity, so things like home building or real estate investment, or even sales, are for property prices to bottom out. And so, these two risks, the increase of the real value of your debt and this self-reinforcement expectations are two huge problems, real dangers for the Chinese economy.

I think inflation, in contrast, also has its problems, which you alluded to. But it’s a problem that China and also just conventional economic theory knows how to fight. So, we can think about tightening policy or reducing fiscal expenditure. It’s arguably easier to deal with excessive inflation than it is excessive deflation.

Andrew: Great points. I will say this all kind of gets back to the point that we’ve made and a lot of economists have made, which is, ideally, you’d have an inflationary environment driven by strong demand, and that’s the argument for China having or enacting a little bit more direct demand-side stimulus, which officials seem pretty reluctant to do. So, they’re kind of picking from bad options, but partly because they’re putting themselves in that place by refusing to do sort of more traditional macroeconomic management from fiscal expansion. Do you agree with that?

Joe: Yeah.

Andrew: Okay, let’s turn to exports — the part of the economy that is particularly bright has been all year, has been for several years now, continues to sort of outstrip expectations or outpace expectations. So last month, exports continued to go strongly at roughly 24% year on year. It sounds like a big win. How upbeat are you on the export side?

Joe: Yeah, it’s one of the successes of China’s economy right now. It’s the upward part of this K. 24% growth in July is amazing. It’s a really strong headline. But I think there’s some nuance we can add to that, which is if we look at exports in volume terms, they’re still growing but by a lot less than the export value. There’s 24% growth in value. So that growth in value, a lot of that is a price story. What I mean is that the prices Chinese exporters are charging is going up, that’s inflating overall export value.

But if we think about exports in real terms, like real activity, really stripping out the price effect, and we can do that by looking at volumes, how are exports growing in volume terms? It’s a lot less. So I can give some examples which really demonstrate this point. In value terms, semiconductor exports more than doubled. There’s growth of 117% year on year in July. In volume terms, they rose by 2%. It’s entirely a price story. And that’s because of the surging cost of memory chips, which is a consequence of the global AI investment boom.

So, just demand for memory chips has gone through the roof everywhere. And that’s led to inflationary pressure on the cost of memory chips, not just in China. Mobile phones, which are kind of a classic Chinese export, in value terms, they grew by double digits. In volume terms, they actually fell. China exported less mobile phone units in July 2026 than last year. But in value terms, they grew because the price is going up.

Same with a bunch of commodities. If we look at metals or petroleum-related products, in value terms, they grew. In volume terms, they shrunk. So, the surge in value, as I mentioned, partly driven by this global AI memory chip shortage, which has led to inflated prices for memory chips, and secondly, elevated commodity prices. So, export growth mainly driven by price, not really driven by China shipping more physical goods. Of course, there are exceptions to this.

Auto exports are surging in value and volume terms. They were up. China shipped 60% more cars in July 2026 than in July 2025. And again, the export of ships, of manufactured ships, that was up about 30% in volume terms. So, there are still some success stories. But I think the big takeaway here is we shouldn’t just look at the headline figure. It’s important to think about the nuance behind that. In this case, exports are an important part of the economy, but maybe not as much as the 24% year-on-year growth, the headline figure that we’re seeing.

Andrew: Yeah, I was thinking about that both as I was reading your piece and as you were talking here. And we kind of present or you kind of present the fact that export growth, at least last month, was driven by price effects as sort of not a negative, but kind of undercutting some of the positivity of the large export growth figure. But I guess the other side of that is, one, Chinese exporters have been dealing with negative margin pressure for a long time, right? Partly as they shift exports away from the U.S. and try to find new markets, partly due to a relatively sluggish global economy.

So, one, is this some relief for exporters with prices going up or at least a certain subset of exporters? And then secondly, I’d just say, as somebody who runs a business, I mean, if my total revenue goes way up, even if I’m not shipping more volumes, just simply on margin, then I’m perfectly happy with that. So, from a macro standpoint, it might not be ideal, but from an individual business standpoint, that seems totally fine.

Joe: Exactly.

Andrew: What do you think?

Joe: Yeah, you’re totally touching on it. So, from an individual business perspective, it’s great news. From a macro perspective is what we really care about when we think about trans macro economy, right? Higher export prices per se aren’t a bad thing. There’s still benefits —increased corporate revenues. And, as a consequence, higher corporate tax receipts for the government, things like this. But what I’m saying is we think of 24 year-on-year export growth really strong figure. What we care more about, if we had to pick, a minute ago you asked me to pick between too much inflation or too much deflation, now I’m asking myself – do I care more about export prices or export?

Volume, definitely volume, because that leads to more manufacturing activity, factory activity, has positive spillover effects on the labor market. It can lead to upward pressure on wages, things like this. So, ultimately, export volumes are really important here. And the export volume story is nowhere near as positive as the prices. But again, to clarify, I’m not saying export prices in and of themselves, it’s not a bad thing if exporters raise their prices. But if there’s no subsequent increase in volume, then I’m less excited about the headline export growth than otherwise.

Andrew: Yeah, I think the key is, one is kind of more beneficial for the macro economy as a whole. Another may be beneficial for individual businesses, as we talked about. And then the other piece is this isn’t China exporting inflation. This is China raising prices because of general sort of weak supply for key goods, particularly in the semiconductor and other AI-driven space, and very, very high demand. So, this is just kind of exporters reacting to the environment. So, they’re sort of more of a passive player in this.

Joe: Yeah, totally. We see the same with China’s imports in value terms. They’re way higher than in volume terms. So, China’s as much, yeah, it’s just a passive player here. Its exports have benefited from high global prices, but its import bill has surged as well. Actually, imports have been growing faster than exports most of this year. China’s trade surplus is actually down a couple of percent so far this year.

Andrew: Yeah, that’s interesting.

Joe: Yeah.

Andrew: Yeah. I think I’ve read headlines or not headlines, but in news articles, people make an argument, “Well, that should make policymakers in other parts of the world more comfortable,” but really not because it’s primarily down to surging cost of commodities. And part of the problem is that China doesn’t buy non-commodity goods from the rest of the world. Right? And that’s what people…

Joe: Exactly. Yeah. We actually, we did some research. We wrote a piece on this for our subscribers. If you strip out the impact of gold imports and memory chips, then China’s imports this year are up by single digits. If you include gold and memory chips, they’re up like 30% year on year. It’s not a broad-based increase in imports. It’s just a spike in the import bill because memory chip inflation and a kind of a one-off surge in gold purchases.

Andrew: Yeah. I’m glad you mentioned that because I thought that was a really interesting finding. So, I’m glad you highlighted it. Okay, let’s move now to another kind of downbeat piece, which has been continually downbeat for basically since the pandemic, and it’s China’s consumption picture. How bad is it and what’s going on there?

Joe: Oh, it’s pretty bad, Andrew. You teed me up for that one, man. So, sales of consumer goods, consumer durables, right? This is like autos and furniture and garments and cosmetics, all that sort of stuff. Sales of consumer durables rose by 0.6% in July. Tiny, tiny growth rate. Down from June, which grew by 1%. So, miserable growth in June, even more miserable growth in July. And we saw a decline in pretty much all of these big ticket items, which is what really from a macro perspective, we care more about the sale of, say, cars than we do of t-shirts because production of cars has much more spillover benefits.

It requires more skilled labor, higher wages, more complex supply chains. So, if we look at big-ticket items, then it’s even worse news. So, sale of cars, home appliances, furniture, all declined by double digits. The one exception was the sale of mobile phones and other consumer electronics, which grew quite strongly. And that’s interesting. It’s a very good kind of case study of the impact of fiscal stimulus. So, all of these items I just talked about- cars, furniture, mobile phones, consumer electronics, home appliances- they’re all part of the consumer goods trading program, right?

There’s essentially, the government providing subsidies for these goods. Now, the program was rolled out in 2024, and it initially targeted only at autos, home appliances, and furniture. So, they’ve now had like two and a half years of this subsidy stimulus. And the stimulus impulse has totally worn away. The reason being it boosts sales by pulling demand from the future. So, an individual that was going to buy a new piece. Let’s say they’re going to buy a new washing machine next year, but now there’s government subsidies available that will they buy it this year instead?

So, you get the short-term boost, but it means over the medium term, over several years, the stimulus impact fades. And this is what we’ve seen. This is why, even though in 2026, there are still subsidies available, the sale of these items is declining by double digits. But the program was only expanded to include mobile phones and other consumer electronics last year in 2025. So, they’ve only benefited from the program for about 12, 12 plus months, meaning that the stimulus impulse is still very much alive.

This is why last month, mobile phone sales, they grew by over 20%. So, what we’re seeing is that by borrowing future demand, over time, the stimulus fades. That’s already played out for cars, home appliances, furniture. And at some point, it’s going to happen to mobile phones as well and consumer electronics. Towards year end, the sale of these items is also going to decline. So, even kind of this one bright spot in the consumption data, this 20% growth in mobile phone sales, that’s running on a clock. It’s not a sustainable driver. At some point, it runs out.

And then to add to this gloomy picture, which I mentioned earlier, is the sale of services. This is household spending on travel and medical services, entertainment, going to the cinema, catering sales, all this sort of stuff. That’s fallen to its lowest growth rate in over two years. So, it grew by about 3.5%, 3.7%, I think. Previously, it’s been growing around the 5% mark. So, a sharp slowdown in one of the only strong parts of the consumption picture.

Andrew: So not ideal. Yeah, yeah, yeah.

Joe: Sorry, I left you on a cliff.

Andrew: No, that’s okay. That’s okay.

Joe: That’s my piece.

Andrew: Yeah. Well, anything that you see on the horizon that is going to turn the consumption picture around? I mean, we’ve been waiting for it. It seems like policy is not there. Are we just in for sluggish consumption? It seems like Beijing is… they talk about it a lot, but when push comes to shove, they seem unwilling to put more fiscal resources here. And maybe it’s unwilling, maybe it’s unable to manage this demand side picture on the consumption side. I mean, is there anything that can change this?

Joe: No, as you say, it’s largely focused on supply-side measures, even today. So, this August the 19th when we’re recording this, and Beijing has just released a policy plan to support local governments to support consumption in their local economies. This is like at the township level really localized policies. And it’s all about supply-side measures kind of building new shopping centers or converting dilapidated government buildings into retail stores, all this sort of stuff, improving consumption infrastructure is generally what they refer to it as very much a supply-side focus.

The one demand-side tool, which is this trading program, these consumer subsidies, that was effective for the original set of goods last year. It’s been effective for the mobile phone and consumer electronics this year. I mean, that’s just pulling forward demand. It’s not leaving a structural change in consumption. And it does raise the question, for which I don’t have a good answer, is what fills the gap when the program’s runway ends? At the moment, it looks like probably nothing. So, it’s another potential headwind for consumption in the coming months.

Andrew: Well, with that further grim sort of assessment, why don’t you wrap us up here? If you sort of had a single takeaway from the month’s data, what would it be? And then also sort of look ahead. What are you expecting from both the trajectory of the economy and policy, macro policy going forward?

Joe: So, look, a single takeaway, I think, is there’s been an exacerbation of this K-shaped economy. It’s kind of a tale of two economies. This narrow part of the economy, which is performing well, which is AI and export-driven and performing exceptionally well. And then there’s the much larger domestic economy, consumption and property and investment and mainstream manufacturing outside of AI and export-related sectors that is deteriorating. And this is exacerbated this month because we’re seeing a slowdown in consumption of services, and we’re seeing a removal or kind of a waning of this cost-push inflation, so the return of deflationary pressures.

What that means for H2, clearly pressure is building on policymakers to do something. I think the most recent signal we saw was in late July when they explicitly acknowledged economic challenges, but didn’t really commit to any new policies. I think they used the phrase “incremental policy measures,: so they promised to implement incremental policies, whatever these are, presumably modest and not very effective. But at least there’s explicit acknowledgement of the challenges that face them.

Now, I think the one clear area where we may see some progress or some momentum would be in infrastructure investment. It’s really unprecedented that infrastructure is declining for so long and so fast. And we’ve seen some movements. So, this week, the macro planner has pushed policy banks to increase their funding for infrastructure development. And there’s chatter going on in policy circles that Beijing sees this as a kind of as an increase in the important lever, something they really do have control over in the domestic economy to boost growth.

So, what that entails, it could be an increase in local government debt instruments, could be an expansion of the central government balance sheet to fund more infrastructure. I mean, we’re going to find out in the next few months. As of now, we’ve seen a push towards policy banks issuing more. At some point, we expect an increase in government debt as well to support infrastructure spending.

Andrew: Well, I was just again thinking as you were talking, it used to be when I started in this business 20 years ago, that if you said something like Chinese policymakers understand the issue and it’s on their radar, that you could expect a policy fix, a policy, fairly aggressive policy response to whatever that issue was in short order. And I feel increasingly the idea that Chinese policymakers know the problems. It’s like we have the same problem we have in the West. They’re admiring the problems. They’re not doing much about it, right?

Joe: Mm-hmm, yeah.

Andrew: So, we do not expect that necessarily to change anytime in the short term, which means kind of what you see is what you get. And the economy is likely to kind of struggle and bounce along on its current trajectory for the foreseeable. But as it does, we will continue to analyze it through Joe’s great work. So, Joe, I appreciate you walking us through all this today.

Joe: Yeah. Thanks for having me, Andrew.

Andrew: Yeah. Thanks, everybody, for listening. We’ll see you next time. Bye, everybody.

This week on Sinica, I sit down with the writer Pallavi Aiyar — at her own dining table in Beijing, where in recent months I’ve been the lucky beneficiary of her and her husband Julio’s legendary hospitality. Pallavi first arrived in Beijing in 2002 to teach at the Beijing Broadcasting Institute and went on to spend the better part of a decade as The Hindu’s China correspondent — for much of that time, the only Chinese-speaking Indian foreign correspondent in the country. That period produced Smoke and Mirrors: An Experience of China, still one of the very few sustained attempts to look at China through Indian eyes. After 16 years away — years spent in Brussels, Jakarta, Tokyo, and Madrid — she’s back in Beijing, and turning her gaze inward with her latest book, Travels in the Other Place: Pursuing the Self in Eight Acts. She writes the wonderful Substack The Global Jigsaw, which I recommend without reservation.

Our conversation is built around her recent essay for Noema Magazine, “The Real Problem Underlying India-China Tensions,” which argues that the deepest problem in the relationship isn’t the border or the trade imbalance but the distorting lenses through which each side reads the other: China reads India through the lens of colonial subordination, while India reads China through the lens of betrayal. We talk about the ugly etymology of an ethnic slur, the partial historical memories each country mistakes for the whole picture, her serialized interviews with the Chinese India-watcher Mao Keji, the aporia-inducing impossibility of explaining either country to outsiders — and how her answer to the question she first posed in 2008, “Would I rather be born Indian or Chinese?”, has changed, painfully, in the years since.

• 4:35 – Beijing, 2002: an ad in That’s Beijing, gandhi@hotmail.com, and becoming The Hindu’s correspondent

• 10:03 – “Beijing and I grew up together”: the aughts as a shared coming-of-age

• 12:16 – The asymmetry of obsession: why India watches China, but not the reverse

• 16:39 – The unacknowledged third vertex: Western discursive power in the India-China relationship

• 18:08 – Back after 16 years: the Liangma River, blue skies, and the panopticon

• 21:35 – Walks in the park and the “buddy system”: what access looks like now

• 25:43 – Where did all the foreigners go?

• 29:59 – The scene at CCG: candor, offense, and the register of truth

• 33:10 – “Asan”: the etymology of a slur, Sikh policemen, opium fortunes, and China’s colonial lens

• 40:10 – 1962 and India’s betrayal lens

• 42:15 – Aporia: the foolhardy task of explaining India or China

• 47:22 – Shame and indignation: explaining a place you love versus a place you merely know

• 52:29 – The big question, 2008: born Indian or Chinese?

• 55:44 – The 2026 answer: “It hurts”

• 1:00:08 – Kaiser pushes back: cherry-picked comparisons, and can this essay’s very existence complicate its conclusions?

• 1:04:43 – Twin nations of the exam

• 1:06:57 – Cognitive empathy: what it would take for ordinary Indians and Chinese to actually see each other

Paying It Forward

• Yaqi Li, a young Chinese international relations scholar recently returned to China after a year in Singapore — Pallavi admires the rare self-reflectiveness of his memoir-inflected IR writing on his Substack, New China Literacy, and notes that he makes an interesting case for AI-assisted writing as a way for second- and third-language English speakers to find their voice.

Recommendations

• Pallavi: Flashlight by Susan Choi — a novel spanning Japan, the U.S., and North Korea, built around the North Korean abductions of Japanese citizens in the 1970s. Also This Is Where the Serpent Lives by Daniyal Mueenuddin — the first novel from her favorite Pakistani writer, a sprawling, Chekhovian portrait of feudalism and politics in modern Pakistan.

• Kaiser: Crossing to Safety by Wallace Stegner — beautiful at the sentence level, painted on a small canvas: two couples who meet as young academics at the University of Wisconsin–Madison, and their friendship across the decades. Emotionally rich despite the absence of grand drama.

Transcript (courtesy of the fantastic CadreScripts) further down the page. Image by Keya Zhou. Listen in the embedded player above!

This week on Sinica, I sit down with the writer Pallavi Aiyar — at her own dining table in Beijing, where in recent months I’ve been the lucky beneficiary of her and her husband Julio’s legendary hospitality. Pallavi first arrived in Beijing in 2002 to teach at the Beijing Broadcasting Institute and went on to spend the better part of a decade as The Hindu’s China correspondent — for much of that time, the only Chinese-speaking Indian foreign correspondent in the country. That period produced Smoke and Mirrors: An Experience of China, still one of the very few sustained attempts to look at China through Indian eyes. After 16 years away — years spent in Brussels, Jakarta, Tokyo, and Madrid — she’s back in Beijing, and turning her gaze inward with her latest book, Travels in the Other Place: Pursuing the Self in Eight Acts. She writes the wonderful Substack The Global Jigsaw, which I recommend without reservation.

Our conversation is built around her recent essay for Noema Magazine, “The Real Problem Underlying India-China Tensions,” which argues that the deepest problem in the relationship isn’t the border or the trade imbalance but the distorting lenses through which each side reads the other: China reads India through the lens of colonial subordination, while India reads China through the lens of betrayal. We talk about the ugly etymology of an ethnic slur, the partial historical memories each country mistakes for the whole picture, her serialized interviews with the Chinese India-watcher Mao Keji, the aporia-inducing impossibility of explaining either country to outsiders — and how her answer to the question she first posed in 2008, “Would I rather be born Indian or Chinese?”, has changed, painfully, in the years since.

• 4:35 – Beijing, 2002: an ad in That’s Beijing, gandhi@hotmail.com, and becoming The Hindu’s correspondent

• 10:03 – “Beijing and I grew up together”: the aughts as a shared coming-of-age

• 12:16 – The asymmetry of obsession: why India watches China, but not the reverse

• 16:39 – The unacknowledged third vertex: Western discursive power in the India-China relationship

• 18:08 – Back after 16 years: the Liangma River, blue skies, and the panopticon

• 21:35 – Walks in the park and the “buddy system”: what access looks like now

• 25:43 – Where did all the foreigners go?

• 29:59 – The scene at CCG: candor, offense, and the register of truth

• 33:10 – “Asan”: the etymology of a slur, Sikh policemen, opium fortunes, and China’s colonial lens

• 40:10 – 1962 and India’s betrayal lens

• 42:15 – Aporia: the foolhardy task of explaining India or China

• 47:22 – Shame and indignation: explaining a place you love versus a place you merely know

• 52:29 – The big question, 2008: born Indian or Chinese?

• 55:44 – The 2026 answer: “It hurts”

• 1:00:08 – Kaiser pushes back: cherry-picked comparisons, and can this essay’s very existence complicate its conclusions?

• 1:04:43 – Twin nations of the exam

• 1:06:57 – Cognitive empathy: what it would take for ordinary Indians and Chinese to actually see each other

Paying It Forward

• Yaqi Li, a young Chinese international relations scholar recently returned to China after a year in Singapore — Pallavi admires the rare self-reflectiveness of his memoir-inflected IR writing on his Substack, New China Literacy, and notes that he makes an interesting case for AI-assisted writing as a way for second- and third-language English speakers to find their voice.

Recommendations

• Pallavi: Flashlight by Susan Choi — a novel spanning Japan, the U.S., and North Korea, built around the North Korean abductions of Japanese citizens in the 1970s. Also This Is Where the Serpent Lives by Daniyal Mueenuddin — the first novel from her favorite Pakistani writer, a sprawling, Chekhovian portrait of feudalism and politics in modern Pakistan.

• Kaiser: Crossing to Safety by Wallace Stegner — beautiful at the sentence level, painted on a small canvas: two couples who meet as young academics at the University of Wisconsin–Madison, and their friendship across the decades. Emotionally rich despite the absence of grand drama.

Transcript

Kaiser Kuo: Welcome to the Sinica Podcast, a weekly discussion of current affairs in China. In this program, we look at books, ideas, new research, intellectual currents, and cultural trends that can help us better understand what’s happening in China’s politics, foreign relations, economics, and society. Join me each week for in-depth conversations that shed more light and bring less heat to how we think and talk about China.

I’m Kaiser Kuo, coming to you this week from Beijing, though not, for once, from my home, but from the home of my guest at a dining table where, in recent months, I have enjoyed wonderful meals and delicious wine in great company, all due to the hospitality of the guest I’ll introduce to you momentarily.

Listeners, please support my work by becoming a paying subscriber at SinicaPodcast.com. I know there are tons of Substacks out there, including one beautiful one I subscribe to written by my guest. They start to add up — I know they do — This one really, though, does deliver value for money with great content from wonderful partners like Trivium and the China Global South Project.

So, please do subscribe so I can continue to bring you these conversations and lots more.

Today, on Sinica, I am delighted to welcome the writer Pallavi Aiyar. Pallavi first came to Beijing back in 2002, if I’m not mistaken, taught at the Beijing Broadcasting Institute, and went on to spend the better part of a decade here as a correspondent for, much of that time, the only Chinese-speaking Indian foreign correspondent in the country, chronicling China’s rise for readers back home in India.

That period produced Smoke and Mirrors, her wonderful memoir of those years, which remains, I think, one of the very few sustained attempts by anyone to look at China through Indian eyes and India through China-habituated eyes. In the years since, she’s turned that same gaze on Europe, on Japan, places where she’s lived for good stretches as the wife of a diplomat. More recently, she’s turned the gaze inward in her latest excellent book, Travels in the Other Place: Pursuing the Self in Eight Acts.

Last year, Pallavi and Julio, her husband, moved back to Beijing after some 16 years away, long years, agonizing years for me, just months before my own return, which I count as just really one of the great blessings of my move back. The two of them have been convening some genuinely memorable evenings, and they are, simply put, enormously fun to be around. But the real reason she’s on the show is her writing, which manages a balance that I think is actually fiendishly difficult to strike.

Combining deep sensitivity toward both of the countries she knows best and everywhere else she writes about, combined with an almost brutal candor about each of them. She writes this Substack, which I mentioned, called The Global Jigsaw. I recommend that without reservation. Please go subscribe. And over the past year and a half, she’s published a remarkable series of essays there and elsewhere on India and China as the twin nations of the exam.

We’ll talk about that a bit. Both of them are very much sort of driven by meritocratic or notionally meritocratic exams, on the near impossibility of explaining either country to outsiders. She’s published a serialized interview with the Chinese India watcher, Mao Keji of, the National Development and Reform Commission and the piece that we’re going to build much of today’s conversation around, an essay for Noema Magazine, published by the Berggruen Institute, arguing that the deepest problem in the India-China relationship isn’t the border or the trade imbalance, but actually the distorting lenses through which each side reads the other.

We’re going to be talking about both of those lenses, about cognitive empathy and its lamentable absence in the relationship, about how her answer to the question that she posed back in 2008 — would I rather be born Indian or Chinese? — has changed, and about what it’s like to come home to a Beijing transformed.

Pallavi Aiyar, welcome to Sinica.

Pallavi Aiyar: Hey, Kaiser. It’s so great to be on the show.

Kaiser: We’re so long overdue. I mean, it was a long time ago. Smoke and Mirrors, that was the last time we had you on, right?

Pallavi: I think it was during COVID, and that was in the context of Anand Krishnan’s book on India and China, and I was on there as a discussant.

Kaiser: Oh, that’s right. That’s right. Yeah, you were on with Anand, another lovely human being who will be joining us again on the show, hopefully in the not too distant future. But let’s talk a little bit first about where you started back in 2002, probably. You guys arrived in Beijing. You arrived to teach English initially, like I said, at the Beijing Broadcasting Institute. China had just joined the WTO only months before that. The Olympic bid had been won.

The CBD, this jungle of skyscrapers, was still mostly just sort of on a planner’s draft board.

Pallavi: Yes.

Kaiser: So let’s go back to that city. What was it like for a young Indian woman really just off the plane here? And how did teaching English turn into becoming the Hindu’s correspondent here?

Pallavi: So the first time I ever considered coming to China, the idea even crossing my mind, was back in 2000 when I happened to meet my now husband, Julio, with whom I’ve been hosting all these parties that you’ve been the beneficiary of.

Kaiser: Let me just give in a word about your Julio. I mean, he’s been an invaluable person for me to get European perspectives on. We have all sorts of nerd-outs where, you’ve heard all about them, talking about the Thirty Years’ War and talking about Spain and its golden day. It’s been so fun. He’s such a lovely man.

Pallavi: He is. And when I met him in 2000, he was actually already somewhat of a China person, having studied at Renmin Daxue in 1998. In fact, when I first started dating him, I remember at some point looking at him and saying, “Darling, should I start learning Spanish?” Because he’s Spanish. And he turned around and said, “Why would you do that? You should start learning Chinese.” And at that point of time, a foreign Indian with my background, which is really quite anglophone, I had sort of grown up studying in what we call English medium schools, where the language of instruction was in English.

You know, when we thought about abroad, we really thought about the UK or the U.S., these were like, or Canada, or any of the sort of developed English-speaking countries of the world. And China just didn’t really exist on the mental map of an Indian who was born in 1975 and had grown up in Delhi in the 1980s, ‘90s. We’d had a very long 20-year almost diplomatic freeze. We had no direct flights between the two countries. Trade was almost negligible. There was no China in our imagination. A kind of ridiculous situation given that we share almost 4,000 kilometers long boundary, etc., and have a deep and storied shared history, and so on, but it just didn’t exist.

So, when Julio turned around to me and said that, you know, “China is going to be the future, this is what you should be thinking about,” I just thought it was a laughable idea. Like, what would I do in China? Why would I go to China? However, I was in love. And that had a role to play in my eventual China story because he did move to China in 2001. I went off to the U.S. for a year to continue with my education. But I came to visit him in Beijing. And it was actually December 2001. And I remember driving in from the airport into the city, and just looking out of the window. And my jaw was like close to my knees.

Because just the kind of dynamism, the energy, the sort of freneticism of what you could see outside the window in terms of just the construction energy and the jackhammering. And the fact that it really looked like something was erupting, it felt tectonic. And I just kept thinking, how has this somehow escaped my knowledge? How did I not know that this was happening? There was like an epochal change happening over here. It was almost gravity-defying. Things were kind of rising up, shearing up from the ground.

And I sort of realized the weight and import of Julio’s words about, you know, China is the place to be. I, of course, didn’t know how this was going to be possible for someone like me. I’m what I call a passport-backward caste. With an Indian passport, you can’t just up and move to places in the way that a European could. But there was a lot of serendipity involved in that particular vacation. I picked up a copy of That’s Beijing, a magazine that perhaps you’re quite familiar with, Kaiser.

And I looked at the classifieds. And there was an ad in the classified for somebody to teach English news writing at the Beijing Broadcasting Institute, the Běijīng Guǎngbō Xuéyuàn at the time. And the address of the person to contact was gandhi@hotmail.com. And I was like, Gandhi at Hotmail.com? Anyway, I sort of reached out to this Gandhi person who turned out to be a Chinese guy. And he was a great Gandhian.

And not only that, he had just applied to do the course that I was finishing studying for. It was a combined degree in the UK and the U.S. So, I mean, there were just all these things. And he immediately offered me this job. And suddenly I had this ability to like wash up in Beijing as a foreign expert, as a waiguó zhuānjiā. And I thought I’d be coming for a year. And like many other people at the time, the rest is history — We stayed.

Kaiser: Yeah, you stayed. And you’ve said before that you feel like you and Beijing grew up together. In your farewell column, that was, I think, in 2009, that line has really stayed with me. So, you and Julio were married here. Your son, Ishan, was born here. What do those years give you that really…? I mean, you clearly developed a special place in your heart for Beijing.

Pallavi: Absolutely.

Kaiser: You’ve lived in Jakarta. You’ve lived in Tokyo. You’ve lived in Madrid. You’ve lived all over the place. Something about Beijing has held on to you.

Pallavi: Yeah. So, I think, you know, a lot of how you respond to a place has to do with that place. But it also often has to do with you as an individual and where you are at that moment. And I came here straight out of university, you know, very much in love. It’s where I developed my voice. It’s where I discovered my vocation. I became a foreign correspondent here. I got married in 2005. My first son was born over here. Now, it feels a bit hubristic to say that Beijing and I grew up together. China is an ancient civilization.

And while I am getting on, I wouldn’t claim to that kind of age. However, in some ways, while it’s an ancient civilization, the early 2000s were also a new iteration for China, given that it had joined the WTO in 2001. It had just won the bid to host the Olympic Games.

Kaiser: You couldn’t have picked a better time.

Pallavi: You couldn’t have picked a better time. They were tearing down huge parts of the city to sort of rebuild it. So, it was a new old city and was also in some ways going through its adolescence or early adulthood in the post-reform era.

Kaiser: Certainly a growth spurt, right?

Pallavi: Right, a growth spurt. Yes. And in many ways, you know, it was the geography in which I grew up as well. And I also think that I learned, as all people who are sort of young adults learn, to negotiate certain contradictions in their lives. And to also, you know, begin to understand that there are a lot of shades of gray. And there’s a lot of nuance to life and these kind of early teenage certainties that you have of black and white. China was also going through that, and it helped me, I think, to develop a more nuanced way of understanding myself, society, other people.

Kaiser: But it still sort of surprises me that as somebody who grew up in a prominent Indian intellectual family, that China wasn’t more on your radar by 2000, just prior to your December 2000 trip here. And the reason I say this is because I remember distinctly reading in The Economist, it must have been around then, how the Indian intellectual national pastime was obsessing about China. That line really just sort of stuck with me. And I bounced it off a lot of my Indian friends at the time. I said, “Is this true?”

I mean, it sure seemed to be that way. I remember a few years later writing on the website Quora, I noticed I was answering a question about why there’s this asymmetry of interest, why it seemed that Indians were so much more interested in learning about China, asking so many China-related questions on Quora, where the equally populous Chinese population there asked almost no questions at all about India and would only sort of answer perfunctorily, was not interested in engaging.

And it’s sort of this asymmetry still that’s going to form a lot of our conversation this morning. What do you think explains your particular blind spot? And was it a blind spot? Was it already a national obsession by that time?

Pallavi: Actually, I think there was a huge difference between the 80s, 90s, and the 2000s. So, I think that, you know, basically we had a massive rapprochement around 2001, 2002, which was the time that I moved here. So, I was really in the right place at the right time. We had the first visit by a high-level visit. So, we had the Indian Prime Minister Vajpayee visit China in 2003.

Kaiser: The prior one had been in 88 or 89. I remember meeting him.

Pallavi: Exactly. So, after this like 15-year-long deep freeze, we had some kind of movement at the highest political level. We had the direct flights being reinstated in 2003, 2004. And at that point of time, we also eased trade restrictions, which then began to kind of grow exponentially. Like, they were almost doubling year on year. So, there was a sudden interest in China around the time that I came, which I think coincided, to some extent, with all of this WTO Olympic Games, because Indians really know China through the Western media.

And, as there was an uptick in the Western media about China, China, China, all of this happening, this hope that China was going to become one of us, was kind of entering the fray of Western nations by sort of joining the WTO and was going to become a different kind of power that was going to mirror the liberal West in some ways, at least that was the hope. I think that there was this surge of interest in India as well.

So there was a big difference even between the time when I first announced to people that I was leaving in 2002 for China when there was like, why would you do that? To say, a few years later, when I got married in 2005, when people were agog with what was going on in China. And suddenly China had emerged as a kind of benchmark. I think Manmohan Singh, the then Indian Prime Minister, when he came to China in 2006 said that he was going to make Mumbai into Shanghai. That was like the first explicit benchmarking of an Indian city with a Chinese city, rather than, say, a Western city.

And there was really this sense that China had suddenly become something of interest, which it should have been, given that it was a much more reasonable

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Our phrase of the week is: “the breeze cannot read, so why, then, does it riffle through my book?” (清风不识字，何故乱翻书 qīngfēng bù shízì, hégù luàn fānshū)

Context

Huawei (华为), one of China’s biggest and most powerful companies, has been humbled by a cheap children’s toy.

That toy is called a “bamboo cicada” (竹知了). It’s made of a short section of bamboo and a piece of string, and sounds like a cicada when spun.

In recent weeks, netizens somehow connected the bamboo cicada’s buzz to the unveiling of Huawei’s AITO M9 (问界M9) SUV back in December 2023. The event was hosted by Richard Yu (余承东), the head and public face of Huawei’s smart car business. Yu is well-known for his over-the-top language at these events, dropping claims like Huawei is “way ahead” (遥遥领先) of the competition.

The sound of the audience’s reaction to one of his claims at that 2023 launch, and Yu’s own distinctive rapid-fire way of speaking, were likened to the buzz of the bamboo cicada toy.

From mid-July, content creators began mixing the toy’s high-pitched sound into footage of the launch. At first it was no more than a niche joke and a minor trending topic. But around July 23, some bloggers received notices that their videos had been flagged for infringement. As takedown requests from Huawei’s legal team mounted, the story was catapulted to the top of hot search lists in early August. Soon, there were reports that even videos of people simply shaking the toy were being removed.

A backlash against Huawei followed. In response, the company issued a statement denying any blanket campaign against the toy or people posting about it. But this only invited further ridicule. One widely shared essay called it the worst PR disaster in Huawei’s history.

Another writer went on to use a cryptic reference to imperial censorship from nearly 300 years ago to characterise Huawei’s heavy-handed tactics to silence the public:

“The public may be uneducated, but that doesn’t mean you can abuse your power.”

老百姓可以不识字，但你不能乱翻书。

And with that, we have our Sinica Phrase of the Week.

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What it means

“The public may be uneducated, but that doesn’t mean you can abuse your power” is a modern reworking of a famous line of verse from the time of the Qing dynasty (1644–1912).

The original is:

“The breeze cannot read, so why, then, does it riffle through my book?”

清风不识字，何故乱翻书。

It’s attributed to Xu Jun (徐骏), a young scholar in the Hanlin Academy (翰林院), the elite secretariat of the imperial court. Xu was also the son of Xu Qianxue (徐乾学), one of the most senior officials under the Kangxi (康熙) emperor, who reigned from 1661 to 1722.

That line was nothing more than an observation from Xu at his desk, describing how he noticed a breeze blowing through the room flipping the pages of a book as if it were a person. And yet, the breeze was unable to read the words.

In 1730, under Kangxi’s son and successor, the Yongzheng (雍正) emperor, Xu Jun made a fatal slip in a memorial.

He miswrote “Your Majesty” (陛下 bì xià), accidentally writing the first character as one which evokes the meaning of “prison beast” (狴犴 bì àn), a mythical tiger-like creature, whose image was carved on prison gates. The two characters (陛 vs 狴) are pronounced exactly the same (bì), and are almost identical in form, just differing by one component.

The Yongzheng emperor took offence at this slip. Xu was stripped of his title, removed from office, and had his writings searched.

In their investigation, the Qing officials found the line beginning “the clear breeze…” (清风). They concluded this was a seditious attack on the Qing empire’s Manchu rulers, because “clear breeze” (清风) shares a character with the name of the dynasty, Qing (清).

The innocuous line was interpreted as something much more serious:

“The Qing rulers are uneducated, so they have no business meddling in Chinese culture.”

So Xu was convicted and executed.

In the years that followed, “the breeze that cannot read” (清风不识字) became synonymous with the Manchu rulers’ paranoia and abuse of power. The story is retold in the Classified Anthology of Qing Anecdotes (清稗类钞), a compendium of Qing stories assembled by the writer Xu Ke (徐珂) in 1916, four years after the empire’s fall.

The case became one of the most notorious of the Qing “literary inquisitions” (文字狱), or “prisons of the written word”. These were waves of prosecutions where officials combed books, poems and even examination papers for hidden sedition. Their defining feature was that guilt lay in what a suspicious reader could find hidden in the words on the page, such as imagined puns, homophones, and allusions.

Today, “the breeze cannot read” (清风不识字) is shorthand for the misreading of innocent words by the powerful and the thin-skinned. Netizens use it whenever a harmless post is deleted by over-anxious, risk-averse censors. In this modern form, “riffling through the books” (乱翻书) refers the to censors, not the breeze.

So the warning to Huawei is not to echo the heavy-handed instincts of the Qing rulers by silencing the innocent. Which is why we translate this week's phrase as: "The public may be uneducated (in the law), but that doesn't mean you can abuse your power."

Andrew Methven is the author of RealTime Mandarin, a resource which helps you bridge the gap to real-world fluency in Mandarin, stay informed about China, and communicate with confidence—all through weekly immersion in real news. Subscribe for free here.

Read more about how this story is being discussed in the Chinese media in this week’s RealTime Mandarin:

RealTime Mandarin

#289: Huawei picks a fight with a bamboo toy, and loses

One of China’s most formidable companies, Huawei (华为), has been humbled by a cheap children’s toy…

Listen now

5 days ago · 5 likes · Andrew Methven

But the more durable — and future — points of leverage are already hiding in plain sight, in hundreds of intermediate goods most people never think about.

• Gerard DiPippo, Director of Global Macro at Eurasia Group, returns to the pod as our first ever two-time guest, joined by Dinny McMahon and Cory Combs, to unpack it.

On this episode, host Andrew Polk sits down with Gerard, Dinny, and Cory to dive into:

• Why rare earths are a uniquely cheap and low-cost weapon for Beijing, and why other chokepoints like batteries carry far higher stakes

• How China’s licensing regime doubles as a surveillance system, giving Beijing visibility into global supply chains it can use to ratchet pressure up or down at will

• The “shoe that hasn’t dropped yet”: China’s shelved extraterritorial rule that could restrict any product containing Chinese-origin content, anywhere in the world

• Why intermediate goods are the next frontier to watch, and why China’s reaction function gets a lot murkier once controls move further down the production chain — into products with real commercial value to Chinese firms themselves

It’s another great discussion – so enjoy!

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 today we’ve got a bit of a special lineup. I’m joined by two Trivium regulars, our Head of Markets Research, Dinny McMahon, and our Head of Supply Chain and Critical Minerals Research, Cory Combs, but we also have an extra guest with us today, and that is the Director of Global Macro at Eurasia Group, Gerard DiPippo.

Gerard, how are you doing, man?

Gerard DiPippo: Good. Very happy to be back on the show.

Andrew: Yeah, it’s great to have you back. You’re our first two-time guest.

Gerard: Really? Wow.

Andrew: Yeah, absolutely. Very excited to have you back. Dinny, how are you doing, man?

Dinny McMahon: Good, mate. Always happy to be here.

Andrew: And Cory, how about yourself?

Cory Combs: Doing great. Really excited. We’re starting the hiring process for a new analyst position. So, very jazzed for that. It’s a good week.

Andrew: Awesome. Love to hear it. All right. Well, today we’re going to do another look at basically the economic lawfare and economic coercion playbook that is evolving out of China, specifically looking at kind of future choke points that China may look to draw on as its export regime evolves and its kind of choke point capabilities evolve. We’re going to use, as a jumping-off point, a piece of research that Gerard has done called China’s Chokepoint Leverage Goes Beyond Critical Minerals.

We’re not going to go line by line on that research, but we will kind of use that as a jumping-off point. And we’ll talk about where China is quietly building a dominant kind of share in various global markets. And then we’ll walk through that paper in general and our general thoughts from the Trivium side on Gerard’s analysis. It’ll be a great discussion. But of course, before we get into it, we have to do the customary vibe check. Gerard, I’ll start with you. How’s your vibe today, man?

Gerard: I’m happy to be here, although it’s funny because just before we recorded this, I was talking to my co-author from that piece, Amanda Hsiao, and she was saying how she loves this podcast, but actually doesn’t like the vibe check. And so it’s always controversial. So, shout out to her and shout out to the vibe check.

Andrew: Awesome. I love it. Yes, the vibe check is very controversial. We get a lot of people who love it, a lot of people who hate it. And so I guess that means you’re doing something right. I don’t know.

Gerard: I love it for what it’s worth.

Andrew: Well, see, good. Exactly.

Dinny: Yeah, I’m on the other side of the divide.

Andrew: Well, and with that, Dinny, how’s your vibe today?

Dinny: I’m feeling good now that I know that there are people out there who feel the same way that I do. But no, my vibe today, I’m feeling pretty rested. I had a long weekend in New York with the family. So yeah, I’m feeling good.

Andrew: Nice. So Dinny’s vibe is officially unburdened, I feel, now that he’s let it be known. Cory, how about you, man? How are you doing today?

Cory: I’m good. Yeah, again, just really excited to be bringing on a new team member soon, in particular to help work on a lot of these types of issues. Although now I have a new interview question, which is going to be the make-or-break for the candidates, which is whether or not they like the vibe check. It’s going to be a deciding factor now.

Andrew: Well, you can’t give away what the correct answer is actually now so that people will make sure that they answer honestly. Well, my vibe is pumped to have all you guys on. I’m excited. I think this is going to be a great conversation. I’m also excited. I’m going to see Gerard in real life later today. I always enjoy catching up, talking China beyond what we put on the pod.

So, we’ll get into the meat of the discussion in a sec, but of course, we also have to quickly do the housekeeping. So, a quick reminder to everybody — 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 domestic policy in China on a range of areas: autos, tech, etc., minerals, you name it, we do it. But it also 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 more Trivium content, check out our website. Again, triviumchina.com. You’ll definitely find a subscription option that will meet your needs in terms of staying on top of China policy, intelligence, and research. We have a bunch of different options on the site. And finally, please do tell your friends and colleagues about Tribune, both about the podcast and about the company. It really helps us to grow through those word-of-mouth recommendations, so we really appreciate those.

All right, Gerard, are you ready to walk us through this?

Gerard: Let’s do it.

Andrew: All right. So, Gerard, your piece, or not just your piece, but let’s start sort of where the conventional conversation around this U.S.-China back-and-forth and evolving China lawfare usually starts, which is critical minerals and rare earths. Your paper argues that rare earth controls remain Beijing’s preferred retaliatory tool, but that the approach is evolving within that space. Why don’t you just set the scene and talk to us about how you see things evolving?

Gerard: Yeah, I’ll just give you the bottom line, which is that it is proper to be focused on critical minerals as a key choke point. And those are, in fact, what Beijing knows it can weaponize for at least years, and we can debate how long. But the point we wanted to make is that there are other choke points that are developing, particularly in intermediate goods. And Chinese industrial policy is geared towards expanding China’s market share of those goods.

And so, the implication of all of that is even if you think at some point the West is able to have enough secure supply of critical minerals, and we can debate how long that takes, at that point, China will have other choke points. And there are implications from that because it means that China’s coercive leverage is growing in ways that I think Western governments are not planning for.

Andrew: So, Gerard, we’re going to talk a little bit about the evolving nature of some of these choke points that you point to in your paper. And Trivium has done some work on this as well, so we’ll kind of be able to compare notes on what we think is next. But before we get there, you also identify some of the current attributes of China’s export control regime, specifically zeroing in on the licensing aspect, which sort of allows Beijing to ration supply and deny importers of goods from China the ability to stockpile.

Can you talk to us a little bit about why you think Beijing’s leaning on the licensing piece rather than an outright ban of sales to have a more durable and effective approach to export controls?

Gerard: It’s for several reasons. One is that the licensing requires foreign companies to apply for those licenses, which means they’re able to collect information on supply chains and general needs of companies. Relatedly, if they have more comprehensive data, they can then have a sense of what total demand is and have better mechanisms for detecting whether there’s any sort of transshipment or stockpiling going on.

So, they want full visibility so that there’s no smuggling or workarounds that put holes in things once they leave China’s borders. The other reason is you want to be able to keep companies on as short of a leash as possible. And that, one, is to prevent stockpiling. But two, it also means that if Beijing wants to dial up the pressure on any government or company, it can do so fairly quickly precisely because it’s prevented that stockpiling and workarounds.

And so think of it as sort of a surveillance and enforcement capacity that’s working together.

Andrew: Totally makes sense. And another piece I wanted you to highlight is, you know, focus in on Chinese state investment and overseas mining as well. So, this isn’t just about sort of controlling the source inside China, it’s also about reinforcing dependencies in the long term through investments. Cory’s also done a bunch of work on this. So, talk to us about that piece of it in terms of what China’s doing externally to reinforce its domestic export control regime.

Gerard: Right. So, they’re investing in overseas mining and capacities. I mean, Cory is a master of tracking this stuff, so I wouldn’t deign to lecture him on it. But think of it as a comprehensive plan. I don’t know if there’s a single plan, but there’s at least planning going on such that they’re able to track the supply chains of the things they know are upstream vulnerabilities. And their companies are making those investments, right?

And so, they also are aware that Western governments are working quickly by at least Western government industrial policy standards, to try to indigenize or sort of de-Chinaize offshore those capacities. And so, it’s really like a race of industrial policy systems.

Andrew: Cory, what are you seeing on this side? Do you see it similarly to how Gerard’s characterizing it?

Cory: Yeah, the first thing is that top to bottom, at a high level, there is systematic effort to map and understand China’s vulnerabilities. And so we have that supply chain and industrial security policy from March made public in April. And it’s a state council level doc that says that very explicitly, various authorities, including Central Planner and DOC, are basically in charge of making sure that these foreign vulnerabilities don’t disrupt China’s industrial upgrading and regular operations.

So, that’s driving a lot of investment by state actors, by state investors, Ex-Im, development banks, policy banks, all that. And so absolutely, at the same time, you also, at a lower level, at a more commercial level, you still see a ton of, and I would probably argue even more, private sector investment. Now, obviously, private gets very messy when you talk about private sector in China’s mining ecosystem, but you also have things like CATL, BYD, genuinely private listed companies that are pursuing no-one supply chain security overseas, especially in Latin America, parts of Africa, etc.

So, there’s both fronts happening simultaneously, and they both support Chinese mineral resiliency, as well as processing. So, it all aligns. And to the extent that Beijing doesn’t have certain central-level plans for driving specific niches of minerals, it’s because the market’s doing it for them. And so the areas where the market’s not doing it, Beijing is making sure it’s happening. So in both regards, it’s happening, 100%.

Gerard: I may be jumping ahead here, but I would say that China’s focus on overseas investments as a means of securing its own critical materials or other resources is not new. That’s been going on pretty much for decades, at least in a concerted way, at least 20 years. I think what is more new is China imposing export controls, not only as a means of having coercive leverage against countries, which you’ve already mentioned, but also to control the technology that it knows those countries want, including for things like magnets, so that they can indigenize their own technology.

I mean, one theme you can see is that a lot of China’s recent measures, including recent controls and outbound investment, are really aimed at technology, including but not limited to things that would be useful for critical minerals, right? So, it’s the idea that China now has the capacity, one, to hit back, but two, it also has technologies that it knows other countries want, particularly to break free of those chokeholds. And so, it’s sort of protecting in both directions.

Cory: Exactly right. And a good case study of that, I think there’s 100 of them, but I think one very clear one is gallium. So, one of the earliest controls, so gallium and germanium, had a lot of attention. Australia is now recovering some gallium as a byproduct of other operations. But what do we need the gallium for? And one of the most important applications right now, to my view, is the rising demand for GaN, a gallium nitride used in wideband-gap semiconductors.

I don’t know of really any large-scale producer outside of China that can turn the gallium into gallium nitride in the substrates we use for semiconductors. So, it’s great that we’re getting gallium, but what about the processing? And that’s exactly the kind of choke point that I completely agree — this is the intermediate goods issue. This is the processing issue. And where Beijing continues to control that, that is leverage.

Andrew: So, staying on this kind of idea of where we are now with the export controls and the strength of the export controls around critical minerals and rare earths, you guys both, I think, rightly touched on the processing piece, which now, of course, other countries, notably led by the U.S. are trying to you know alleviate that choke point from China, trying to build processing capacity. But again, Gerard, you point out in your paper, in your research that even if China’s critical minerals processing eventually erodes, Beijing could extend restrictions to foreign-made goods containing Chinese mineral content.

So, this is sort of the extraterritorial piece that we talked about a little bit, Cory, where you say if there’s any piece of Chinese content, doesn’t matter if it’s processed in China or not, we’re going to restrict that. Notably, that was part of their big October 2025 controls that really brought things to a head in the U.S.-China negotiations and led to the U.S. backing off a little bit and ultimately to the Busan agreement. But talk to us about that aspect of it, Gerard. How do you think that unfolds?

Gerard: Right. So, it’s the Chinese version of the foreign direct product rule. And that is the provision among several, but maybe that one in particular in October that scared Russian government so much. Because if you read it, at least verbatim, it sounded like China had the ability to impose controls on anything that had any non-negligible amount of Chinese rare earth content in it.

Which would, if you read it that way, would mean like a battery that China had made that is in a car made in Poland that goes to France or whatever. That is still subject to those controls. Now, because of the Busan truce, that part of the controls has been shelved. It’s not dead. It’s just on pause as part of the ceasefire. And so, to my knowledge, that part has not been fully tested. And it’s sort of the shoe that hasn’t dropped yet.

But because China is collecting data during this time through the application process for the sort of normal export controls and licensing requirements, it might be able to more effectively implement that in the future. And I don’t think that regulation or that capacity is going away.

Andrew: 100% agree. I mean, I think we always talk about these export controls as, Cory, let me bring you in, like, basically, China is sort of suspending their use. But there’s just one way of general travel here, right? China wants to bolster its export control regime overall. The actual implementation of the controls may ebb and flow, but they want extraterritorial jurisdiction. They want to be able to not only use these in a weaponized fashion when needed, but also for broader industrial policy purposes. What’s your perspective on the piece Gerard was just talking about?

Cory: Yeah, I mean, all of these tools, I think the hardest part of all this to map is what are the constraints on Beijing’s use of these tools, right? And so, I think exactly right, there’s one direction of travel when it comes to the material level controls. I think at this point it’s pretty clear. Meaning, which is to say, Beijing can impose an export restriction, which just means you have to apply for the licenses. I shouldn’t say just, it means you have to apply for licenses. And this is where a lot of the attention comes from.

At that point, I don’t see any way of coming back from that. Like that is just a lever that it can ratchet it up, it can ratchet it down. And there’s two different levers on top of that, which I’m sure many listeners will be familiar with, but just to confirm, first, they can escalate the restriction to a prohibition, which means you’re not getting a license. And separately, there’s a number of ways they can expand, add new compounds, add new derivative materials, etc. Or they could go the extraterritorial route and say, “Not only are you not getting it from China, you’re not getting it from somewhere else if it has a Chinese input,” right?

Som there’s other ways of escalating. And so, I think that is negotiable. That’s up and down. That’s leverage that you can deploy at will or pull back when you’re trying to pursue strategic stability, all that. But the existence of a licensing requirement in the first place, I don’t see you coming back from that point. I see one direction of travel there, and then it’s flexible from there on. And this is in contrast to, for example, some of the commercial security or industrial security investigations, which have been very explicitly used as leverage in negotiations.

Like, oh, maybe we’ll investigate this sector, but we’ll scrap that investigation if we get certain concessions, right? And so, one question I have for Gerard and Dinny as well is, in this context, is where do intermediate goods fall? I mean, we have some intermediate goods are already affected, right? spluttering targets are a good one. They’re not intermediate from a consumer perspective, but if you’re making semiconductors, you’re not taking rare earth, making a spluttering target making a chip. You’re buying a sputtering target from somebody who bought rare earths elsewhere.

So, in the upstream sense, we’ve already seen that migration down the production chain, so to speak, and we’ve seen it in a number of others that I won’t go on about. When do we start seeing that in intermediate goods where that, I think, starts to play? Those are much bigger factors in China’s total export value. Those have much bigger costs associated with them. So that’s why I’m very curious, how do you see China’s reaction function? What are the constraints on its willingness to move further down the production chain with export controls?

Gerard: So, I think we’re waiting to see what happens when they fully weaponize other intermediate goods. I mean, you’re referencing things that might have critical mineral components in them, but there are a lot of things that are unrelated to critical minerals where China makes intermediate goods. But you mentioned something that’s really important, which is those other goods, or some of them at least, things like, say, batteries, right, they have much more commercial value for China to restrict those things, but actually be imposing harm on its own companies in a way that rare earths do not.

Rare earths are basically an optimal upstream weapon, right? Because in dollar value terms, they’re really not worth all that much. But China controls the chokehold on the processing side. It has basically two state firms it can operate with to do that. It has the ability to use that to get visibility through licensing of a whole bunch of other industries. And it can do it without really disrupting its own exports all that much. And so, it can sort of pick and choose which industry it wants to disrupt.

There are other intermediate goods, like just think of industrial chemicals, let’s say, right, where China could disrupt something, but that’s going to be probably more narrow, right? So, I’m actually skeptical that there’s any one set of things that is going to be as powerful and as sort of cheap to use for China as critical minerals. That said, there are a lot of other things that could be used in conjunction.

And if you have a sort of whole supply chain visibility, you don’t have to use the same type of good to retaliate against any one country, right? You could use different sets of goods for multiple countries. So that was kind of the point of our piece, that there are other things I can go at that would be valid, even if it were the case that there were Western supplies of processed critical minerals that could avoid China.

Cory: Absolutely. Excellent. And just to put some scale on this, you’re talking about the difference in the impact for China, the cost of imposing this. China’s rare earth industry, the entire rare earth industry is probably on the order of one to $2 billion in terms of total value. That’s obviously not strategic value. I believe their exports of batteries last year were over 60 billion. So, that’s one product and that’s just exports, right? That’s exports compared to the entire rare earth industry. So, it just doesn’t really compare, and the nature of the companies as well.

The battery revenues are even more critical because a lot of Chinese companies can sell batteries, for example, at a much higher premium overseas than they can domestically given involution. And a lot of that money is going straight back into R&D. It’s going straight back into development of new battery chemistries that China is hoping will drive its competitiveness long term. You’re not seeing that kind of R&D in rare earths. You don’t need it. So, I think both financial value-wise and strategically, the costs are so much higher for some of these.

But very well said, I completely agree with the kind of ability to target narrowly these intermediate goods. It’s not quite the same blanket. Yeah, so just seconding all of that.

Gerard: And part of why we’re still talking about this is basically hypotheticals because they still don’t need to use as other weapons, so to speak, right? You could debate how long, but at least say five years conservatively where they would have a lot of leverage with critical minerals. And if we get to a point, say, in 2030, where there is Western self-reliance, we’re going to have another conversation about what else to go after.

One thing we tried to highlight in our piece was to look at specific intermediate goods in the trade data where China has 50% market share globally, both in value and volume terms. And we identified 300 goods at the HS6 level where that’s the case. And it’s grown rapidly since 2022. It’s almost like a straight line up and on track to be 400 goods by the end of this decade. Now, I should say that because we’re operating at the HS6 level in trade code terms, that’s like sort of medium granularity.

If you are assessing your own vulnerabilities, I would want to go much more granular than that. But the problem is that you don’t actually have a global standardization of those codes at that level. So, think of that as just sort of a high-level illustration that you actually see in the data what their industrial policies are saying they’re trying to do, which is to develop whole supply chain security, including for their own defensive reasons.

But it also means that because a lot of these things are pretty low value added or low margin goods, it’s things that Chinese industrial policy is just much better suited to absorb.

Dinny: Yeah, I’d say that when it comes to the intermediate goods, I mean, what Gerard’s saying makes perfect sense that for the most part, you know, so many of these intermediate goods for the meantime don’t necessarily pose a… aren’t the sort of things that can be weaponized particularly although one day it might get to that point. In some ways, the real threat to developed economies in particular at the moment is that China’s moving so aggressively on intermediate goods. And I think that’s kind of what Europe in particular is sort of struggling with.

It kind of looks at the degree to which China is so aggressively expanded into things like chemicals or it looks at the degree to which sort of China dominates, you know, precursor ingredients for pharmaceuticals. And yet, to a certain extent, it feels exposed, but it’s also worrying about the hollowing out of its own industry because China is moving so aggressively into these sorts of bits and pieces.

I think the researcher Richard Baldwin coined the phrase that China is effectively the OPEC of intermediate goods just because of the sheer scale at which it’s producing the components that go into manufactured goods. So yeah, the point’s well taken that for most industries, China isn’t in a position to weaponize these, certainly without sort of doing damage to their own industries. But certainly, I think the rest of the world is increasingly cognizant of just how vulnerable they feel, given how dependent they are.

Andrew: Yeah, I think this is basically the sexiest part of your research, Gerard, is the intermediate good space. Can you talk to us about how you think that’s going to increase China’s leverage over time? And then you also make an interesting point about how it’s more politically palatable to control intermediate goods instead of final goods?

Gerard: The intermediate goods are, in some sense, better as a weapon because you can mess up the production side of a target economy. And you might even be able to mess with multiple industries at once with the same good. The counterfactual would be if China were going after, say, consumption goods or final goods, right? These are things that consumers or end users would notice more visibly. They could, in theory, do that, right?

So, for example, in theory, BYD could be told you have to restrict exports of electric vehicles. The problem is that’s just much more visible, so more likely to engender political pushback. And also, because final goods, by definition, contain the value of all the intermediary goods, they’re worth more, right? Which means that if you go after final goods, you’re basically asking Chinese firms to eat a bigger cost as part of that weaponization.

So, again, the intermediates are really just the better tool, both economically and politically. And in terms of how they’re going to do it going forward, now, as I said, this hasn’t really happened yet because they haven’t had to rely on non-critical minerals because they still have critical minerals. Right? But we’ve seen in March, the Chinese Academy of Sciences published a note, a bulletin that had some research looking at 63 different technologies that China could, in theory, control.

And it sort of bracketed them in different metrics. And you get a sense of, you know, that’s just like one window, right? I’m sure there’s more going on that we’re not seeing. And there are ways of trying to systematically assess different technologies or goods where there are choke points. And what that shows is we think there are basically five broad criteria that they can assess whether something is, you know, a good weapon, right? So, one is obviously, does it hurt the target economy? Two, how replaceable is it? Because it can cause a supply or policy response.

The third is how much hurts Chinese industry, because if it’s worth a lot, then you don’t really want to actually impose those costs on the Chinese firms. And then there’s the enforcement capacity, which we talked about briefly. But if you’re talking about extraterritorial controls, that is harder to do. And they have spent the last year building up their ability to map out rare earths. But if you try to do that with other goods, they might not have the same visibility into that.

And finally, there’s reputational risk. So, there are things like pharmaceutical APIs. People talk about China having choke points there, which is basically true. And I should say that last year during the height of the U.S.-China trade war, Chinese interlocutors were back channeling, suggesting that a nice API supply chain there would be a shame if something happened to it, meaning that would be sort of the next threat. We’re personally skeptical they would actually do that, partially because if you’re trying to cut off pharmaceutical goods, you’re basically risking, at least narratively, killing people because they’re not getting medication, right?

So that’s not really optimal. That’s why I think their preference would be to stay in things that are either more sort industrial or “dual use,” they would have the pretense of having that sort of geopolitical security covered.

Andrew: Yeah. Cory, Gerard just walked through his kind of framework in terms of how he thinks Beijing identifies its next export control or its item to export control. What are your thinking or what is your thinking on how Beijing makes that decision? What are its key criteria going through that? And then I want you both to say what you think, kind of based on that criteria, what might be next? That’s what people want to know. What’s coming down the pike in terms of what the next choke points are?

Cory: Yeah. I mean, first off, seconding so much of what you said, I think it’s a great framework. I’ll just add a couple of pieces. I think one is in a lot of the lawfare countermeasures retaliation, we still see a preference for symbolic reciprocity, you know, reciprocal actions. When it comes to specific critical mineral-related export controls, you know, they’ve run down the list, you’re not going to see exact reciprocity. So, if there’s a defense action, you’re not necessarily going to see a defense mineral, right?

But at the same time, I think at this point, that on the export control piece specifically, we’re just seeing them go through kind of the next best targets in terms of where China has control and where the costs are not extreme. And so, for example, if I had my money where my mouth is, I think tungsten was one early on that we were very concerned about. And it’s a huge issue now because China appears to not be exporting any of it, as far as we can tell.

Another one very similar to that or akin to that is magnesium, which goes into so many things. But magnesium metal specifically, not oxide, is just such a risk if Beijing were to go after that, and we’d have to talk about that another time. So there’s your one, going on a limb to say something specific. But I think more broadly, I mean, I agree that we’re moving past the era of just an export control, right? There’s so much more dimensionality retaliation across the lawfare toolkit, but even within the realm of export controls.

And so, I agree with Gerard as well on things like API that there are costs that are not just financial that definitely seem to factor in. I think Beijing has had many opportunities to cause more damage, if it so chose, against a particular economy, against a particular sector, against particular institutions or interests that are very clearly not taken or stopped short of. And I think API is a good example. If you really want to force the other person to do what you want, API is not a bad target, but if you also want to be accused of killing people.

There are costs beyond financial that Beijing has been very wary of, including, for example, hurting the broad consuming public. I haven’t seen them go after, for example, things that would just drive inflation. I know it’s one of the early kind of questions– would Beijing go after kind of downstream goods? And there’s other reasons for that. Like Gerard said, they’re not the top strategic targets, but I also think the cost is, you know, right now, I think more Americans are mad at America than China, and for the current situation when it comes to consumers.

Not talking about the fans, not talking about the people involved in procurement, but the average person. There’s power in that, right? And so actually, I mean, one question I have going further down the chain, I had for Gerard is, does Beijing’s reticence to use certain tools in intermediate goods, obviously, there are potential risks there, but for the ones that aren’t risks, is that enough for the U.S. to focus less on de-risking, diversifying, decoupling in certain areas?

Is the sense that, for example, Beijing would not want to target certain sectors, is that enough for the U.S. to feel more comfortable in that space? Like, right now, I feel like the strategy in D.C. is decouple as much as possible, de-risk every possible thing that China has any leverage over. Are there pockets where we can relax a little bit, or should we continue to try to push to de-risk as much as humanly possible, just because China has control, regardless of the analysis of its likelihood of using it?

How much can we trust that? So, I’m going to fight the premise a little bit, which is to say that it is true that in D.C., where I live, there’s a lot of concern about reliance on China. But as a matter of policy, the focus is overwhelmingly on critical minerals. There are a lot of other things like, say, industrial chemicals, right? Which is there are various kinds, but that’s sort of a decent bucket of targets.

I am not aware of any U.S. industrial policy specifically to address that. The point I keep making to clients is that we knew, the West, everyone knew, about the risks of reliance on China for processing of rare earths 15, 16 years ago. And yet, there was not really a concerted Western response until about a year ago. Why? It’s because China had to fully weaponize them against the U.S., they’d use them a little bit against Japan.

So, we talked about the policy response function in Beijing, but the policy response function in the West, certainly in the United States, when it comes to industrial policy, is not all that forward-leaning. It’s quite reactive. So, there might be a lot of things where the system in the U.S. is good at sort of prohibiting emerging reliances on the technology side.

So, you see that with some of the actions with the FCC just announcing, for example, that they’re going to basically ban new types of robots coming from China. But there’s nothing equivalent on the lower value added intermediate goods side of things. I think it’s because there’s just too many goods to track. I actually don’t think the U.S. government is that good at tracking these things.

But maybe the more important point is even if they were, they don’t have the policy instruments or enough fiscal firepower to actually address all of them anyway. So, my sort of scary so-what of all of this is that my belief, my observation, is that Chinese industrial policy is quite good at targeting a very wide set of goods, in this case, intermediate goods.

Whereas the Western industrial policy apparatus, which is much less intricate and less developed, is more responsive. And so, the Chinese have this sort of first mover advantage in all cases. So, it might be true that the U.S. prevents reliance on China for, say, electric vehicles because the U.S. doesn’t allow any Chinese electric vehicles to come in.

But do the same thing across, say, pharmaceutical inputs or across industrial chemicals, things that are not really all that valuable but are still part of the supply chain? I doubt it. And so, I actually don’t think that the Western response can front-run Chinese industrial policy, so to speak, which is why I push against the premise of your question. So, you might say that the West might be less worried about things like batteries if you think there’s a big financial cost for China imposing controls on that, which I agree with.

But nonetheless, there are other things they’re going to miss. And I think the Chinese are going to map those things out.

Andrew: I’ve got a couple of thoughts and a bunch of questions. So, one is I think almost the exception that proves the rule of what you just said is that the FCC is now talking about restricting inputs into AI data centers from China, right? And it’s kind of like, oh, we found this one intermediate good, right? First of all, it’s the FCC doing it, a smaller regulatory body, not the Department of Commerce would do larger-scale export controls.

And secondly, it’s only there because it is part of the AI buildup, right? It is the sexy thing that everybody’s focused on. And data centers in particular are a huge, you know, they’re becoming a political issue. They’re part of the infrastructure buildup, all that stuff. So, I think the fact that the FCC is like looking ahead at this one intermediate good really backs up your point because it’s so rare that they would do that. I guess on the back of your statements just now, I wanted to bring in Dinny to see, I mean, again, you’ve done a lot of work on this intermediate goods stuff… Well, I’ll bring Dinny in and then have Gerard respond.

How much of this, if you can put a proportion on it, China’s investment in intermediate goods is for the express purposes of future weaponization versus this is just a strategy to grow our exports versus we just want to ensconce ourselves in supply chains, not for weaponization’s sake, but for our own economic security’s sake? What do you think about that, Dinny?

Dinny: It started off as the latter. So, I mean, Xi Jinping first started talking about this, I think, back in, probably going to get it slightly wrong, but I think it was about 2019, the idea of, you know, we need to do, that Intermediate goods is something that we have vested interest in investing more in and expanding our capacity. And the idea was that China would become so embedded in global supply chains that it’d be incredibly difficult to decouple. It’d be very difficult to extract China from them.

And so, it was a defensive measure. It kind of speaks to what Gerard was talking about before. It’s like, you know, it’s a smaller target. It doesn’t attract the same attention as sort of a consumer brand or anything that, you know, it’s sort of an end product. And so, it was a way to protect China’s export machine by embedding it more deeply in global supply chains and make it more difficult to extract China from it.

And so, in a world of decoupling and de-risking, it was a degree of protection that China could lean into. And I think, over time, it’s probably evolved because as China becomes more embedded in those supply chains and the rest of the world becomes more dependent on China for procurement, it gives China unprecedented power to sort of withhold supply. And so, yeah, I don’t think it started off as a weapon, but the success of the policy has certainly created weaponization opportunities.

Andrew: Gerard, what do you think? Well, let me restate the question. If we break it down, weaponization versus just growing exports versus economic and industrial or supply chain security, where do you put the emphasis? And then I guess the follow-up question is, does it matter? Am I splitting hairs? It’s all everything all the time, just because this helps China out economically?

Gerard: So, I agree with Dinny that you can see clearly in the planning, going back to maybe probably around 2019, that the fixation on supply chain security that was embedded in the 14-5-year plan, I think that was born out of a sense of insecurity based on U.S. actions, particularly what happened with Huawei and ZTE, and then also the trade war, right? So, I actually think it does come primarily from a position of insecurity. But that’s evolving over time as we’re getting more confidence.

And I think you’ve seen over the last roughly year or two, much more confident Beijing in how they’ve been using the export controls and how they’ve handled the United States for various reasons. So, it could be that, yes, most of this is “defensive” in origin, but then it has offensive implications. In terms of growing exports, it’s obvious that they care about manufacturing as a source of growth and they generally care about exports.

But a lot of these things that are going to be choke points, those that are actually the best types of choke points, are precisely those things that actually aren’t worth all that much. So, from an overall developmental perspective, they don’t actually do much for China. What they do is buy China resiliency against coercion against them. But then once you do that, with sort of the same mechanisms, you have your own indigenous supply, and then it gets big enough, it starts to be 50% or more of global supply, you then created a weapon, right? So, it’s sort of like a distinction without a difference.

Andrew: What do you, Gerard, and then I’ll bring Dinny and Cory on this as well, make of this argument that we touched on a little bit with the whole processing versus upstream inputs piece? That China sort of shot the starting gun on companies diversifying away from China, and therefore, the export controls actually backfired, they overreached. What do you make of that in terms of, A, the current situation, but more importantly, what we’re talking about going forward? Like, if we say China overreached, as having seen that in the instance of rare earths, will that create any policy impetus or a policy roadmap to avoid more dependencies in the future at all, in your view?

Gerard: So, the response function that Beijing has to watch for is not so much what companies do, it’s what governments do to facilitate diversification for companies. And that’s because for things like rare earths, if there is no state support, if there is no industrial policy, there’s pretty clearly a limit on what companies are going to be able to do on their own, because it just doesn’t make any sense for any one of them at least to pay for it. So, basically, I think they do have to be careful to not provoke a massive industrial policy response against them.

However, because there’s only so much industrial policy capacity in the West, and they’re quite focused on critical minerals at the moment, I think the risk of overreach there is currently pretty low. If you ask the question in the other direction, I think the U.S. export controls on China, or at least the early entity listing, and then later export controls, particularly what happened after 2022 with chips, that clearly has triggered a massive industrial policy response. And so, insofar as you’re seeing this as sort of an industrial policy race on both sides, it’s advantaged China for basically institutional reasons. And I think they are playing that to their advantage.

Andrew: Cory, I see vigorous thing that in your head. What are your thoughts?

Cory: Yep, absolutely that. And tying it to the biggest points on intermediate goods and kind of the limitations of Western industrial policy more broadly, I think one exactly, companies cannot replicate these production chains. I had conversations before this even blew up about companies who considered it, said it’s not worth it, spoke with the same companies after gallium, germanium, tungsten, all these, and finally rare earth controls, and they said, “Yeah, still can’t do it, still not worth it.” And these are some of the biggest companies in the world. They need the support. It just doesn’t make economic sense otherwise.

And, as that conversation happens, you know, we start thinking ahead companies, like, how do we not get in this position again? How do we de-risk and diversify our supply chains before the next action, which is why everyone’s asking, “What’s next?” Because they want to get ahead of it. But the calculus doesn’t change. They’re even less able to get around some of these other things than they are where it’s in many cases from the financial perspective, right?

And to tie in Gerard’s point from earlier, this gets even more difficult the further down you go into intermediate goods. There are too many of them, right? And I think exactly right. I see the same thing where the U.S. is able to focus industrial policy attention on maybe a couple of things. We see it on rare earths for sure. We’ve seen a couple of other things, but pretty modest, honestly, overall. And you frankly don’t see any industrial policy, meaningful industrial policy actions, even where there’s attention when it comes to certain critical minerals that definitely need diversification today or already controlled, but they just aren’t Earth since they don’t get a type of attention.

So, I think when it comes to has Beijing overreach, is Beijing going to face a slew of industrial policies that erode future leverage? The U.S. is struggling to erode the leverage it already has in rare earths, and it’s going to be harder to erode the future types of leverage on intermediate goods. The U.S. is going to be even less able to do that for the future goods than is for the current. So yeah, that’s my take here.

Gerard: Can I make a political point? I know this show is about China, but we’re talking about U.S. and China, so I’ll make a point about the U.S. We keep saying, or I keep saying, that and the U.S. is not as responsive, not as sweeping with industrial policy compared to China, which is true. And there are many reasons for that. But I think one important thing to focus on now is that the U.S. institutionally and legally has a bias towards mechanisms that give executive-level discretion, particularly when it comes to banning things.

That’s things like export controls or ICTS rule or things like what the FCC just did. It does not have the same level of discretion on the fiscal side, which is to say it doesn’t have the means of greatly empowering industrial policy in the way the Chinese system does. So, to take an example of critical minerals, and Cory, correct me if I’m wrong on this, apart for some small sort of top-up measures that were part of NDAAs or the One Big Beautiful Bill, there is no sort of sweeping congressional legislation that has been passed on critical minerals.

It’s mostly running through executive discretion, largely through the Department of War and the Department of energy, but there’s no comprehensive plan. There’s not a lot of actual money behind it, even though fiscally speaking, the U.S. could afford it. And I think it’s really revealed preference. And so, there’s a lot of talk in this town, there has been really for the past eight years or so about industrial policy for various reasons, including climate change. But my point is revealed preference is pretty important.

And the U.S. is actually just not all that disposed to do industrial policy that has any real fiscal outlays, except for rare exceptions like the IRA or CHIPS. And that’s basically the only ones I could think of, except for a few things on the defense side. And so even if we identify these goods, unless there’s going to be some mechanism to actually fund the response to them, it’s not just a question of, oh, do we have enough expertise or do we not know what those goods are?

Is there’s a literally fiscal authority to make it work. The U.S. does not have the equivalent of the Chinese state-owned financial sector to direct credit or government guidance funds at scale. And so, there is sort of an instrument in a political economy disadvantage here.

Cory: Absolutely. And I’d add to that, they’ve revealed preference. Obviously, there’s party line, there’s other ideology, this administration, etc. But when it comes to supply versus demand side, there’s a lot of focus on let’s keep feedstock here so we can get recycling all of black mass and all these other materials. What would be more productive, I would argue, for developing a battery industry would be to help support demand for batteries, which would be an EV policy, which was under the IRA, right?

So, there’s obviously a lot of complexity to what happened with IRA rollbacks and everything. But I’d argue that there’s a problem. It’s a supply problem. We can fix it with this targeted thing. And even within that, it’s very restricted, as you said. And I’d argue that’s another aspect of the reveal preference.

Andrew: Yeah. And Dinny, why don’t you talk a little bit? You just made a great point on the demand side, Cory, on the back of Gerard’s comments, which is, you know, not only is the U.S. policy not good at incentivizing, it’s really bad at creating demand for goods, which is what Chinese industrial policy is particularly good at. Dinny, wouldn’t you say?

Dinny: Yeah, look, I wanted to go back to this question about overreach, actually, because I think what Gerard and Cory were saying is spot on when it comes to specific issues, instances of lawfare. I mean, so far, we probably haven’t seen China overreach. And as Gerard said, I mean, what the U.S. did in terms of the CHIPS Act and whatnot sort of ended up in a massive industrial response in China.

But I think if we’re talking about Chinese overreach, I don’t think it’s with specific industries or specific instances of lawfare or protections or whatever. I think perhaps what we’re looking at is a more macro level, and it’s kind of what we were talking about a couple of weeks ago, or was it even just last week, Andrew, with the Ministry of Commerce’s essay about how China isn’t dealing with overcapacity and a kind of defense of its trade surplus and whatnot.

And I think if we’re looking at overreach or we’re looking for instances of overreach, that might be where to find it. I mean, China in its full-throated defense of its trade surplus saying, “Yeah, sure, we use subsidies, but so do you. We adhere to WTO rules. We are the defenders of the free trade regime.” But then you look at sort of Europe, for example, you know, and other parts of the world, you know, developed world where increasingly, if you’re kind of looking at the free trade regimes that currently stands, European nations in particular must be looking at and going, “This isn’t what we originally signed up for,” right?

Because free trade, more or less, was supposed to be a win-win situation, not a Chinese win-win, but a win-win for everybody, right? Where you sign up and you bring down your tariff barriers and your protectionist barriers, and sure, some of your industries are going to suffer, but you’re going to come out the front because that’s why everybody got involved in it.

And for a lot of countries in the world at the moment, there isn’t any clear benefit from the free trade regime as it currently stands because of just the sheer overwhelming power of China’s export machine. So, I think for me, the space to watch is more that kind of macro level of overreach. China says it’s sort of the defender of free trade and clearly sort of supports the current trade regime because it gets so much out of it.

But is it potentially undermining the sustainability of that system because more and more countries are going to find that they’re actually not benefiting in a way that they intended, that they thought they would from this regime and wake up one morning and go, you know, we want out because we’re not getting anything from it?

And I think the EU will be the proverbial canary in the coal mine because of China 2.0. Now, of course, you know, China shot 2.0 with the Europeans, it’s probably a slow moving response or a reaction given the sort of the way the EU works. But I think, to the extent we’re talking overreach, that’s the place to watch rather than sort of China’s management of individual industries or products.

Andrew: Yeah, and Gerard, I know you’ll have thoughts on this, so I want to let you cook on it for a minute. But I guess the way I bring it together in my mind is we talk about the overreach on weaponization of export controls and Dinny making the case that China’s overreaching in terms of, you know, its overall current account and trade surplus. We’re kind of getting to a situation which you can understand why other countries are frustrated with is China’s basically saying, “You have to buy all of our stuff, except you can’t buy certain stuff.”

And really kind of weaponizing the surplus in a way, saying we’re going to deluge your economies with all of these goods, except for really high value stuff or really stuff that goes into military applications. And that you can’t buy from us, and we’re dominant in it. I mean, that’s not a tenable situation at all. Gerard, what’s your thought on all of it?

Gerard: There’s maybe a dark irony that for years, Western companies saw China as being the market of the future. So, there was sort of a demand side narrative, but it turns out that China’s power is on a producer side. If only someone had been paying attention to Marxism, maybe that would be a little more predictable. That’s clearly where the policy has been driving at, right? And so, they are weaponizing it to some extent.

I would say to Dinny’s comment, maybe there’s different layers of overreach. So, I think Beijing more routinely commits types of diplomatic overreach. I think having a paper that says, “Basically, we deny all charges when it comes to industrial overcapacity, it doesn’t exist, blah, blah, blah.” Or telling the IMF, “No, our undervalued exchange rate has no bearing because prices basically don’t matter and our subsidies are actually in no way boosting our competitiveness, which raises the question, why do you have subsidies at all? But okay.”

I think that stuff enables the environment that is happening now in Brussels, where there’s serious discussion of finally doing something. However, it doesn’t operate on the layer of triggering a specific response function to get those countries to do something, particularly on the supply chain side, to target those goods. So, I think China has a pretty good read on other countries’ political economies in terms of their ability to actually respond meaningfully.

They don’t seem to be all that concerned of whether they’ve made the Europeans that upset. It’s more of, are they going to do something that is actually going to cause problems? And there, the threshold is much higher. So it might be true that China has committed diplomatic overreach in various instances. I just don’t think they’ve caused the same sort of specific policy overreach that’s triggered a response function that is that much of a problem for them.

Andrew: Wholeheartedly agree. My pet peeve is when prognosticators describe some action China has taken or position China has taken and describe it as untenable because it’s awkward, as if China is a person and they can’t stand awkwardness. And so, at some point, they’ll have to relent because the situation is just too awkward. We can’t deal with the awkwardness.

But actually, China have to have these dynamics be quite uncomfortable, even I would say awkward for other countries, and it might even prefer that because that’s the kind of situation where it’s uncomfortable, but it’s not so extreme that a country or a block of countries is actually going to push back. And that’s sort of the sweet spot for China in terms of exactly what you’re saying, sort of ruffling feathers, but not to the point where it actually spurs action a lot of times.

Well, Cory, you’ve got something. I do want to get to some of the specific, like what we think the upcoming choke points will be. And I want to give us a little bit of time for that because I know Gerard pointed out a lot of these in his paper, and I know Cory’s in a lot of work. But Cory, jump in on your thoughts here.

Cory: No, I agree. I think trying to hit that sweet spot seems to be the objective in many domains, politically and technically on the controls of export technology, as well as on the material goods. And I think you saw this, for example, I think the most robust overreach focused conversations I’ve had were early on after the rare earth export controls, when it became, again, this is reading between the lines, but I say it with fair confidence that Beijing did not intend to cause quite as much fear and anxiety in Europe with the rare earth export controls as they actually they did.

And they had to then have those conversations around, do we whitelist, do we green channel, etc. And eventually they got to the point where like, okay, yeah, Europe is angry, but not in a position to do that much more about it. And then rare earth, enough things got through that. It kind of held at this exact, that awkward, but not like Europe is going to do anything major over this. And I think that’s an example where when we talk about leverage, we talk about the dimensionality of leverage. That’s why it’s so important that China has the ability to make certain efforts more intense or less intense.

So, whether they move from a restriction to a prohibition, allow more exports or less exports, I think that, in large part, is the way that it’s able to calibrate and try to hit that sweet spot without going too far. And sometimes it does go a bit too far and then it dials it back a little bit. And actually, I agree on the diplomatic. I mean, the last several trips to Beijing this year, back and forth, was shocking to me how the level of technical depth of so many officials, and some of the, what I felt personally were ham-fisted diplomatic analyses of like, no, do you understand how big a deal certain things are diplomatically?

And so, while there’s a much greater, I feel, and again, this is not a definitive statement, the sample size is modest, but it does strike me that the average bureaucrat has a much deeper understanding of supply chain issues, industrial security, and all this stuff than you have, say, for example, in the U.S., where the U.S. has much less experience with industrial policy. But the diplomatic capabilities are not comparable in my view, at least in terms of what they were, certainly what they’re messaging, how they’re handling that.

I think, for example, the degree of concern around the cutoff of Japan, which Beijing, others have said this before, but Beijing seems to view the cutoff of rare earth exports and other critical matter exports to Japan as a bilateral issue. The entire world is now getting really, I’ll be polite with it, in a hard state, in a hard position, because Japan is not able to process things or to produce things that everyone else depends on.

So, this bilateral thing for China and Japan is not bilateral at all to the rest of the world, including Japan, including the U.S., including the EU. And that’s the case where I think if Beijing were listening or were acting more on the diplomatic side, diplomats have been saying this. This is not a surprise. This is something that diplomatic efforts have been trying to signal a message, but Beijing is not taking that seriously. And so, that’s where I think we could get into issues where it’s got a lot of tools to hit the sweet spot, technically, but maybe diplomatically it’s missing where the sweet spot really lives. I’m not sure, but that’s where I’d see it this day.

Andrew: Yeah, nuance certainly is not always the Chinese Communist Party’s forte. Great discussion so far. I do want to, as I mentioned a couple of times, drill down a little bit. We’ve talked about really the motivations, the current weaponization centered around critical minerals and rare earths. We’ve dug into the intermediates good piece at kind of the, call it 10,000 foot level. Let’s go a little bit closer to 5,000 foot level.

Gerard, you did a lot of work looking at what’s coming next. So critical minerals are really the tip of the iceberg. And you looked at, for example, Chinese dominance in battery active materials, super hard materials, power electronics, grid inverters, chemical intermediaries like fluorine chemicals, you mentioned pharmaceutical starting materials. What’s on your list for kind of, even just if it’s one or two things, that really are at the top of your list for where Beijing might zero in in the future that, you know, companies should be looking for, policymakers should be looking for? Where do you start with that?

Gerard: So, I would separate the question between what are goods that China might impose export controls on narrowly for sort of defensive reasons where it doesn’t want to allow its technology to go offshore for, you know, offshoring capabilities, right? But those are not meant necessarily to be retaliatory or necessarily to impose pain. That’s one set. The set we were looking at is one of the things that could replace critical minerals as a coercive tool for leverage. And there, it’s those five buckets you just mentioned.

So, it’s things related to batteries, super hard materials, power-related things, chemical things, and pharmaceutical things, right? I don’t know which one China is going to use. It thus far has not really had to use any others and won’t need to for at least several years. My guess is, of those groups, chemicals are going to be kind of an obvious one or certain materials because they are so upstream for reasons we already discussed, going after pharmaceutical APIs, while technically possible, is politically suboptimal.

And batteries are things where there is a real economic cost. Although you could imagine if China maintains its dominance of the technology, particularly with, say, Europe and the global south, not so much with the U.S. because it has more protective measures. Those could be weaponized. But I actually, I don’t know if they have a list of like what’s ready to go next.

I mean, they probably do for specific countries, but, by and large, I think the sort of magazine has some depth left in it on the critical mineral side.

Andrew: Yeah, maybe they’re like a coach in a football game that has, you know, he’s got a list of five to ten fourth-down plays that he can pull from, but he doesn’t know which one he’s going to pull until the actual situation arrives. As you can tell, I love sports metaphors, and they’re always very good, as is this one.

Gerard: Everyone understands American football. It’s a great reference.

Andrew: Cory, what are your thoughts on what’s next and how Gerard’s thinking about it?

Cory: My thought is that then you should introduce the cricket and rugby metaphors and watch them go everyone’s head. I think that’ll be the next best stuff here. No, in terms of predicting, I completely agree with all that. And I think chemicals in particular, I mean, it’s such a broad space. And so, I mean, more than saying, “Hey, we’re going after gallium nitride, I think one of the most approximate risks is probably riders where you start expanding existing controls a little bit further down the production chain, right?

It wouldn’t be hard to extend some of the existing controls to some of the, like, two production steps down from that. So, that’s one proximate thing, right? So, that’s one set of materials that we already track because they’re already impacted, but they could be much more impacted.

Andrew: Can you give a concrete example of one of those? I hate to put you on the spot, but just...

Cory: No, not at all, not at all. Yeah, so you have super hard materials, right, for example. That mostly is looking at tungsten carbide, and you’re looking at carbon-boron nitride, and then you have diamond windows which are using semiconductors. You also have things like types of silicon carbide that most of their applications are not actually controlled like just very specific ones. You could expand that, and that would be important in photonics and all these other applications. You have a lot of the gallium substrates, but you don’t have all of them, right?

So, you notice I’m focused on semiconductor. Guess what? We’ve been thinking about that a lot lately. Well, now on the flip side, you also have the potential, and Gerard, I’m not going to plant my flag on this piece, but when it comes to some mineral categories, there are certain types of control, I think, would be very difficult, very risky. So, lithium, for example, it’s kind of the canonical, why didn’t China do lithium? And it’s like China produces most of the world’s lithium and the cathodes and the batteries, and what they don’t control is the actual upstream supply of Spodumene, which come from mostly Latin America, specifically lithium triangle specifically Chile, and then Australia, U.S. treaty ally on the other side is where China’s getting most of its lithium.

So, you see them, this thing I mentioned before, increased domestic development of lithium, which is kind of a terrible source. It’s a lepidolite, which is not commercially attractive, and China’s investing in it just to have it. But I think that’s an example where Beijing’s going to be very careful about a blanket ban on lithium exports because they’re so upstream and upstream dependent. But there’s some really interesting intermediates, CAM, the cathode active materials, and pCAM which is the precursor cathode active material that stuff I feel like you could mess with that market if you wanted to, maybe more subtle than an export restriction.

China has a lot of control over those markets, right? So, the main thing that I would flag is that the whole response playbook has become much more diversified, obviously, in terms of tools available. It’s also become more creative within those tools. I think we’ve seen much more creativity within the application. And so, that’s why I’m thinking more broadly about rather than just it’s magnesium, it’s titanium, right? Yes. But what else?

I would just flag that there’s more space, that the possibility space is broadening. And that’s what makes it so difficult. And that’s why we go through, not just at a high level, but we literally do this mapping on a component and input basis because there’s so much stuff that parts. There’s a lot of possibility space there.

Andrew: Well, thanks for these kind of more detailed looks at what may be coming. We’re at over an hour already. And I want to make sure that I respect everybody’s time, especially our guest, Gerard. But I want to sort of give you a last word here, Gerard. We’ve kind of been thinking about what’s coming down the pike. And one other interesting argument you made in your paper, I thought, was that the threshold for usage of these various economic coercion measures is falling. And then you specifically pointed to the 1260H list, which is a Defense Department list that the Defense Department expanded and China responded to.

Talk to us about your thinking about sort of that lowering threshold and what you think that means going forward in terms of how China approaches these issues.

Gerard: Over the past year or two, China has been responding in a tit-for-tat way to pretty much everything the U.S. or the Europeans, to some extent the Japanese are doing, there’s more to a political side to that, with measures that it’s designed to be somewhat parallel. So it used to be, say, 10 years ago, China did retaliate in certain cases, but it was typically through import restrictions. So, messing with Australian wine exports to China, for example. They now have a parallel legal architecture, and the threshold for using it is basically if the West does anything it thinks crosses the line, it has a parallel response.

This has happened even in the past few weeks, with the U.S. adding Entities for the Uyghur Forced Labor Protection Act, and then China having a parallel act. They’re not necessarily doing it to pose massive cost. What they’re trying to do is signal for everything you do, we have a response. And that response is becoming more powerful. And if you take the intermediate goods argument seriously, as I think you should, over the medium term, it becomes more forceful and more responsive to those actions, which means that the big sort of geopolitical so-one of all of this is that China is trying to teach the West and has, I think, to some extent, taught President Trump, that they don’t have unilateral freedom of action when it comes to imposing offensive measures on China.

And it has real bearing on policy debates even now. So, I think there’s an actual debate in the administration of what to do about the Chinese open-weight models, particularly after Moonshot and K3, I think you guys had a separate episode on this, and people were expecting, and we are expecting some response to that, but it’s not clear what the response is. And part of the reason for that is, there’s maybe some commercial reasons, but it’s also that the U.S. White House is aware if they do something as aggressive as, say, banning Chinese models, then China is going to respond. And we know what they’re going to do.

They’re going to probably do something with rare earths, and then the U.S. will probably have to back down. And so, expect that equilibrium. Think of it as like an arms race where now both sides have demonstrated weapons. Both sides have shown they can shoot as weapons. And now it’s new equilibrium. Now, maybe the positive spin on this is like an arms race. If both sides know the other is armed, then it actually could be stabilizing somewhat perversely, right? It’s a little bit of mutually assured destruction.

But both sides can misread each other. I think the U.S. certainly misread China’s response to the 50% BIS rule last September, and they were not expecting China to respond so forcefully with its own rare earth export patrols, which were later shelved as part of the Busan truce. So, I think both sides are sort of learning, and they’re trying to teach the U.S. and Europe, basically, like, “Don’t mess with us, we’re going to punch back.”

And if that is accepted, or to the extent that it is accepted, it just means that policy in the West going forward has to be more careful and probably has to rely less on things like export controls and maybe to some extent tariffs than it has so far. And that means what’s left is more domestic industrial policy, which is still more or less in play for the West. But for reasons I already expressed, that’s not the comparative advantage of the West. So, that is it’s overall tilting the field towards China’s advantages.

Andrew: Yeah, great points. I think we should leave it there.

I’ll just, you know, speaker’s or host’s prerogative, make one final point, which is I would love it if the U.S. moved in that direction without getting too much on the soapbox. I think we should compete with China, right? You know, instead of complaining about China cheating and trying to hold them back and all this stuff. Yeah, we need a multifaceted toolkit, of course. But China’s on the playing field and they’re competing, and they’re trying to assert their interests.

Let’s assert ours by trying to invest at home, make sure that our companies are world-leading, that we’ve got the supplies we need. I don’t know if you call that more offensive or defensive in this context, but just kind of investing in our own capabilities, I think, is a longer-term and more sort of productive and proactive approach.

Hopefully, that’s a lesson we learned, and we can evolve and maybe become better at kind of that domestic investment that, as you say, we’re kind of currently disadvantaged at. So, that’s my hope. I’ll leave that hopefully for everyone on an optimistic note. But with that, Gerard, thanks so much for the time. Great discussion as always. Great to have you back on, man.

Gerard: Thank you for having me.

Andrew: And Dinny and Cory, thanks as always, fellas. Good to see you.

Cory: Cheers.

Andrew: And of course, thanks to the listeners. We appreciate it. We’ll see you next time. Bye, everybody.

• And this time, officials did something they rarely do – naming exactly which US actions they were responding to and why.

On this episode of the Trivium China Podcast, Andrew Polk sits down with Cory Combs (Head of Supply Chain and Critical Minerals Research) to unpack:

• What exactly landed in MofCom’s four-part policy package — from countersanctions on US biotech and compliance firms to China’s first ever foreign-trade national security investigation

• Why this round of retaliation was aimed squarely at the FCC and DHS, and how it traces back to actions on robotics, drones, and forced-labor sanctions

• Whether Beijing’s unusually direct language about the Busan detente is a warning shot or a sign the deal is really at risk

• Why neither side seems ready to blow up the agreement just yet, even as both keep testing its edges

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 today we’re doing another quick reaction episode. I’m going to be talking with Trivium’s Head of Supply Chain and Critical Minerals Research, Cory Combs, about the latest economic coercion measures or retaliation measures, as they would see it, taken by China. But first, you know, Cory, how are you doing today, man?

Cory Combs: Doing very well. Thank you. Yeah. Happy to get into this.

Andrew: Yeah. Good to have you back. So, I already teased it — China dropped a large batch of retaliatory economic restrictions on August 5th. These were kind of against a range of U.S. actors and entities. The measures included some formal counter-sanctions and a spate of other things that we’re going to walk through. We’re going to talk about exactly what was done, what actions were taken by the Ministry of Commerce, which was the one officially putting these measures forth, the context that provoked these actions, and then talk about what it all means both for the short-term in U.S.-China relations and more broadly for that economic relationship. So, let’s get into it.

All right, Cory, like I said, August 5th. So, we’re recording this on August 10th in the afternoon, East Coast time, 5.45 p.m. It’s been a few days, but I was on vacation last week. So, I wanted to get you on the horn as quickly as I could once we were back to work. But why don’t you just start by walking us through what actually landed here? What actions did MOFCOM announce?

Cory: Yeah. So, on August 5th, we have two sets of documents. We have two orders and two announcements. And the orders are these kind of overarching orders signed by the minister. And the announcements are largely implementation of policy. So, I’ll kind of walk through all four documents in order. Order No. 2 has six counter sanctions. Specifically, these appear to be direct responses to the UFLPA, or Uyghur Forced Labor Prevention Act sanctions from the U.S. side.

And so, they’re applied to six different entities, including Applied Sciences DNA, Stratum Reservoir, Altana, folks in bio might recognize some of these names, as well as some compliance and human rights groups. So, we have Responsible Business Alliance, Verite Group, which is a labor practices group, among other things, and then Human Rights in China, HRiC. So, the order sanctions their business activities within China. So, they’re basically, they’re not on the ground anymore. It’s a sudden abrupt change, direct countermeasure against UFLPA.

We have Order No. 3, which is a countermeasure under the Anti-Foreign Sanctions Law. So this is, again, quite literally, a counter-sanction against the FCC measures in the U.S. Specifically, these are applied to U.S. Compliance Testing LLC. Beijing has accused this company, and let’s just be very clear, I’ve seen a couple places, it’s like someone has mistranslated this is applied to U.S. compliance testing companies. It is the name of an actual company, an actual LLC, Compliance Testing, right? Beijing has accused them of assisting in the FCC’s investigation and ultimate actions that in China’s, this is translated verbatim, ‘actions that harm China’s sovereignty, security, and development interests,’ right?

And so, these compliance efforts are deemed anti-China, right? So, the broad question here is, first, you have all the Chinese entities are now prohibited from engaging with that LLC in any business activity. That obviously means they can’t do much on compliance work of Chinese companies or anyone working with Chinese companies. So, one of the questions immediately is, is this going to be a broader issue with compliance? So, we’ll get to that. So, those are the orders. The announcements: the first is Announcement 33 of 2026. These are numbered annually.

And this starts a national security investigation into foreign trade regarding, and this is a really interesting one, imported printing, copying, and office equipment. So, this is not exactly what you’d think of, at least for me, as kind of a national security imperative, but it’s under the hood. What’s really targeting is foreign-developed software. And that software is used in imported office equipment. They’re not naming specific entities, but there’s a lot of prime candidates here. I mean, in the U.S., you have things like HP, you have Lexmark under Ninestar, you have Xerox.

In Japan, you’d have entities like Canon, Ricoh, Kyocera, Konica, right? So, just to be clear, it didn’t name those entities. I don’t want everyone to be like, “Okay, this is happening to this company.” But this is a broad national security investigation into foreign trade associated with those foreign office equipment and other products. So, it sounds a little bit niche, but I want to flag, this is China’s first-ever foreign trade national security investigation of this type. So, it’s kind of an odd one, but it’s also the first in this front.

So, very notable. I think it’ll be referenced a lot as we move forward as we’re trying to piece… trying to take out the lessons from this will be tricky. And then finally, you have announcement 34, which strengthens the export control specifically on dual-use items “related to drones,” right? So that’s pretty broad. You might imagine a few things. You have propellers, you have the batteries, you have all that stuff. Every affected export to the U.S., specifically, will undergo strict review.

And it also makes very clear there’ll be no fast-tracking or simplified approvals. Basically, we’re looking at a very high-friction process.

Andrew: Okay, great. Thanks for laying out the details. I want to get into the implications of each of those, but maybe before we do that, we start with the trigger. Why did this happen now? Why did China take these actions? Walk us through the thinking there. I mean, this isn’t conjecture. They were pretty forthright about this, right?

Cory: Yeah, MOFCOM’s spokesperson, they had a press conference and they were very clear that these are all responses to, again, China’s language, ‘negative China-related measures,’ and particularly the FCC and DHS. So I’ll talk about those two in particular. But the concerns here from China’s part, from Beijing’s part, date back to a number of things, a number of actions on drones, optical cables, and others. So, the FCC regulations in particular, it’s the July 28 ban on imports of Chinese humanoid robots, quadruped robots, power inverters, etc. Basically, the FCC has build this as a way to protect the U.S. AI industry, including not just power inverters is really talking about batteries and energy supply for data centers, but then you have the embodied AI, the humanoid robots and all that stuff.

So, the FCC is explicitly targeting this to “protect” the U.S. from Chinese capabilities there. This is also, by the way, there are reports that the administration is drafting a much broader ban on Chinese data center components and various other things. Of course, this is very problematic for China from its view, because those are very high-value exports in things it’s very good at and trying to develop. So again, very much in China’s economic model is increasing exports of these high-value things. Then you have July 31st, you have the Department of Homeland Security announced an expansion of the UFLPA entity list.

And again, that’s the Uyghur Forced Labor Prevention Act entity list. And so, these are companies that the U.S. alleges are involved in human rights abuses in Xinjiang, basically. It added 43 companies, and they span a whole bunch of different areas, a lot of them in minerals. I mean, we have steel, copper, lithium, caustic soda, and some other stuff. Also, notably, there are several biopharma and biochemicals companies as well. So, bio is in the list for the first time ever, but it is a notable issue.

Anytime you’re targeting Chinese bio right now, it’s very sensitive because that is one of the future industries that Beijing is really looking to develop. Those are the two main sets of actions that I think triggered all of this.

Andrew: Yeah. And we’ll get into this a little bit more in a minute in terms of how this may impact the Busan Agreement that occurred in November of last year and is expected to be renewed in the upcoming, you know, talks between the U.S. and China with Xi Jinping coming to Washington, D.C. in September, of course, next month. I will just say, I think from the U.S. side, I had heard that various parts of the U.S. government were looking for ways to continue pressing China that was “outside the eye of Sauron,” by which they mean, frankly, the White House.

The White House has been, I mean, this public reporting, very, or has taking a strong interest in tamping down any actions towards China in order to maintain stability, to maintain the Busan Agreement, to have a productive and well-received trip to the U.S. by Xi Jinping. And I think the thinking was basically the FCC’s a little bit more ancillary. It’s not a big legislative move. It’s not a tariff. It’s not an export control. So maybe we can get away with this, right? Both get away with this by effectively end-running the White House’s desire or, you know, command for more stability. And sort of same on DHS, right?

This is kind of like, it’s not a new action per se. The legislation’s already been put in force, and they’re just adding a few more names to the list. So these are not kind of what we-

Cory: Which happens regularly.

Andrew: Yeah. It’s kind of like, these aren’t the big lead moves. They’re the AAA moves, if you will. And that’s, I think, what the people who were kind of in charge of these were thinking, right?

Cory: Were thinking, yeah.

Andrew: There are ways we can continue to press China without kind of disrupting the core of what was agreed to in Busan and the core of the ongoing negotiations. China saw it differently, which we’ll get into in a minute. So, you know, people thought they were being nuanced, maybe, or I don’t know, being, I don’t know what the right word is, that they were able to get around kind of the White House desire. And I think some of them may have thought, you know, also China wouldn’t respond.

Or maybe there are elements out there that want China to respond because they don’t like the stability, but that’s conjecture.

Cory: But one can imagine that there’s this view that you can be tough without being provocative. And maybe that’s, you know.

Andrew: Yeah. Good point. Good point. You can imagine that.

Cory: I’m not sure I’d buy that, but one could imagine.

Andrew: I’m with you. Yes. Okay. But we’ll get more into that in a second. Before we do that, talk to us about the real ramifications of this. So, there’s MOFCOM Order No.2, which sanctioned the six entities you talked about. Then there’s the counter-sanctions order, which was in response to the FCC enforcement. Then there’s the Announcement 33, which is the national security investigation on foreign software or in the printing industry. And then there’s the tightened export controls on drugs. So, those are the four things. Start with thus No. 1, MOFCOM Order No.2 on those six entities. What are the real-world implications here?

Cory: Yeah, I think a couple of the main ones for a lot of MNCs is just that, I mean, some of these entities are essential to getting facts on the ground for their compliance efforts. And so, I mean, at risk of stating the very obvious, a lot of the entities or several of the entities in question were involved in UFLPA compliance. And so, if they’re not on the ground, they probably can’t be involved in compliance.

And so, all these American companies and anyone else operating in the U.S. who has to comply, they to figure out, if they’re working with some of these entities, what their backup plan is. So, that’s a very concrete, and it is distinct from the type of counter-sanction out of the Anti-Foreign Sanctions Law, but effectively, it is a means to undercut the ability of foreign companies to comply with American law. I mean, that’s effectively what this does. And obviously, it makes things a little harder for the bio side on those companies that are affected on that side as well.

Andrew: Okay. What about Order No.2, the compliance testing LLC piece?

Cory: You know, still working through this one, but I mean, long and short is that I think the medium-term risk here is that compliance itself becomes a battleground. That is not good for anyone because compliance, by necessity, when it comes to this type of trade, you need… the whole point of compliance is to verify what’s happening on one side from the other side. I mean, it’s probably not going to work for most countries outside of China to be like, well, we had a local Chinese body, you know, certified compliance with something that like you copy or whatever else.

So, you need reciprocity, bilateral access when it comes to this type of compliance. And so, if compliance and testing types of companies are getting squeezed by counter sanctions, that’s a dangerous path to go down. And so, the implications aren’t super clear to me yet, honestly. I’m sure someone in an office somewhere is, “This is what it means for me.” And I know there are going to be specifics that we’re still working through, but I’m mostly concerned about that medium term.

And to be very clear, I do not see this as Beijing trying to systematically target compliance or testing or anything like that. This is a specifically targeted thing. But if this becomes a center point of U.S.-China lawfare and economic coercion and counter-sanctions of anything, that becomes rather dangerous very quickly. So, I’d rather we not go down that particular route.

Andrew: Okay. So before we move to the other two pieces, how big, scale of one to 10 in terms of real-world implications are these first two things we’re talking about? I guess another way to say it is, you know, what’s Beijing’s intention here? Is Beijing really trying to hit back with full force? Or is this something that’s marginally disruptive for some companies?

Kind of like not symbolic, but a little bit of a more sort of protest type retaliation to throw some further friction in the works, but not fundamentally make it so that… I mean, Beijing doesn’t want these companies to leave. They’re going to have to do compliance. Is it more of a disruption or how do you see it?

Cory: Yeah, no, I think on one hand, these are intended to demonstrate that China’s very serious. I mean, Beijing did not view this as tough, but not provocative. This was very clearly provocative. These FCC and DHS actions at the same time, exactly as you said, they’re not trying to escalate the situation per se, and they’re not looking to destroy the Busan truce or détente, right? And so that’s a fine line to walk or find a kind of tightrope there.

But I do think that is the intent. Not escalate, but show that we take this very seriously. I think it shows the willingness. In some ways, you could argue it’s increasingly creative. I know creative is probably too positive a term for this kind of action. I’m not trying to, you know, it’s not a good thing. But in terms of it’s not so straightforward as, well, if you do this, we’ll just hit the next rare earth. You know, it’s much more dynamic. It’s much more involved. There’s much more optionality, basically, so I’d put it. And I think that demonstrates that willingness to be serious, but also not escalating.

Andrew: Yeah, I think the challenge with these moves, as we’ve seen in our work, is almost by design, not almost by design, by design- these moves have asymmetric impact. And I don’t just mean asymmetric to U.S. moves. What I mean is they impact you as a company. They impact you pretty significantly, potentially. But if you’re not dealing with one of the compliance testing LLC, maybe it has no impact on you whatsoever. And so, unlike a tariff that kind of impacts all companies in that industry equally, these kinds of moves impact companies disproportionately. And that’s the challenge, I think, for companies.

I think, originally, Beijing was trying to use that as leverage. When I say originally, like months ago in the U.S., China back and forth to try to get the U.S. business community to go to the White House and say, listen, “We as X company are getting absolutely hammered here.” I think Beijing now realized that doesn’t work as a piece of leverage per se to get companies to change the White House’s approach. But the ultimate impact for companies is still quite disproportionate, depending on where you happen to land on that.

Cory: Absolutely. You know, there’s not perfect visibility on Beijing’s side either. You can’t guarantee anything, but I would nearly guarantee that Beijing does not have a perfect mapping of all the companies that rely on… right? And so, all their consumers and clients and everything. So, I think in that kind of environment of uncertainty about like, how serious is this? One counterfactual that is helpful for understanding Beijing’s positioning is if Beijing wants to do more, what could it have done?

And it could have done after everyone who does publicly work with the Responsible Business Alliance. It did not. And I do not anticipate it doing that. So, that’s a good example, I think, of just kind of ordinal ranking of actions it could have taken and kind of contextualizing. But absolutely. And this is not equally deployed. And it is a huge problem for individuals. But at a macro level, we tend to, and I recognize, that as you’re saying, you’re absolutely right, we tend to think of these things in terms of kind of broad macroeconomic impacts.

And a lot of the times they aren’t. These particular moves won’t have that type of impact, but that doesn’t mean they’re not incredibly impactful for individual. Yeah. A hundred percent with you.

Andrew: Yeah. And I mean, I think additionally, like Beijing is probably trying to limit the collateral damage to the extent it can, but kind of probably is like, there’s going to be some collateral damage. If you’re going to make an omelet, we have to break some eggs kind of thing. So, I think, you know, they’re going to probably try to map it out best they can, but they’re not going to do a ton of work to make sure no major company’s impacted. It’s just going to whack some folks, right? And that’s just part of it.

Okay. So quickly, the last two, practical impacts of Announcement 33, which is national security investigation into the software piece, and then Announcement 34, the export controls and drone-related. Both of these strike me as, as you said, the foreign trade national security or investigation is a brand-new mechanism, but both of these strike me as pretty tame. Yeah. Real world impacts. Tell me if I’m wrong.

Andrew: No, I agree. And I think, I think specifically we’ve seen a number of national security investigations and other types, or other types of commercial investigations, pardon me, that tend to get used as leverage, right? This is the kind of thing that Beijing is willing to trade more of. When it comes to a counter-sanction, that’s serious. So, like, okay, as long as the sanctions in place, the counter sanctions in place is the default presumption.

Whereas investigations, obviously with commercial investigations, trade investigations, that is obviously a little bit less… I mean, we don’t really have precedent for this, as noted. So, it’s hard to say with too much confidence, but I do think that, one, the national security investigation is inherently a bit more serious, frankly, than some of the trade investigations. But at the same time, most of these investigations have been opened in response to something, and then once that issue is kind of tamped down or there’s discussion, negotiation, those investigations tend to lead nowhere or be repealed or formally or informally. Assuming things don’t get worse, that’s what this strikes me as. And that could be proven otherwise, but that’s my default.

Andrew: Right. Well, that’s assuming things don’t get worse is an important caveat.

Cory: Right. Always a caveat.

Andrew: Yeah. Well, a couple of things. One is Beijing has shown a clear pattern, putting up countermeasures so that it can roll them back, right? Like putting entities on the Unreliable Entity List so that it can take them off as part of a negotiation, opening investigations so that it can roll them back as part of a negotiation. I think that might be part of it here. But your other question, again, we’ll get to your point that we’ll get to again later on, assuming things don’t get worse. A lot of our clients are saying, “Well, is this the first in a series of moves?” And the answer is totally path dependent.

Does the U.S. ramp things up? Do the FCC take more moves? China is not trying to, in my view, up the ante. Officials feel compelled to respond. But the point is we don’t really know where things go from here. Beijing is highly unlikely to continue ratcheting up without further provocation from the U.S., we can say that, I think.

Cory: Yes, I agree with that.

Andrew: Okay, so let’s talk through some of this stuff. So, you’ve written in some of your work, writing about some of this stuff, just how Beijing’s being more direct. They didn’t hold punches, they were very clear, this is retaliation. Talk to us about how you kind of think about that piece.

Cory: Yeah, I mean, I think there’s a couple ways to look at this. I mean, I think fundamentally, the strategy around messaging has become, the clearer, the better, not in every single instance, right? There’s definitely some obfuscated policymaking. I don’t want to overstate that argument. But when it comes specifically to countermeasures against the U.S., I mean, we used to have, you know, well, no, the export controls aren’t retaliatory. You know, they’re in the interest of national security, and say, okay, given three days after the action that you’re very symbolically nearing, okay, sure.

And now we have the MOFCOM spokesperson saying, since Busan, I’m paraphrasing from my personal translation here, the FCC has ignored strong opposition from China, right? Continuously broadening the concept of national security, and particularly the U.S. has repeatedly ignoring China’s negotiations, yada, yada. And so, we’re doing this, you know, these actions. And direct quote, “I want to emphasize that China’s countermeasures have generally been restrained. China values the hard-won stability of China-U.S. economic and trade relations,” referring to Busan on that list.

So, I mean, there’s no playing coy there. It’s like, “Hey, we’ve worked really hard for stability. You’re only screwing it up.” I mean, you don’t have to agree with it, but that is the messaging, right? And it’s just such a turn. And I think a logical turn. I mean, this is probably, I think I’ve been saying this for a long time. I think we’ve all on the side been saying, if you want to get through to the White House, don’t play coy. Tell them exactly what you’re trying to do and what you’re mad about. And I don’t think subtlety is the name of the game in this context.

And they seem to have gotten a memo. At least MOFCOM has been very straightforward in this case.

Andrew: Yeah. And I think that’s a really important piece to point out. We had been hearing that Beijing was frustrated about these ancillary moves, the moves outside of the eye of Sauron, as we said. And, again, you know, whatever the motivations were, it was pretty clear this was coming to a head, and Beijing felt as though it had to respond. So, let’s talk a little bit then about how you think this impacts the Busan détente. I mean, how seriously should we take Beijing’s claim that the U.S. is abrogating the Busan agreement? And what should we expect moves like this to mean for that agreement, which is, up until last week, kind of expected to be pretty smoothly rolled over for at least six months, if not to the end of Trump’s term?

Cory: Yeah, I think bottom line, there are positions on both the optimistic and pessimistic side of the spectrum that I think would be reasonable here. For me personally, I’ll be very curious to get your view. I take this very seriously. I think Beijing genuinely views, you and I have discussed this before, Beijing views these types of affairs out of the U.S., whether by the White House or not, whether with a direct approval or not, they view this as directly violating the spirits of the stability that the U.S. and China have formed. And they view this as a direct attack on, especially when it comes to like biotech and things like that. These are direct attacks against China’s economy in the perception of Beijing.

And so, the motivation there doesn’t really matter. They have to hit back. And that phrase, the relationship that undercuts the spirit of Hussain. Now that said, I don’t think we’re at the breaking point yet. Personally, I think it’s quite clear to me that Beijing is very broadly committed to, or really wants the stability to be maintained. They want to have an agreement to postpone export controls further by November. They want to move forward with more constructive trade and economic relations. And they’d really like to see the relationship not fray further. And in fact, that it will get better.

And I think in the White House, you see a lot of interest in that direction too. And so structurally, I think the case for optimism is that both sides have structural strategic interests in maintaining the state option. I think that is essential. If we didn’t have that, there wouldn’t be much room for optimism, but I do think that is still there. The question now is, to me, and there’s many other ways of looking at it, but my question is, first and foremost, do we continue forward with FCC and some congressionally directed actions that just fray the relationship too far where Beijing kind of, it’s like, “Look, we’ve had enough. We need to start from scratch. We’re not playing this game anymore.” Do we hit that or not?

And I think that’s largely, but not entirely in the White House’s control as of right now. That could change. Obviously, Trump can be more or less personally involved in things. But I take it very seriously. Beijing is putting up a warning flare. It’s saying, “If this path continues, we will not end up where we want to be.” So, I take it seriously, but not a doomer about it. So anyway, I’m curious of your take here.

Andrew: Yeah, yeah. I think that’s all right. I mean, I would say it’ll be really interesting to see if we start to get some reporting that the White House is putting the FCC on a tighter leash, and maybe DHS as well. DHS has its own political challenges among the leadership with MAGA and all the immigration stuff that’s happening. So, you know, that might be one way to… even another reason to rein in DHS. I don’t know, just speculation.

But I guess the way I think about it is the White House, as far as we understand, has been very clear to Treasury, not that they need to be as clear with Treasury, but to USTR, to the Department of Commerce — hey, we are putting actions against China on pause while we try to negotiate some kind of stability. So, all the entities, the U.S. government entities that were told explicitly, hey, it’s time to pause have paused. But now it’s the ones just outside the circle, right? Who weren’t explicitly told that are now moving.

And so, do those folks get slapped down a little bit and said, “Hey, we didn’t tell you before, but now we’re just making it crystal clear.” So, I wouldn’t be shocked if we saw some kind of messaging or reporting about that kind of messaging from the White House. And then the other thing I was just thinking as you were talking was, you know, for anybody who thinks that China might be trying to blow up the deal, I mean, this just wouldn’t be the path they would take. If they, for some reason, wanted Busan to blow up, they would just reinstitute export controls.

That’s the path of least resistance. They don’t need to create some kind of cover for blowing the deal up. They don’t need to create some reasoning, some rationale. They would just blame the U.S. no matter what and say, “Guess what? You guys are being jerks. We don’t think you’re living up to what we agreed and we’re reinstating export controls.” They wouldn’t be coy about it.

Cory: Yeah. I’d say they already have enough, like, if that were the path they’re going to do, they’d say that what we’ve seen so far is enough to do that. And they’re actively trying to say, again, you don’t have to agree with the statement, but they’re like, China’s measures or countermeasures have been restrained, right? Like they’re trying to, you know… they wouldn’t say that. They would just go for it.

Andrew: Yeah. They’re trying to be as clear as possible. I think that’s right. So, I mean, all that is to say, of course, you have to… with any government readout from China or many places, but China in particular, you got to sort of understand the Party speak and the goals and kind of what the angles are. But I think this one’s pretty straightforward. They’re trying to say…

Cory: Usually, yeah.

Andrew: Yeah, yeah. We don’t want this to blow up, but we feel compelled to respond. And so, this is the response. So, I think we can leave it there. I’ve already taken up more of your time than I expected, so I appreciate that. Just one quick 30 seconds if you’ve got it. The next day after these announcements on August 5th, on August 6th, the cybersecurity regulator announced an investigation, or not an investigation, a review of products sold by Palo Alto Networks, a cybersecurity firm. Do you think that’s related to this or is that separate?

Cory: I think that probably is separate. I mean, this is very similar to the CAC’s cybersecurity review into Micron in 2023, right? It fits a different pattern. It is very confusing when these things overlap, obviously. But I think broadly, Beijing has been expanding its reviews into foreign technology it considers risky to use. And so, there’s a lot of different motivations for that kind of review. And the tech team, I think Kendra will have so much to say about that. That’s beyond me, but I do think that’s kind of separate.

But on the other side, I mean, one thing that you do see as, I think, very specifically interesting about where Beijing retaliated and why Beijing retaliated against these efforts were, one, again, the MOFCOM spokesperson specifically singled out U.S.-restricted measures against China covering telecoms, covering consumer-grade routers. These are pure kind of core tech when we think of tech. And then submarine optical cables, right?

These are more a little bit further afield, but also kind of in that core space. And then AI. The other side of it is biotech. And so, I think there’s going to be a lot more overlap. There are going to be these cybersecurity reviews, these kind of broad technology reviews. For much the same way that FCC is arguing that Chinese technologies pose a risk to the U.S., I mean, a lot of Chinese authorities are looking at this the same way. Like, yeah, U.S. technologies that China’s dependent on have back doors, right?

We’re going to start being a bit more cautious about that and reviewing this stuff more carefully. And so again, Kendra and the tech team have much more to say about that than I will. But on that, you have that piece of it, which is a whole separate dimension of tech review, in addition to these retaliatory kind of actions. And then on biotech, it’s probably up there with embodied AI in terms of… I think embodied AI is certainly the sexiest, if you will, in terms of getting the most attention. But biotech is an industry that Beijing hopes is on the precipice of a massive development spurt, with huge TFP gains and just total value add for the economy.

And if it starts facing tight restrictions that either undermine development of the domestic biotech industry or that prohibit or prevent the export of key technologies or key products really using those technologies, Beijing’s going to hit back very hard against those because they’re such strategic industries. And that’s going to overlap with all the cybersecurity, data protection, all these other governance regimes. They’re going to all be stacking up on each other. And it’s probably going to get difficult to tell some of them apart. And it’s going to be essential that we do because those reviews will all serve different functions. It’s going to be important that we don’t mix the signal there.

Andrew: Yeah, great points. I’m glad that you pointed out that you think that the Palo Alto networks thing is separate. I think that’s an important point. We may or may not have a chance to pick that up with Kendra at some point. But it just also brings up the point that China is still also hitting back in certain ways. Like that Palo Alto thing may have happened even absent this retaliatory back and forth. And so, both sides are trying to test the limits of where they can continue to assert their interests without blowing up the Busan deal.

So, that’s an interesting dynamic. And then the other piece I was just thinking is, I also wonder if, to an extent, maybe taking the action against the FCC on the back of their move against robotics. The reporting is that the FCC is also looking at a ban for certain inputs into data centers. Right?

Cory: Yes, it is. That’s correct.

Andrew: And once you take these actions into the realm of AI, which is one of the key things propping up the Chinese economy and exports of those components into data centers are a real big driver, or one key driver, China’s export performance recently. Maybe China’s trying to head that off. Like, hey, we can see more and more coming out of the FCC. We want to nip this in the bud. I don’t know. Maybe that’s part of it as well.

Cory: No, I think that that stands to reason. And it’s especially because the reporting, the public reporting around this has been so clear that it seems like there’s a much broader interest in not even decoupling, but preemptively making sure that Chinese tech is not throughout the data centers, which on the energy side, at least, is difficult because a lot of what you need is made best and cheapest by China. And so, that is just a difficulty for hyperscalers. And it’s a practical challenge and a security challenge and all this stuff.

And the problem is when we decouple the technical and security reviews, like the legitimate kind of teardowns and then figuring out any backdoor issues, that’s stuff you just do as a matter of course, versus kind of general narrative and geopolitical. There are a lot of things that frankly do not need to be banned, right? But there are things that do, right? We’re in that middle space where your value set kind of dictates. But if everything gets lumped together, that would definitely be viewed as excessive harm to China’s economy and an ideological as opposed to market-driven approach.

And so, that’s where things start to get very complicated. And unfortunately, policy, one, often doesn’t play with that type of nuance in many cases for political reasons. But also, even if it does, it can be very difficult to actually execute in a nuanced way. I understand that. And I know it’s very easy for us analysts to kind of be like, “Well, actually, you really should have a 17-point framework for analyzing every component.” That’s not realistic. We get that. For all the policymakers listening to the naive people, we get that, right? At the same time, separating out things that bear technical risk and need to be handled on a technical basis versus things that we don’t want it because we don’t want it, those are different things.

And so, I think for Beijing, being able to signal which actions are on which side is very geopolitically and practically important in terms of how they might counteract, what measures they might respond with.

Andrew: Yeah. Yeah. All good points. All good points. Well, we’ve already, like I said, gone over a little bit longer than we…

Cory: Sorry.

Andrew: No, no, not you. This is a great discussion. The only other thing to talk about is sort of where all this goes. But I think time will tell and we’ll have plenty of chances to kind of discuss that with the Xi Jinping meeting coming up. I think we’ve already touched on enough to say we still think both sides, despite showing some cracks, have a strategic interest in maintaining the Busan deal, extending the Busan deal. Whether or not someone on either side decides we want to blow this thing up, we don’t seem to be at that point yet.

Cory: 100%.

Cory: So, I think we can say that with confidence. Great. And also, I think the main point here was just to lay out the key details of what happened for listeners. And this was all kind of a complicated mishmash of stuff. So, I appreciate you just laying out the details and making it clear as to what exactly happened and what the likely near-term impacts are. So, thanks for that, Cory. I really appreciate it, man.

Cory: Absolutely. Always a pleasure.

Andrew: Yeah. Well, this has been great. Thanks for your time, Cory, and thanks, everybody, for listening. We’ll see you next time, everybody. Bye.

Transcript (courtesy of the fantastic CadreScripts) further down the page. Image by Keya Zhou. Listen in the embedded player above!

This week on Sinica, I welcome back Evan Osnos of The New Yorker, whose marvelous new essay, “The Future, Made in China,” chronicles a tech-focused return trip to Beijing, where he lived from 2005 to 2013 — first for the Chicago Tribune, then as The New Yorker’s China correspondent. Evan is the author of Age of Ambition: Chasing Fortune, Truth, and Faith in the New China, which won the National Book Award, as well as Wildland: The Making of America’s Fury and The Haves and Have-Yachts.

His essay is far more than another breathless account of China’s advances in robotics and electric vehicles. It’s a meditation on what China’s technological ascent means for the United States, for how both societies are organized, and for the rest of us, whose futures increasingly seem to be wagered by two small circles of powerful men in Beijing and Washington. We talk about the Xiaomi Hyperfactory, “Chinamaxxing,” the export control debate, and the deeper contest Evan identifies: not democracy versus authoritarianism, but humanism versus scientism.

• 3:04 – Walking Beijing’s streets again: quieter, richer, more surveilled

• 11:26 – The Xiaomi Hyperfactory: choreography, awe, and what’s actually real

• 18:10 – Doomed to coexist: Evan’s message for the American reader

• 24:15 – Schrödinger’s China: joke or juggernaut?

• 27:16 – The limits of knowability in an increasingly opaque system

• 31:56 – Threat narratives vs. “Chinamaxxing”: America’s two China conversations

• 43:20 – “Thank Trump”: America’s self-inflicted wounds

• 47:29 – Revisiting the Sullivan doctrine and export controls

• 53:10 – Mankind 2000: humanism, scientism, and rival oligarchies

• 1:02:48 – Convergence: arriving at dystopia from opposite directions

• 1:07:21 – Self-strengthening redux: Levenson and America’s meum-verum gap

• 1:17:53 – The other Sputnik moment: the backlash against tech oligarchy

Paying It Forward

• Yi-Ling Liu, author of The Wall Dancers: Searching for Freedom and Connection on the Chinese Internet — Evan admires how her work grapples with the competition between scientism and humanism across national borders.

• Chang Che, who writes for The New Yorker and The Guardian — watching China’s technological developments up close, “creating history in real time.”

Recommendations

• Evan: How to Rule the World: An Education in Power at Stanford University by Theo Baker — the youngest-ever Polk Award winner on how a rising generation at Silicon Valley’s feeder school perceives its opportunities and obligations. Also True Grit by Charles Portis — splendid, sentence-savoring dialogue.

• Kaiser: Butcher’s Crossing by John Williams, author of Stoner — a Western with the same sentence-level craft; for fans of Melville and Cormac McCarthy.

Transcript

Kaiser Kuo: Welcome to the Sinica Podcast, a weekly discussion of current affairs in China. In this program, we look at books, ideas, new research, intellectual currents, and cultural trends that can help us better understand what’s happening in China’s politics, foreign relations, economics, and society. Join me each week for in-depth conversations that shed more light and bring less heat to how we think and talk about China.

I’m Kaiser Kuo, coming to you from my home in Beijing. Listeners, please support my work by becoming a paying subscriber at sinicapodcast.com. I know there are a lot of Substacks out there, and they start to add up because there’s so many good ones, but this one really does deliver value for money with great content from wonderful partners like Trivium and the China Global South Project, so please do subscribe so I can continue to bring you these conversations and lots more.

Today on Sinica, I am delighted to welcome back Evan Osnos of The New Yorker. Evan, as many of you know, was in Beijing for a good stretch during that oft-nostalgized golden age in the capital as a correspondent, first for the Chicago Tribune from 2005, and then after 2008, for The New Yorker until he headed back to the States in 2013, I believe. He is the author of The Outstanding Age of Ambition, which won the National Book Award in 2014 and was a Pulitzer Prize finalist the following year. He’s since written a couple of books, Wildland: The Making of America’s Fury, which is just a fantastic one, and The Haves and the Have-Yachts, which I have yet to read, but I’m really looking forward to, in addition, of course, to dozens and dozens of widely read profiles on important American political figures, mostly named Joe, Joe Manchin, Joe Biden.

Earlier this month, Evan published a marvelous essay chronicling a recent tech-focused trip back to China, his old stomping ground, where he spoke with people ranging from grandees of the Chinese tech scene, like Li Kai-fu, to delivery drivers, visited all manner of tech companies, and of course just sort of pounded the pavement and checked out his old digs. The essay is called The Future Made in China, and if you’ve not had a chance to read it yet, do hit pause and take, you know, 40, 45 minutes to do so, and then come back.

Anyway, this was, as I hope you’ll know now, far more than just another breathless account of China’s mind-blowing advances in robotics and electric vehicles and yada, yada, of the sort that we’re so used to seeing these days. It’s actually a meditation, I think, on what China’s technological ascent means for the United States, for the way both societies are organized, and really for the rest of us, whose futures increasingly seem to be wagered by two small circles of powerful men in Beijing and Washington. It’s reported with the eye and written with the grace that made Age of Ambition so indispensable. He joins us from D.C. And Evan, welcome back to Sinica.

Evan Osnos: Thank you very much, Kaiser. It’s always great to be with you.

Kaiser: Evan, you lived in Beijing, I think I have those dates, right? 2005 to 2013?

Evan: Yeah.

Kaiser: And Age of Ambition was, I think, in many ways, a book about individual aspiration, about people hurtling themselves at the future with an optimism that kind of bordered on recklessness. I think it captured the zeitgeist of that time where we were both living in China, the good and the bad of those years, which, again, I mean, we both experienced that very much at first hand, and it was just such a true account. Now you return, and you find a city that’s quieter, it’s richer, certainly. It’s more convenient and more automated.

I’m always sort of impressed with how seamless the whole kind of digital experience is. But it’s also more surveilled.

Evan: Yeah.

Kaiser: In some sense, sadder. I would hesitate to generalize on that sadder bit. But before we get into any of the geopolitics or too much of the tech stuff, I just really want to get a sense from you how it felt just at a personal level to walk those streets again. Where did your old instincts as a resident really serve you well? And where do they maybe even mislead you or set up false expectations?

Evan: Well, this is not, you know, certainly not the first time I’ve been back. And I tend to come back every couple of years and try to get my arms around what the latest mood is like. And I think you captured it well in the sense that one of the things that you are really struck by right now is the fact that there is a feeling of kind of technological saturation. It just is everywhere. And, you know, you kind of remember Age of Ambition.

And it’s, in that book, one of the little tiny themes that I think probably a lot of readers read right by. But if you were a China person, if you’d spent a lot of time in China, people often would bring this up, which was this pattern of people out in the countryside building things, sometimes wild things. And they were known as the peasant da Vinci’s. That’s what an artist-

Kaiser: Yeah. The submarine guy, the flying machines guy, right. The robots.

Evan: So, yeah, it’d be somebody in a village far from the sea who decided that really his life’s destiny was to build the world’s most perfect wooden submarine or something like that. There’s a reason why these became kind of these iconic objects, because they represented this slightly madcap sense of ambition, to use the relevant word. But what it really, for me at least, seemed to capture was this idea of this

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This week on Sinica, I welcome back Evan Osnos of The New Yorker, whose marvelous new essay, “The Future, Made in China,” chronicles a tech-focused return trip to Beijing, where he lived from 2005 to 2013 — first for the Chicago Tribune, then as The New Yorker’s China correspondent. Evan is the author of Age of Ambition: Chasing Fortune, Truth, and Faith in the New China, which won the National Book Award, as well as Wildland: The Making of America’s Fury and The Haves and Have-Yachts.

His essay is far more than another breathless account of China’s advances in robotics and electric vehicles. It’s a meditation on what China’s technological ascent means for the United States, for how both societies are organized, and for the rest of us, whose futures increasingly seem to be wagered by two small circles of powerful men in Beijing and Washington. We talk about the Xiaomi Hyperfactory, “Chinamaxxing,” the export control debate, and the deeper contest Evan identifies: not democracy versus authoritarianism, but humanism versus scientism.

• 3:04 – Walking Beijing’s streets again: quieter, richer, more surveilled

• 11:26 – The Xiaomi Hyperfactory: choreography, awe, and what’s actually real

• 18:10 – Doomed to coexist: Evan’s message for the American reader

• 24:15 – Schrödinger’s China: joke or juggernaut?

• 27:16 – The limits of knowability in an increasingly opaque system

• 31:56 – Threat narratives vs. “Chinamaxxing”: America’s two China conversations

• 43:20 – “Thank Trump”: America’s self-inflicted wounds

• 47:29 – Revisiting the Sullivan doctrine and export controls

• 53:10 – Mankind 2000: humanism, scientism, and rival oligarchies

• 1:02:48 – Convergence: arriving at dystopia from opposite directions

• 1:07:21 – Self-strengthening redux: Levenson and America’s meum-verum gap

• 1:17:53 – The other Sputnik moment: the backlash against tech oligarchy

Paying It Forward

• Yi-Ling Liu, author of The Wall Dancers: Searching for Freedom and Connection on the Chinese Internet — Evan admires how her work grapples with the competition between scientism and humanism across national borders.

• Chang Che, who writes for The New Yorker and The Guardian — watching China’s technological developments up close, “creating history in real time.”

Recommendations

• Evan: How to Rule the World: An Education in Power at Stanford University by Theo Baker — the youngest-ever Polk Award winner on how a rising generation at Silicon Valley’s feeder school perceives its opportunities and obligations. Also True Grit by Charles Portis — splendid, sentence-savoring dialogue.

• Kaiser: Butcher’s Crossing by John Williams, author of Stoner — a Western with the same sentence-level craft; for fans of Melville and Cormac McCarthy.

Our phrase of the week is: “calm meltdown” (平静发疯 píng jìng fā fēng)

Context

Over the past few weeks a song called “I’m so mad” (生气了) has gone viral on the Chinese internet. It’s by Papi Jiang (papi酱) who is one of China’s best-known comedians.

Within two days of its release, I’m so mad had surpassed ten million plays and had close to two million likes across social media platforms.

Jiang wrote the lyrics but everything else was generated by AI. The melody is slow and intentionally cheesy.

The video of I’m so mad is an entertaining journey through conversations Jiang has with people who annoy her. The lyrics are what’s going on inside her head as she gets increasingly frustrated with her annoying friends.

But on the outside at least she remains calm, which is what makes the song so relatable , according to one review of the song:

“There is no wailing, no dramatic breakdown.

Just a ‘I’m-completely-done-this-is-ridiculous’ kind of calm meltdown.”

没有大哭大闹的崩溃，透露出一种”算了，不想吵，但真的很无语”的平静发疯。

And with that, we have our Sinica Phrase of the Week.

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What it means

“Calm meltdown” is a our translation of a relatively new internet slang expression. It translates literally as “calm” (平静 píngjìng) and “to go mad” (发疯 fāfēng).

It means outwardly composed but inwardly falling apart.

The phrase grew out of an earlier online craze known as “going-mad literature” (发疯文学), where “literature” (文学) is online slang for “-ism”.

That earlier trend took hold on the social platform Douban (豆瓣) in 2021. It began as a style of forum post of “If I don’t go mad, what am I supposed to say?” (我不发疯我说什么). That soon moved into the real world when unhappy shoppers put it to good use, bombarding online customer service desks with melodramatic, going-mad rants to pressure sellers into shipping their orders or giving refunds.

This earlier phrase, “going-mad literature” is loud, theatrical, and cathartic. It’s when you vent about something and you get your way.

But by 2023, a new version emerged called “going mad while staying calm” (在平静中发疯), which some commentators described as the year’s dominant online mood.

And that eventually condensed into the four-character phrase, “calm meltdown” (平静发疯).

Back to Papi酱’s recent viral hit. I’m so angry has brought the phrase further into the mainstream. With her angry lyrics, comic delivery, and deadpan expression, it’s the perfect demonstration of staying calm on the outside while completely flipping out on the inside.

And it could be an early contender for a our 2026 Phrase of the Year!

Andrew Methven is the author of RealTime Mandarin, a resource which helps you bridge the gap to real-world fluency in Mandarin, stay informed about China, and communicate with confidence—all through weekly immersion in real news. Subscribe for free here.

Read more about how this story is being discussed in the Chinese media in this week’s RealTime Mandarin:

RealTime Mandarin

#288: Papi Jiang's viral AI song about her “calm meltdown”

Over the past few weeks a song called “I’m so mad” (生气了) has gone viral on the Chinese internet. It’s by Papi Jiang (papi酱) who is one of China’s best-known comedians…

Listen now

12 days ago · 10 likes · 9 comments · Andrew Methven

A few months into their first semester, students in U.S. law schools will often notice the following: not too long ago, a disturbingly large number of Americans were injured, maimed, or killed in incidents involving trains. In Erie Railroad Company v. Tompkins (1938), a landmark case in civil procedure, a man walking near a rail line is struck by an open door of a passing train. He falls beneath the tracks, and ends up losing an arm. In Palsgraf v. Long Island Railroad Company (1928), a favorite case among torts professors, a woman on a station platform suffers from an extraordinarily unlucky series of events. A man running to catch a train carries a box, which he drops; the box contains fireworks, one of which explodes; the explosion causes a scale to topple over, which falls onto the woman’s head; several days later, shaken from the events, she develops a stammer.

These train injuries formed one small part of a much larger pattern. Across the late 1800s and early 1900s, Americans witnessed profound changes in how the U.S. economy worked. Some changes arose from new technology, such as trains. Others arose from new business techniques, such as the formation of massive monopolies. During this period, a major question for lawyers, judges, and legislators was how to build a legal system that could encourage industrialization without causing too much social disruption. The legal regime we in the United States have inherited from that era is the result of decades of debate over the following questions: How much pain should be tolerated in the name of economic growth? And who should bear it?

In the United States, those questions have receded from public debate. By the end of World War II, the United States had established itself beyond question as one of the world’s most “developed” countries. That status became only more deeply entrenched in the 1990s, with the end of the Cold War. Questions about development have of course continued to percolate among some corners of the legal profession, and critics have persistently raised concerns that the U.S. legal system frustrates economic advances. (This was the basic point of Ezra Klein and Derek Thompson’s Abundance; twenty years earlier, prominent legal scholar Robert Kagan made a similar observation, when he pointed out that American public works often get weighted down in endless legal proceedings.) But for several decades, the most high-profile legal debates in the United States have revolved not around economic growth, but around racial justice and individual rights.

In much of the world, the situation is different. Questions about law and development continue to capture a great deal of attention, especially in the Global South, both among specialists and in the public sphere. In many locations, those questions now carry a geopolitical gloss. Lawyers and legislators no longer need to deal only with new technologies and business practices. They also must work with foreign economic partners, many of whom bring their own ideas about how an economy “should” work, and about the laws that should govern economic exchanges.

Since roughly the year 2000, a particular challenge has been posed by the rise China. For many countries across Africa, Latin America, and Central and Southeast Asia, resources from China have grown dramatically, in the form of loans, investments, and traded goods. At the same time, Chinese partners—ranging from public officials in Chinese embassies to business leaders of Chinese enterprises—have brought their own, particular ideas about law and development. These ideas are often grounded in China’s own domestic experience. By the standards of “Western” development theory, they are also highly heterodox.

How should people in the Global South design a legal system that best makes use of Chinese capital? In her excellent new book Immunity on Trial, Oxford anthropologist Miriam Driessen follows a range of judges, lawyers, and litigants in Ethiopia as they grapple with this question. She reveals—unsurprisingly, and discomfortingly—that conflicts run deep, and are unlikely to lend themselves to happy compromises. Frequently, both sides disagree even on the basic nature of their relationship. “Once you have completed your job, you are nothing for them,” says one Ethiopian employee of a Chinese firm. “They use you and throw you away, just like socks” (46). A Chinese construction worker sees things differently. “These black people,” he insists, “don’t realize we are here to help them” (65).

Many of China’s ventures into Ethiopia are infrastructure projects. These involve the employment of a large number of people under relatively dangerous conditions. As a result, they sometimes give rise to employment disputes, and less frequently, but more seriously, they also result in serious injuries, or death. Driessen describes one notorious episode in which an Ethiopian mechanic on a tunnel-building project was standing on a moveable platform. A Chinese foreman pressed a button that raised the platform, and the Ethiopian mechanic, unable to move in time, was fatally crushed against the tunnel roof.

This is Driessen’s second book about Chinese enterprises in Ethiopia. As with her first, she draws on an exceptionally rich collection of materials. These include in-depth interviews with Ethiopian litigants, judges, and lawyers, as well as observations of courtroom proceedings. She also, somehow, manages to conduct interviews with Chinese workers and managers. This is an impressive achievement; Chinese enterprises often resist scrutiny from researchers, and it would have been valuable to learn more about how Driessen gained access. Driessen gathered most of her materials during an eleven-month stay in Ethiopia during 2020. As she notes, this was a turbulent time for her research subjects. In January, COVID-19 started to spread across China; in March, the first reported case appeared in Ethiopia; in November, a civil war broke out in Ethiopia, in the northern region of Tigray.

Driessen centers the book on the concept of legal “immunity.” As she frames it, this is the power of Chinese actors (individuals and enterprises) to withdraw legal claims from the Ethiopian legal system and to resolve them in other fora, such as private mediation or international arbitration. In the case of the Chinese foreman and the Ethiopian mechanic, for example, the Chinese defendant successfully, and opaquely, removed the case from the Ethiopian court system. (Years later, opposition politicians pointed to this event as one example of the government’s pattern of caving to Chinese capital.) As Driessen points out, there is nothing inherently unusual or suspect about legal immunity. Many legal systems grant it to at least some entities, such as government officials. The difficult question posed by the influx of Chinese enterprises into Ethiopia is whether those enterprises and their employees should receive immunity, and if so, why.

As Driessen reveals, Chinese businesses (and their lawyers) put forward two reasons that they deserve immunity. The first is that Chinese investment in Ethiopia forms a type of gift, and that litigation against Chinese entities is an expression of ingratitude. This argument seems unlikely to get much traction outside of China; Driessen finds little evidence of uptake among Ethiopians. The second, and more substantial, argument is that litigation against Chinese enterprises—and, more generally, the existence of a strong legal system, which is independent from other branches of government, and which vigorously protects rights guaranteed by law—is counterproductive to Ethiopia’s economic prospects. Driessen recounts one painful episode in which an employee of a Chinese company strikes and kills a young Ethiopian girl with his car. The manager of the Chinese company later urges the girl’s family to accept a settlement and drop any future court case. “We came here to work,” the manager informed the family. “Our work must not be interrupted” (35).

Across various interviews, Driessen reports, Chinese respondents described Ethiopia’s legal system as too “rigid,” “protective,” or “complete” for its level of wealth (59). This is not a frivolous argument. China achieved rapid, sustained economic growth without a legal system that strongly protected worker rights. More generally, China’s domestic experience suggests that robust, Western-style institutions (such as a legal system that resembles what currently exists in the United States) may not be conducive to short-term economic growth, and may, in fact, stifle it. A growing number of scholars, with Johns Hopkins political economist Yuen Yuen Ang foremost among them, insist that the task facing political leaders in the Global South is not to construct institutions that conform to Western-influenced ideals. Rather, it is to support economic activity using the institutions that are available and workable in their current environment.

Many Ethiopians reject both of these arguments. To them, in deciding whether Chinese enterprises should be immune from lawsuits, the most important consideration is not Ethiopia’s growth prospects; it is Ethiopia’s status as a sovereign, independent state. Summarizing the views of one Ethiopian judge, Driessen writes that “[i]mmunity, in [his] eyes, was non-transactional,” and “cannot be acquired or given away in return for economic development.” Many Ethiopians were preoccupied with “dignity.” This meant the dignity of individuals, but also to the dignity of the Ethiopian state, which, as a source of pride that is constantly referred to by its leaders, was never colonized.

One Ethiopian who spent more than ten years working for Chinese managers summarized his experiences this way: “They don’t listen to us. They don’t respect us. They don’t really listen to what you say.” For many in Ethiopia, this is not the type of behavior that they want to reward with legal immunity.

Driessen sometimes frames her book as a contest between two groups: Chinese litigants trying to pull their cases out of Ethiopian courts, and Ethiopian litigants trying to yank them back in. It is surprising, therefore, to find many people in its pages who fit into neither group.

Some Chinese enterprises and managers have no problem litigating in Ethiopia. In run-of-the-mill employment disputes—where nobody died, and nobody is going to jail—Chinese parties are frequently willing to participate in Ethiopian legal proceedings. Some have even become savvy users of that system. Driessen describes one enterprise that, after a loss in court, learned that it needed to provide proof that terminated workers had been performing poorly. It then set itself to stockpiling that evidence, and later, in a suit for wrongful termination, it provided the court with a video of a fired worker sitting in the shade. It also submitted a photograph of him on the construction site, napping.

Even more interesting, Driessen identifies stark differences in opinion between people in Ethiopia. Recall the case of the Ethiopian worker crushed against the roof of a tunnel. That case ended when the responsible prosecutor’s office sent a letter to the local police, informing them that the charges were being dismissed “for the benefit of maintaining good relations between the two countries” (21). This pattern repeats across many cases that Driessen recounts, and aligns with my own findings about litigation related to Chinese projects in Kenya. The upshot is significant. The contest over immunity is not only between Ethiopia and China. It is also between different representatives of the Ethiopian state, and what is at stake is not only the power of Chinese enterprises and their employees, but also the distribution of power between different arms of the Ethiopian government.

Why do any Ethiopian leaders want to grant immunity to Chinese enterprises? Driessen describes an interview with one judge whose opinions followed the lines put forward by Chinese officials and business leaders. To this judge, the worker-protective slant of Ethiopian labor law presented an obstacle to Ethiopia’s immediate economic development. The judge thought it might be worthwhile for Ethiopia to devise a formal, separate set of rules for employees of foreign businesses, which would encourage foreign investment. “One of the grounds of attracting foreign direct investment is how a country’s law protects the investor’s rights,” he tells Driessen. “[T]hey should not have to spend all of their time in court” (131).

On an online discussion board, Driessen finds a post written by an author who claims to be a Chinese worker who has spent many years in Africa:

“[I]n fact many other African countries . . . give you a feeling of a small horse pulling a big carriage. The big carriage stands for a perfect administration and a legal system left by the Western colonialists. The small horse stands for the country’s backward economic condition, the quality of the masses, the level of education, and so forth. The small horse cannot pull this whole superstructure.”

This image of a horse pulling an overly large carriage reflects one view of the relationship between law and development: that overly strong legal institutions operate as an impediment to economic growth. It is a powerful metaphor, and it stands for a viewpoint that is gaining traction across the world.

But it is also a flawed one. It assumes that the only objective is growth, and that the main consideration is speed. Neither assumption is necessarily true. Certain features of a legal system—such as strong worker protections, regardless of employer—may appeal to many Ethiopians, even if those features potentially reduce the rate of economic growth. Many people might not mind a slightly longer, slightly slower trip to “development,” if they can spend it in a nicer carriage.

Kevin Keller is an Associate Professor at the University of Missouri - Kansas City School of Law. Follow him on X here, or on Bluesky here.

• There’s a reason for that, and we break it all down in today’s podcast.

On this episode, Andrew Polk sits down with Dinny McMahon (Head of Markets Research) to unpack:

• The five core arguments in MOFCOM’s new position paper on overcapacity, examining which ones hold up and which ones stretch too far

• Why Beijing dropped the word “overcapacity” for “involution” 18 months ago, and what that rhetorical swap is designed to do

• How China frames itself as both free trade’s champion and its victim, and why that framing leaves little room for compromise

• Why the US may have the least at stake here economically, and why Europe is where this fight actually gets decided

As always, we hope you enjoy the discussion – reach out and let us know any thoughts or feedback.

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 today I’ve got with me Trivium’s Head of Markets Research, Dinny McMahon. Dinny, welcome back to the pod, man. How are you doing?

Dinny McMahon: Thanks, mate. I’m doing well.

Andrew: Good to have you on. I am having Dinny on today because we want to get into MOFCOM, the Ministry of Commerce’s official response to accusations of overcapacity from the West. This is the first time the Chinese government has really come out with a sort of meaty riposte to the idea that they have overcapacity. And specifically, it held a press briefing, released a big comprehensive position paper responding to these accusations about industrial overcapacity that have taken place over the past several years.

Pointedly, the paper was titled, China’s Position on the So-Called Excess Capacity Issue. You can just kind of feel the sass in that. So, we’re going to get into that. We’re going to get Dinny’s reactions to that, specifically as it impacts macroeconomics and trade. But before we do, we got to start with a customary vibe check. Dinny, how’s your vibe today, man?

Dinny: Mate, I’m living life on the edge. I’ve got two kids in the house, and I’m recording this podcast from my living room. So, if we can get through this without sort of a minor catastrophe, I should buy a lottery ticket.

Andrew: Yeah, that really is living life on the edge, man. That’ll keep your, not anxiety, your adrenaline up during the pod. So that’ll keep you focused. That’s good. Yeah, my vibe is chill. I’m about to go on another holiday for a week. Next week, I’m actually going to be down sort of near SU in North Carolina with the family, just chilling out in the mountains. So, ready to get out of D.C. again for a bit. It’s always nice to get out of D.C. But actually, before we do that, really looking forward to this conversation, which we will dive into in a second. But we also have to, of course, do the quick housekeeping.

Just 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 domestic policy in China, a longer range of areas, a light range of issues: tech, macro, autos, minerals, you name it. And we’re going to talk about some of those policies, like industrial policy and policies that lead to overcapacity, or not, as the Chinese would say today.

But it also 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 more Trivium content, check out our website. Again, triviumchina.com. We’ve got a bunch of subscription options as well on the site that you can sign up for, again, focused on things like tech, macro, business environment. Check those out. You’ll definitely find the China policy intelligence option you need on our website.

And otherwise, please tell your friends and colleagues about Trivium. We really appreciate those word-of-mouth recommendations. They help us grow the business and grow the listenership. So, please do that. All right, Dinny, let’s get into it. We are going to talk about this MOFCOM Presser and this position paper. I think first, what we should probably do is lay out the key arguments that MOFCOM makes. I will note some of them are somewhat contradictory, shocking. But I’ll go through kind of the key arguments and then you can kind of lay out how you think they stand up.

So first, the paper argues that there’s no such thing as overcapacity, that no one- no economists, not the IMF, not the World Bank- can agree on a definition. I got to say, I have a little bit of sympathy for that. What exactly is overcapacity? You know, you always have a little bit more capacity than you’re going to use. Are you expected to use 100% of your capacity? Should you have zero exports? I don’t know. Okay, so but that’s argument one. Argument two says that these sorts of major shifts in industrial capacity have happened periodically throughout history.

So, you know, the bulk of industrial capacity moved from the UK to the US to Japan over time. And then that this shift now is part of a natural part of the global economic order. These shifts over time are part of that natural global economic order. Third, it spends most of the time rebutting the criticisms, of course, that have been against it, like that industrial subsidies, especially, have led to overcapacity. And it argues that everybody uses subsidies and that subsidies are WTO-compliant. So, you know, that it’s operating within the rules.

Fourth, it argues that, you know, other countries should stop griping about trade surpluses so much because many countries, it points to Germany, Japan, and the U.S. have historically run large surpluses without being accused of overcapacity. Of course, the U.S. doesn’t run a large surplus now, but historically it did. And then it also argues that the trade surplus is a result of U.S. debt in the EU underinvestment, not weak Chinese demand, which the paper says has been growing strongly, which is true- not as strong as in the past, but it is still growing at a decent clip- and that Chinese demand is an anchor of Chinese growth.

Again, I will say I have a little bit of sympathy for this as well. There are flip sides of the Chinese trade surplus, which is that many countries run deficits, most notably the U.S. Of course, I acknowledge that these are arguments that are defending the Chinese position. And they’re made partly disingenuously and partly out of legitimate analysis of how China fits in the global economy. But we’ll get into all this. And finally, the last piece, the fifth piece, there’s an argument that industrial growth has been driven by innovation and that China’s competitiveness stems from genuine technological progress.

This is not a subsidy story. This is not a margin story. This is not a scale story. This is a technological progression story. So those are the five major arguments, Dinny. What do you think about all of them? Just give us your broad thinking as to how these stand up.

Dinny: Yeah, well, on one level, it’d be easy for us to sort of sit here and go through each of those arguments and debate the merits or the economic rounding of them one by one. But that would kind of defeat the point because although this is framed as an economic rebuttal, at the end of the day, this is a political document. This exists because China is trying to do two things. One, it is trying to frame itself as a champion of free trade.

I mean, in this article, when it’s not defending itself against overcapacity criticisms, it’s talking about how it wants to see further trade liberalization, further liberalization of cross-border investment. It wants what it calls an open ecosystem of innovation. So, it sets itself up as both a champion of the prevailing global free trade regime, not just the status quo, but as the one who wants to push it further. So, that’s the first thing.

It’s setting itself up as the champion for the regime that we all say has benefited humanity incredibly over the last 50 years. And the other thing it’s saying, it’s trying to do, is frame itself as the victim. Because, even as it is the one that is steadfastly defending this system, it is the one that is sort of suffering the slings and arrows of the U.S. and the EU unilaterally imposing protectionism and putting up trade barriers.

And so, that ultimately is kind of what China is trying to achieve here. This is a framing for the current trade wars and the trade wars to come that try to position China as both champion and victim at the same time. And this is kind of something we’ve talked about before on the podcast, just how the West, sort of the broadly, the U.S., EU, maybe sort of the ecosystem nations around them, and China see free trade differently.

So, the West broadly sees free trade as a principle, and then they kind of built this sort of edifice of first GATT in the World Trade Organization, sort of edifice of rules around it to try and codify that principle into kind of some sort of working arrangement, imperfect as it may be. China, on the other hand, sees free trade as a set of rules. It came to the free trade world late, got accepted into WTO in the year 2000. And so, it sees the free trade as being the set of rules that exists to maintain this free trade regime.

And so, that’s a really big distinction because as far as the Chinese are concerned, compliance with those rules makes you pro-free trade, makes you a champion of free trade, makes you a party which is preserving the free trade regime. Whereas in the US and the EU, it’s a completely different outlook because you can kind of be adhering to those rules, but if those principles have kind of broken down, then, well, we don’t have free trade anymore.

Now, of course, when we’re talking about principle, the West has never been entirely pure in its commitment or even its defense of free trade. I mean, countries have run large, persistent trade surpluses for a long time. I mean, most notably Japan and Germany. Countries have used subsidies liberally. They’ve defended, they’ve pursued carve-outs for certain industries that are politically sensitive in their own economies.

Even when it comes to the principle, the free trade regime as it’s been built has never been kind of this, you know, pure thing. It’s been a real, just an effort to kind of build a scaffold around the principle. And so now China is-

Andrew: Yeah, let me just make a quick point there before you move on. Well, I’ll make the point that you made a great point, which is I think you’re fundamentally right that China does see these as rules to be followed, right? It doesn’t care about the principle of free trade so much. It’s like, hey, we’re operating within the system that you built. But I will say no one’s blameless here.

Kind of just like the U.S. and other Western countries, or at least used to, talk about free trade as a good in and of itself, but didn’t always adhere to the rules, China also understands that they’re not adhering to the spirit of free trade often, and so makes an argument that, while I think you’re right, that they fundamentally, they’re like, “Well, we truly are following the rules,” but they know that they’re following them while also bending them and not adhering to the spirit of the design.

And so, all that is to say everyone here is making arguments that are fully in their self-interest, and we’re aware of that, but we’re just going to kind of deconstruct what we think the merits are and I guess the non-merits, where these arguments fall flat. So, that may be a bit of a framing piece, but anyway, go on.

Dinny: Yeah, well, I mean, it’s a good point you make because I think just going back to what I was saying about subsidies and carve-outs and whatnot, China kind of pushes, sort of points to areas in the West, you know, where the Western nations haven’t kind of adhered to the principle and kind of go, “Look, you guys have never lived up to your own principles. Why are you pointing the finger at us?” And in the MOFCOM essay, they talk specifically about, look, you know, big Western countries have run persistent trade deficits. And I think here, there’s certainly a degree of cynicism involved in MOFCOM’s essay, because one of the examples they give is that, look, the United States in 1953 accounted for 44% of global manufacturing output.

And its point is like, look, we’re not even at that level. Although the United Nations, I think it was the UNIDO, has a well-published sized estimate or forecast that by 2030, if things continue the way they are, China will account for 45% of global manufacturing output. So, it’s interesting. Oh, that is the track that we’re on. MOFCOM saying, hey, the United States was in exactly the same position in 1953. Of course, the difference is the U.S. was in that position because we just had a world war which had completely destroyed the industrial stock of both Europe and East Asia.

And so, I mean, for China to kind of go, “Hey, we’ve been here before, you did it, why not us?” I mean, it is a little bit cynical. And there’s also an element of false equivalency as well in the way that the MOFCOM essay talks about subsidies as well. It’s the same argument. “Hey, look, you guys use subsidies all the time. We’re using subsidies. We’re compliant with the rules. Sort of back off.” But of course, the OECD recently published a report which said that China’s industrial subsidies are anywhere between three and eight times the level of any other country in the OECD.

So, yes, China does it. Yes, everybody does it. But China is doing it to a degree of magnitude far beyond what anybody else is pursuing. And I think that kind of comes back to sort of the principles of free trade again. It’s like, sure, Western countries have never purely adhered to the principles of free trade. But in some ways, there was kind of a dance or, you know, there were certain acceptable levels that everyone kind of sort of were willing to live within. And China, with the scale of its trade surplus and the scale of its subsidies, seem to have blown past those informal limits and is now going, “But there were never any limits. You do it. We’re doing it. What’s wrong with what we’re doing?” That’s why I kind of feel the essay is perhaps a little bit cynical.

Andrew: Yeah. I mean, it’s definitely very cynical. Both things can be true at the same time, but it makes some good points and is very cynical. It’s like having a political argument with someone on the other side. The points they may be making may be generally true, but they’re usually taken to such an extreme, no matter which side you’re on, that they become sort of cynical. I don’t what the right word is. They just become kind of disingenuous at a point. But anyway, so I think that’s what’s happening here.

But what the next question for you is, you’ve laid out kind of what the arguments are, what you think about them. You made the point that China is trying to play the victim. Why is it doing that?

Dinny: Yeah, I think it’s laying the groundwork for a protracted trade war. I think it’s trying to establish a theoretical foundation and justification for pushing the back against the EU and the United States. And I think it’s trying to frame it in a way whereby it can say it has the moral high ground and that it will champion a global free trade order and that gives it legitimacy for why it will not back down in the face of U.S., EU, anybody else’s efforts to try and reduce China’s trade surplus, to try and rebalance the imbalances.

Andrew: Well, that’s somewhat daunting and are definitely kind of pessimistic, but I think you’re probably right there. Let’s talk about some of the specific arguments. So, let’s start with the title itself. It’s about “so-called excess capacity.” First of all, there’s the ‘so-called.’ Secondly, it says ‘excess’ instead of overcapacity. That word choice is very specific to say, kind of, to reframe the argument and to basically say we don’t accept basically the overall framing that the West is using. So, sort of that whole, again, back to the political argument, you know, I disagree with the premise of your question, sir, kind of thing.

So, how significant do you think it is that Beijing is explicitly rejecting the framing outright rather than sort of just contesting the specifics?

Dinny: Well, at this point, I don’t think we should be surprised because Beijing does not talk about overcapacity, and it hasn’t for about 18 months. It talks about involution. Now, if I remember the milestones properly, it was in December 2024, that in the Central Economic Work Conference readout, the big end of the year to get together of all of China’s top economic policymakers. In the readout of that meeting, we saw mention of overcapacity.

One of the big challenges in the year ahead was we return to industrial overcapacity. And this was something that we hadn’t seen in government documents for at least a few years. I mean, overcapacity is a recurring theme in China’s economy. It goes in waves. It pops up. Beijing spends years dealing with it. You have a lull for a while, and then it comes back. And so, you know, end of December, all of a sudden it was back on the agenda. And that was kind of the first and the last we saw of it. And then in the new year, after a few months, it was replaced by this word, involution.

And I think that was a deliberate political choice, largely because when they used the word involution in December of 2024, the U.S., the EU, they all jumped on it. They were like, “See, see, you have overcapacity. We want to work with you to get rid of your overcapacity.” And Beijing was having none of that, and so it reframed the issue. Involution isn’t just another word for overcapacity. It reflects a very fundamental difference in understanding of what the problem is. So, overcapacity is used by the U.S. and EU to kind of look at Chinese industry and say, look, you’ve overbuilt. You have too many factories. You’re driving prices down. You’re driving out competition.

Our firm should be competitive, but because you have massively over-invested, we can’t compete on what should be a fair market basis. So, you need to close down your factories. So, China’s approach, though, is that the issue isn’t that there’s too much installed capacity, that the issue is one of pricing. The issue is of excess competition. And so, whereas foreigners talk about overcapacity as a way to get China to close down capacity, China talks about involution as a way to get Chinese firms to stop running each other into the ground, stop competing each other, stop their race to the bottom.

And so, it’s about stopping Chinese firms overly aggressively driving prices down. It’s about ultimately trying to restore Chinese firms to profitability by stopping them from cutting prices overly aggressively. And so that’s what involution is about. It’s about what they see as being excessive and detrimental and damaging competition. And they don’t see the root cause as being overinvestment really in anything. And so, of course, when you frame it like that, the solutions are different and the ultimate beneficiaries of success of policies to deal with those problems are different as well.

If China successfully deals with overcapacity, then the EU and the U.S. should expect to come out in front in some way. Where, if China can successfully deal with involution, then the winners here are Chinese firms that will see their profits rise and the Chinese state that will see an increase in tax revenue.

Andrew: This one isn’t on our list, but we find it at the top. So, I’ll just throw it in here. What do you think make of the argument about our trade surplus is just driven by the competitiveness of our firms, right? That we’re just better than yours. Because I feel like this an argument they’re making more and more directly that I’m hearing to European officials in particular, to a lot of companies even, to other officials. We heard it sort of at the CDF, the China Development Forum in the spring. You know, it’s another one where, like I said, I have a little bit of sympathy.

I actually do think the Chinese companies are really good, and the products are really good, especially when you think of the big core exports that are growing quickly, the renewable energy stuff, the clean tech stuff, the AI link stuff. These companies are good. Yeah. And the products are cheap. They’re cheap, but good. I talked with Cory yesterday about the battery tech, for example, is like world leading and will continue to be, and that pod will come out next week. And it’s the cheapest in the world. So, I don’t know. What do you think about that part of their argument?

Dinny: It’s complicated because it’s not just the quality of their innovation and the technology. I mean, the crucible that is competition in these cutting-edge industries in China at the moment is like nowhere else on earth. I mean, the sheer intensity of the competition is crazy. And yet, part of the problem here is that we all kind of pretend that we’re all operating or running on the same economic model. China is doing something completely different. I mean, we assume that when firms compete, they’re competing for profit. They’re competing to maximize returns to their shareholders.

Chinese firms might get to that point eventually, but at the startup stage, it’s all about competing for market share. I mean, that’s not unusual. You’ll see the same in Silicon Valley as well. It’s just that the ability of Chinese firms to survive far beyond when market forces should dictate that they collapse is something that’s fairly unique to the Chinese system. That’s why you had hundreds of auto companies, electric vehicle companies. That’s why you still have about 80 of them; that they managed to compete far beyond what their sales and their profit margins would typically allow them to do because they’re getting support from all sorts of different corners of the economy.

They might be getting explicit subsidies, cash subsidies, sure. They might be operating on cheap, free, or subsidized land. They might have their utilities subsidized. They might be getting direct capital injection from a local government. The local government may have secured for them contracts. For example, if you’re making cars locally for me in this area, then all taxis in this area have to be that brand of car. Local governments can put up trade barriers between other cities and other provinces.

There’s just all these mechanisms which allow Chinese firms, both at the cutting edge and even in traditional industries, whether it be steel or aluminum or whatever, to survive on non-market terms for far longer than would ever be possible elsewhere, which allows them to drive prices into the ground, which allows them to drive out other Chinese competitors. But once they go overseas, also allows them to sort of drive out foreign competitors as well.

So yeah, Chinese firms are innovative. Yes, the crucible of competition in China at the moment is second to none. Chinese efficiencies in the factory floor are fantastic. But the fact that it’s running a trillion-dollar annual trade surplus isn’t necessarily indicative of all of that. And putting aside everything I just said, and this kind of brings us, leading to the next issue I wanted to talk to you about — The other question then becomes, why is China incapable of producing so little of what it produces. And understandably, it doesn’t have to consume everything it makes.

That’s what exports are for. But even if it’s not consuming what it makes, why is it so incapable of importing from the rest of the world, to a comparable degree, the volume of what it’s exporting? And that’s kind of the issue here. It’s not about the quality or the innovation of what China produces. It is about why the domestic economy is so incapable of consuming far more than it actually does, such that you end up with this earth-shattering global economy redefining trade surplus.

Andrew: Yeah, that’s a good point, really good point, which we’ll pick up in a sec. Also a good point about all the companies. I just had a buddy who was down with his family in Costa Rica was telling me about all the Chinese EVs he saw there, and they were super cheap and pretty good. They weren’t always the high end, but he said a bunch of brands he’d never even heard of. And this guy follows this stuff pretty closely. And so, I do wonder what element of it is because of just the sheer number of companies and their ability to kind of compete on cost. It’s one I’ll have to think through.

I’m just thinking through it in real time. Because what I always say is like, actually, the worst thing in the world would be if like there were only two very dominant Chinese companies because they would just like run everyone else globally into the ground. So, maybe it’s actually good, like careful what you wish for kind of thing in terms of like saying, oh, you need to consolidate. Then you have two super profitable, super healthy companies and they just dominate. But that could be one problem. But then I also wonder how the number of companies plays into it.

Which one of those is worse? Which one would drive more of a surplus? Anyway, just kind of thinking out loud on that. But let’s get back to the consumption piece because the interesting part of that is, of course, this is something that the white paper that MOFCOM puts out, basically doesn’t even engage with this issue. And you kind of highlighted that when you wrote about this in our daily note. And this is the idea that relative to the size of the economy, Chinese households consume less than basically anyone else on earth, right?

And so, they talk about Chinese consumption growing quickly, which is also true, right? The economists talk about the consumption paradox. It’s so low as a percentage of GDP, but it’s also growing quite quickly at the same time. So, that’s a little bit of a paradox. But again, the paper doesn’t even really engage with that much at all. So, talk to us about what you mean by this. You know, just expound a little bit more on what you were just talking about in terms of weak consumption, the inability of the Chinese economy to absorb imports at all, etc.

Dinny: Yeah, so it’s interesting because, as you said, this MOFCOM essay was like, look, you know, Chinese households are spending more and more. It’s becoming a bigger share of our economy. Clearly, weak domestic demand isn’t contributing to overcapacity, which that is not the argument anybody’s making. The problem, the reason China’s trade surplus kind of exists is because Chinese households consume so much, not in absolute terms, because it’s the second biggest economy in the world.

China’s households are becoming more affluent, you know, compared to almost anywhere else in the world other than really the United States. Yeah, as a group, the Chinese consumer population consumes a huge amount, but that doesn’t matter when we’re talking about what that population is also producing. What matters is how much they are consuming relative to the size of their economy. Chinese households, in terms of end consumption, they consume far less than perhaps any other economy in the world. I think as a percentage of GDP, it’s about 45%, and most other countries, use about 65%, 70%.

So, it is a massive, massive shortfall. And this is where we kind of get into the territory of Michael Pettis’s arguments, and he probably explains it far better than I ever will. But he’s also not the only person who makes it as well. I mean, inside China as well, academics like Liu Shijin make this exact same argument that Chinese households do not consume anywhere near as much as anyone else does. And ultimately, they need to consume more to be able to create a sustainable source of demand. So, the issue here is that if the nation isn’t consuming, if households aren’t consuming, what it effectively means is that the national wealth isn’t going to households.

It’s being distributed in some other way. And that other way really is that the wealth is pooling in the hands of firms. Now, of course, firms can generate wealth, but then distribute it back to households, either as wages or bonuses or as dividends or even as taxes, which then get redistributed to households, right? But in China’s system, the national wealth disproportionately avoids household and pools with firms. And what has happened is that China has one of the highest savings rates in the world, something like I think 55% of GDP is saved, or maybe it’s 50% relative… I think the global average is something closer to 25%.

So, all those national savings, about half are being saved by households and the other half is being saved by companies, by corporations. So, what it means is when you’re saving, you’re not spending. And when you’re saving, savings, by definition, are being used for investment. So, the system by definition has been set up to provide a self-replenishing, cheap source of funds for firms to invest because the cheapest source of funds is retained profits for firms, right? They don’t have to go out and borrow. They don’t have to issue shares.

And so, having this system which kind of recycles money back into the firms, it creates all these resources that have to be invested. And, of course, you know, what are these mechanisms? Look, you look at the state sector, which accounts for a significant portion of economic activity. Sure, they pay dividends, but they pay dividends to the government. And in most cases, they then get handed straight back to the state sector as capital injections and as subsidies. You look at the Hukou system. The Hukou system is effectively the household registration system whereby people who move from the countryside to the cities, because they’re legally not really supposed to be there, it means that employers can pay them less.

It means employers avoid making their social security contributions because they don’t really have any political connections, political protections. And so, you’ve got a system, again, whereby the labor system is effectively set up in a way to provide an implicit subsidy to employers. The property system, although we look at it as a mechanism, as an engine for generating wealth for China’s middle class, that wealth was never realized. They were all paper gains. The property system was also a massive tool for extracting wealth from households by local governments through inflated land prices that then recycled the money back into construction companies for infrastructure investment.

I mean, it’s almost every layer of Chinese economy in some way or the other was tooled to either minimize the degree to which wealth was flowing into households or, in some ways, extracting wealth from households to support the corporate sector. And what that’s resulted in is these huge pools of savings, which, by definition, end up in investment. And those investments then result in greater industrial output, and somebody has to buy that output. But because Chinese households aren’t spending, because they get such a relatively small share of the national wealth, well, that output has to go somewhere else.

And it turns into exports. And so, this is kind of the recurring problem of China’s economy. All these arguments in the MOFCOM essay, so many of them are like, this is just the way things are. We have the great surplus…

Andrew: This is the way of the world.

Dinny: Exactly. This is the way of the world, right? It’s like other countries have big surpluses. Where now this is a period of technological innovation. Every industrial and technological revolution results in overcapacity because old plant gets superseded by new machines. We can get used to it. This is just the water we swim in. This is how the economy works. Whereas the reality is China runs such a big trade surplus because of this savings and consumption imbalance, and that’s a political decision.

That is a decision China made, really 40 years ago, and it was a decision made by so many other developing countries, particularly in East Asia, as a way to generate wealth, to supercharge domestic development. But we’re now at a stage where that sort of economy works really well when the sheer needs of the domestic economy demand large-scale investment. So, China needed that when the housing stock was absolutely lousy, which it was at the end of the 1990s.

And you need it when the population is rapidly expanding or migrating to the cities because they need housing, and they need infrastructure. And you need it when your economy is advancing because you need to upgrade infrastructure. There is legitimate reasons for a domestic economy to need to shortchange households in the interests of investment because everyone’s better off. But China’s not there anymore. China has a surfeit of housing. It doesn’t need to invest in infrastructure the way that it used to.

And yes, it has all these savings and an under-consuming household sector. So, you have this massive imbalance that’s getting worse and worse, and the adjustment costs are being forced on the rest of the world.

Andrew: Yeah, this is definitely the point where they lose me in terms of what I was saying before, you know, some of their arguments are grounded in reality. Some of them are legitimate. They just take them to the extreme. This one, just not engaging with this idea of underconsumption and the need to do some sort of rebalancing and just saying this is kind of the way of the world and how it works. It’s a bridge too far for me. And I think it really kind of undercuts the whole argument. But then, again, this is not really an economic argument they’re trying to win.

It’s more of a political thing, as you said. And so, this kind of brings us back to another one of the off-putting parts of this whole effort, which is this idea of China being a victim. And in particular, a victim, at the same time that is supposedly a champion of the global trade regime. I mean, the question is sort of how is the U.S. or EU even supposed to react to that? It’s not like they’re going to look at themselves and be like, “You know, actually, you’re right. China is playing by the rules that we set up, and we should just accept this and move on. And it is the natural order of things.”

I mean, that is just not happening. So, where does that leave us in terms of any kind of response that the U.S. or EU would make? I guess there’s not going to be a massive feel. They will not feel a need to respond, but also what does that tell us about this whole effort at all?

Dinny: Yeah. Look, the way that I see it is that this sort of framing from MOFCOM doesn’t really set the stage for compromise or for finding mutual ground.

Andrew: You don’t say!

Dinny: I mean, I think, if there was any ambiguity about that, I mean, you look at sort of how China has engaged with the trade wars over the past year, I mean, it’s become pretty clear that it’s built up an arsenal of tools which it can deploy quite successfully against the protectionist measures of other countries. And so, as much as anything, I think this essay signals Beijing will continue to do that. And what it’s signaling is that it has the high moral ground when it does deploy those tools. And so, I mean, as you were just saying, where does this leave everybody else? Because if we go back to first principles, the global free trade regime wasn’t supposed to look like this.

I mean, sure, plenty of countries have abused it over the years with all that stuff we talked about; persistent trade surpluses, subsidies, whatever. But the foundational principles of having a free trade regime in the first place was that everybody would be better off, right? So, sure, countries would see some of their industries suffer because you bring down the trade wars and the tariffs and the trade barriers, and other countries would do certain things better than you did, and so your domestic industries would suffer in some areas. But other domestic industries would do far, far better, and net-net as a nation everybody would be better off.

The idea was that by opening ourselves up to free trade, the benefits net-net would justify any adjustment costs, but that’s a mile away from what’s going on at the moment. And I think Europe is really the canary in all this, because they’re increasingly at a point where they’re going to have to decide whether they are willing to accept the cost of protecting their own domestic industries. And that’s kind of the first step. And then the second question becomes, well, if they do, what comes next? What is the trade regime that replaces what we currently have?

So, at the moment, it kind of feels like the inevitable direction on the path, that sort of feels like the path that we’re on, because China is arguing that the system is currently operating as it should. So, if that’s the case, then it’s no longer really in the interest of many countries to adhere to that system anymore. And the only thing keeping them in line and adhering to, at least paying lip service to the current order is the threat of Chinese repercussions. And I think, increasingly, that’s kind of where we’re at. I mean, I think we’re going to see a lot more deep thinking about what we replace the current water with.

Andrew: Yeah, I think you make a good point about Europe. I’ve always thought it was a little weird that the Americans are making the overcapacity argument or leaning into it because I don’t think Chinese overcapacity really impacts the U.S. economy all that much. It’s in the stuff that we tend to buy from China is a little low-value add. We have decided not to allow Chinese EVs into this country. I talked with Cory on this podcast that we’re going to release next week while on vacation, we talked about the battery sector, and I was just talking about how I don’t think it’s tenable to just shut down our economy, or not shut down our economy, shut out Chinese products from our economy, like with the robotics thing that happened this week and with the EV thing that’s happened before, and which may happen with batteries.

I think U.S. companies understand that this tech is really good and they want to license it. They basically want to work with Chinese companies. So, long term, I don’t think that’s a strategy from the U.S. side. And it doesn’t work long term to just kind of turn towards autarky or cut out China of the global trading system, say, “We’re not going to buy any of your products,” because, as you said, China will retaliate. And we want them to allow our companies to operate there. We do want them to buy some level of our exports. But all of that is to say the overcapacity, excess capacity, whatever, is a moot point, I think, in the U.S.-China relationship for the most part.

Europe’s where the rubber meets the road. And the EV thing obviously is the most kind of front and center, hollowing out the German car industry in particular, potentially the broader European auto sector; clean tech’s another area. And so, I do think it’s an interesting idea that China is ramping this up with the Europeans in mind and is ready to really play some hardball. And I think you’re right. The Europeans are going to have to decide. Do they want to take the path of the Americans and say, we’re just shutting this out? I don’t think that’s a viable option. Like I said, for the U.S., it’s more viable. But I don’t think that’s viable for the Europeans for a bunch of reasons, for political reasons, for economic reasons.

So, we’ll see. And then we’ll have to see, do the Europeans have the stomach to fight against China? Because you know that China, once gloves go off, they’re going to be nasty. So, I just don’t think, as I’m just talking this through, I guess somewhat concerning that MOFCOM is putting this out because it may be a sign that this Europe-China fight might get even nastier than it has been.

Dinny: Yeah. I mean, the way I see it is the way Europe works is everyone keeps talking until everyone arrives at a compromise. And I don’t think that can work in China-EU discussions at this point. To the extent that that may have happened in the past, I don’t think it’ll happen this time. And I look at an essay like this, and China is very much nailing its colors to the mast. It’s like, we are the victims here. We have become the champions of the trade regime that you built. It is not us to make compromises, and we will defend our position. That’s what’s… I was going to say, between the lines in this essay, but I’m just…

Andrew: Decide between the lines.

Dinny: It’s all the subtext.

Andrew: Totally. Well, I’ll just say, I’ve said this a few times before on the pod, and elsewhere, I think China’s increasingly saying the quiet part out loud. They’re basically saying, the model is the model, get used to it. We’re better than you because we’re more competitive and more innovative. And if that leads to exports, so be it. So, that to me is the kind of change that we’ve seen since, again, I first started hearing that message back in March this year. And I think that’s pretty telling because once they make it official, so to speak, like that, you know, it’s one thing when they kind of do it subtly and won’t kind of be that blunt about it and won’t negotiate, but then try to change things at the very end.

But they’re just kind of putting it out there and saying, “This is how it is and we’re not backing down.” Now, the whole adding — “Oh, and we’re the victim,” that’s the part of the Chinese system that drives me crazy, or of any authoritarian system where it’s like this brittle, like can’t deal with any criticism. Yeah, it just drives me nuts. So, I could do without that. But I just find this whole get used to it attitude concerning and interesting from an analytical standpoint. What are your thoughts on that?

Dinny: Yeah, I think interesting is the right word because China is in a position at the moment, given how weak domestic demand is, I mean, the economy is exports, right? I mean, their ability to sort of maintain growth, to sort of sustain this massive industrial investment that they’ve been pursuing over the last, what, six, seven years, I mean, it relies on the rest of the world buying more and more Chinese stuff. And so, on one level, that’s quite a vulnerable position to be in. But on another, I think Beijing feels like it holds all the cards.

I mean, you look at how they managed the U.S., sort of pushing back with rare earths and not, I think it feels like it’s an even stronger position in dealing with the Europeans. And so, even on one level, their economy is vulnerable to a decline in exports. I think they think they hold all the cards because no one’s going to sort of push back to a degree that would really result in a significant hit to the export machine.

Andrew: Yeah, that’s interesting. We have not seen China take that approach yet. And by that approach, I mean, if an economy like the U.S. has done restricts imports or tariffs something. So, I guess, obviously China used the rare earths vis-à-vis the U.S. on tariffs. But they haven’t done it specifically to say like if the U.S. or another country says we’re not going to buy X from you, they haven’t said, “Well, if you won’t buy X, then you can’t buy Y. You have to buy both.”

And that would be an interesting development of the Chinese lawfare toolkit, right?

Dinny: Absolutely.

Andrew: Well, on that very happy note, Dinny, it’s definitely depressing. It’ll be interesting, again, from an analytical standpoint. I always try not to use the word interesting because usually we’re talking to clients and they have a problem, I’m like, “Oh, that’s interesting.” And they’re like, “No, it’s a problem.” Anyway, from an analytical standpoint, we’ll be watching how all this plays out. I really appreciate you taking the time to walk through this. Pretty fascinating that they put this out, and I think worth dissecting and kind of going through kind of how they’re trying to frame this up. So, thanks for that, man.

Dinny: Yeah, no worries, mate.

Andrew: And thanks, everybody, for listening. We’ll see you next time. Bye, everybody.

In case you’ve been living under a rock: The economy has slowed sharply over the past few months – investment is collapsing, the property sector is in freefall, and household income growth has fallen to its lowest level on record.

• Calls for a stimulus package have been growing louder, and in previous cycles this is exactly the point where the government would reach for the fiscal fire hose – but not this time.

What looks from the outside like policy drift or stimulus timidity is, in our view, something far more deliberate: Beijing is quietly using the current moment to deleverage the economy.

Here’s why.

• China’s debt-to-GDP ratio hit 300% at the end of 2025 – higher than most major economies, and almost 50 percentage points higher than at the property market’s 2021 peak. Left unchecked, it would exceed 400% within a decade.

• That matters because healthcare and eldercare costs are set to explode as the working-age population shrinks.

• When that moment arrives, the government will need to borrow heavily to foot the bill. And the higher the starting debt burden, the less room it will have to do so.

Deleveraging, in other words, is preparation for a much bigger fight down the road.

The tricky part is that deleveraging usually requires either painful austerity or a prolonged period of below-target growth.

• Neither is politically palatable, but for the first time in years, Beijing thinks it has found a way to bring the debt burden down without triggering an outright recession – and it involves pulling three levers at once.

The first lever is inflation.

• Producer prices have finally turned positive after years of deflation, thanks partly to the Iran war’s energy shock, and partly to anti-involution efforts.

• Rising prices inflate nominal GDP – which in turn shrinks the debt-to-GDP ratio.

The second is exports.

• China’s AI and clean-energy export machine is booming, delivering the kind of nominal growth that doesn’t require domestic borrowing to sustain it.

• That’s a rare and valuable combination – growth without leverage – and Beijing is making the most of it.

The third is enforced fiscal discipline.

• Central state-owned enterprises are being forced to remit a larger share of their profits, gutting their capacity for new investment.

• Trade-in subsidies for consumer goods have been cut back.

• And the central government has drawn a hard line against bailing out cash-strapped local governments, forcing them to implement tough austerity measures.

This all has significant implications – the most immediate being that China’s domestic demand problems are unlikely to get better any time soon. If Beijing is serious about deleveraging, then the K-shaped divergence between a booming export sector and a struggling domestic economy is not a bug to be fixed – it’s a feature to be tolerated.

• Investors pricing in a stimulus rescue are misinterpreting China’s policy playbook.

The second implication is that stimulus, when it comes, will disappoint. We expect Beijing to add a modest supplementary bond allocation in the autumn – probably around RMB 500 billion, similar to last year. But that’s calibrated to keep the economy ticking over, not to reignite growth.

The open question is how long Beijing pursues this strategy. Chinese leaders have historically had little tolerance for prolonged economic pain, though Xi Jinping has shown more than most.

• Our base case is that the deleveraging drive runs through year-end at a minimum.

• Whether it extends into 2027 will depend on how much pain Beijing is willing to absorb – and how loud the calls for fiscal reinforcement become.

For now, though, the cavalry isn’t coming. And that, more than anything else, will be the story of China’s economy in the second half of 2026.

Dinny McMahon, Head of China Markets Research

What you missed

US-China

A commerce ministry (MofCom) spokesperson revealed for the first time that the US has committed to keeping tariffs on Chinese goods at or below 20%.

• By making the US commitment public, China is signalling clearly that it is fine with additional tariffs of up to 7.5% (after the latest 301 trade action from the US put them at 12.5%)

• It is also signaling that tariff increases above 7.5% will be met with countermeasures.

Foreign affairs

MofCom added 14 EU entities to its export control list on July 24, barring Chinese suppliers from selling them dual-use goods.

• Germany and France were hit hardest: Three firms from each country were added to MofCom’s list, including Germany’s largest defense company, Rheinmetall AG.

Brazilian President Luiz Inácio Lula da Silva called Xi Jinping on Monday.

• The call gave Lula the opportunity to showcase his positive relationship with China in the run-up to Brazil’s presidential election in October, in which he faces a close race against right-wing Senator Flávio Bolsonaro.

Econ and finance

Tax revenue registered strong growth in Q2, up 8.6% y/y, the fastest rate of expansion since Q3 2023.

• Individual income tax revenue grew 16.4% y/y, corporate income tax revenue increased 11.3% y/y, and value-added tax revenue also grew 7.4% y/y.

• Consumption tax was the only category to contract, down 2.0% y/y.

Regulators are trying to create a new channel for families to turn their homes into retirement income via trusts, but their efforts are hitting roadblocks.

• The biggest remaining constraint, according to experts, is an ill-suited tax regime that treats the creation of a housing trust as a taxable property transfer.

Tech

Moonshot released Kimi K3’s model weights, as promised.

• Anyone can now download and deploy the 2.8 trillion-parameter model.

MofCom made formal statements addressing US Treasury Secretary Scott Bessent’s recent remarks characterizing AI distillation as IP theft.

• MofCom stated there is no legal basis for tying distillation to IP theft, pointing out that many US firms distill Chinese models.

• They also noted that the timeline of Chinese model releases doesn’t square with accusations of theft.

Beijing’s science commission opened bidding on eight lab machines it wants companies to build for autonomous research laboratories.

• Many of these machines appear designed to do semiconductor research, raising an interesting question: Can robots running experiments rapidly beat decades of accumulated process knowledge?

Net zero

18 regulators – led by the environment ministry (MEE) – jointly released the 15th Five-Year Plan (FYP) for National Climate Change Response.

• The plan’s most notable feature is its emphasis on non-CO₂ greenhouse gases (GHGs) – including methane, nitrous oxide, and several fluorinated gases.

Politics

The monthly Politburo meeting on July 30 announced that the Central Committee’s Fifth Plenum will be held in October.

• The terse readout gave little hint as to what will actually be discussed at the Plenum, but did say: “Efforts must focus on improving the Party’s capacity for long-term governance, preserving its advanced nature and integrity, and maintaining its close ties with the people.”

Our phrase of the week is: “to finally make it” (修成正果 xiū chéng zhèng guǒ)

Context

Two Chinese mathematicians have won the Fields Medal, which is also known as the “Nobel Prize of Mathematics”. They are the first from mainland China to ever to win the prestigious prize.

The pair are Wang Hong (王虹) and Deng Yu (邓煜). They also turned out to be former classmates, having studied at Peking University (北京大学) in 2007.

After the announcement the story began trending online in China. At first it was all good news. State media championed the two winners as examples of homegrown, world-beating talent.

But as more details about Wang and Deng surfaced, celebration turned into a heated debate about the pitfalls of China’s higher education system.

Because the two winners spent the last decade overseas after leaving Peking University (PKU). Wang left PKU for France, and later moved on to the United States. Deng lasted only two years there before heading to MIT.

So in both cases, the prize-winning work was done abroad.

The official coverage steered clear of all this. State media praised the pair, celebrating their “Chinese nationality”.

But one education expert in China pushed back on this, pointing out:

“The excitement fixates on the ‘Chinese nationality’ of the two medalists, while avoiding the key question:

Why is it that they only ever finally make it once they are abroad?”

但是，高兴聚焦点是在”中国籍”上，却很少触碰一个实质性的问题——为什么都是在国外才最终“修成正果”。

And with that, we have our Sinica Phrase of the Week.

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What it means

“To finally make it” is a loose rendering of a four-character Chinese phrase which translates as “to cultivate” (修 xiū), “to achieve” (成 chéng), “true” (正 zhèng) and “fruit” (果 guǒ).

This phrase has its roots in Buddhism. The “fruit” (果) is the outcome of practice. A believer climbs a ladder of attainments known as “fruits” (果位), rising from the arhat (阿罗汉) all the way up to Buddhahood (成佛). The “true” (正) fruit is the genuine, orthodox attainment, as opposed to the false fruits promised by lesser paths. To reach it is to “complete the long road of cultivation” (修成) and arrive at enlightenment, which is also the end of suffering.

Most Chinese people first meet the idea of “cultivation to the true fruits” not in Buddhist scripture but in the novel, Journey to the West (西游记), the great Ming Dynasty fantasy attributed to Wu Cheng’en (吴承恩), and one of the four great classical novels of Chinese literature.

Its plot is one long journey of cultivation. The monk, Tang Sanzang (唐僧), and his disciples must survive eighty-one tribulations (九九八十一难) on the pilgrimage to find the Buddhist scriptures. Only at the very end of that journey, does the Buddha reward each of them with their “fruit”.

To the Monkey King, Sun Wukong (孙悟空), the Buddha says:

“It pleases me that you have shunned evil and done good, and that along the road you subdued demons and monsters, seeing it through from start to finish.

You are raised now to the true fruit, and shall be the Victorious Fighting Buddha.”

且喜汝隐恶扬善，在途中炼魔降怪有功，全终全始，加升大职正果，汝为斗战胜佛。

The concept also appears in a Ming story collection, Slapping the Table in Amazement (初刻拍案惊奇), by Ling Mengchu (凌濛初, 1580–1644), where a tangled romance comes right in the end:

“Who would have thought such a fateful match nearly cost the young woman her whole life — yet in the end it still came good.”

谁知是老大一段姻缘，几乎把女子一生断送了！还亏得后来成了正果。

Here the “true fruit” is not enlightenment but a happy marriage. And that hints at how the phrase works today.

In modern Chinese, the phrase “to finally make it” has two uses. This first meaning describes a couple who after many years of courtship, finally marry. The second meaning, which closer to this week’s story, is to reach success after a long and punishing effort.

It’s used pointedly or ironically in relation to academics. It describes the overworked young university lecturer who “finally makes it” by landing a teaching post after many years, only to continue with yet more pushing effort on the job.

Wang Hong and Deng Yu certainly did put in many years of effort, and in the end did “finally make it”.

They just had to leave China to do it.

Andrew Methven is the author of RealTime Mandarin, a resource which helps you bridge the gap to real-world fluency in Mandarin, stay informed about China, and communicate with confidence—all through weekly immersion in real news. Subscribe for free here.

Subscribe to RealTime Mandarin today!

Read more about how this story is being discussed in the Chinese media in this week’s RealTime Mandarin:

RealTime Mandarin

#287: China celebrates its first Fields medallists

Two Chinese mathematicians have won the Fields Medal. Known as the "Nobel Prize of Mathematics" (数学诺贝尔奖), it’s awarded once every four years, and only to those under 40…

Listen now

19 days ago · 6 likes · Andrew Methven

The new organization is the latest in a series of Chinese initiatives aimed at reshaping the international order to better reflect Beijing’s priorities. Through efforts such as the Global Development Initiative, the Global Security Initiative, and now the WAIO, China is positioning itself not just as a participant in the existing system, but as an architect of new global rules.

Yu Jie, a senior research fellow on China at Chatham House in London, joins Eric to discuss whether Beijing can turn its diplomatic ambitions into lasting influence and why many countries in the Global South are receptive to China’s vision.

📌 Topics Covered in This Episode

• China’s vision for reshaping global governance

• Why AI is central to Beijing’s diplomatic strategy

• The World Artificial Intelligence Organization (WAIO)

• Why the Global South is embracing China’s initiatives

• Can China match its ambitions with resources?

• How Beijing’s approach differs from the West

Show Notes:

• Chatham House: China sets out its vision for a new global order – but will it commit the resources to match its ambition? by Yu Jie

• The Diplomat: With New AI Governance Organization, China Seeks to Formalize Its Global AI Influence by Michael Caster

• The China-Global South Project: For China, the Race for AI Supremacy Runs Through the Global South by Eric Olander

Join the Discussion:

X: @ChinaGSProject | @eric_olander

Facebook: www.facebook.com/ChinaAfricaProject
YouTube: www.youtube.com/@ChinaGlobalSouth

Now on Bluesky! Follow CGSP at @chinagsproject.bsky.social

Follow CGSP in French and Spanish:

• French: www.projetafriquechine.com | @AfrikChine

• Spanish: www.chinalasamericas.com | @ChinaAmericas

• In this year’s July meeting, officials clearly signaled that more fiscal support is on the way, but only in modest amounts.

Note: This is our second short format episode – tighter, quick-turnaround reactions to the news as it breaks, alongside our regular weekly deep dives.

• Let us know what you think about the new format!

On this episode, Andrew Polk sits down with Dinny McMahon (Trivium’s Head of Markets Research) to unpack:

• How this July Politburo readout offered surprisingly clear language that more fiscal support is coming, and in what form

• What “fiscal-financial cooperation” means in practice, and why it’s really code for interest rate subsidies

• Why Beijing is likely to lean on accelerated special-purpose bond issuance – and a probable Q4 top-up, following last year’s playbook – rather than broad interest rate cuts

• Why none of this changes the underlying story: Beijing is deliberately riding out a long, painful real estate adjustment – and this is just a slight pick-me-up

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 today we are trying our second go at our quick turnaround, shorter format pods where we grab one of our analysts and get their unfiltered reaction to something that’s happening in the news.

Today, I’m talking to our Head of Markets Research, Dinny McMahon, about the July Politburo meeting that just took place overnight. So, we are reporting this on July 30th in the afternoon in the U.S. The Politburo meeting happened July 30th in China. The readout was released at the end of the day. So, we’re going to get into that quickly. But first, Danny, how are you doing, man?

Dinny McMahon: Good, mate. I’m all the better for seeing you.

Andrew: Yeah. Well, I appreciate you jumping on for this. We are going to do something that is totally different and skip the vibe check today because Dinny and I are going to do this pod and then immediately record our longer form weekly pod. So, I’ll get his vibe check then. So, we’re going to skip it for now. So, anyway, first of all, tell the people why the July Politburo is particularly important.

Dinny: All right. So, you know, the Politburo meets monthly, but about three times a year when it gets together, it’s all about the economy. And July is one of those meetings. And in some ways, it’s particularly important because we’ve just got the GDP data for the first half of the year. They’re kind of, you know, taking stock of what needs to be done in the back half of the year. And this is kind of their vibe check. You know, what does the Politburo make of the economy?

And what does it think it needs to be done from here on in? So, that’s why July is always… you know, why we’re always particularly interested in the July meeting.

Andrew: Yeah, well, it feels like July is always the stakes are high for the July meeting, almost always, but particularly this time. And why would you say the stakes were particularly high this time, or at least the expectations were raised?

Dinny: Yeah, because the economy is really in the doldrums. I mean, that’s a bit of an exaggeration because the exports sector is still going gangbusters, particularly anything related to energy or AI. But domestic demand is weak. It’s been chronically weak. I think it’s fair to call it chronically weak at this point. The last few weeks, the last few months have been particularly bad. But more broadly, I mean, it’s been three years at this point. It’s been really weak.

So, there’s been a sense of like, okay, given how poor the data has been for the last few months, what is Beijing going to do about it? And so, all eyes were on this meeting just to get a sense of, is Beijing going to roll out some sort of stimulus? And if it is, can we gauge how meaningful it’s going to be?

Andrew: Great. Well, tell us what we got. I think people were looking in particular for more economic support. I think at this stage, everybody realizes the days of big bang stimulus are over. So, that ship has sailed. But businesses, investors, everybody was hoping for a little bit more support, what do we end up getting in terms of, I would say, concrete policy? This isn’t really the place for concrete policy, but what specific sort of formulations do the policymakers use that would make us think they might be tinkering on various policy areas?

Dinny: Yeah, so the Politburo readouts can often be pretty cryptic. I mean, as you said, there are never specific policy measures. It always takes a few weeks or even a few months before the actual government agencies respond to what the Politburo has decided and we get sort of substantive specific policy measures. But even beyond that, sometimes these readouts can be incredibly cryptic. I mean, trying to read between the lines, trying to read the tea leaves of exactly what they mean can be quite the challenge. But this one’s a bit different. I mean, it’s pretty specific. From the moment it starts talking about the economy and fiscal issues, it’s pretty clear that it intends to roll out more support.

So, it has all the key words that you expect from a government that is about to provide additional fiscal support for the economy.

They said, we’re going to pursue a more active fiscal policy.

We will fully leverage the effectiveness of existing policies.

We will introduce incremental policies.

We will increase counter-cyclical adjustments.

We will intensify efforts to expand domestic demand.

It’s increased, intensified, fully leveraged. They even got a bit more specific sort of saying they’ll accelerate the pace of fiscal spending and the utilization of bonds. And they would promote domestic demand by coordinating fiscal and financial policies, and that they will use and adjust monetary policy tools as appropriate.

So, you put all that together and there is no ambiguity there whatsoever. There’s a sense that clearly more needs to be done to support the economy and specifically domestic demand. And that support is going to be fiscal, and probably around the edges is going to be a little bit monetary as well. So, all told, for what can often be a very cryptic meeting, a very cryptic readout, I think the signals here are incredibly clear.

Andrew: Well, you also had some thoughts specifically on monetary tools that they will use. Go through those. I mean, you’re not basically all front-running a little bit here. You’re not expecting interest rate cuts outright, but more structural tools. Talk to us about those. And then you also pointed out this idea of fiscal financial cooperation. You have a pretty good idea of what you think that means. Talk us through that as well.

Dinny: Yeah. So monetary policy, I don’t think we’re talking interest rate cuts or even reserve requirement cuts. I mean, in the past, when the government has signaled or is about to line up an interest rate cut, it will say something like, “We will cut interest rates in a timely manner.” So, if you’re kind of talking more abstractly about monetary policy, I think we’re probably looking more about what Beijing calls structural tools or relending quotas. And this is kind of the approach the PBOC has favored in recent years.

It’s about providing a dedicated quota of cheap funding to some aspect of the economy that they deem to be strategically important. So, they’ll provide a relending quota to innovative companies or to companies that are building aged care homes or something like that. They have had no qualms about upping and re-upping the quotas for those sorts of structural tools. So, I think it’s fair to say we’ll perhaps see more of that rather than kind of cut interest rates or reserve requirement ratios. And then on the cooperation of the sort of the fiscal and the financial world, I think that is really code for interest rate subsidies.

Now, this is something again that they’ve leaned into a fair bit over the last 18 months, whereby the Ministry of Finance provides fiscal support for the central bank to effectively… Actually, I’m not quite sure the degree in which the central bank is involved, but it’s a way to bring down borrowing costs for certain firms by subsidizing their interest payment. So, it’s not explicitly reducing the interest they pay. It’s just the Ministry of Finance stepping in and helping subsidize those interest payments. So, yeah, I think we might see a little bit more of that as well.

Andrew: Okay. Well, what about on the fiscal side? There was some specific language around, let me pull this up, fully leveraging the effectiveness of existing policies when it comes to fiscal policy, introducing incremental policies. So, effectively saying we’re going to ramp things up at least to a degree. Increasing counter-cyclical adjustments and intensifying efforts to expand domestic demand and optimize supply. Final one, accelerate the pace of fiscal spending and the utilization of bonds. That’s the main one I was actually going for. What does that all mean?

Dinny: Yeah, it’s pretty bland language, mate. I can see you, after a 17-mile run, it’s not doing much to get you awake.

Andrew: Yeah.

Dinny: Yeah, I mean, what we think is here, so anyone who’s been listening to the podcast knows we think Beijing is trying to de-leverage, right? So, it is trying to take advantage of this particular moment in time where exports are strong, inflation is rising, credit demand is weak to sort of bring down China’s debt to GDP ratio, which has just been rising so aggressively over the last four years. So, we think Beijing, when it comes to providing some sort of support for the economy, has that at the back of its mind. It has no intention of ramping up, borrowing to provide fiscal support, certainly not any meaningful way.

So, what we think is really going to happen is kind of a replay of what we certainly saw last year, I think we saw it the year before that as well, is when authorities start worrying about the state of the economy, they get local governments to accelerate their issuance of special purpose bonds. Okay, so those are the tools. They are the tool which traditionally has been most responsible for funding infrastructure investment. Now, so firstly, we think they’ll accelerate that. And second, we think the focus of those funds will concentrate far more on infrastructure.

So, as I said, this is the tool for funding infrastructure. But over the last few years, these special purpose bonds have turned into a bit of a Swiss army knife. Every priority Beijing now has that requires some sort of funding, they go, “Oh, okay, we’ll get the special purpose bonds to fund it.” So, these days, they’re used for land buybacks to kind of help support developers and local government finance vehicles. They’re used to sort of pay down hidden debt. So, this quota was used for a whole bunch of other stuff other than infrastructure these days. So, what we expect in the second half of the year is firstly, issuance will accelerate, which, you know, it got off to a very slow start.

So, they’ve got a bit of runway. Certainly, we saw it accelerate in June. So, we think that that pace will remain elevated. And the second thing, we think that the funds raised from these bonds will focus more on infrastructure, less will go back into land buybacks and to paying down hidden debt. So, that’s the first step. It will take what they’ve already promised, that sort of local government debt, central government bonds, whatever, and they’ll accelerate their deployment.

And then when we get to the fourth quarter of this year, Beijing will come out and they’ll make an additional allocation of debt, borrowing that some level of government, whether it be the central government itself or the local governments, they’ll be allowed to borrow more and use that to sort of prop up the economy. We saw that last year. I think it was in October, local governments got an additional allocation of 500 billion worth of special purpose bonds on top of the original quota of 4.4 trillion. So that extra 500 billion, 200 went into infrastructure. The remaining 300 went to support local government budgets and dealing with some hidden debt.

So, we think given Beijing’s focus on deleveraging, we think it’s fair that they’ll do the same thing probably on a similar scale. An extra $500 billion worth of borrowing in the fourth quarter to kind of keep investment elevated and tide the economy through to the end of the year when the funding cycle will start again.

Andrew: All right, man. So that’s a good wrap up of the main themes that we saw in there. But let’s take it home. What do you think this means going forward overall for the economy? I think you explained what it means for policy, but what does that mean for the economy? More of the same or what?

Dinny: I think the short answer is ‘not much’ in the sense that this isn’t the sort of silver bullet that will revive domestic demand. I think Beijing has now got to a point where it realizes that it’s not interested in throwing good money after bad. It’s not interested in ramping up its consumer trading program because it realizes stuff like that only works as a band-aid to tide the economy over until demand recovers of its own volition. It doesn’t want to sort of massively ramp up infrastructure.

In fact, the focus of infrastructure investment under the next five-year plan, what they’re calling the six networks, is a lot more focused on pursuing infrastructure that delivers productivity gains as opposed to infrastructure as sort of ballast for economic growth. So, I think there’s a sense of like, look, if we’re going to borrow money and we’re going to deploy it in the economy, we want to get bang for our buck. We just don’t want to be sort of borrowing more and more just to sort of reach arbitrary targets.

So, I think what this means is we’ll probably see more robust domestic demand in the second half of the year. There’ll be more money going into infrastructure. I think there’ll be more central government spending as well. I mean, what we saw in the first half of the year is that tax revenue was rising, which makes for a nice change from the last few years where it’s been really weak. But government expenditure has been pretty weak. In some months, it’s actually been contracting. So, given that, we think maybe the government’s been sort of keeping its power to dry.

It might have some sort of tax revenue at its back pocket that it can pump into the economy in the second half of the year. We also saw second quarter was particularly weak because state grid, its investment really slowed down really aggressively. If that picks up again in the second half of the year, then we’ll have an extra shot in the arm for investment. So, I think there’s enough here to suggest, okay, the second half will be more robust for the domestic economy. The second half will be more robust than the first half.

But this is not the sort of stimulus package that’s going to get the economy out of the woods, that’s going to sort of radically change or radically fix this chronically weak domestic demand we’ve seen for years now. All those underlying forces are still going to stay in effect. This is just a little bit of a pick-me-up that’ll help the economy get through to the end of the year and help Beijing realize its GDP target of 4.5 to 5% growth.

Andrew: Yeah. I’ll just end on two quick things from my perspective. One is, I always say, you know, we watch these Politburo meetings to understand policymakers’ reaction function, and everyone’s talking about how terrible the Chinese economy is, and it’s true. Well, you know, it’s bifurcated, right? It’s the K-shaped economy that Joe P. has written about, and others have written about. Export’s doing great, high-tech part of the economy, anything linked to AI doing great. Everything else, doing terrible, right? Particularly consumption, the overall domestic demand picture. Part of that domestic demand picture is also weak infrastructure investment.

They’ll try to adjust that piece. But policymakers are not panicking. Maybe this is a bad decision, but they are riding it out. I don’t know why that tells us. To me, it tells us maybe things aren’t as bad as we think from the outside. They obviously aren’t panicking, at least they have not deemed the level of domestic weakness to be bad enough to warrant more aggressive action. That’s something we can say. Now, why that is, I think, is because people forget that we’re still in the process of this massive real estate realignment, and the economy is weaning itself off of real estate. That’s what officials want. It’s painful.

It’s going to take a long time. And they’ve just decided we are going to ride this out. And the real estate adjustment is a lot of what’s driving, not solely, but a lot of what’s driving weak consumption. And so, I think they’re just saying it’s pretty simple diagnosis from their point of view. Like, we’re realigning the property market. That means domestic demand is going to be weak for a while. Doesn’t mean they don’t wish it was stronger and they need to tinker here or there, but they’re riding this puppy out. So, I think what you see is largely what you get. Although I think you’re right. We probably will see a little bit of a fill up to the economy there at the end. So, that’s my two cents. Tell me why I’m wrong or are you okay with that assessment?

Dinny: No, no, that sounds about right to me, mate.

Andrew: And then just finally, quickly for people, there was one other element of the Politburo meeting. I won’t ask Dinny to weigh in on this, but it did also announce the Central Committee’s 5th Plenum will be held in October. There’s an annual plenum for the Party. Sometimes there’s more than one they have to have, I believe, are Party rules at least one each year. But the 5th Plenum is important because it’s going to set the stage for the leadership turnover that will take place in 2027, which is only about nine months away, I believe, because a lot of that will happen in March.

And then there will be further additional moves at the actual, what is it, 21st party Congress in the fall. And so, this plenum is a lot about setting the stage for that. And it is all about internal party governance, improving the party, further rooting out corruption, which again, you’d think would make sense to do ahead of a big turnover at the top leadership. So, we’ll leave any further analysis on that to the nerds in our politics practice at Trivium, but wanted to at least flag that for people who may be interested. All right, that’s going to do it. Dinny, thanks for this quick React pod. This was super helpful. Hope people found it useful. Thanks, man.

Dinny: Cheers, mate.

Andrew: All right. Bye, everybody.

Our phrase of the week is: “pilfered in passing” (顺手牵羊 shùn shǒu qiān yáng)

Context

One of the biggest stories being discussed in the Chinese media this week is a high profile plagiarism case involving the academic and writer, Jiang Fangzhou (蒋方舟).

Jiang is known as the “genius girl” (天才少女). She published her first book at the age of nine, and by the age of 12 was writing columns for Southern Metropolis Daily (南方都市报).

She was admitted to Tsinghua University in 2008 for her under graduate degree with a 60-point concession on her gaokao score. After a stint as deputy editor of Neweekly (新周刊), a respected current affairs magazine, Jiang went on to take a master’s degree in creative writing at Renmin University which she completed in 2019.

Since then she’s become one of the more recognisable literary personalities in China, especially among people born in the 1990s and 2000s.

But this has all come crashing down this month following accusations of plagiarism which resulted in her master’s being revoked by Renmin University.

The accusations were first raised by a retired Tsinghua University professor in August last year, who made a formal complaint to Remin University in April this year which triggered an investigation.

More recently, two “online sleuths” identified passages in her master’s thesis, and one of her books, which they alleged had been lifted directly from publications outside of China, asking the question:

“This makes me wonder:

how much of it did she write herself, and did she casually lift it from somewhere else?”

这让我不禁怀疑，多少东西是她自己写的，多少东西是顺手牵羊的。

And with that, we have our Sinica Phrase of the Week.

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What it means

“Casually lift from somewhere else” is our translation of the classical Chinese idiom which literally means to “leading the goat away in passing” (顺手牵羊 shùn shǒu qiān yáng). Although in the end we landed on a different translation which I’ll come to at the end.

But first, the long and winding history of this old idiom.

The earliest reference of the image of “leading a goat” is believed to be in The Book of Rites (礼记), the Confucian classic on ritual and etiquette compiled during the Han Dynasty (206 BCE-220 CE). The text instructs that when presenting a horse or a goat as a gift, it should be led in a certain way:

“When presenting a horse or a goat, lead it with the right hand.”

效马效羊者右牵之。

The first recorded use of the idiom in its modern form comes over a millennia later, in Single Whip Seizes the Lance (单鞭夺槊), a play by Shang Zhongxian (尚仲贤) who was a playwright of the Yuan Dynasty (1271-1368).

In one scene, a warrior boasts of capturing an enemy rider:

“I gripped his horse with my right hand, seized his eyelashes with my left, and led him back as easily as leading away a goat.”

是我把右手带住马，左手揪着他眼扎毛，顺手牵羊一般牵他回来了。

A century later, “as easily as leading away a goat” was immortalised in the Thirty-Six Stratagems (三十六计), a famous collection of military tactics, likely compiled in the late Ming Dynasty (1368-1644), althgough the writer is unknown.

“As easily as leading a goat” (顺手牵羊) is the twelfth stratagem. It teaches that when a large army is on the move it will inevitably expose weaknesses. A clever opponent takes advantage of every one of them, no matter how small, accumulating minor gains into major ones.

The idiom’s meaning has evolved over the centuries. Now in modern Chinese it describes casually or opportunistically pocketing something that doesn’t belong to you. It always carries a negative tone, which is exactly how it was used to describe Jiang Fangzhou’s writing.

According to the allegations against her, the work of other writers was conveniently within her reach, and helpfully written outside China making it harder to track.

So, according to her accusers, she casually lifted, translated, adjusted and dropped them into her own work. Which is why we landed on “pilfered in passing” for the translation of this ancient and storied idiom.

Andrew Methven is the author of RealTime Mandarin, a resource which helps you bridge the gap to real-world fluency in Mandarin, stay informed about China, and communicate with confidence—all through weekly immersion in real news. Subscribe for free here.

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Read more about how this story is being discussed in the Chinese media in this week’s RealTime Mandarin:

RealTime Mandarin

#286: Top academic in plagiarism scandal

This week we meet Jiang Fangzhou (蒋方舟) who is a famous writer and media personality in China…

Listen now

a month ago · 3 likes · Andrew Methven

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• Xi expressed full-throated support for AI development, while indicating that regulation is moving up Beijing’s priority list.

Read together, the message was that China intends to compete hard on AI, but on its own terms, with stability ranked ahead of any near-term gains.

The bit that attracted the most attention was Xi’s reaffirmation of China’s commitment to open-source AI.

• There has been growing speculation that AI safety concerns may force Chinese regulators to disallow ongoing release of open-source models.

• But Xi’s message was that China isn’t going to walk away from open source.

That’s likely because the global popularity of Chinese open-source tools is a once-in-a-generation opportunity to bring the international community onto China’s AI stack – particularly in the absence of cheap, open US alternatives.

• Beijing intends to press that advantage for as long as it can.

Running alongside the open-source pitch, however, was a notable elevation of regulation, ethics, and governance in Xi’s remarks.

• The speech raised deep questions about practical and existential AI risk and called for new laws and risk-monitoring systems.

• Beijing was already an early and fast mover on AI regulation, but Xi’s talk indicated that China will double down on AI safety, potentially placing stronger controls on both the release of new open-source models and the distribution of open model weights.

Then there was the announcement of the World Artificial Intelligence Cooperation Organization, formally launched on the eve of the conference last week.

• This represents Beijing’s bid to compete with the US on global AI governance and offer the Global South an alternative to Western-led bodies.

• Whether it gains traction is an open question – China’s track record on tech governance organizations is patchy at best, and the recent past is littered with abandoned Chinese-led cooperative platforms.

Zoom out from the individual announcements, though, and a bigger picture emerges: Xi believes that while AI is deeply important and transformative, it should never become so all-consuming that policymakers lose sight of what really matters.

• Technology is not an end unto itself – instead, AI should serve social development and stability.

The implications of that framing are far-reaching. Beijing is prioritizing AI’s long-term development over a sprint race to build the most advanced frontier model.

• Viewed through that lens, the tighter regulations, willingness to slow model releases, and the hard line on NVIDIA chip imports all begin to make a lot more sense.

The bottom line: The AI race won’t be decided this year – it is a decade-long play for who owns the AI stack that the developing world runs on, who sets the rules of global AI governance, and ultimately, whose industries make the best use of these tools for economic gain.

Kendra Schaefer, Partner and Head of Tech Policy Research, Trivium China

What you missed

US-China

The Trump administration imposed tariffs of between 10% and 12.5% on 60 countries, including China, alleging that they hadn’t done enough to prevent the import of products made with forced labor.

• The fact that China wasn’t singled out and that the new duties merely aim to re-establish Washington’s previous tariff rate mean Beijing is highly unlikely to retaliate.

Xi Jinping looks headed to DC in September – at least for now.

• Trump has downplayed his July 16 comments claiming that China interfered in the 2020 US election, saying: “Well, we’re going to talk to them about it. It took place a long time ago.”

• On Monday, US Secretary of State Marco Rubio said, “we anticipate that the trip is happening in September,” while China’s foreign ministry says the two sides have “kept in communication on head-of-state interactions.”

Foreign affairs

Top diplomat Wang Yi met a delegation from the European Parliament’s Committee on Foreign Affairs visiting Beijing on Tuesday.

• Wang told the delegation: “China and Europe should…refrain from politicizing economic and trade issues and overstretching the concept of security in exchanges, and work for an upward and dynamic balance of trade from a long-term perspective.”

Econ and finance

Five of China’s largest state-backed insurers – China Life, PICC, Ping An, China Pacific, and New China Life – issued separate statements expressing confidence in A-shares.

• A-share valuations have collapsed over the past month, with the CSI 300 Index down more than 9% between its June 22 peak and July 17.

Total fiscal expenditure fell 11.9% y/y in June, widening from the 3.9% decline in May – but the scale of the decline is deceiving.

• Government-managed fund expenditure – which accounts for about 30% of total spending – was the main drag in June, plunging 43.7% y/y, largely due to base effects.

Commodities

China added 72.1 GW of new solar capacity in H1, a massive 66% y/y decline.

• Installation growth is all but certain to pick up in H2 as utilities rush to meet year-end grid connection deadlines. However, the structural bottlenecks constraining growth are unlikely to be resolved anytime soon.

Business environment

The finance ministry (MoF) has announced that, starting September 1, lithium-ion batteries – a core input for new energy vehicles (NEV) – will be subject to a 2% consumption tax.

• Innovative, early-stage battery products that have yet to reach mass-scale commercialization – including sodium-ion batteries and fuel cells – will be exempt from the tax until the end of 2028.

Tech

Chinese regulators, led by the commerce ministry (MofCom), are consulting domestic AI and chip firms on tightening export controls over advanced technologies.

• Regulators are also discussing ways to prevent offshore chip firms from fabricating chips designed by Huawei, Alibaba, or ByteDance.

Net zero

The macro planner (NDRC) and energy regulator (NEA) jointly released the 15th Five-Year Plan for renewable energy.

• The plan targets an increase in annual renewables output to 6,000 TWh by 2030 – a 50% increase from 2025 and roughly 35% higher than the US’s 2025 annual power output.

Zhang Xiliang – the chief architect of China’s national carbon market (ETS) – says regulators will tighten the screws on ETS compliance over the 15th Five-Year Plan (FYP) period.

• Zhang also hinted that policymakers are considering a carbon tax for energy-intensive industries not yet covered by the ETS.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.

• Same standoff, squeezing from opposite ends of the pipeline.

Quick note: This episode is the first of a new, more frequent style of podcast we’re rolling out – shorter, faster-turnaround conversations to react to the news as it breaks, alongside our regular weekly deep dives.

• Look for more of these in your feed soon.

On this episode, Andrew Polk sits down with Kendra Schaefer (Head of Tech Policy Research) to unpack:

• Why MOFCOM’s reported talks with Alibaba, ByteDance, and Zhipu on export controls could reshape how Chinese model weights get released

• The three priorities Beijing is trying to balance: model competitiveness, security risk, and controllability

• How Kimi K3’s release has intensified US anxiety, with Treasury Secretary Scott Bessent floating possible sanctions over model distillation

• What Xi’s WAIC speech signals about China staying committed to open source while tightening the regulatory leash

Give it a listen and let us know what you think.

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’m joined today once again by our Head of Tech Policy Research, Kendra Schaefer. Kendra, how are you doing?

Kendra Schaefer: I’m good. I’m good. How are you?

Andrew: Yeah, glad to have you back on so quickly, which it’s a rare treat to get such a quick turnaround. I’ll talk about this a little bit in the housekeeping piece, but just for listeners — we’re doing a little bit of experimentation with putting out content more frequently, which means some of it will be shorter. I’ll talk through some of that in more of it in just a minute. But the reason specifically that I had Kendra on was there were some big developments, even since we talked last, in, of course, the China AI space.

The big news is sort of that Chinese regulators led by MOFCOM are reportedly in talks with some of the big hyperscalers — Alibaba, ByteDance, Zhepu, about potentially tightening export controls on AI models and chips going out of China, potentially even limiting overseas transfer of training data and model weights. And so, this is like a big deal in terms of potential restrictions from China’s side, but also we’re seeing potential restrictions from the U.S. side, which we talked about two weeks ago when I talked to Kendra.

And that has even ramped up further with the release of Kimi 3, Moonshot’s latest release, with now U.S. policymakers really worried. So, there’s like this very narrowing space where the U.S. looks like it’s going to increasingly restrict the Chinese models and China’s going to restrict Chinese models from going abroad. We’re going to talk a little bit about that, and then also add the context of Xi Jinping giving a big keynote speech at the WAIC. What does that stand for, Kendra? World AI Conference?

Kendra: Yes.

Andrew: Okay. Where he kind of doubled down on China’s commitment to open-source AI. A lot of just related topics. I want to get Kendra’s quick take on while it was top of mind for folks. But of course, we’ll do this quick. Got to do the quick vibe check. How’s your vibe today, Kendra?

Kendra: Well, I’m a little under the weather, actually, but I really wanted to do this podcast. So I’m all hopped up on DayQuil and ibuprofen. So I don’t know if overmedicated is a vibe, but if so, that is my vibe.

Andrew: It’s definitely a vibe. I love it. Well, this will be a trip then. I’m looking forward to it. My vibe is excited to kind of experiment with some of this more frequent, quick-hit content. So, excited about that. We will do a little bit of quick housekeeping reminder to anyone listening: if you’ve just got this or if this was forwarded to you, Trivium is not just a podcast. We are a strategic advisory firm and we work with businesses and funds to figure out China. So, we are a strategic advisory that helps businesses and investors navigate the China policy landscape.

That includes policy in China across a range of areas, but also policy towards China out of Western capitals like DC, London, Brussels, and others. So, if you need any help on that front, please do reach out to us at hq@riviumchina.com. Otherwise, listeners, please do leave us ratings and reviews on your favorite podcast apps. It really helps expand our reach and grow our business.

All right. The other housekeeping piece quickly. So, we are going to experiment with more frequent podcasts, more frequent content. It’ll be shorter, many of them. We’ll still kind of have our weekly anchor podcast kind of talking about bigger themes, but I just want to get more Trivium voices on, talk about stuff that’s really top of mind that people may be wondering about in the news. And so please look for us in your feeds more regularly. This isn’t just going to be just suddenly you see three or four Trivian pods. In a couple of weeks, we should be in your feed on a more regular basis.

So, make sure you subscribe to the podcast on whatever platform you use. All right, let’s get into it, Kendra. So, we’ll start with the MOFCOM piece. So, The FT in particular reported that Chinese regulators, led by MOFCOM, the Ministry of Commerce, are in talks with the hyperscalers about tightening export controls on AI models and chips. We’re talking again about potential overseas transfer of training data and model weights, and apparently even some discussion of preventing offshore firms from fabricating Huawei, Alibaba, and ByteDance design chips.

This all matters because, as we’ve talked about on the pod before, the whole reason that Chinese models like DeepSeek and Moonshot’s models have gotten global traction is precisely because they’re open weight, and anyone can download them and run them locally. So, if Beijing starts clamping down on that, it’s a huge deal. Why don’t you talk us through kind of, I know you’ve got a big picture understanding of what’s going on here and also kind of the different priorities that policymakers might be balancing when they’re thinking through this stuff.

Kendra: Yeah, totally. So we don’t know exactly what MOFCOM is going to do or specifically how they’re going to approach this. I’ll come back to my hypothesis on what tools they might use maybe later in the podcast. But we do know what considerations Beijing is trying to balance right now. It’s trying to balance three considerations. First, the competitiveness of models. Second, these sort of big, scary cybersecurity questions around models. And then on top of that, controllability.

And so, it’s probably helpful to paint a little bit of a picture in terms of what the state is thinking on each of those three aspects. So in terms of competitiveness, I mean, I think most of our listeners know that there’s been hope in China for 15 years that the country could sort of develop an alternative tech stack to the U.S. tech stack that would gain international traction. But prior to LLMs, you know, the platform economy and sort of cross-border e-commerce represented China’s best hope to do that.

TikTok was kind of the first big Chinese platform that American users loved and that really got a lot of traction in the U.S. And also, you’ve got some minor stuff like Temu and Shein with a mixed reception, but still relatively popular in the United States. But TikTok, Temu and Shein face direct competition from bigger, better established, better funded U.S. competitors. Temu and Shein have to go head to head with Amazon. TikTok has to compete with Meta and X. But look at what’s happening now in AI.

It’s crazy. Companies all over the world, including all these big companies and a lot of small firms like us in the U.S., want cheap AI technology that they can control. But there’s a huge demand for that. And right now there’s really only viable Chinese supply. There are like very few competitive U.S. models that meet that demand. U.S. models meet the demand for high-quality, very secure, bleeding-edge AI. There’s no great Chinese competitor in that space. And of course, there’s a huge market for that as well.

But they don’t meet the demand for cheap, controllable AI. Right? Chinese firms do. So, this is a once-in-a-lifetime opportunity for China. Even though Chinese tech firms have a sort of fraction of the resources that U.S. firms do, because they’re really the only viable players on the field in that particular segment of the AI market right now, they’re getting a ton of traction. My personal opinion is this isn’t even actually a U.S.-China issue. It’s just a supply and demand problem. And then China has this sort of additional incentive of, you know, it’s not just about can our firms gain market share in the U.S. or EU.

You know, Chinese tools also have actually probably much more long term durable prospects in the global south. Startups and government institutions and companies in countries where the startups don’t have that much money, where you know they’re scrappy, where there’s a lot of R&D firms that don’t have funding, of course, they’re going to want to use a model that’s cheaper, that’s easier to access, there’s lower barriers to entry, there’s not so much sort of subscription control or geofencing or any of that sort of stuff.

So, as you said if Beijing were to ban the export of Chinese open source models on a permanent basis that would essentially amount to ceding the most momentum China has ever gained due to risk aversion. So it would be a huge deal. So that’s one piece of the puzzle. And Beijing is certainly weighing that piece.

Andrew: That’s the competitiveness piece I’m talking about.

Kendra: That’s the competitiveness piece, exactly.

Andrew: So you said competitiveness, security, controllability. Okay, talk us through security then.

Kendra: We’re trying to do a faster pod here, so I’ll try to keep these shorter. But for safety...

Andrew: No, no, people will love it. It doesn’t have to be short.

Kendra: Okay. So, I think the safety concerns are becoming pretty clear to everyone.

I don’t know if you also saw the news just yesterday that this OpenAI was running some tests on new agentic system, and it lowered the guardrails on the system. My God, it was so terrifying. They lowered the guardrails on the system and basically told this tool to like do its worst, essentially, just to see what it could do. And it broke out of its box and went to Hugging Face, launched a cyberattack against the Hugging Face website, totally autonomously, right?

Andrew: Insane.

Kendra: Anyway, there was a big kerfuffle over this. OpenAI and Hugging Face have since cooperated to sort out the issue. But obviously, every week there’s some other terrifying headline about the cybersecurity risks of these models. You know, they’re doing things that humans didn’t expect them to do, etc. So, these safety concerns are very, very real. And open source tools have an even bigger safety problem than closed source tools, which is that if it’s a closed source tool and it is discovered to be hackable or breakable or the guardrails can come off or there’s something seriously wrong with it, the company that manages it can pull it off the market today.

But if you release an open source tool onto the market, you release open weights onto the market, it’s gone. It’s out of your control. That’s the end. And so, the risks for China to be the source of such a tool, let’s say a Chinese company releases a tool like that onto the domestic market. And suddenly there’s a bunch of attacks against Chinese critical infrastructure, even by domestic actors, even, right? Or by foreign state-sponsored actors, that is a direct risk for China, built by China to China.

But similar problem, even if those tools aren’t even used to attack China. I mean, the amount of geopolitical tension that would arise if a bad actor took a Chinese tool and then was using that to attack other countries and China was seen as this irresponsible global actor after they have, you know, talked up safety, etc. And then on top of all of that, It’s like Chinese regulators are some of the most risk-averse humans on the planet.

Andrew: Yeah. I was just quickly going to say, are you saying it’s like some sort of disruptive element escaped to the borders of China and caused a global issue? Have we seen something like that recently? That everyone would blame China for it? Yeah, I think we have. Yeah, well, so I’m sure. Yeah, absolutely. It caused a huge issue. But before you go to the controllability piece, just quickly, our team noted that Hugging Face use open source Chinese models to do the security postmortem to try to figure out what went wrong and fix it. Anything to take away from that?

Kendra: Yeah, that’s a whole nother rabbit hole. It’s like essentially what happened was Hugging Face tried to use in their own blog post when they were reporting on the incident, they essentially said we tried to use commercially available U.S. tools. Presumably, they’re talking about, you know, Anthropics tools or OpenAI’s tools. They tried to use the sort of leading edge commercial tools, and the guardrails on those tools couldn’t distinguish between a company trying to defend itself from a cyberattack and a cyberattacker.

And so those guardrails were triggered and they prevented them from using that tool. And so what happened was Hugging Face reached instead for Zhipu’s GLM 5.2 to do it because the guardrails were not preventative. So, I mean, need I enumerate all the different ways in which that’s scary? It’s also actually a really good argument for, again, China doesn’t really have anything to do with this argument. It’s just like people need, they want controllability. The market wants controllability over their tools, partially for this reason.

Partially because they don’t want, there are situations in which it doesn’t actually make sense or it’s actually unsafe or there’s a security risk to having a middleman tell you what you can and can’t do with the tools that you have access to. So, that’s a real tension, right? It’s the biggest tension, obviously, in the AI ecosystem at the moment.

Andrew: Thanks for that. Sorry for the quick detour, but okay, now let’s talk about the controllability piece, which you were about to go to.

Kendra: Yeah, so you and I have been talking about this for a while. A couple of months ago, we talked about the Meta-Manus deal. And around that time, we flagged for our clients that the Meta-Manus deal caused a shift in the way that China thinks about technology, right? Chinese regulators at the time hadn’t really had to consider the possibility that now that China’s making some bleeding-edge technology, that China needs the regulatory tools to control the outflow of that technology, right? That’s what the Meta-Manus deal sort of revealed to regulators.

And we flagged for clients at the time, this is actually going to be a major theme over the next couple of years, is that regulators are going to start giving themselves opportunities and options for saying no to specific deals, to saying no to a lot of different technology exports, to saying no to the transfer of our IP to foreign companies. And so, we expected to see that as well. And so now you have this interesting situation where Chinese models are starting to, with the release of Kimi, for example, walk up closer to the frontier.

I still think they’re relatively far behind the leading edge, but walk up close enough to the frontier that it starts to become a question of, well, these models are open weight. They don’t have a lot of restrictions on their use. There’s no framework for restrictions on their use. Does that mean a foreign company can just take those models and modify… what technology can be squeezed out of them that China doesn’t want to lose? Regulators don’t really know. That’s not really something they have considered before.

So, I think all three of those things are weighing on the state, are weighing on top leaders, and are weighing on MOFCOM as they consider what to do about open source Chinese models.

Andrew: All right. Well, thanks for laying that out. We’ll come back to how that may be impacting what they do next. But with that sort of context of where are the key priorities that policymakers are trying to balance, let’s now bring in Xi Jinping’s speech at the WAIC conference. It’s a lot to unpack. The headline really is that Xi Jinping recommitted or reiterated China’s commitment to open source, even though there’s been this reporting that China might be considering kind of putting on some restrictions. So, why don’t you just talk to us about the key themes that you saw from Xi Jinping and how this plays into what you just said about policymakers competing priorities.

Kendra: I think Xi’s speech was a perfect summary of all of the issues that China is currently dealing with that I just outlined, plus a bunch of stuff about international AI cooperation also at the end. But, you know, he basically said both, right? He said both things. He painted AI as a new industrial revolution, blah, blah, blah. We’ve heard that from… kind of most policymakers agree on that point. But he also really underscored some of the major risks that AI was presenting for China and for humanity. I’m actually going to read those questions here because I think they’re kind of interesting. He said, “When machines begin to think, how should humans coexist with them? When algorithms take part in decision-making, how can safety be guaranteed? When technology challenges ethics, how can governance keep pace? And when the divide keeps widening, how can inclusive benefits be achieved?”

And so, then he gets into his kind of proposals about how China may answer those questions. And his first proposal was that China should stay committed to openness. And again, I’m going to read out what he said because the devil’s in the details. He said, “Artificial intelligence is a new engine of global economic growth and an accelerator of the shift from old to new drivers of growth. It’s moving from the digital world into the physical world.”

In other words, robots are starting to be powered by AI. And he says, “We should seize this rare historic opportunity, encourage open source development and cooperative sharing,” there’s the money line, “and comprehensively promote AI innovation,” blah, blah, blah. So, he says straight up that the number one principle, right, and often these principles get listed in order of importance and priority. Right up front, he says, “We’re going to stay committed to open source and cooperative sharing.”

In other words, we’re reading that as China has no intention of taking a step back from open source technology. We still think that’s a great tool, and we intend to share Chinese open source models with the world, with other countries as well. But then he comes in from the other side. He pivots to addressing the safety risks. He said, “Second, we should strengthen risk awareness to ensure that AI remains safe and controllable. Artificial intelligence should be a trustworthy tool for humanity.

We must attach great importance to the various inherent and derivative risks that AI gives rise to and work to build systems of laws and regulations, technical monitoring, risk early warning, and emergency response so as to establish a firm safety baseline, guard against misuse and malicious use, and ensure that AI always remains under human control.” And then he kind of gets into some global cooperation stuff on how China will partner with the global south, etc. So, what matters there is they say they’re going to keep supporting open source, but they’re also going to put much more stringent safeguards in place relative to AI technologies.

Later in the speech, he reiterates that, and he says, “We’re going to continuously improve relevant laws and regulations, policies and institutions, norms and ethical guidelines to ensure that AI is safe, reliable and controllable so that this,” love this part, “so that this galloping steed of artificial intelligence runs both fast and steady.” I know. And then he goes on to say, “The more rapidly AI technology advances, the more firmly its direction towards goodness and the benefit of humanity must be anchored, the more precisely the measure of regulation and governance must be calibrated.” Blah, blah, blah.

So, all of this is centered around a clear message that there’s going to be a very sharp uptick in Chinese domestic regulation on AI and China’s efforts to control, likely control the pace of model releases. There’s no question in our mind that Beijing is seeking to do this. So, the question just becomes, right? the question just becomes, what is the tool they use to do it? They’re obviously going to do it. They’re obviously going to try to control probably some kind of technology exports or the release of models in some way or, or, or…

But the question is, what level of ban is that? How much regulatory involvement will that have? You know, we have some clues, but we’re not exactly sure yet.

Andrew: Well, can you talk us through the clues? Like what forms you think they might take?

Kendra: I think that when interests conflict in technology regulation, China almost always tries to kind of thread the needle. And I think, this is just my guess, I think this is just my hypothesis, but I think the best way to thread the needle in this case would be to sort of create a lag between the availability of an open model and the release of the weights. So, in other words, maybe you can access a model online through a provider right away. If you want to ping a hosted version of a new frontier model now or a new open model now, great.

But if you want to download the weights, the model has to go through some kind of very stringent security assessment or some kind of licensing or approval process before those weights actually become available online. And so that’s the really interesting piece. You said in the beginning that, and this is what we’re watching really closely, and I think I’m on the edge of my seat on this one, you know, there have been multiple reports that MOFCOM is leading the discussions on exactly how that might happen.

And if MOFCOM is leading the discussions, that tells us quite a lot because MOFCOM only has a couple of tools available to them. So, if they are the regulator that is going to move forward with controlling model releases, that tells us those releases may be controlled with the tools that MOFCOM already has. Most notably, MOFCOM handles China’s export control regime, right? And they do that through the same export control regime they’re using for rare earths. They do that through this regulation called Regulations on Export Control of Dual Use Items, which basically creates this centralized dual-use control list.

When MOFCOM puts something on that list, exporters have to apply for a license in order to export it, just like what’s happening with rare earths now. Something goes on the list, you’ve got to go to MOFCOM, get a license to export it. And there’s a few different kinds of licenses you can get. You can get a license to send it to just one company. That wouldn’t make a ton of sense here. You can get a license to provide it to a larger audience, etc. But that list has never been used to control something like this.

So, it would actually be super interesting if MOFCOM decides to use the export control regime because it opens a question, is posting model weights online an export? And I guess it could be considered an export under this regime. They also have this other tool called the Catalog of Technologies Prohibited or Restricted from Export. Basically, that’s not a dual-use issue. That catalog is managed by MOFCOM and the Ministry of Science and Technology together. I think, if I recall correctly, it’s under the foreign trade law, not under the export control regime.

And this is the list that China used to control or to kind of prevent the unapproved outbound transfer of TikTok under the TikTok divestiture kerfuffle. And that list too, if I recall correctly, has two sections. It’s got a prohibited section, like this is definitely banned from export under any circumstances, and then a restricted section, like you got to get a license if you’re going to export this. So, functionally speaking, MOFCOM has a couple of lists that they could use to stick model weights on.

Some of the language related to some of these lists, or at least the second one, could already be considered to apply to model weights. But I think they could just go ahead and make it very explicit, add model weights to maybe the export control list. And what that would do would be to give China a very granular pathway for controlling releases on a model-by-model basis. It’s a bit clunky, and I actually think it’s a terrible pathway because there are a hundred ways it could go wrong.

Andrew: Yeah. So I want to pick up on two last pieces then. One is what you see as potential unintended consequences. How can things go wrong? And then I want to circle back to the U.S., what the U.S.

is doing because we’re talking about the Chinese restrictions as China trying to restrict technology outflow and U.S. is trying to restrict Chinese technology inflow. So we’ll get to that piece in a second. But first, how could things go…? No, surely nothing could go wrong here. Nothing could go wrong.

Kendra: Sucks to be a Chinese frontier lab right now. Everybody’s gunning for you. So the first thing that’s on the top of mind is that MOFCOM doesn’t exactly have a history of granting export approvals in a timely manner. I mean, they are just terrible at granting export approvals under this particular regime in any sort of streamlined way. I mean, I think a lot of our listeners are probably watching the whole rare earths saga, even when top leadership, when MOFCOM itself, when the receiving party, when the selling party, in other words, even when every single party involved in a licensed transaction wanted that to happen smoothly, it did not.

That regime was beset by delays. That is one thing when you’re talking about a commodity. It is a very different thing when you are talking about a market that is moving so quickly that every two months, the entire shape of the market has changed. And it’s actually not just MOFCOM. I mean, every single export control regime I can think of, even those not controlled by MOFCOM, like cross-border data exports approved by the CAC was a snarl for two and a half years to the point where EU regulators were bringing it up with Xi Jinping at meetings saying, “Hey, we can’t get data, we can’t get access to data.”

So, I think that’s a potential where, in fact, I would almost guarantee it that if MOFCOM steps into the room, model releases will not be approved rapidly and there is going to be some kind of problem with the speed of exports. So that’s issue number one. The second problem is that MOFCOM doesn’t know anything about safe AI. In other words, at what point does MOFCOM issue an approval on what basis? It has to be the basis of some other kind of security test run by somebody else, right?

And those security tests, what constitutes safe artificial intelligence is still very much an open question globally. I mean, the U.S. is working with our… you know, we’re working with our best tech company as USG is working with, you know, sort of top AI companies to figure that out. And they’re going to be figuring that out for a couple of years. And so, if you put a bureaucrat in the room and you say, “This is exactly what happened with data exports,” you say, “Only allow people to export safe data, but then you didn’t tell them what safe data is.” It’s exactly what happened with data exports.

And regulators just stopped approving anything because they didn’t have a good definition and they couldn’t save their own butts. They couldn’t justify why they allowed something. Nobody wanted to be the one that rubber-stamped a major security risk.

Andrew: Yes.

Kendra: So I think that is the second problem. The third problem is I think China could definitely get too wrapped up in its own narrative about technology outflow too soon. We’ve already seen a couple of examples where the state made an ideological decision, ideological-ish bet that did not make sense from a purely tech competitive perspective. And here I’m talking about Beijing refusing to immediately allow the purchase of as many NVIDIA chips as its companies wanted as soon as the U.S. approved those exports, approved those sales. China sided on delayed for a while and focused primarily on self-sufficiency and said, “Look, we’re going to allow a couple of these.”

And meanwhile, a lot of the AI firms are going, “Please, please, please, we need as many chips as we can get. We’ll get them from anywhere. We’ll take them from anywhere.” So, it wouldn’t be unusual or strange to me if the state essentially talked itself into this idea where, look, we can’t allow too much technology outflow. We can allow foreign companies to access Chinese hosted models, but we can’t just freely and openly allow model weights to be distributed anywhere willy-nilly. We’re going to keep model weights domestic. We’re only going to da, da, da, da, da, which would absolutely destroy the one market advantage that China really has, which is that you can get the model weights…

I think China could just make a bad decision about over-securitization and talk itself into something dumb. And then finally, I think this is true for probably the U.S. and China. There could definitely be some kind of black swan event, where some, you know, we’re already seeing hints of that, just like this sort of OpenAI issue. Luckily, nothing terrible has happened yet. But there could definitely be some major security intrusion or breach or event that sends both China and the U.S. scuttling back into a crab shell, going, “Absolutely not, lock it all down. Nothing is released without approval.” And China being particularly risk averse, I imagine that we could see some serious sort of knee jerk security backlash to something like that.

Those are the four things that I think could derail any efforts by China to institute reasonable, rational safeguards, which are desperately needed, by the way, you know, on open-source model releases.

Andrew: Yeah. Like I was alluding to with the pandemic, don’t want to get into the hole; did China do this on purpose or not? I don’t want to go down those rabbit holes. But if there were an accident and some open-source model released from China started causing problems in the cybersecurity world globally, there would, of course, be an assumption that the CCP did it on purpose, right? And then that, I mean, you talked about geopolitical tension, I mean, that’s a war, I think, you know, waiting to happen.

Kendra: Yeah, 100 percent, 100 percent. I mean, China will avoid that at all costs. So, I don’t think it, but I’ve heard some of this chatter on X or whatever that people think China’s in control of every aspect of this. I mean, we are watching regulators in real time respond to like new catastrophes or new sort of angles on this question. Every week, there’s some other thing nobody thought of that has to be addressed and that regulators aren’t prepared for.

Andrew: Everyone’s flying or building the airplane while they’re flying it. Everyone everywhere, right?

Kendra: Exactly. Yeah.

Andrew: And the companies are trying to stay ahead of the regulators as is happening in the U.S., that’s a whole nother podcast. But let’s now turn to what’s happening in the U.S. So, already the U.S. was making a bunch of noise about potentially restricting access. I think we touched on it maybe in our last pod, potentially restricting access to Chinese models because a bunch of companies in the U.S. are increasingly using these models because of everything you said, because they’re cheaper. And a lot of times you just need kind of bread-and-butter type AI usages, right? You don’t need the bleeding edge models. That was before the release of Kimi 3, which caused a lot of waves.

We won’t go into the details, but basically it was much closer to the frontier of models that many people thought China was. And now, I mean, even today, Scott Bessent, maybe it was yesterday, the U.S. Treasury Secretary saying, “Oh, you know, we think there was a ton of distillation to train these models. We might sanction or entity list Chinese companies that are using mass distillation. So, talk about what you think of the U.S. discussion around restrictions on Chinese models. And then we’ll end by just talking about how there’s very clearly a pincer on both sides, China trying to restrict outbound access, U.S. trying to restrict inbound access, and what that might mean for the future.

Kendra: I mean, I think there’s a lot of angst, but I don’t think there’s a real strategy. And what Bessent said was, we’re going to take a look at whether or not, I mean, how I heard that was, we’re going to take a look at whether or not… I mean, how I heard that was we’re going to take a look at whether or not we can paint distillation as a major IP theft problem and go after Chinese models on that basis, because we’re not sure what basis to go after them on. We need some reason to go after Chinese models. We’re just not sure what that is. I mean, look, five years ago, D.C. was thinking about China’s digital technology space the same way that we think about Russia’s digital technology space.

And it’s helpful to look back on where people’s brains were at five years ago. The idea was like if China developed a digital technology that people liked, it was a massive fluke. It was an accident. And if you wanted to kill it, all you had to do...

Andrew: Or it must have cheated.

Kendra: Or they must have cheated, right? And so, China can’t innovate, they only steal and cheat. And so, all you have to do is sort of kill the international expansion of that one product or ban that one product and that one thing dies. And in some case, we’re always kind of fighting the last war. Against most countries, that has worked just fine. I mean, in 2024, I don’t know if you remember this, there was this Russian cybersecurity software made by like Kaspersky, which Russian cybersecurity.

Russia’s good at cybersecurity. And so, they created this really good software. It got some traction in the U.S. Commerce came in and said, “Absolutely not. We’re banning Kaspersky products in the United States due to national security reasons.” And not a peep before or since from any major Russian producer of software that the United States is clamoring to have. And that has been true for most countries, for most of Internet history. And it is no longer true relative to China.

When TikTok came out, we said it. We said this is not going to be the last digital technology that China develops that people want to use. They have a very strong digital technology ecosystem now. And so, we don’t have anything else except ban it, sanction it, whack-a-mole it, you know, kill it. Let’s find some way to kill it. And I don’t think that strategy is going to be effective here. But more than that, I think the problem is that without a U.S. alternative, again, it’s just a supply and demand problem. It’s just a supply and demand problem. We said this on the last podcast. I do not care at all if it’s a Chinese model or not.

I do not care at all. When we are deciding what model to use, we want one that’s cheap and we want one that’s controllable and good enough. That’s it.

Andrew: And sorry to interrupt you, but maybe also worth touching quickly, like it’s not that easy to ban these models. Like, once they’re on the Internet, that’s the whole point of open source, right? Like, if we were going to try to ban it, what do you think would be the…?

Kendra: I mean, there’s been a lot of very controversial conversation on that in the last couple of days. There’s been some arguments that all the U.S. needs to do is sort of create enough risk, create enough perceived risk. Like they don’t even have to ban it. They just have to create enough perceived risks for corporations, right? For major corporations to touch the models that they will sort of back away from them and won’t use them at all. That they don’t necessarily have to sanction or they have to take the worst step, but just try to create some kind of churn.

I actually don’t know if that will work considering this, again, just considering the supply and demand problem. You have a massive consumer base that desperately wants this technology and, you know, not a ton of alternatives. So, yeah, I mean, I think that’s really the critical issue.

Andrew: All right. We meant to do a short one, but there’s just so much to unpack here that I think… I mean, I’m glad we went a little bit longer and I’m sure listeners will have enjoyed it. I’ve certainly learned a lot. But last piece, like, I don’t know, we talked about, you know, this pincer, this like short or like narrowing space for Chinese models. It seems, at least in the U.S., used by U.S. users, if not more globally. Any thoughts on how to think about that or what that might portend to going forward to wrap this up?

Kendra: I mean, the last thing I’ll say just as a summary is I think that what is going to define the space of AI development going forward is the gap between Chinese regulations and how they choose to control their own model releases and then how the United States decides to approach disincentivizing U.S. firms from using Chinese models. But I also just I think I would be remiss if I didn’t say this. One lesson I’ve learned during my career trying to analyze technology and the direction technology is going to go is that very often the shape of our conversation turns out to be wrong.

That the actual issues that we’re dealing with turn out to be like something comes out of left field that we didn’t consider that we go, “Oh, that changes the entire shape of the conversation.” I’ll give you one example before we sign off. There was a massive panic over the 5G race. Right? But for the average consumer, the move from 4G to 5G didn’t end up being that impactful at all. And actually, where a lot of the impact was, was on the sort of enterprise side of 5G. But we talked a lot about what it was going to mean for China to have access to 5G technology before the United States and what it would mean for their ecosystem and what it would mean for ICDs.

And we worried that China had more base stations than we did and their rural population had more access to 5G than we did. I was giving a talk at a classroom a couple of weeks ago, and it was a college classroom, and I asked people to put their hands up if they knew what the 5G race was. You know how many people put their hands up? Zero. Zero people. Zero people under the age of 22 had ever even heard of that. And it was the only thing anybody was talking about for a long time. Other considerations entered that. We defined that conversation as a race between the U.S. and China on a couple of really narrow points.

None of those things ended up being that big of a deal. And then other considerations actually did end up being a really big deal that nobody was talking about. I suspect we will find something similar here. For example, I think there’s a possibility that the shape of this argument changes in a year. Here’s one hypothesis. The bleeding edge of artificial intelligence is going to keep moving forward for the foreseeable future. But most consumers probably aren’t going to need a bleeding-edge model starting quite soon.

What do we do with AI at our company? We do document processing en masse. That doesn’t require a very smart model. It requires a pretty good model. So, imagine a world a year and a half from now, I’m not saying this is definitely going to happen, but imagine a world a year and a half from now in which it doesn’t actually matter if a Chinese regulator takes six months to release an open-weight model because people don’t switch models anymore every month.

The frontier is moving forward, but most people just pick a model and stick with it for a couple of years because it does what they need it to do and that’s just fine. And so, none of the concerns about who’s approving faster or regulatory capture, you know, or where the frontier is, that becomes a cybersecurity and critical infrastructure problem and stays in that space. And the actual competitive consumer landscape for how companies are using AI is about cost, is about whatever stack you picked up two years ago, becomes a little bit more, kind of becomes boring, essentially.

Andrew: Totally. It does make sense.

Kendra: This whole conversation could change in two years, right? And it could just be about something completely different. So I’m just aware of that as we move ahead.

Andrew: I’m like so tempted to press on that point, because I think it’s a great point. And I think we could expound on that. But we’ll save it for another pod. I’m excited to get you on more regularly for some of these quick reaction discussions. The listeners need more Kendra Schaefer in their life. That’s like my constant feedback that I’m getting.

Kendra: I mean, if only I could shut up faster, we could get more quick reactions.

Andrew: This has been amazing. Amazing, amazing. So, thank you for the knowledge bombs. And yeah, we’ll look forward to seeing you again soon. Hope you feel better.

Kendra: All right. Thanks. Talk to you later.

Andrew: Thanks. Bye, everybody.