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📬 China Update — End of Week Newsletter
🕑 Added 2025-09-14 04:29:25 +0000 UTCDate: September 14, 2025
Your essential wrap-up on Chinese Political, Economic & Geostrategic developments
Let’s Jump In!
🔶 Top Story: Chinese Economy — How Bad Is It?
CSIS gathered four heavyweight China watchers to answer the (unfair but necessary) question: How bad is it? Their grades clustered 4–6/10 — a muddled middle that masks a sharper message: macro “blah,” tech world-class; deflation risk high; consolidation coming.
The split screen. Scott Kennedy describes a bipolar China: dazzling tech clusters (EVs, drones, AI) alongside an economy “on its back” — overcapacity, swollen inventories, flat consumption, and a still-fraught property complex. Real growth holds up; nominal growth lags — the deflation tell.
Grades.
Kroeber (6): Policy since late-2024 stabilized growth; excess-capacity phase peaking; long, messy shakeout ahead. Exports/tech are outperforming and Western protectionism is often a “paper tiger.”
Huang (5): Given housing and trade friction, ~5.3% real growth 1H25 is “amazing.” Manufacturing capex ~+10% in 2024; private consumption’s share rising toward ~40% (still low, but a post-2005 high). DeepSeek’s rise shows private-sector grit.
Aziz (5–6): China can print 4–5% real; the problem is doing so without deflation. Nominal growth is weak; inventories sticky; expect painful consolidation in EVs and advanced manufacturing — bankruptcies/foreclosures wrapped in the euphemism of “restructuring.”
Seguchi (4): Confidence soft, property malaise, local-finance strain; inland bright spots (Chengdu/Wuhan) can’t yet offset coastal drag.
What to watch. No silver-bullet indicator. Kroeber focuses on nominal GDP (“what firms/households feel”): from a steady 8–11% (2016–22) down near ~4% lately. Aziz tracks industrial production (adjusted), customs-to-NA conversions, and private credit — which looks near stall-speed once you strip interest income. Huang flags vanishing series (youth unemployment revisions; private lending; migrant benefit enrollment) muddying the dashboard.
Cyclical vs structural. Both, intertwined. Supply-side crackdowns help, but “soft budget constraints” keep zombie capacity alive. Without local-finance reform and harder exits, today’s cartel-ish “industry self-discipline” will relapse.
Road map.
1. Lift nominal growth (fiscal + deeper rate cuts).
2. Let services lead jobs, especially for youth.
3. Tighten local budget constraints to force real exits.
4. Strengthen household balance sheets (land/social policy; rural incomes).
The punchline. China’s property market has already collapsed; the wider economy isn’t collapsing — it’s deflating and consolidating. Whether this becomes leaner, innovative growth or a Japan-style slog hinges on pricing power, household confidence, and finally breaking the soft-budget cycle.
🚢 Economy I: Poor Trade Numbers — Surplus Big, Margins Thin
August exports rose +4.4% y/y (weakest in six months), imports +1.3%, surplus $102B. US shipments –33%, with diversion to ASEAN (+~23%), EU (+10%), and Africa (+26%). The reroute props volume, but prices and margins are eroding; industrial profits are –~2% YTD and new export orders are slipping. Translation: headline surplus ≠ healthy firms.
🇷🇺🇨🇳 Russia–China: Alignment Deepens, Terms Still China’s
Xi and Putin inked 20+ cooperation docs (AI to agriculture) and a “legally binding memorandum” on Power of Siberia-2 — but no price/timeline. Beijing keeps leverage, buying time while increasing sanctioned Arctic LNG 2 liftings. Sweetener: 30-day visa-free entries for Russians from Sept 15. Net-net: symbolism of unity; substance on China’s terms.
📈 Economy II: Engineering a “Slow Bull” (On Purpose)
Regulators want a managed, durable equity rise: loosen some short-selling curbs, police hype/illegal tips, nudge insurers long-only — and avoid 2015’s blow-up. Social platforms are damping “to the moon” chatter; CSRC talks “rational investing.” Reality intrudes: STAR names can still air-pocket (see Cambricon –14%). Meanwhile, complex quasi-snowballs are back, advertising 20%+ yields — proof that animal spirits never retire, they rebrand.
🇪🇺🇺🇸 EU–US–China: Talk of Secondary Sanctions
EU officials are sounding out secondary sanctions on buyers of Russian energy — code for China (and others). Unanimity hurdle is high (Hungary/Slovakia rely on Russian barrels), Germany frets over China raw-material exposure. Still, Treasury-to-Commission talks are intensifying. If Brussels follows Washington here, it’d be the sharpest transatlantic hit on Beijing yet.
🏀 Soft Power Watch: LeBron’s Full-Page Cameo in People’s Daily
People’s Daily ran a full-page interview with LeBron James: “Basketball is a bridge.” With Nets vs Suns preseason in Macau and an NBA House fan fest slated for October, the league is carefully re-entering the China market post-2019. Steph Curry’s parallel tour and a $60B sportswear race (Anta vs Nike/Adidas/Under Armour) add commerce to the diplomacy.
💱 RMB vs USD: Taking Share While the Dollar Wobbles
After the dollar’s bruising H1, Chinese banks report surging interest in RMB trade/finance. The PBoC is building an offshore liquidity network, Beijing is adding gold (now ~7.6% of reserves), and floating panda bonds for sanctioned Russian energy firms. The aspiration: a tripolar system (USD/EUR/RMB). The price of entry: more openness, predictable rules, macro stability — reforms still pending.
🧊 Deflation Watch: Producer Easing, Consumer Soft
PPI –2.9% y/y (first sequential improvement in 6 months), with coal/steel/metals firmer m/m. CPI –0.4% y/y (food –4.3%, veg –15%), but core CPI +0.9% (18-month high) as subsidies and durables demand help. Three-year deflation streak still bites profits/incomes/taxes. Without credible demand support plus enforced capacity cuts, the PPI uptick fades.
🌊 South China Sea: Scarborough Shoal Rebranded as a Nature Reserve
Beijing designated “Huangyan Island National Nature Reserve,” layering environmental rules (core/buffer/experimental zones) over its effective control. Practically: tighter access, new pretexts for harassment/exclusion of Philippine fishermen, and a legal veneer atop a 2016 PCA ruling China rejects. Expect Manila to escalate diplomacy; US-Philippine security ties likely deepen.
🚗 BYD Warns of an EV “Bloodbath”
At Munich’s auto show, BYD EVP Stella Li forecast ~100 of 130 Chinese EV/hybrid makers will be “pushed out.” Beijing’s crackdown on involution (price wars, stretched supplier payments) lifts discipline but compresses sales tactics; sector margins already slid to ~4.3% (from 5.7% in 2022). BYD hedges with exports (+130% y/y 1H25) and a Hungary plant, but tariffs, compliance, and brand hurdles loom. AlixPartners: ~15 viable PRC brands by 2030.
One-liner to leave you with
China isn’t falling off a cliff — it’s grinding down a mountainside. Whether it lands on a plateau of leaner, pricier growth or slides into a deflationary valley depends on three choices Beijing still controls: let exits happen, pay households, and price capital realistically.
See you next time!
Tony
Comments
SabreKai
Good brief. My overall feeling is still the same. China is clutching the edge of the toilet bowl with fingernails. And the CCP really has no clue what to do other than trying to kick the can down the road some more. Have a great Sunday Tony.
