Yao has featured extensively in the pages of Sinification, in part because he combines considerable establishment standing with a rare willingness to speak candidly about the challenges China faces.

Across a career spanning development economics, institutional change and political philosophy, he has sought to explain China’s rise and the political order that made it possible. Readers of Sinification will perhaps know him best for his argument that China entered a 20-year era of “correction” around 2018: a necessary response to the excesses of reform and opening, but one in which the screws have now been tightened too far. Now dean of the Dishui Lake Advanced Finance Institute at Shanghai University of Finance and Economics, Yao previously led Peking University’s National School of Development for more than a decade.

The interview opens with Yao’s reflections on his childhood in rural Jiangxi and his current research into the damaging pressure China’s zhongkao system places on children, families and society more broadly. We then turn to the substance of his “period of correction” diagnosis: the post-2018 “new era”, weak domestic demand, the property downturn, local government debt and the external consequences of China’s growing trade surplus.

Throughout, Yao combines confidence in China’s underlying economic capacity with frank pessimism about the current state of the economy and the risks of failing to change course.

I’d encourage listeners and readers to stay until the end of our conversation, where Yao explains why he is no longer so certain that China will avoid Japan-style stagnation, why he remains comparatively optimistic about the U.S.–China relationship and how Beijing might restore incentives for risk-averse local officials.

The transcript has been lightly edited for clarity and brevity, while maintaining Yao’s voice, which you can hear in the full podcast.

— Jacob Mardell

1. Yao’s commitment to rural development grew out of his childhood in a Jiangxi village. On returning from the United States, he defined his mission as speaking “loudly for peasants in the countryside”.

2. The zhongkao, China’s senior high-school entrance examination, sorts children too early, producing tragic human costs while training conformity and “killing young people’s entrepreneurship or spirit of innovation”.

3. The “new era” represents a 20-year correction to the “anything goes” period, taking China “back to Mao’s period of time” in spirit before a post-2037 synthesis of Chinese tradition and selected Western ideas.

4. Beijing should balance technological progress with stronger consumption, rescue highly indebted local governments and halt the property downturn. The central government has “turned the screws too tightly” on local-government debt.

5. China still lacks a social contract binding state and society, reflecting a centuries-long “great political divergence” from Europe. The next 20-year cycle may reveal what a distinctly Chinese social contract looks like.

6. Officials recognise the external pressure generated by China’s trade surplus, but weak domestic demand and vast productive capacity leave them with few alternatives. Europe’s “ultimate solution” is to open its doors to Chinese investment.

7. China cannot sustain a “mercantilist approach” indefinitely. Europe should tone down its national-security rhetoric, while China should accept equity-sharing and technology-transfer requirements as part of investing abroad.

8. State Council Order 837 exposes deep tensions and poor inter-agency coordination within Chinese policymaking. If fully implemented, it will make outbound investment “very, very difficult”.

9. U.S. restrictions on China have been driven by emotion, but “people will come back to rational calculation”. With the Democrats having “no chance” in 2028, an inward-looking America and China’s capacity to retaliate should produce a more stable equilibrium and, eventually, new rules.

10. The risk of Japan-style stagnation can no longer be dismissed. Officials “don’t want to take responsibility”, while tighter discipline suppresses initiative. Publishing local-government assets and debts could create a measure of bottom-up accountability.

Name: Yao Yang (姚洋)
Age: 61 (Nov. 1964)
Position: Dean and Professor, Dishui Lake Advanced Finance Institute, Shanghai University of Finance and Economics
Previously: Dean of the National School of Development, Peking University
Research focus: China’s political economy, political philosophy and economic development
Education: BA-MA Peking University (1982-1989); PhD University of Wisconsin-Madison (1996)

SINIFICATION INTERVIEW WITH PROFESSOR YAO YANG
Yao Yang (姚洋)
Transcript has been lightly edited for clarity and brevity.
(Illustration by ChatGPT)

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Yao Yang: Well, I was born in 1964, so when I was, I think, 10 months old, my parents sent me back to the countryside.

I was born in Xi’an, and my parents’ hometown is in Jiangxi. I lived with my uncle and auntie for eight years, and afterwards I went back for another year. So that experience has had a lot of influence on me.

I know what’s going on in the countryside, right? I’ve been back to the village many, many times and I still support the students from my old primary school.

Yesterday I met them because I launched a small programme with two or three of my EMBA students. Each year they bring about 20 students to Beijing—they go to historical sites like the Forbidden City and the Great Wall. Of course, they also go to Beida Campus. That provides a lot of inspiration for those little kids, most of whom are around 10 to 12 years old.

So I still have a lot of connections with my home village.

It also had an impact on my choice of PhD programme when I went to the United States. I graduated from the Department of Agricultural and Applied Economics at the University of Wisconsin–Madison. I studied development economics at the university and so when I decided to return to China in 1997, I said my mission is to speak loudly for peasants in the countryside.

Yao Yang: Our book is about the zhongkao [中考].

In China, we only have nine years of compulsory education, which is low compared to other countries with comparable income levels, like Brazil—most countries have 12 years of compulsory education.

So because of that, kids aged 15 or 16 have to take a high school entrance exam, and that exam is going to decide whether they can go to an academic high school or a vocational high school.

The difference is huge. If you go to an academic high school, there’s an 80% or 90% chance you are going to end up in a university, whereas if you go to a vocational high school, you are going to take a job immediately after your graduation, or go to a technical college—and most likely you are going to become a worker or a skilled worker.

At the age of 15 or 16, the system is going to determine your fate for your whole lifetime, right? So that’s why parents are so anxious about their children’s education in middle school. They have to do a good job in the exam, so they can go to academic high school.

That causes a lot of problems in China. First, children are under huge pressure. Depression is just really common among kids aged between 12 and 15 years old. Most kids in other countries at this age are just playing, but in China they have to study really hard.

The second problem is that parents are also depressed. Some of them, particularly the mothers, drop out of their jobs and stay home to coach the kids.

There’s a really sad story: one mother quit her job and then tried to coach her boy, so the boy could go to a good high school. They had a particular high school in Shanghai in mind, but the result was bad. The boy didn’t get into that high school, so the boy jumped off the building, and the mother did that too. That’s so tragic, right? It’s a huge social problem.

Families spend tons of money on extracurricular training. Kids don’t have holidays, don’t have weekends, but have to go to all these extracurricular training programmes. It’s just crazy, and it’s wasteful. If everyone increases their efforts on studying, then each one’s effort cancels out the other’s, right? This is about the relative scores, not about your absolute scores. The number of academic high schools is fixed.

So that’s why I started this project. Actually, the project was supported by an entrepreneur in Shanghai. He read my speeches online and wrote to me out of nowhere. I didn’t know him. And he said, “Professor Yao, I want to support you. If you need money, I’m going to give you money.” So in the end, he donated 1 million RMB for us to conduct this project.

It took a long time because it was during the pandemic. We visited many vocational high schools and also vocational technical colleges in two cities, and in the end we did a big survey in one city. We surveyed students who graduated from middle school in 2007 and 2009 and then traced their education and job experience up to today.

The results are quite telling. If you compare academic high school graduates with vocational high school graduates, the first group of students earned much more in their first job. But if you look at their current salaries, there is actually no significant difference. They are, on average, about the same. But if you look at their occupations, there are huge differences. Vocational high school graduates usually work in more labour-intensive jobs and academic high school graduates usually work in office jobs. So it’s not about income; it’s more about social status.

That’s one thing. Another is that if you look at the salaries of those academic high school graduates, you’re going to see that their current salaries can be almost perfectly predicted by their zhongkao scores.

This means that all their education has been training them for just one thing: to follow the rules. “You’ll be a good citizen; you’ll be a good worker.” That’s it.

But if you look at the salaries of those vocational high school graduates, there’s a huge variation. Some of them have really high incomes; some have really low incomes. That’s why their average is about the same as that of academic high school graduates.

This made me think really hard about the meaning of education. Probably, in China, education is just about putting all the students into one mould: train them to be the same.

By contrast, if you look at those people who don’t have that much education, they have preserved some of their inborn characteristics or talents. For example, if you are good at taking exams, that means you are probably going to lose your propensity to take risks.

But if people don’t have that much education, some of them can still take risks. So education in China is a huge problem. I think education in China is killing young people’s entrepreneurship or spirit of innovation.

Yao Yang: Well, history is not linear, right? History is full of cycles. Look at the United States. Now, the United States is also undergoing a correction.

There is a very interesting book written by two American scholars. It’s called The Fourth Turning. It says that in American history there are long cycles of 80 to 100 years and in each long cycle there are four smaller cycles, each lasting for 20 to 25 years.

I think that after the Second World War, the whole world has fallen into this pattern. In China, I can also observe this 80-to-100-year cycle.

Since 1949 we have experienced several cycles. The first one is Mao Zedong’s period of time, right? About 30 years. Then Deng Xiaoping, about 40 years of reform and opening.

And we have entered a new period, the so-called “new era”, which is also going to last for 20 years. So then we can conclude the full cycle of 80 to 100 years.

So you ask the question: What about after 2037?

I think by that time we are going to enter a new large cycle.

Even today we can say something about the new cycle. We can learn from history. During Mao’s period of time, he built up the new China, right? He began this huge drive of industrialisation.

Of course, he made a lot of mistakes, but he finished one thing: he laid a strong and firm foundation for China’s industrialisation. But, of course, he closed the door to the outside world, though I don’t think he fully controlled the world situation at that time. The West had an embargo on China, and China had kind of a really haphazard relationship with the Soviet Union.

But then came Deng Xiaoping’s period, 20 years, from 1977 to 1997, when he died. So this was the first 20 years of reform and opening. And what was the main feature? The main feature was to open the door and learn from the West. So Western ideas just flooded into China.

Then we come to the second 20 years of reform and opening: the Hu Jintao–Wen Jiabao period, plus a little bit of the Jiang Zemin period. So in that period of time—I actually said this 20 years ago—China became a normal developing country. A normal developing country means chaos, right? Almost anything goes, no direction. Politics is becoming corrupt. Corruption is widespread. But of course, people have a lot more freedom.

Then came 2012, when Xi Jinping came to power. And he began this change. There were several years of transition, and by 2018 China had really entered a new era. So in the new era, the task is mainly to correct the problems of the second 20 years of reform and opening.

So in a lot of senses, China is moving back to Mao’s period of time, at least in spirit. So with that, we can think about a new cycle for China after 2037. First, China is becoming more confident and developing a stronger sense of itself. China is a great country again. China is one of the strongest countries in the world.

And then idea-wise, people will move towards Chinese tradition to find resources. I think by that time China will be ready to re-evaluate Western ideas that we received during the 40 years of reform and opening, and to absorb some of them and reject some of them. We are going to see a kind of new Chinese culture that blends, or that sits firmly in Chinese tradition, but that also absorbs some Western ideas.

Yao Yang: I think so, yeah.

Yao Yang: Firstly, I think on the economic front, the Chinese government should balance between consumption and technical progress.

Technical progress is critical for China, of course, no doubt about it. But the problem is that there is a tendency to put those two things—consumption and technical progress—kind of in conflict with each other.

I don’t think that’s the right approach. If we look at the United States, consumption is growing so fast, but technical progress is also so quick. China’s recent history also tells us we can do both. Between 2012 and 2018, China’s consumption increased quite dramatically. Consumption as a share of GDP increased from 48 percent to 55 percent in a matter of six or seven years.

That’s really fast. But in the meantime, China’s innovation also went up. The number of unicorns in 2018 in China was higher than in the United States. So I think the Chinese government should think twice, carefully, about this balance between consumption and technical progress.

So this is one thing. Another thing is that the central government has turned the screw too tightly on local governments, right?

The central government is forcing local governments to repay their debts. That’s almost impossible. It is too enormous. So local governments are now having a really, really difficult time on their financial side. They cannot pay their employees; they cannot pay their contractors. That has a huge impact on the whole of the economy through the supply chain, and also on consumption. So the central government has to think about, not just loosening the screws, but also rescuing local governments.

In the real estate sector, the correction has been too deep; it has been overshooting. I think in China, everyone agrees with this. So the government should take major measures to stop the decline of the housing sector.

You know, at the highest point, China sold 1.8 billion square metres a year. Today that number has been halved. I heard from government officials that sales are probably going to decline to 500 million square metres. Only by that time will the housing sector be stabilised. Then that’s just too much, right? Too much overshooting over there.

So it’s not about the institutions or the control. Many Chinese people, Chinese economists, always say, “Oh, we need the reform, we need reform,” but I don’t think it’s a matter of reform—it’s a matter of policy.

If the central government can adopt some policy changes, then we can change the situation in China.

So that’s on the economic side. On the social and political side, I think we have to find a new social contract between the state and the citizens.

I’ve been conducting a project on Chinese history, or the political history of China. We are proposing the concept of a great political divergence. You know the great divergence between China and the West, right? Pomeranz’s thesis.

[Note: Kenneth Pomeranz’s influential 2000 book, The Great Divergence, argues that the most economically advanced regions of China and Europe remained broadly comparable until around 1800, when access to coal and resources from the Americas helped north-western Europe pull ahead.]

Between China and the West, there was another divergence, a political divergence. Before 1000 AD, China’s political history looked very much like European political history. The main theme was state-building, or the consolidation of power to the ruler—to the emperor in China, to the king in the West.

But by around the Northern Song period in China, the emperor had consolidated his power, but the central government didn’t have enough state capacity to tax people.

So in the end, the central government just gave up grassroots society. Chinese society became bifurcated. At the top, we had the emperor, plus his bureaucrats, and at the bottom, we have all the ordinary people.

But in the West, particularly in the 17th century, as exemplified by Britain, there was this almost century-long fight, right, between the king and Parliament, which was composed of the newly emerged commercial class. In the end, they reached the compromise of the Glorious Revolution, and the whole society became one.

I talk about this because in China we still feel that. We have a strong government on top, and we have numerous ordinary people who don’t care that much about politics. They have what I call political apathy. We have not developed this social contract between the state and ordinary people.

So I think this is a framework to understand China and the difference between China and the West. It’s not just a dictatorship or authoritarian regime versus a democracy. It actually has deep roots in history, so it’s going to take a long time for China to build a new social contract between the state and the society. I think we have to wait until the new cycle begins.

Yao Yang: I don’t know. Probably it’s not like liberal democracy in the West. Of course, people now treat liberal democracy as an abstract ideal. That’s not true. If you read history, that’s not true. It’s a historical process. People say, “Hey, this is so good,” and they have to create theories to defend it, right, starting with John Locke and all the others further down the road.

But really, when the Glorious Revolution was settled, it was a compromise, right? So China has its own history. Probably China will develop a new kind of governance model. I don’t think the current governance model is permanent. It’s still evolving. It’s going to take decades, even centuries, for China to build a new governance model.

Yao Yang: I think government officials are fully aware of the external pressures.

China wants to have a good relationship with the EU, but the problem is that China’s domestic demand is so weak. Look at the first half of this year. Retail has barely grown. The CPI is almost zero, right?

[Note: Official data show that retail sales of consumer goods rose only 1.3% year on year in the first half of 2026. The consumer price index (CPI), which measures changes in the prices paid by households, rose 1.0% year on year. By saying CPI was “almost zero”, Yao is referring to this low rate of consumer-price inflation.]

But on the other hand, China has a huge productive capacity, so I think the central government is forced to promote exports. When there is weakness in the domestic economy, then the central government says, “let’s export.” So you can see over the last several years, exports have been growing so quickly—to everyone’s surprise, I say.

But for the China-EU relationship, I think that the ultimate solution is just for the EU to open the door to Chinese investments. But the EU is still influenced by the United States, right? The recent case in the UK is a perfect example. In Scotland, a Chinese company was about to set up a huge factory to produce wind turbines—that’s a £1.5 billion investment, huge. But then Starmer declared, “No, it’s about national security; we have to stop that project”—under American pressure.

[Note: The company was Ming Yang Smart Energy, which proposed investing up to £1.5 billion in a wind-turbine factory at Ardersier near Inverness. In March 2026, the UK government ruled out supporting Ming Yang turbines in British offshore wind projects on national security grounds, prompting the company to pause the plan.]

So that’s really bad. National security is a really ambiguous concept—if you use this concept without any boundaries, I don’t think the EU-China relationship will improve.

Some European friends wish China would impose some voluntary restrictions on exports. I don’t think that’s going to happen. If Europe opens its door to Chinese investment, it’s going to be good for Europe, right?

For one thing, they can just use China’s capacity to produce cheap and high-quality products. Why not? But of course, Europe also has the problem of high costs. The cost of operation in Europe is just so high, particularly in Germany, because of the energy crisis. Even German companies are moving out of Germany. So, yeah, it’s a complicated situation. It’s about politics, but it’s also about economics.

Yao Yang: Well, I think in the initial stages of Chinese investment, exports from China to Europe are going to increase because many of the intermediate goods are still going to be imported from China, right? This is what is happening in India. Chinese investment is moving to India, but India has a larger trade deficit with China.

But you have to have a long-term perspective. That is, if Chinese companies become localised, then they are going to develop a supply chain network in Europe. Then they are going to cut imports from China.

Of course, there are also debates around technology transfer and equity-sharing requirements. My personal view is that China should accept that Europe has requirements for equity sharing and also technology transfer, because China did that, right? Back in the 1990s, China did exactly that.

I think this is a win-win situation. Many people said, “Hey, if we transfer technology to other countries, then we are going to lose.” I think that’s really short-sighted. The whole world is integrated. China cannot stay here on its own. China relies on the international market.

In the next several decades, China is going to invest all over the world. It’s just not imaginable that China can take this mercantilist approach forever. That is, we are going to invest in your country, but we are not going to transfer technology to you guys. It’s just impossible.

And because competition in China is so fierce, we really don’t need to worry about losing technology. For example, in the auto industry, it used to be the case that every five years a company rolled out a new model, right? But in China, almost every year they’re going to roll out a new model. So why worry about it? You talk with those automakers; they don’t worry about this. Why should the government?

So this is two-way traffic. Europe should make some adjustments, particularly by lowering its voice on national security, and China should have a more open mind on technology transfer and equity-sharing requirements.

Yao Yang: My reading is that it was, in the first place, a reaction to national security rhetoric all over the world, because every country is talking about national security. China is also paranoid about national security, right?

So that’s definitely the factor of the first order. Secondarily, there is also a lack of coordination among different government agencies.

In addition to concerns about technological leakage, there are also concerns about tax evasion and capital flight. So, you know, different government agencies put their concerns into law, okay?

For example, the monetary authorities are really concerned about capital flight, so that’s why the new law tightened up outbound investment. According to the new law, everyone has to apply to the government if they want to invest, but there are some murky boundaries. If someone has a foreign bank account and they buy financial products, then, indirectly, they invest outside China. Does that qualify as an outbound investment? If it does, then that person has to apply to the government. But that’s almost impossible, right?

So I think there is a lack of consideration there. A lack of coordination. And for tax, China now wants to follow the United States, right? To tax Chinese people’s income outside of China—and then they also write it into law. They want to track who is investing outside of China, so they can tax them.

My personal reading is that if this law is put into effect, then it’s going to greatly impact China’s outbound investment. It’s going to make outbound investment very, very difficult. But this is against the government’s general policy orientation—that is, to encourage Chinese capital to invest outside China. Okay, the so-called going abroad policy. So you can see that even within the government there are a lot of policy conflicts.

[Note: Order 837 brings resident individuals within the scope of China’s outbound-investment framework, but leaves the detailed rules governing their investments to be issued separately.]

Yao Yang: Yeah, I’m always optimistic—or more optimistic than most people—about U.S.-China relations.

The reason is that I can see why the United States started the trade war and also export controls on China. It was out of emotion. It was not the result of rational calculation, right?

For example, I asked one of my American friends who used to work in the government, “Have you realised that if you make China feel pain, the United States is also going to suffer?” She said, “Yes, we know that.” Then I said, “Why do you still want to do this?” And she said, “We want to punish you guys.”

This is emotion. So I asked her one last question: “What’s the endgame of this export control, this trade war on China?” And she said, “We don’t know.” So there’s no plan, right? It’s all about the emotion.

You know, for most Americans, they will say, “Oh, China has cheated us, so we are angry. We are going to punish you.” But exactly because this is emotion, I don’t think it’s going to last forever. People will come back to rational calculation.

I’ve been to the U.S. four times this year already. So I talked with people. I saw a lot of changes in people’s views about U.S.-China relations. People are becoming more rational about China. So with that, I can say Trump’s visit to Beijing was a good start towards stabilising U.S.-China relations.

But as you said, Trump—and you know I said, “Trump is the only person in the American administration who’s for China.” What about after Trump?

My guess is that the Democrats have no chance to get into the White House in 2028. Probably not for the next eight years—at least eight years. After 2028, there will still be a Republican president, and that president is going to have MAGA as his political base.

So then, in that sense, we can make a prediction, right? That is, the United States will still, like today, look inwards. The United States has to solve its domestic problems.

So China and Taiwan are not going to be a huge concern for the United States. And with that, then I can say that U.S.-China relations will be stabilised further.

I also hope that the United States and China will work out some rules to govern the two countries’ competition. We are in competition, no doubt about that. But the problem is that the United States now destroys all the rules it has created in the last 80 years.

So we have to rebuild the rules, right? And this is an opportunity for China. China can talk with the United States to start new rules. I think that after a while, the two countries will sit down and talk about the new rules. Those new rules will be quite different from the current WTO rules. But we need rules to govern the competition. For example, the new rules might put restrictions on export controls.

China now has the ability to retaliate, so I think the two countries will reach an equilibrium. We are not going to beat up the other side, so why don’t we just settle down—think about some rules, or what kind of technologies are not allowed to be transferred to the other side, and that’s it.

Yao Yang: I don’t think they have started, but there are good signs, right? At this summit, the two sides agreed to set up two committees. One is the trade committee, the other one is the investment committee. So that’s a good start—particularly the investment committee.

I place high hopes on it because now Chinese companies cannot invest in the United States and American companies don’t invest in China. Not because of China—it’s just because of the United States. The American government doesn’t allow them to invest in China. So if, through this committee, the two sides can negotiate some rules to govern bilateral investment, that’s going to be a gigantic step toward the normalisation of the two countries’ relations.

Yao Yang: Yeah, people are beginning to say, “What about after Trump?” People, I think, are a little worried because who knows?

Even if Vance became the president, what would he do? Who knows? Right? Probably he’s just disguising himself today. He pretends to be a pupil of Trump, but after he really becomes the president, who knows what he would do?

But, as I said, I’m more optimistic about U.S.-China relations. Even if Vance becomes the president, I don’t think he’s going to deviate from Trump’s China policy that much.

Yao Yang: Yes, people can be easily influenced by the media, right? So today in the West, China is depicted as an economically and technologically strong country.

Whenever I talk with foreign friends, they say, “Oh, China is the only bright spot in the world.” Okay, that’s the impression. But inside China, there is a rich debate about the direction of the country, and most economists are worried about the lack of demand in China. I mean, in the past, when foreign experts warned China about China’s Japanisation, I always opposed it, right?

[Note: “Japanisation” refers to a prolonged combination of weak growth, very low inflation or deflation and low interest rates, associated with Japan’s economy from the 1990s.]

You know, I said China is not going to become Japan in the 1990s. But today, when someone says that China is going to become another Japan, I’m not that confident anymore about opposing that view.

Many economists in China just think the same as I do. So yeah, it’s not that we economists and also government officials don’t care about domestic consumption. It’s just that we still have this policy inertia over here, right? With that inertia, it’s really difficult to boost domestic demand.

Yao Yang: Well, you look at the data, right? Retail has declined month on month for more than 20 months now. By May, year-on-year growth had turned negative. So that’s a really important sign. Consumption is really lagging behind.

So that’s one, and also CPI is always around zero. PPI has been negative for a long time. It only turned positive in the last several months, only because of the oil price. I don’t think that’s going to last long. Once the situation in the Strait of Hormuz settles down, the oil price will just drop back.

[Note: The producer price index (PPI) measures changes in the prices industrial firms receive when their products are first sold. A negative year-on-year reading means that these “factory-gate” prices are lower than a year earlier. China’s PPI turned positive in March 2026 and rose 1.5% year on year over the first half. Oil prices affect the index directly through petroleum extraction and refining, and indirectly through fuel, petrochemical and other industrial input costs.]

And then you look at investment: private fixed-asset investment growth has been negative. And overall fixed-asset investment growth has also been negative. That’s quite severe, because much of the fixed investment has been done by local governments.

[Note: In the first half of 2026, fixed-asset investment excluding rural households fell 5.7% year on year, while private investment fell 8.5%. State-holding investment fell 2.3% and infrastructure investment fell 2.4%.]

This means the local governments are not investing. Many people wonder where the money goes, because local governments take on a lot of debt, and they’re supposed to invest, but they haven’t. Many people suspect that the local governments are diverting those debts to repay the older debts.

So all the signs are adding up. I’m deeply worried.

Yao Yang: Well, yeah, our voices have been heard by government officials, right? So when you talk with government officials, particularly privately, they actually think the same as we do. There’s not much difference.

I think it’s just determination. The lack of determination. This is the problem in China now. Government officials don’t want to take responsibility. They see the problem. They know how to solve the problem, but there is just a lack of determination inside of the government.

Yao Yang: Anti-corruption—the anti-corruption campaign has a big impact on ordinary government officials’ decision-making.

And the emphasis on discipline also has an effect.

I can understand why the Central Committee of the Party is tightening control over government officials, right? To increase discipline among them. It’s just because, as I said, in the second 20 years of reform and opening—anything goes. There was no discipline on government officials.

So the new era, one of its tasks, is to correct that, to rebuild the Party, to purify the Party again, okay? So that’s the political consideration. I think that consideration in the long run is correct and also necessary for the Party.

But in the short run, it has a negative impact on government officials’ incentives, right? No one wants to take initiative because if you take the initiative, there’s a risk.

So that’s one of the deeper problems the Party has to solve. The Central Committee already sees the problem. If you read the government documents, it says, “Oh, we should allow for government officials to make mistakes,” the so-called rongcuo [容错]—to tolerate mistakes.

But on the ground, it’s so difficult to implement. You know what I mean, right? On the one hand, if you make a mistake, you will argue, “This was done with good intentions. I just made a mistake.” But then the party discipline committee doesn’t think that way. You made a mistake. That was a mistake. You should be punished.

So you see this conflict or this tension inside the Party organ. I hope that one day the Party will solve this problem and ease the tension.

Yao Yang: I think the government, or the Party, is trying to take a top-down approach, but now it’s also trying to take a kind of bottom-up approach. For example, in the reform plan of the Fourth Plenum of the 20th Central Committee, there is one reform that many people have ignored.

That is, every level of government is going to have a balance sheet of their assets. That is, they are going to make their assets and debts open to the general public. And who’s implementing this reform? The People’s Congress.

So the People’s Congress is overseeing local governments to create this balance sheet. The plan was to finish this reform by 2030. Five years’ time. I have some doubts about whether this reform can be concluded in five years. It’s going to be really hard. Local governments just resist, right?

But if this reform is finished, then we are going to have bottom-up monitoring of local governments—that is, the local people’s congress is going to monitor them. If you take too much debt, then the Congress delegates, the people’s delegates, will say, “No—why do you want to have this white elephant project? We don’t need it.”

[Note: The Fourth Plenum’s recommendations for the 15th Five-Year Plan call for compiling a macro balance sheet covering the major sectors of the economy. Under a parallel framework, governments at county level and above report annually to people’s congress standing committees on state-owned assets and government debt, with the reports made public.]

Yao Yang: It’s really hard to predict. You know, economists are really bad at prediction. But I think the United States will have a correction in its stock market. I think this is a consensus. Many big investors and economists have this consensus because the valuations in the American stock market are just too high. So there will be a correction, but the correction is not going to kill the American economy. It’s just like the 2008 financial crisis didn’t kill the American economy. So that’s the U.S.

China—it pretty much depends on government policy. If the government doesn’t change its policy, doesn’t boost domestic consumption enough, I’m actually quite worried about the Chinese economy. But if the government changes its policy, China—the Chinese economy—will come back. I still believe China’s economy has 5.5 to 6% growth potential. It’s our supply capacity, right? It’s just our demand hasn’t caught up with the supply.

Yao Yang: Thank you.

This conversation also follows our recent paper with the Friedrich-Ebert-Stiftung, of which we shared a preview in a previous newsletter. Drawing on a large corpus of Chinese-language texts published between October 2022 and September 2026, the paper analyses Chinese perspectives on EU-China trade tensions. You can now download the full PDF here.

We hope this live discussion will be the first of many—stay tuned for more interesting discussions around the topics that we write on.

You can find a very short AI summary of the one-hour discussion below, but I encourage you to watch or listen to the full conversation.

— Jacob Mardell

SUBSTACK LIVE: EU-CHINA DEBRIEF
With Yanmei Xie and Finbarr Bermingham

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Yanmei Xie is a Senior Associate Fellow at MERICS
Finbarr Bermingham is Chief Europe Correspondent for the SCMP
Recorded on 19 October 2026

Yanmei (MERICS, RAND, Asia Society Switzerland) and Finbarr (South China Morning Post) both said they had been surprised by Germany’s shift.

Yanmei noted that Germany had long been China’s most effective advocate in the EU. It is now pushing a tougher line together with France.

Finbarr said the hybrid vehicle concession has not softened member states’ resolve. Officials believe that combining dialogue with the threat of new instruments has worked, and they intend to keep up the pressure. He noted that China’s Ministry of Commerce rejected that reading, stating that pressure was not what produced the result. He described the hybrid deal as a negotiated safeguard. The EU caps imports and China agrees not to retaliate, sitting uneasily with WTO rules. Safeguards apply to all trading partners, which has displeased Japan, South Korea and the UK.

Brussels regards them as a stopgap until it has tools that target China alone. According to Finbarr, von der Leyen told EU leaders that chemicals and industrial machinery are the next priority sectors for safeguards.

The Commission aims to present three instruments in December:

• Diversify EU would require firms to diversify suppliers.

• A solidarity mechanism would compensate companies hit by Chinese retaliation. It would make it easier for member states to support EU measures.

• A “kill switch” would allow rapid restrictions on Chinese firms’ market access. Finbarr said it is undecided whether this will be a new instrument or a revised Anti-Coercion Instrument. The ACI has never been used because it requires a majority of member states to activate and is slow. The proposal would reverse this, so that a qualified majority would be needed to block it.

Yanmei said Beijing sees the hybrid deal as a one-off, at least for a long time. It hopes the deal will strengthen voices in Europe that favour negotiation over confrontation, including those in Brussels who argue that the EU and China share an interest in reducing overcapacity.

China’s growth depends heavily on exports, and Europe is where its carmakers recover the margins lost in domestic price wars. That gives the EU leverage, but it also makes Beijing determined to keep selling to Europe and unlikely to accept a drastic curtailment of exports. China might agree to some restraint on certain chemicals. Machinery, a strategic priority in successive five-year plans, will be harder.

Asked whether there is growing concern in China about the trade surplus, she said Chinese economists are generally concerned about the direction of the economy. Exports are carrying growth while domestic demand is weak, and economists tend to argue for rebalancing and stimulus to boost domestic demand. On the Industrial Accelerator Act, China appears unconcerned. By the time it takes effect, Chinese gigafactories will already be operating in countries such as Spain, which have little interest in requiring technology transfer and give access to the whole single market.

Finbarr noted that China’s consultation response was strongly worded. He added that Chinese carmakers investing now may be able to get ahead of its conditions.

Yanmei said Chinese analysis treats EU regulation as a compliance matter that companies can be helped to navigate, while it treats the US as politically hostile.

Asked why the EU now prioritises restraining Chinese exports over Chinese import commitments, Finbarr said this is a recent shift. Years of market-access requests produced little, and the damage to European industry comes from Chinese exports. Yanmei added that the EU can enforce restrictions in its own jurisdiction, whereas import commitments depend on Beijing and are harder to monitor. Chinese offers to buy more have mostly involved agricultural goods, while the EU’s concern is high-value industry.

Yanmei also stressed the limits on the EU. WTO rules require trade defence to follow proven injury and target individual sectors. Chinese firms assembling cars inside the single market will be outside the reach of trade defence instruments. She said it was hard to see how the kill switch would fit WTO rules, though if the Anti-Coercion Instrument could be justified, a similar way might be found.

Yanmei and Finbarr agreed that new instruments take years to become effective. Asked by Finbarr whether such measures would help European industry, Yanmei said that keeping production in Europe matters, because industry needs its home market to maintain scale. European firms are competing with the Chinese state rather than with Chinese companies. Chinese firms can sustain years of price wars and losses while still raising capital from largely state-owned banks. No European firm can do the same.

Finbarr said a common view in Brussels is that 90 per cent of China policy is domestic policy. He suggested the EU may keep negotiating with Beijing while it strengthens its own defences. The principals hold a video call in January and meet in March. He questioned whether the hybrid deal can be replicated in more complex sectors, how long the EU’s confidence would last if Beijing restricted rare earths again, and whether the new approach would survive a change of government in Paris or Berlin. Yanmei will be watching whether Berlin is satisfied by the hybrid deal or keeps to the Franco-German line.

September’s coverage focuses on global imbalances and China’s external surplus—appropriately so, given that the EU Trade Commissioner was just in Beijing pressing China to resolve a trade surplus the EU sees as “unsustainable”. “Global Rebalancing” was also a theme of this year’s Tsinghua PBCSF Chief Economists Forum on 19 September, which supplies many of this edition’s entries.

A number of the authors appear to make concessions on China’s role in fuelling global imbalances. Yu Yongding admits that some export tax rebates have been excessive, Yao Yang notes the pressure that China’s scale and technology exert on other countries, while Lu Feng (卢锋, not 路风) comes closest to Brussels’s core diagnosis. He argues that the renminbi’s real depreciation is pushing the surplus higher, that this reflects weak domestic demand, and that China should “put itself into the picture” by proactively rebalancing.

Pushback comes from Tsinghua PBCSF’s Ju Jiandong, who attributes the surplus to natural specialisation between Chinese manufacturing and US finance, and from Justin Yifu Lin, who says that weak global growth since 2008 is the bigger problem, and that China’s 18% of world demand cannot offset the other 82%.

Currency appreciation and international circulation

Currency is the other major topic in September’s selection. Some authors link currency appreciation to the external imbalance, while others keep the two deliberately separate. Shi Kang, also of Tsinghua PBCSF, and Ju Jiandong argue that appreciation cannot be relied on to shrink the surplus, and Ju adds that it would hurt China’s competitiveness.

Others argue for renminbi appreciation on domestic grounds. Shi Kang, while dismissing appreciation as a surplus fix, argues that it would support capital markets, property and industrial upgrading.

Xia Chun of Zhigu Trends says a stronger renminbi would raise household purchasing power—his conversational piece is notable for its highly unusual argument that Chinese consumers should be “individuals before members of the nation” and for dismissing the “sob story” about the Plaza Accord.

Other authors—Zhu Min and Lian Ping—discuss currency and a “strong” RMB, not in the sense of its value, but in terms of its international circulation. Shi Kang and Ju Jiandong separately propose issuing renminbi-denominated government bonds abroad. Ju made his case at the Tsinghua PBCSF roundtable itself, where the idea met with resistance.

Who pays? The central government

The same roundtable featured widespread support for central borrowing, although the speakers differ on what the money is for. Lin and Yu favour investment and infrastructure, Li Xunlei favours consumption, while Yao doubts long-term investment can solve short-term problems. Still, the question posed in August’s digest—“who pays for the new economy?”—receives an answer: the central government.

But People’s Bank of China Governor Pan Gongsheng disagrees. In a Qiushi article, Pan argues that slower growth in financial aggregates will help keep macro leverage “basically stable”, seeming to dampen hopes of a central government with an appetite for expanding credit. He adds that credit beyond the real economy’s needs would leave funds idling—exactly the caution Yu Yongding criticises in the roundtable when he says that “we worry too much about debt”.

Households and the state

Returning to the roundtable debate on what exactly the centre should be paying for, several authors advocate a transfer of wealth to households. Zhang Xiaojing of the National Institution for Finance & Development echoes the roundtable in arguing that Beijing, not localities, should fund “investing in people”. She also argues that rebalancing requires moving part of the public sector’s wealth—held by government and SOEs—to households. Zhang’s “asset policy” would include interest subsidies on mortgages (something similar was indeed announced ten days later).

Zhou Tianyong of the China Society of Economic Reform similarly argues that income should reach households through employment, requiring small and micro firms, rather than an expanding state sector.

Artificial intelligence

AI features prominently—in dedicated articles and as a thread running through some of those already mentioned.

On trade, two authors find that AI accounts for much of China’s strong headline growth, in both imports and exports. Zhao Wei of Shenwan Hongyuan finds that the 26.6% year-on-year rise in China’s January–August imports reflects the AI revolution and oil and gold prices, not stronger domestic consumption, while JD Group’s Shen Jianguang attributes the export boom to AI but finds that it is largely a price effect, which concentrates gains among a few capital-intensive tech firms.

On currency, Changjiang Securities’ Wu Ge argues that AI lifts Chinese exports, which now drive renminbi appreciation, while US tech firms’ bond issuance keeps Treasury yields high. CICC’s Miao Yanliang argues that AI efficiency gains in China’s mostly non-tradable services sectors will pass through as lower prices and may therefore lower the ceiling on real appreciation.

A recurrent recommendation, related to the question of household wealth, is to share AI’s gains more widely. Zhang Xiaojing would ring-fence gains from state stakes in AI firms for those affected by AI. Jiang Xiaojuan, a former deputy secretary-general of the State Council who argues that marketisation in China is incomplete, would tax job-displacing robots and AI and convert part of technology’s capital dividends into assets held by all citizens.

Overall, the point of agreement among many of the economists surveyed here is that China’s growth is not reaching households. However, the signal that counts most—Pan Gongsheng’s article in Qiushi—suggests the central bank is more focused on credit discipline than on financing a larger transfer.

— Jacob Mardell

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In Brief

1. Global Rebalancing:

   1. Lu Feng on China entering “a new stage of external surplus imbalance” driven by weak domestic demand rather than exchange-rate manipulation.

   2. Ju Jiandong on China’s surplus as a product of natural specialisation between Chinese manufacturing and US finance, and on issuing RMB10 trillion of government bonds abroad.

   3. Justin Yifu Lin on prolonged weak global growth as a bigger problem than global imbalances, with investment as the main remedy.

2. RMB Appreciation & Internationalisation:

   1. Wu Ge on export-driven renminbi appreciation easing external constraints on China’s interest-rate policy.

   2. Xia Chun on renminbi appreciation being better for China’s economy than depreciation, and on the mistaken “sob story” about the Plaza Accord.

   3. Shi Kang on the window for a strong RMB, and on borrowing abroad to refinance local governments and fund welfare.

   4. Miao Yanliang on AI efficiency gains in non-tradable services lowering the ceiling on real renminbi appreciation.

   5. Zhu Min on the dollar going “from hegemony to myth” and on China needing a strong, internationally used currency.

   6. Lian Ping & Liu Tao on building an “energy-renminbi system” and on a 15–20% “strategic appreciation”.

3. Local Government and Debt:

   1. Yu Yongding, Justin Yifu Lin, Li Xunlei & Yao Yang on the urgent need for the central government to take over local government debt.

   2. Luo Zhiheng on “equity finance” as a poor substitute for land finance, and on the limits of selling local state assets.

   3. Liu Shangxi on how the “shared risk pot” socialises losses through public finances and prevents markets from clearing risks.

   4. Pan Gongsheng on slower credit growth as a “new normal” that helps keep macro leverage “basically stable”.

4. Money to Households:

   1. Zhang Xiaojing on an “asset policy” transferring some public wealth to households.

   2. Zhang Yu on revenue constraints on “investing in people”, and on tax instruments for adjusting wealth.

   3. Jiang Xiaojuan on “inclusive reform”, more universal social security and taxing job-displacing robots and AI.

   4. Zhou Tianyong on small, medium and micro enterprises, rather than SOEs, as the route to “common prosperity”.

   5. Dong Yu on applying the “K-shaped” lens to China being the same as measuring it with a “Western ruler”.

5. AI and Trade:

   1. Zhao Wei on the AI revolution and oil and gold prices, rather than stronger domestic consumption, driving China’s import growth.

   2. Shen Jianguang on the AI export boom being largely a price effect, with gains concentrated in a few capital-intensive tech firms.

1. Global Rebalancing

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Brazil is a nation close to my heart and, as many readers may know, it is in the midst of a decisive and highly divisive election contest between incumbent Lula da Silva and his challenger on the populist right, Flávio Bolsonaro, son of the former president, who is serving a 27-year sentence for plotting a coup. In this newsletter, we interrogate the consequences for China, which has significant interests—economic and geopolitical—in Brazil. Maurício Santoro, who has literally written the book on China-Brazil relations, has very kindly provided an introduction to the following piece by Xu Tianqi.

Maurício is a fellow at the Brazilian Navy’s Centre for Political and Strategic Studies. He holds a PhD in political science from IUPERJ and twice headed the Department of International Relations at the State University of Rio de Janeiro (UERJ). We are grateful for his contribution. — Jacob Mardell

The Brazilian elections are mostly about domestic issues, but international affairs are also being discussed—especially Brazil’s relationship with the United States and with China. If the right-wing opposition wins, as polls suggest it will, we can expect changes on both fronts, since one of Flávio Bolsonaro’s proposals is closer cooperation with Donald Trump’s administration.

Xu Tianqi rightly observes that Brazil will not leave BRICS if the opposition wins. Among this year’s candidates, only one minor figure, Romeu Zema, pledged to leave. Flávio Bolsonaro has mentioned in passing that he might consider leaving the bloc, but Brazil’s exit is unlikely, and not what is at stake. This is just one facet of a wider debate on Brazil, China and the BRICS.

China is, by far, Brazil’s biggest trade partner, the destination of 30% of Brazilian exports, and a major investor in the country—especially in the electricity sector. Brazilians are buying increasing numbers of Chinese products, such as cars, smartphones and computers, and there is a growing appreciation for companies such as BYD, Didi, Geely and Huawei—which are now even appearing in Brazil’s prime-time telenovelas.

The United States is Brazil’s second largest trading partner, though exchanges are decreasing due to Trump’s protectionism. Around 10% of Brazilian exports go to the American market. However, US influence stretches far beyond that because of decades of strong political, military and cultural ties. Conservatives usually advocate a stronger partnership with Washington.

In the last 50 years, the Brazilian foreign policy establishment has held a consensus on non-alignment with major powers and the search for a multipolar world. Countries such as China, India and Russia have been important partners in these efforts, and the creation of the BRICS was a milestone in that cooperation.

However, the Bolsonaro family has a different approach. During Jair Bolsonaro’s administration (2019-2022), he tried to establish a strong relationship with Trump and had something of a roller-coaster relationship with China, including several very low points during the coronavirus pandemic, before ending his mandate on a more moderate and pragmatic note. His son Flávio proposes to repeat the partnership with the United States, especially on public security, but does not share his father’s record of hostile comments or behaviour against the Chinese.

Still, the question remains: can Flávio Bolsonaro reconcile a pragmatic approach to China and a strong relationship with the US, in a period in which Trump is putting so much pressure on Latin America to reduce Chinese influence? Other right-wing presidents in Argentina, Chile and Peru have been able to tread this line, but there is more at stake in Brazil, a country with much broader geopolitical ambitions.

— Maurício Santoro

1. No political camp with significant influence in Brazil can easily abandon BRICS, nor would they lightly weaken Brazil’s economic and trade ties with China.

2. If Flávio Bolsonaro and the right-wing forces he represents win the 2026 election, Brazil’s foreign policy is likely to resemble that of his father’s administration from 2019 to 2022.

3. Only Romeu Zema, former governor of Minas Gerais, has called for Brazil to leave BRICS, but this proposal amounts to little more than a political stunt and Zema’s state itself has deep economic links with China.

4. None of the three groups shaping the Brazilian right favours a rupture with China. Flávio Bolsonaro’s team stresses pragmatism, agricultural producers depend on Chinese demand and São Paulo’s business interests seek Chinese investment.

5. Both China and the United States are important partners that Brazil can ill afford to lose. There is even a degree of structural complementarity between Chinese and US trade and investment ties with Brazil.

6. Brazilian voters face significant financial pressures in their everyday lives and are primarily concerned not with foreign policy, but with candidates’ positions on domestic issues affecting their livelihoods.

7. If Flávio Bolsonaro does win, the right-wing forces he represents are more likely to call for the so-called “depoliticisation” and “de-ideologisation” of BRICS, but would not withdraw from the grouping.

Name: Xu Tianqi (徐天启)
Positions: Deputy Director, Area Studies Department, Chongyang Institute for Financial Studies, Renmin University of China (RDCY); Associate Research Fellow
Research Focus: Latin American affairs; US policy towards the Western Hemisphere; Marxist political economy; monetary economics and finance
Education: Master’s degree in Finance, Drexel University, United States

BRAZIL LEAVING BRICS? MERELY POLITICAL THEATRE BY A HANDFUL OF POLITICIANS
By Xu Tianqi (徐天启）
Published on Guancha (观察者网) on 1 October 2026
Human-edited machine translation
(Illustration by ChatGPT)

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As Brazil’s 2026 general election draws closer, the BRICS mechanism has once again become a subject of campaign debate among some Brazilian politicians. A handful of right-wing politicians have floated the idea of “leaving BRICS” or reassessing the grouping, prompting questions about the future direction of Brazil’s foreign policy.

Viewed dispassionately from a Chinese perspective, one central point in this debate must be kept in mind: Brazil’s election is approaching, and under the system of “ballot-box politics” prevalent across the Americas, candidates are seeking to distinguish themselves and win votes. This has given rise both to extreme rhetoric from right-wing politicians about withdrawing from international groupings [退群] and severing economic and trade ties with China, and to criticism from the Brazilian left that the right is tying Brazil to the United States, making it dependent on Washington and selling out the national interest.

At a deeper level, however, no political camp with significant influence in Brazil can easily abandon BRICS, which is an important multilateral strategic platform for the country. Nor would they take the decision to weaken Brazil’s economic and trade ties with China lightly. If Flávio Bolsonaro (the younger Bolsonaro) and the right-wing forces he represents win the 2026 election, Brazil’s foreign policy is likely to resemble that of his father’s administration from 2019 to 2022. A Bolsonaro government might push BRICS to focus more on practical economic and trade cooperation, but would not withdraw from the grouping, thereby safeguarding Brazil’s strategic standing and broader economic and trade interests.

Of the 13 candidates in Brazil’s 2026 election, only Romeu Zema, leader of the right-wing Novo party and governor of Minas Gerais, has called for Brazil to leave BRICS. He claims that BRICS has become an “anti-American and anti-Western club” and has pledged that, if elected, he would push for Brazil to withdraw from the grouping and pivot towards the OECD.

[Note: The author makes two small factual errors here: 1) There were 12 presidential candidates, rather than 13 after the Superior Electoral Court rejected Pablo Marçal’s candidacy on 11 September 2026; 2) Zema is no longer governor, having resigned on 22 March 2026 to pursue national political office.]

In practice, however, this proposal amounts to little more than an attention-grabbing political stunt. Opinion polls show that Zema’s nationwide support has long hovered at a meagre 1.3%, meaning that he cannot be considered representative of mainstream opinion.

In fact, Minas Gerais, the state Zema governs, is one of the Brazilian states with the closest economic ties to China and other BRICS countries. China has long been the state’s largest trading partner and export market, accounting for nearly 40% of its total exports. Annual iron ore exports to China alone are worth tens of billions of US dollars.

[Note: According to Minas Gerais government figures, the state’s iron ore exports to China were worth approximately US$9.7 billion in 2024 and US$9.8 billion in 2025.]

Since becoming governor in 2019, Zema has personally spearheaded efforts to attract Chinese investment. In July 2023, he attended a ceremony marking the first shipment of lithium ore from Minas Gerais to China, hailing it as “a historic moment for Minas Gerais and for all of Brazil”. That November, he led a 15-day delegation to China, promoting the state’s “Lithium Valley” project and engaging with Chinese companies including Ganfeng Lithium and Huawei. The initiative has since attracted several Chinese companies, including BYD, which have acquired exploration rights in Lithium Valley and become deeply involved in lithium extraction and processing. Another major infrastructure project in the state that Zema takes pride in is the Belo Horizonte metro project, which CRRC began constructing in 2024.

[Note: BYD acquired lithium exploration rights in Minas Gerais in 2023, but its subsidiary was still in the research phase as of February 2025, so “deeply involved” overstates the evidence. Likewise, CRRC was contracted to supply 24 trains for the Belo Horizonte metro in 2024, while construction of Line 2 is the responsibility of Metrô BH, a Grupo Comporte subsidiary.]

Zema is therefore fully aware of the importance of China and the BRICS countries to his state and to Brazil as a whole. When questioned by members of the public about whether leaving BRICS might provoke Chinese “retaliation”, he repeatedly assured voters that he would “absolutely not abandon China” and that “China is a major buyer that deserves the red-carpet treatment”. These contradictory statements reveal that his remarks are more akin to political theatre designed to serve a particular purpose.

Although Minas Gerais carries considerable weight in Brazilian politics—there is even a saying that “whoever wins Minas wins the presidential election”—assessing the likely policy direction of a right-wing government requires closer attention to three groups:

First, Flávio Bolsonaro and members of his core campaign team;

Second, large agricultural producers in Brazil’s Centre-West and South, particularly in states such as Mato Grosso, Goiás and Paraná. They form a powerful agricultural caucus in Congress, whose leading figures include Tereza Cristina, a former minister of agriculture and livestock and leader of the congressional agricultural caucus;

Third, industrial and financial interests in Brazil’s Southeast, including factory owners, exporters and financial conglomerates in São Paulo state. A leading representative of this group is São Paulo governor Tarcísio de Freitas.

Judging by the public statements and interests of these three groups, their policy towards China has never been to leave BRICS or tie Brazil exclusively to the United States.

On 22 September 2026, when questioned about foreign policy, Flávio Bolsonaro explicitly stated: “My approach to foreign relations will always be grounded in economic pragmatism… Brazil does not need to take sides.” He did not endorse the fringe radicals’ calls for Brazil to leave BRICS.

[Note: In a June 2026 interview, Flávio Bolsonaro said he would reassess Brazil’s BRICS membership, but he has been relatively quiet on the topic—Brazilian analysts, including the author of this newsletter’s introduction, predict that under Flávio Bolsonaro, Brazil would stay in BRICS, but downgrade its engagement.]

As a leading figure among the power brokers of the Brazilian right wing, São Paulo governor Tarcísio de Freitas places considerable importance on attracting Chinese investment. His team has actively engaged with Chinese companies, including China Communications Construction Company (CCCC) and CRRC, to secure investment for the state’s intercity railway and power grid modernisation projects. When questioned by the United States and Europe, he emphasised that São Paulo welcomes efficient investment, and capital carries no geopolitical label.

Tereza Cristina, a leading figure in the right-wing agricultural caucus, has repeatedly emphasised the importance of safeguarding agricultural exports to China. China buys more than 70% of Brazil’s soybean exports. The agricultural sector knows full well that there is no other buyer of agricultural products quite like China. [Note: The original Chinese says “seller” [卖家], apparently in error.] US farmers compete directly with Brazilian soybean and beef producers on international markets, and Brazil cannot afford to surrender its largest and most reliable overseas market.

In fact, given Brazil’s current economic and trade structure, both China and the United States are important partners that the country can ill afford to lose. There is even a degree of structural complementarity between Chinese and US trade and investment ties with Brazil.

In terms of bilateral trade, exports to China are of major economic importance to Brazil. According to data from Brazil’s Ministry of Development, Industry, Trade and Services, China has been Brazil’s largest trading partner for 17 consecutive years. In 2025, bilateral trade reached a record US$171 billion, with Brazilian exports to China totalling US$100 billion and Brazil recording a trade surplus of US$29 billion. The agricultural caucus and mining companies, both of which tend to support the right, are the biggest beneficiaries of this surplus. In the first eight months of 2026, Brazilian exports to China exceeded US$77 billion, up a further 15% year on year.

The United States remains Brazil’s second-largest trading partner, with bilateral trade reaching US$83 billion in 2025. Although Brazil exported US$37.7 billion to the United States and ran a trade deficit of more than US$7 billion, its exports consisted mainly of higher-value-added manufactured goods, including machinery, steel and aircraft components. Brazilian manufacturers have long supplied parts and components to North American supply chains, creating a degree of complementarity with Brazil’s agricultural and mineral exports to China.

In terms of investment types and sectoral distribution, Chinese and US investment in Brazil follows something of a pattern of “existing stocks of financial investment alongside new investment in the real economy” [金融投资存量+实体投资增量]. According to the Central Bank of Brazil’s report on foreign investment stocks, the United States has consistently held the largest stock of foreign direct investment (FDI) in Brazil, exceeding US$200 billion. US investment is concentrated in sectors such as finance, IT services and consumer goods, and is particularly closely connected to São Paulo’s financial sector. It even plays an important role in maintaining the stability of Brazil’s exchange rate and the liquidity of its capital markets.

Chinese investment in Brazil, meanwhile, has grown rapidly in recent years, cumulatively exceeding US$80 billion according to the Brazil–China Trade Association. Much of this investment has involved the acquisition of capital-intensive and physical assets, particularly in heavy industries such as electricity transmission and distribution, mining, new-energy vehicles and agricultural logistics. These investments have contributed to the development of Brazil’s real economy and its industrial revitalisation plans.

Trade and investment ties with China and the United States are therefore equally important to Brazil. Its economic interests make it difficult to favour one over the other, and withdrawing from BRICS would be tantamount to cutting off one of its own limbs.

When observing Brazil’s election from a Chinese perspective, it is easy to be drawn to the radical foreign-policy statements of certain politicians. In reality, Brazil is a major developing country, and under the electoral system prevalent across the Americas, foreign-policy pronouncements are often simply a means for politicians to appeal to particular voters and attract public attention. Voters are primarily concerned not with foreign policy, but with candidates’ positions on domestic issues affecting their livelihoods and local governance, such as public security, incomes and healthcare.

If you spend time living in Brazil, the financial pressures facing ordinary people quickly become apparent. At an exchange rate of 1 real to 1.3 yuan, prices for meat, vegetables, eggs and dairy products in supermarkets and restaurants in Brazil’s major cities are comparable to those in China’s first-tier cities, such as Beijing, Shanghai, Shenzhen and Guangzhou. Thirty eggs cost around 16 reais, equivalent to 7–8 yuan per jin (500 g). A McDonald’s burger meal costs around 50 reais (65 yuan), while regular petrol costs approximately 7 reais per litre (9.1 yuan).

Yet ordinary Brazilians have relatively low incomes. In 2026, Brazil’s national statutory minimum wage is approximately 1,621 reais per month. Even in São Paulo, the country’s most economically developed state, the minimum wage is just 1,804 reais (2,350 yuan). The average wage nationwide is equivalent to around 4,750 yuan, while the median is approximately 2,850 yuan.

[Note: São Paulo raised its state minimum wage slightly for specified occupational categories from R$1,804 to R$1,874.36 on 1 June 2026. The average earnings figure is broadly consistent with official data.]

Beyond everyday living expenses, borrowing costs for individuals in Brazil are extremely high. According to data published by the Central Bank of Brazil, annual interest rates on residential mortgages typically range from 10% to 12%, while car loan rates range from 18% to 28%. Unsecured personal loans carry annual interest rates as high as 50–60%, while annualised rates on revolving credit card balances frequently approach or exceed 100%. Ordinary households do not understand the connection between great-power competition, geopolitics and their daily lives. Instead, their votes are fundamentally determined by whether economic and trade policies can raise incomes, improve employment prospects, reduce borrowing costs and safeguard livelihoods.

[Note: Brazilian Central Bank data for August 2026 put average annual interest rates at 110.2% for non-payroll-deducted personal loans and 449.4% for revolving credit-card balances, substantially above the figures cited here.]

To return to the question posed in the title: will Brazil leave BRICS? Setting aside the many attention-grabbing political slogans, Lula’s position goes without saying. If Flávio Bolsonaro wins, the right-wing forces he represents are more likely to call for the so-called “depoliticisation” and “de-ideologisation” of BRICS [去政治化、去意识形态化], but would not withdraw from the grouping. Nor would they undermine pragmatic economic and trade cooperation with China without good reason.

To understand why, it is worth looking back at the China policy of his father, Jair Bolsonaro, during his presidency. Although the elder Bolsonaro made a series of ideologically driven statements hostile to China during his election campaign and early in his presidency, he quickly adopted a more favourable tone towards Beijing. He attended BRICS summits, visited China and introduced a number of measures to promote bilateral economic, trade, cultural and people-to-people exchanges. China–Brazil relations thus made substantive progress during his presidency.

Trade tensions between the EU and China escalated in March, when the Commission proposed its Industrial Accelerator Act, and have been simmering since then, but October is decisive.

The second ministerial round of the EU–China Trade and Investment Consultations takes place this week. EU Trade Commissioner Maroš Šefčovič is meeting his counterpart, Commerce Minister Wang Wentao, in Beijing this Thursday-Friday, but nobody is holding their breath for a quick resolution. The next date to watch is 15–16 October, when EU leaders meet at the European Council in Brussels to discuss their response.

Some sort of escalation is likely—not a full-blown trade war, but an intensification of the same tit-for-tat measures and countermeasures we’ve seen to date, punctuated by negotiations.

That is, at least, the expectation of many Chinese analysts that we have been reading. 

We’ve been working on a paper in cooperation with the Friedrich-Ebert-Stiftung, analysing Chinese perspectives on EU-China trade tensions. The paper, which draws on a large corpus of Chinese-language texts published between October 2022 and September 2026 will be published shortly through FES’s online library, but given that Šefčovič is in Beijing on Thursday, we wanted to provide subscribers with a preview.

What follows is an abridged version of the much longer full paper.

1. Chinese analysts seldom regard the EU as a capable geopolitical actor. EU fragmentation and disunity are consistently highlighted in the corpus and the standing recommendation is engagement with member-state capitals rather than Brussels.

2. Analysts broadly follow the semi-official narrative that the US is a principal driver of Europe’s tough line on China. However, an emerging strand of analysis treats the hard line as Europe’s own.

3. Authors reject the view that subsidy and dumping explain the surplus, but they more readily acknowledge that domestic demand is too weak to absorb capacity, which then spills abroad.

4. The dominant diagnosis is that Europe’s anxiety is real but misattributed, but macroeconomists in particular are more willing to acknowledge a domestic imbalance and to link overcapacity to trade friction.

5. The prevailing expectation in the corpus is for protracted, institutionalised friction. The observation that there is still room for negotiations is recurrent and the dominant call is for “strategic composure”.

6. Analysts are more concerned about the wider external frictions created by China’s trade surplus than about tensions with the EU per se.

7. The EU can expect a firm but non-escalatory response to any trade defence measures introduced this year. The dominant prescription is to gradually expand imports rather than restrict exports.

8. Localisation, or further Chinese manufacturing investment in Europe, is the most widely supported solution to trade frictions, but there are detractors—technology transfer and investment terms will be a key battleground.

9. Implications for the EU:

   1. Prioritise member state unity; make sure to match rhetoric with action; expect firm but measured resistance; treat the surplus as a global problem; and follow China’s domestic economic debate closely.

   2. Avoid resting arguments on subsidies and frame trade effects in terms of Europe’s social stability; ask for measures Beijing can present as its own policy; and define the boundaries of de-risking.

HOW BEIJING READS EUROPE: CHINESE PERSPECTIVES ON THE EU–CHINA TRADE CONFLICT

Jacob Mardell

An abridged version of a forthcoming Sinification paper produced in cooperation with the Friedrich-Ebert-Stiftung. The full paper will shortly be available through the FES online library.

Chinese analysts seldom regard the EU as a capable geopolitical actor. This assessment is broadly shared by authors in the corpus, who are sceptical about EU unity and European staying power in a trade conflict. The establishment consensus reading of Europe is—to borrow a phrase from Sun Keqin (孙恪勤), a researcher at CICIR—that it is a “declining aristocrat”.

EU fragmentation and disunity are consistently highlighted in the corpus and the standing recommendation is engagement with member-state capitals rather than Brussels. There are, however, a few who see EU institutions as increasingly important actors. Zhang Jian (张健), for example, argues that, as the Franco-German axis weakens, the Commission is filling the vacuum.

The perception of EU weakness—in both its general standing and its cohesion—is matched by confidence in China’s current position. With Chinese analysts reading the Xi–Trump summit in May as a truce with the US, some consider Europe’s position diminished. The perception that China prevailed in the 2025 US–China trade war also leads several analysts to conclude that a conflict with a less powerful actor such as the EU would be comparatively manageable.

The corpus broadly follows the semi-official narrative that the US is a principal driver of Europe’s tough line on China. However, since late 2025, and more clearly since the May 2026 summit, an emerging strand of analysis, mostly from Europe specialists, treats the hard line as Europe’s own. Yan Shaohua (严少华) expects EU China policy to be “driven more by its own internal dynamics” and Xin Hua (忻华) notes that Europe “originated” (首创) de-risking.

Authors who address the transatlantic question have long argued for differentiated treatment of the US and Europe. It may seem self-evident to Europeans that Europe and the US should be approached differently, but it speaks volumes that this point must be made, and the opposite argument—that Europe answers to the US and so China should focus on Washington—is also made several times.

On the future prospects of the transatlantic relationship, authors disagree on whether 2026 represents rupture or continuity, but the most common reading is that the transatlantic relationship will persist in diminished form, sustained by Europe’s structural dependence on the US in security and other areas.

The corpus also provides a less positive interpretation than the semi-official line on what “strategic autonomy” means for China. Even Jian Junbo, who has consistently argued that Beijing should support European strategic autonomy, wrote in January 2023 that it “carries a strong undertone of targeting China” and called it a “double-edged sword”.

Most authors agree that, whatever strategic autonomy might mean for China, it remains largely aspirational. Li Xing (李形) calls it “a myth constructed through political discourse”, and Jian Junbo, writing of the EU’s vow to pursue geopolitical competition, writes that “the slogans are too loud and the actual steps too small”.

On the prognosis for China–EU relations, analysts tend to repeat the official line that China and Europe have no fundamental conflict of interest and no “geopolitical contradiction”, but several senior Europe specialists have begun to qualify it.

Observing a fundamental shift in relations in recent years is a more common position than repetition of the official line might suggest. In fact, several of the most prominent Europe specialists now state that trade relations have shifted from vertical complementarity to horizontal competition.

Several authors take a pessimistic position on EU–China relations as a whole. Jin Canrong endorses the view that EU–China relations face a “tipping point” similar to that in US–China relations a decade ago, and judges that “the overall trend has turned negative”.

On China’s trade surplus and the overcapacity issue itself, Beijing has been vocal in its official denial of the charge. The consensus evident in the corpus broadly follows this party line, though in less categorical terms and with some variation. Authors reject the view that subsidies and dumping explain the surplus, but they more readily acknowledge that domestic demand is too weak to absorb capacity, which then spills abroad.

The Chinese Europe experts in the corpus broadly reiterate the sanctioned narrative on the drivers of the “China shock 2.0” narrative in Europe, arguing that the EU’s movement towards “protectionism” stems from anxiety about self-inflicted industrial decline and that confronting China will only compound the problem. They tend to describe Europe’s concerns as legitimate, but do not concede the European account of their causes. The dominant diagnosis is that Europe’s anxiety is real but misattributed—Jiang Feng (姜锋), for example, calls the EU’s hard line “in essence the external projection of its internal crisis”.

Some authors describe Europe’s responses as emotional and irrational, while others trace this transferred trauma to European dependence on Russia.

Among the Europe experts more receptive to European concerns, Ding Chun writes that Europe’s concern about the deficit “is not in itself too unreasonable, and is easy to understand” and that China should “take the European side’s genuine concerns seriously”.

Macroeconomists in particular are more willing to acknowledge a domestic imbalance and to link overcapacity to trade friction. This may in part be because it is more politically permissible for Chinese economists to raise concerns about the negative externalities of observed domestic phenomena than it is to start from foreign complaints and follow them to their conclusions about the Chinese system. Among them, Huang Yiping (黄益平) most clearly treats “China Shock 2.0” as a serious proposition. Yao Yang (姚洋) also accepts the phenomenon, rejecting only the mechanism.

These acknowledgements are the most direct in the corpus and come from senior figures, but they are largely macroeconomic and begin from a domestic starting point, with trade friction named as a consequence. They do not accept the argument on subsidies and—of potential relevance to European policymakers—their arguments are intertwined with concern about the domestic, as well as the external, implications of China’s export-driven model.

The prevailing expectation among experts is for protracted, institutionalised friction. Despite confidence in China’s position, few authors predict that the EU will concede easily, or appear to expect a full-scale trade war. The central prediction is for intermittent bargaining leading to a negotiated settlement, and authors point to a precedent in the EV case.

Ding Chun’s prediction sums up the consensus—he expects that the EU will be “tough in rhetoric, escalatory in instruments, but leaving room in implementation”.

This is not to say that authors expect a return to the status quo ante. For example, Ding Chun also expects the dispute to migrate “from friction over single products to friction between industrial systems”.

While analysts are relatively confident that a full-scale trade war with Europe can be avoided, there is greater concern about the external frictions created by China’s trade surplus more broadly—particularly with countries in the Global South.

This contrast is most clearly evidenced by results of the annual survey conducted by the Center for International Security and Strategy at Tsinghua, which asks Chinese experts to assess the principal geopolitical risks facing China. In most years, US-related concerns occupy first place, while Europe registers at or near the bottom—seventh of eight in 2024 and last in 2025. In 2026, the item devoted to the US—technology decoupling and “systematic encirclement”—fell to third place, behind the Taiwan Strait and China–Japan relations, although the US is listed as a core party to both. The “securitisation” of EU–China economic relations, under the heading “crossing the tipping point” (跨过临界点), ranked seventh of ten, with April’s Hungarian election flagged as the turning point. At fifth place, the middle position, was international backlash over a second “China shock” and the concern that a “wolf-pack effect” around Chinese overcapacity would galvanise a unified international position on Chinese trade and overcapacity. The concern is not about Europe per se, but about a global backlash, although Europe was identified as its potential leader.

Although the baseline sentiment throughout the corpus is that, with Europe relatively weak, China holding retaliatory options and the US–China relationship stabilised, China is in a strong position, few authors argue that Beijing should press its advantage.

The corpus, on balance, is considerably less hawkish than Chinese debates tend to be when the adversary is the US, let alone when the focus turns to Japan. The observation that there is still room for negotiations is recurrent and the dominant call is for “strategic composure”.

Explicit hawkishness is a minority position and is concentrated largely outside the Europe-specialist community, particularly among public and media commentators. Arguments against a hard line are more extensively developed, and restraint is the dominant prescription.

Huang Jing (黄靖) summarises China’s formula with the phrase “the keynote of our relations with Europe is not struggle but compromise and cooperation: if you insist on fighting, we will fight you. When the fighting is done, so long as you are willing to extend a hand, we remain willing to shake it”.

Where retaliation is advocated, authors call for trade measures of the sort seen in response to the 2024 EV tariffs. However, in 2026 authors increasingly treat export controls on rare earths and other critical inputs as China’s strongest card.

Authors also refer to the legal toolkit China has developed over the years to strengthen its defensive and offensive capabilities vis-à-vis foreign pressure. Authors pair legal defence with a call for China to shape the rules itself. Ma Xiaolin (马晓霖) and Wang Wanying (王婉赢) for example, write that “passively adapting to the other side’s rule framework is clearly not advisable”, and that active participation in rule dialogue is the route to “converting rule pressure into institutional competitiveness”.

Discussion of stimulating domestic demand features prominently in the corpus, with a number of authors portraying rebalancing as necessary not only from a domestic standpoint, but also in order to improve China’s external relations. However, the debate on rebalancing is long-standing—despite growing calls from economists to boost domestic demand, and despite Beijing’s stated support for the same objective, its policy planning continues to prioritise manufacturing and export-driven growth.

Few authors call for restricting exports directly, and several rule it out. Xu Mingqi (徐明棋), for instance, states that “restricting exports is not feasible”. However, the rejection of export curbs is less firm than it first appears. For example, further cutting export tax rebates is on the table—Zhang Deli (张德礼) calls cutting or abolishing them “the government’s relatively direct and effective means of adjusting export prices”.

In general, “balancing upward”, or expanding the export of European services, agri-food and high value-added consumer goods is widely supported.

The domestic reform debate also discusses gradual RMB appreciation as a solution. Support for appreciation is gradually growing among Chinese economists, who argue that China’s currency has room to appreciate and that appreciation could advance RMB internationalisation while tempering trade friction. However, no author advocates an overnight revaluation, and the Plaza Accord is cited mainly as a cautionary example.

Localisation, or further Chinese manufacturing investment in Europe, is the most widely supported solution to trade frictions, the logic being that the local value and jobs created would allay European concerns about industrial decline. This argument resonates with a broader discussion beyond the corpus. The case for a new wave of Chinese overseas investment is gaining support in both discourse and policy, with an increasing number of establishment intellectuals calling for a “Going Out 2.0” in order to build a “new China” abroad.

However, this idea also has its detractors. Luo Zhiheng (罗志恒) for example calls for safeguards against an overly rapid transfer of capacity “hollowing out the domestic industrial chain”.

Prioritise member-state unity. Long-standing advocacy of a differentiated approach to EU member states and constituent interests has become more explicit as trade tensions rise. Brussels is already keenly aware that disagreement among member states is a structural weakness and that warnings about Beijing’s “divide and rule” approach are long-standing, but it should continue to stress the importance of a united approach, underlining that Beijing’s strategy depends on being able to play interest groups off against one another.

Match rhetoric with action. Chinese analysts generally hold the view that Brussels’ rhetoric on China outpaces its ability to act and they tend to attach limited weight to European power and to the EU as a geopolitical actor. The power Chinese analysts take most seriously is regulatory and market power, and they read unused instruments, such as the Anti-Coercion Instrument, as lacking credibility. Despite Beijing’s objections, the more the EU develops and applies its de-risking and trade defence instruments, the more Chinese analysis is likely to treat it as a significant actor.

Expect firm but measured resistance. Despite considerable confidence in China’s relative strength, analysts generally do not argue for exploiting that advantage aggressively. The debate is not hawkish: the dominant counsel is for restraint and calibrated retaliation, with an expectation of manageable conflict running alongside negotiations. This may reflect confidence in a Chinese victory—a view that there is no need for urgent action—but it may also stem from recognition of Europe’s economic significance to China, combined with reluctance to risk further disruption, given the state of China’s domestic economy and wider global instability. The corpus of expert views tentatively supports the latter reading. Additionally, China’s economy faces significant headwinds, and second, that Beijing has other pressing concerns—in the Middle East, with Japan and across the Taiwan Strait—and has little reason to escalate a confrontation with its second-largest trading partner.

Treat the surplus as a global problem. Chinese analysts are less concerned about Europe itself than about the wider international consequences of China’s trade surplus and the EU’s potential to galvanise a broader front of resistance. The EU should not view trade tensions with China as an isolated, bilateral phenomenon, but as a part of a wider renegotiation of China’s role in global trade. Brussels should coordinate as much as possible with other countries, particularly in the Global South.

Follow the domestic economic debate. Chinese macroeconomists write more openly about China’s trade surplus than Chinese Europe experts do. This indicates that the imbalance is acknowledged more widely within the Chinese establishment than extensive rebuttals in the official discourse and by Chinese Europe experts would imply.

Speak Beijing’s language on “subsidies” and “overcapacity”. While some concede the overcapacity charge, analysts almost universally reject the idea that overcapacity is mostly a subsidy-induced phenomenon. This is the official line, but it also appears to reflect a genuine view that Europe underestimates the competitiveness of Chinese industry. Chinese analysts accept the premise that European industry is under pressure, and arguments framed in terms of social stability are familiar to Beijing.

Ask for what Beijing can present as its own policy. Few Chinese analysts call for direct export restrictions, and several rule them out, but in practice, Beijing has already licensed exports of battery-electric cars, cut export tax rebates and negotiated minimum prices for electric vehicles—and presents these as its own decisions rather than as concessions.

Define the boundary of de-risking. The most persistent Chinese complaint about “de-risking” is that it is open-ended. This also creates leverage: Brussels can offer greater predictability in exchange for Chinese commitments rather than conceding it unilaterally.

Technology transfer and investment terms are likely to be a key battlefield. Localisation is the most widely supported Chinese response to trade tensions and investment in European production is likely to be a central part of Beijing’s offer. There is, however, a tension between growing concern about technology transfer and industrial hollowing-out on the Chinese side, and demands for technology transfer and local value added on the European side.

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In official commentary, symbolism and language are the focus, even if difficult questions lurk beneath. CCTV’s Yuyuan Tantian blog approvingly quoted Trump’s invocation of “gung-ho” as a symbol of Sino-US cooperation.1 The term originated in a wartime mistranslation of China’s Industrial Cooperatives (工合, for short) as “work together”, and a similar linguistic elasticity appears in Yuyuan Ta…

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Today's introduction is from Dr Gatra Priyandita, a senior analyst at the Australian Strategic Policy Institute specialising in Southeast Asian security and the geopolitics of cyberspace. He has published widely in academic journals, policy reports and newspapers, including recently an insightful analysis of Indonesia’s naval exercise with China and its implications for Indonesian foreign policy. We're very grateful to him for contributing to this newsletter. — James

Dr Xue Song argues that Sino-Indonesian relations under President Prabowo Subianto are becoming “more strategic and institutionalised”. Her evidence includes the inaugural Comprehensive Strategic Dialogue, the second foreign and defence ministers’ (2+2) meeting, a planned 2027-31 action plan and expanding defence cooperation, including through the Peace Garuda exercises. She contends that economic frictions such as nickel policy can be contained within this framework, and that Indonesia’s engagement may widen political spa…

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In anticipation of next week’s meeting, we’re looking in this newsletter at how Chinese establishment scholars assess:

1. What “constructive strategic stability” actually means

2. Prospects for progress on trade and tech controls

3. The scope for cooperation on AI safety

4. Whether Taiwan could derail the rapprochement

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Huang Ping, a scholar at CUHK-Shenzhen, nevertheless lays out why it would be in China’s interests to seek a much broader AI agreement to secure its access to global markets and influence over standards. His reasoning is that whatever disagreements other countries may have with Washington, they tend to share its fundamental concerns about industrial competition from China. Recent events at the G20, where China alone opposed provisions on addressing “non-market policies” in global trade, amply illustrate the US’s ability to pull together a united front on suc…

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Yet, as Wu Ge argues, the fundamental macroeconomic direction is dictated less by policy than structural factors. Mainly, these are the deepening deflationary effects of local-government deleveraging as formerly hidden debts from local-government financing vehicles (LGFVs) are moved onto government balance sheets through debt swaps.

Wu Ge deems that even China’s large trade surplus cannot compensate for the weakening of domestic credit creation as local governments deleverage. He suggests that strong high-tech exports have had a limited impact on money creation because their benefits are constrained by China’s position in global value chains, where foreign firms capture much of the value from high-end chips and AI models.

As a result of the inability of new growth drivers to compensate for the drag in traditional sectors, Luo Zhiheng expects the overall slowdown and resulting fiscal pressures on the state to persist until around 2032. The consequences of these fiscal pressures are illustrated by an unusually probing academic article from Dai Zhixin on the normalisation of fines and confiscations as a revenue-raising measure for many local governments.

Faced with this, what are the proposed policy measures? Rebalancing towards “investing in people” to develop new sources of growth in consumption and services is the longstanding answer. However, that takes time and more money. Meanwhile, investment in high tech remains a key policy priority, placing another demand on strained finances.

Cue the panacea: more government and state-supported bond issuance. Cao Jing’s article represents the most rose-tinted framing of this approach, proposing the novel accounting approach of recognising local-government investments in human capital and welfare as assets on their balance sheets.

Zhang Jiqiang is more measured. The three-year debt-swap programme launched in 2024 to tackle hidden debt has already strained banks’ balance sheets by requiring them to absorb large volumes of long-dated local-government bonds. Amid these pressures, Beijing recently announced a $54 billion recapitalisation of banks and insurers. The main debt-swap programme ends this year, which should ease the strain on banks and help stabilise lending growth in the medium term. However, local governments will still face funding constraints, with Zhang expecting greater reliance on bonds issued by provincial-level LGFVs and policy-backed technology and industrial companies.

Zhang Ming proposes another way to ease the funding squeeze: revitalising local-government holdings by turning industrial parks, logistics centres, transport infrastructure and data centres into publicly investable real-estate investment trusts (REITs)—effectively, reviving land finance in a more regulated manner. Yet repackaging assets does not make them more productive: the scope for this approach ultimately depends on finding properties with sufficiently reliable income to attract investors, and Zhang concedes that currently, participation by non-institutional investors is low.

Amidst this rather challenging outlook, economists regard any improvements in demand as likely to be concentrated in growing first- and second-tier metropolises, as population flows reflect the overall theme of divergence and leave many lower-tier cities behind.

Li Xunlei couples his relative optimism for these metropolises with a damning assessment of lower-tier cities’ fiscal prospects. Faced with the reality of regional divergence, he counsels centralising fiscal powers and directing fiscal transfers towards growing urban centres, while restraining expenditure in shrinking localities: investing in people only works if the investments go where people want to live. Based on his macroeconomic assessment, he identifies property in growing metropolises, consumer stocks and large-cap companies as contrarian investment opportunities (see the “Consumption and Social Security” section below for his reasoning).

What about AI? Just as bond issuance and patient capital have become the optimistic buzzwords in macroeconomic discussion, a Qiushi article by Z.ai co-founder Tang Jie on the “token economy” has prompted much speculation about how commoditised intelligence might benefit China’s tech ecosystem.

We spotlight a couple of more measured takes. Hou Hong argues that the open-source business model desperately needs to find a way to “save itself”, identifying charges for overseas cloud providers as a possible pathway to subsidising the domestic market. Huang Yutao points out that much overseas use of Chinese open-source models currently relies on foreign data centres—an obstacle to the “token export” narrative that needs to be overcome if Chinese providers are to capture revenue from overseas users.

— James Farquharson

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In Brief

1. Policy Support and H2 Assessments:

   1. Wu Ge on the cause of monetary contraction in China’s economy.

   2. Luo Zhiheng on the medium-term effect of K-shaped economic divergence.

   3. Dong Yu explaining the rationale behind the central government’s relatively restrained fiscal posture.

2. Local Government and Real Estate:

   1. Dai Zhixin, Xie Yihao & Yang Su on the prevalence of fines and confiscations as a revenue-raising tool.

   2. Li Xunlei on “transport overcapacity” and its pronounced risks for shrinking lower-tier cities.

   3. Yao Yang on the importance of real estate and the naivety of seeing tech investments as a funding source for local governments.

3. Bonds and Financing:

   1. Cao Jing on bond issuance as a pathway to fiscal stability for local governments.

   2. Zhang Jiqiang on local government finances after the deleveraging cycle ends.

   3. Zhang Ming on the potential of REITs to revitalise local-government land assets.

4. Tech and AI:

   1. Tang Jie on the potential of the AI token economy and token exports to act as an economic engine.

   2. Huang Yutao on overcoming the reliance on overseas data centres for token exports.

   3. Hou Hong on a possible pathway to saving the open-source business model from unprofitability.

   4. Liu Shaoshan on the potential of cheap energy to become part of China’s comparative advantage in token exports.

5. Consumption and Social Security:

   1. Li Xunlei on the overlooked investment opportunities to bear in mind from 2027 onwards.

   2. Sun Liping on the difficulties facing the establishment of a social security system for gig economy workers.

1. Policy Support and H2 Assessments

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The argument is framed, at least, with a defensive fig leaf. Despite the new “relationship of constructive strategic stability between China and the United States”, Di does not believe that Trump has “accepted defeat”, and he expects the US to build leverage against China’s vulnerabilities, chief among which are chokepoints on its vital maritime routes. His solution? China should embark on a thirty-year effort to secure dominance over…

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This month’s digest pulls in different directions—insofar as we can follow a single thread, it is that of traditional systems being swept away and of “changes unseen in a century” coming to pass: in discussions of nuclear proliferation, the Cold War nuclear order has “irreversibly come to an end”; in the Middle East, the US security architecture is crumbling; in the maritime domain, volatility threatens sea lanes; and overseas, Chinese firms’ modus operandi is shifting.

While most scholars identify the increasing security risks attendant on such changes, what comes next and what China should do about it are open questions. More hawkish scholars advocate stronger unilateral action in the international system, while others caution against such measures.

Addressing maritime chokepoints, Di Dongsheng argues that China must embark on a 30-year effort to secure control of the seas, whereas Zhao Long makes the opposite case, arguing that the solution lies in the international community’s joint efforts to maintain “open, stable, and predictable operating rules”. Hu Bo comes down on Zhao Long’s side, arguing that military power cannot provide absolute security, while also claiming that maritime chokepoints remain secure despite volatility and that Hormuz is an exceptional case.

On Taiwan, two analysts reflect positively on the US’ new posture following the May summit. Zhou Zhihuai argues that the “Taiwan issue has begun to become an option for cooperation” between the US and China, while Wang Weixing claims that Taiwan’s path of “resisting reunification by force” has been “completely closed off” after the US revealed its bottom line.

However, on the broader US–China relationship, Wang Fan counsels caution, writing that while US strategic contraction is an inevitable trajectory, China should maintain strategic composure and not act too hastily.

In the Middle East section, Zhou Li, a former vice-minister, looks favourably on the “Mecca Agreement” signed on 7 August. Not only does it have points of convergence with China’s Global Security Initiative, but it is “an inevitable product of deepening global multipolarity” that exposes the “inherent fragility and hypocrisy of the US-led unipolar security architecture”.

Sun Degang reads weakening US security commitments as forcing the Gulf States to pursue policies that reflect a newfound pragmatism and emphasis on diversification. Meanwhile, Niu Xinchun explores the downward trajectory of US–Israel relations and Guo Xiaobing explains how the Iran war has fundamentally changed the underlying logic of aerial warfare.

While next month’s commentary on Europe is likely to heat up ahead of ministerial talks in October, August’s coverage was sparse but contained a couple of highlights: Duan Demin and Wang Hongyi provide a fascinating, business-focused map of Europe’s shifting geoeconomic landscape, while Wang Yuyan and Wang Shuo pin Europe’s “economic protectionism” on France.

Elsewhere, Zheng Jiyong provides an unusually frank account of Beijing’s shifting priorities vis-à-vis North Korea, admitting China’s discomfort with growing Russia–DPRK ties and writing that short-term denuclearisation is no longer a realistic goal. On Russia itself, Zhou Li offers a rare account of the country’s economic woes, though he is quick to highlight Putin’s responsiveness to criticism.

This month’s “Going Out” section focuses on the Global South—Qin Hui claims that China’s “low human-rights advantage” is being eroded and that rather than dispatching Chinese labour for overseas infrastructure, Chinese firms are now hiring local labour. Ju Yue and Chen Qi then explore how another established economic model—in which resource-producing countries supply minerals and China processes them—is shifting due to localisation and “resource nationalism”.

On AI, commentators focus on wider AI ecosystems: Huang Yutao looks at China’s “token exports” model; Hou Hong examines the trade-offs of continuing the open-source strategy for development; and Liu Shaoshan makes the case that as agentic AI develops, a cheap supply of energy will become a major source of China’s comparative advantage.

Finally, the award of Fields Medals—mathematics’ highest honour—to Chinese nationals in July continues to prompt reflection. Ding Xueliang uses the occasion to question China’s focus on applied disciplines over theoretical research, while Li Houchen examines the debate over whether the winning mathematician, Wang Hong, should return to China.

Zhu Rongji’s death also generated a number of pieces, the most interesting of which (besides the Zhao Jian piece we translated in full) was Yang Zaiping’s article, which warns that China’s development is fettered by “ultra-leftist” ideological currents that threaten to derail continued market reform.

More than usual, August’s commentary is a mixed bag of themes, without a dominant mood or prescription—the constant is change, coupled with a strong sense that geopolitical turbulence is an operating condition rather than a problem that can be solved.

— Jacob Mardell

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1. US–China & Global Order:

   1. Jin Canrong on China needing to expand its nuclear arsenal to strengthen deterrence.

   2. Jiang Tianjiao on the Cold War nuclear order having “irreversibly come to an end”, bringing new risks.

   3. Wang Fan on US strategic contraction being inevitable, but China needing to resist advancing rashly.

2. Taiwan:

   1. Zhou Zhihuai on “jointly managing ‘Taiwan independence’” becoming an area of US–China cooperation.

   2. Wang Weixing on historic restructuring in the Taiwan Strait and “resisting reunification by force” being completely closed off.

3. Maritime Security:

   1. Di Dongsheng on China needing a 30-year effort to “regain” control of the oceans.

   2. Zhao Long on growing threats to maritime chokepoints requiring international cooperation.

   3. Hu Bo on broad maritime security, Hormuz being an exceptional case and military power being unable to provide absolute security.

4. Middle East:

   1. Zhou Li on the “Mecca Agreement” aligning with the Global Security Initiative and reflecting deepening multipolarity.

   2. Sun Degang on weakening US security commitments pushing Gulf states towards different forms of diversification.

   3. Niu Xinchun on US–Israel relations entering long-term structural decline as both ideological affinity and strategic alignment erode.

   4. Guo Xiaobing on Iranian asymmetric operations fundamentally disrupting the logic of aerial warfare.

5. Europe:

   1. Duan Demin & Wang Hongyi on Europe’s geoeconomic map being redrawn, with Southern Europe shifting from periphery to destination.

   2. Wang Yuyan & Wang Shuo on France as the “standard-bearer” of European economic protectionism.

6. Russia & North Korea:

   1. Zheng Jiyong on short-term North Korean denuclearisation no longer being realistic and the risks of deeper Russia–DPRK ties.

   2. Zhou Li on Russia’s resilience under sanctions masking long-term erosion of economic competitiveness.

7. Economy:

   1. Dong Yu on the Chinese government’s plan for the economy.

   2. Yao Yang on a naïve belief that high tech can replace the property sector.

   3. Sun Liping on the difficult challenge of establishing a social security system for the growing ranks of flexible workers.

8. Going out:

   1. Qin Hui on rising wages and local resentment eroding China’s “low human-rights advantage” and the growing use of local labour in overseas infrastructure.

   2. Ju Yue & Chen Qi on resource nationalism shifting critical-mineral value chains towards local processing.

9. AI & Tech:

   1. Huang Yutao on China competing with the US through “token exports”, with overseas compute and data trust remaining constraints.

   2. Hou Hong on growing US support for open-source AI competition.

   3. Liu Shaoshan on cheap energy becoming a major Chinese comparative advantage as agentic AI develops.

10. Society:

    1. Ding Xueliang on institutional conditions constraining breakthroughs in mathematics and basic science.

    2. Li Houchen on the Wang Hong debate revealing an assumption that individual career choices are subject to collective judgement.

    3. Yu Huiwen on Hohhot using continuous performance evaluation to enable cadre demotion.

    4. Yang Zaiping on “ultra-leftist” thinking as the principal fetter on economic development, threatening continued market reform.

    5. Liu Dong & Zhang Jun’an on young people’s “debt spiral” reflecting structural risks, requiring stronger welfare provision and tighter credit controls.

1. US-China & Global Order

Jin Canrong (金灿荣): China should rapidly expand its nuclear arsenal, developing tactical nuclear weapons and increasing its reserves as much as possible in order to strengthen deterrence. Recent NBC reporting that the US Department of Defense is studying a new policy of using tactical nuclear weapons in the case of a direct conflict with China or Russia is plausible and warrants China moving beyond its previous thinking of “as long as we have enough, that will do” regarding its nuclear arsenal. — Director, Center for China’s Foreign Strategy, Renmin University of China (金金乐道编辑部, 14 August).

Jiang Tianjiao (江天骄): The Cold War-era nuclear order has irreversibly come to an end, but a new order has not yet coalesced. Doubts about extended nuclear deterrence have led Japan, South Korea and Saudi Arabia to debate acquiring nuclear weapons, while some Global South states may pursue proliferation to enhance security and international standing. Russia and the US are developing new nuclear weapons and doctrines for their “limited use” in conventional conflicts. China fears its smaller arsenal could be vulnerable to a pre-emptive US strike, while Washington has refused to assure Beijing that it would not target China’s retaliatory capabilities. — Associate Professor, Development Institute of Fudan University. (复旦发展研究院, 9 August).

Wang Fan (王帆): US strategic contraction did not begin with Trump and is not determined by the wishes of a particular president—when the cost of maintaining hegemony exceeds the benefits, contraction becomes inevitable. However, China should exercise restraint, rather than seizing the opportunity to “advance rashly”. As major-power competition shifts towards artificial intelligence, the world may leave the area of nuclear deterrent-based stalemate and wars may once again produce clear winners, increasing systemic risk in the world order. As these changes progress, a world dominated and controlled by the West will fade out of existence—and in its place will be a more reasonable situation of multipolar joint governance. — Former President and Professor, China Foreign Affairs University (Guancha.cn, 7 August).

2. Taiwan

Zhou Zhihuai (周志懷): Following the China–US leaders’ meeting in May 2026, the Taiwan issue has begun to become an option for cooperation between the two sides, but cooperation should involve “jointly managing ‘Taiwan independence’”, rather than “jointly managing the Taiwan Strait”. The two sides have not yet formed an institutional consensus embodied in a joint statement or joint communiqué, and the US should reduce uncertainty by moving from personal statements by the president towards formal official statements. Overall, the essence of China–US relations remains competition, and the relationship is still at the stage of strategic stalemate rather than strategic counter-offensive. — Research Fellow and former Director, Institute of Taiwan Studies, Chinese Academy of Social Sciences (CRNTT, 12 August).

Wang Weixing (王卫星): The security configuration in the Taiwan Strait has undergone a historic restructuring and the path of “resisting reunification by force” has been completely closed off. The overall chessboard of China–US competition has undergone a systemic reset, while Trump has clearly revealed America’s “strategic bottom line” of being unwilling to become involved in a conflict in the Taiwan Strait and unwilling to pay the price for “Taiwan independence”. The balance of power across the Taiwan Strait has undergone a fundamental reversal, with mainland China’s ability to strike at “Taiwan independence” separatism and resist external interference continuously strengthened. — Vice-President, National Society of Taiwan Studies; former Deputy Political Commissar, PLA Academy of Military Science (京彩台湾, 12 August).

3. Maritime Security

Di Dongsheng (翟东升): The US has not fully accepted the “relationship of constructive strategic stability” and may be preparing leverage against China’s weak points, the major one being its maritime routes. Geopolitical changes around the Panama Canal, Greenland and Iran are warning signals that the openness of the oceans is moving towards an end. Counting the US alliance network and overseas bases, China remains far from surpassing US maritime power and may need a 30-year effort to secure control of the seas. Besides channelling funds into the navy, China must foster a new national consensus: only by “regaining” control of the oceans can the Chinese nation have a future. — Associate Dean, School of International Studies, Renmin University of China (翟东升的全球政治经济研究, 25 August).

Zhao Long (赵隆): Under the dual impact of the Ukraine crisis and the Middle East crisis, the vulnerability of critical maritime routes has become even more pronounced. The rapid proliferation of long-range precision-strike weapons and low-cost unmanned platforms has increased asymmetric combat capabilities, while critical routes are increasingly becoming an important lever through which certain countries seek strategic competitive advantages and dominance over industrial and supply chains. The international community should uphold freedom of navigation, common, comprehensive, cooperative and sustainable security, and improve the provision of public goods for critical maritime routes. — Director and Research Fellow, Institute for International Strategy and Security, Shanghai Institutes for International Studies (环球时报, 24 August).

Hu Bo (胡波): Developments in the Strait of Hormuz have caused enormous volatility, but global maritime chokepoints remain stable and secure overall. The Strait of Hormuz is exceptional—other routes have alternatives and other countries would find it difficult to imitate Iran’s approach of blockading the strait. Military strength has its limits—safeguarding the security of maritime passages must still rely primarily on diplomatic, economic, financial and legal means. As the world’s largest goods-trading nation, China cannot pursue absolute security in the way the United States does. China should maintain strategic composure and not become excessively anxious merely because certain countries occasionally “talk tough”. — Director, South China Sea Strategic Situation Probing Initiative (溟坤数科, 9 August).

4. Middle East

Zhou Li (周力): The principles embodied in the “Mecca Agreement”—“collective self-strengthening, openness and inclusiveness, and defensive self-protection”—have points of convergence with the core spirit of China’s Global Security Initiative. The agreement’s political significance exceeds its military significance, communicating to the outside world a strategic posture of “collective self-strengthening and not relying solely on the United States”. It is an inevitable product of deepening global multipolarity, catalysed by the US-Israeli conflict with Iran, which has further exposed the inherent fragility and hypocrisy of the US-led unipolar security architecture. — Former Vice-Minister, International Department of the CPC Central Committee (爱思想, 19 August).

Sun Degang (孙德刚): The Gulf Arab states’ philosophy of “security depends on the United States, development depends on Asia” is coming under strain as conflict in the Middle East intensifies, forcing them to pursue divergent policies that nonetheless reflect diversification amid declining US hegemony and weakening security commitments. Saudi Arabia and Kuwait are pursuing strategic autonomy by expanding cooperation with additional partners. Oman and Qatar are pursuing strategic balancing, maintaining close relations with the US while engaging Iran. The UAE and Bahrain, meanwhile, remain dependent on US support. — Director, Center for Middle Eastern Studies, Fudan University (光明日报, 2 August).

Niu Xinchun (牛新春): The structural trajectory of US–Israel relations is one of gradual long-term weakening due to the erosion of two traditional pillars: ideological affinity and strategic alignment. Ideologically, Americans, particularly Democrats, increasingly see Israel’s “democratic” character as fading and moving away from American values, while polling shows growing public hostility towards Israel. Strategically, US and Israeli interests are increasingly misaligned: Washington is pursuing strategic retrenchment in the Middle East, while Israel seeks to reshape the regional balance of power through military force against its regional adversaries. — Executive Dean, China–Arab States Research Institute, Ningxia University (环球时报, 11 August).

Guo Xiaobing (郭晓兵): Iran’s asymmetric operations have broken through the US–Israeli air and missile defence system, disrupting the underlying logic of aerial warfare. Faced with the impact of Iran’s swarm tactics, the West is accelerating adjustments to air and missile defence systems. Emphasis will be placed on developing short-range laser interception capabilities, with reliance on high-end missiles abandoned in favour of a graduated, layered defence system. Artificial intelligence will likely be used to remedy weaknesses in low-altitude detection, attack and defence will be integrated in order to strike threats at their source, and manufacturing capacity across the entire industrial chain will be strengthened. — Director, Arms Control Research Centre, China Institutes of Contemporary International Relations (中国网, 11 August).

5. Europe

Duan Demin (段德敏) & Wang Hongyi (王弘毅): Europe’s geoeconomic map is being redrawn and Southern Europe is shifting from the market periphery towards becoming a destination for investment into electrification-related industries. Following the EU’s imposition of anti-subsidy duties on Chinese EVs, Chinese firms must resolve industrial frictions by implementing a localisation model of “manufactured in Europe, designed for Europe, maintained by European workers”. Political change in Central and Eastern Europe provides an opportunity to abandon the rigid model of tying relations to “top-leader projects”. In security-conscious Northern Europe, Chinese firms should use minority equity stakes, joint R&D, replaceable supply-chain models and avoid controlling acquisitions. — Director of Centre for European Studies, Peking University; Associate Professor, Centre for Central and Eastern European Studies, Beijing Foreign Studies University (北京对话, 9 August).

Wang Yuyan (王语嫣) & Wang Shuo (王朔): France has become the “standard-bearer” of European economic protectionism, turning French concerns into common European anxieties and French initiatives into EU operating rules. Europe is facing competition from Chinese manufacturing to the East and US subsidy policies to the West. Whereas the “China shock” of the late twentieth century was concentrated in labour intensive industries, the new shock has penetrated into traditional areas of European strength. France has shaped a roadmap for the EU’s direction of travel, “herding” member states towards trade defence, industrial support and greater “economic sovereignty”. — Research Assistant and Professor, School of International Relations, Beijing Foreign Studies University (世界知识, 25 August).

6. Russia & East Asia

Zheng Jiyong (郑继永): Beijing is adjusting its policy priorities towards North Korea—it recognises that immediate denuclearisation of the peninsula is not realistic, while deepening Moscow–Pyongyang relations give North Korea greater strategic autonomy and make its behaviour more difficult to predict. The greatest risk from deepening Russia–North Korea cooperation is that it provides the US, Japan and South Korea with a powerful pretext for strengthening security cooperation. China needs an institution-driven policy towards North Korea, emphasising formal cooperation mechanisms and institutionalised communication channels. Beijing also hopes to involve North Korea in more multilateral cooperation platforms. — Professor and Dean, Institute of Country and Area Studies, Tianjin Foreign Studies University (Foreign Affairs, 10 August).

Zhou Li (周力): Russia has demonstrated surprising resilience under Western sanctions, but this has been more a matter of passive adaptation than active breakthrough—the Russian economy faces erosion of its long-term competitiveness as military mobilisation, capital outflows and tight monetary policy squeeze civilian investment. External pressure is “resonating” dangerously with internal structural weaknesses. Former VEB chief economist Andrei Klepach argues that Russia finances the world while the world finances Ukraine, and warns that a social crisis is “almost certain”. Klepach is a genuine patriot, while Putin’s response is evidence that he is listening to expert opinion. — Former Vice-Minister, International Department of the CPC Central Committee (爱思想, 24 August).

7. Economy

Dong Yu (董煜)：Four “Zhong Caiwen” articles published in quick succession this August address misunderstandings regarding the leadership’s responses to China’s economic challenges. The government is working both to “accelerate the transition between old and new growth drivers”, but this does not involve the abandonment of traditional industries, whose upgrading remains an important part of economic planning. Meanwhile, the absence of large increases in stimulus is due to planners aiming for targeted structural measures to avoid creating economic dependence on policy support. The economic priorities are to continue focus on the provision of high-quality services, leverage private investment by providing private companies with a list of “national projects” eligible for support, and aim to “create a fair and orderly environment for market competition”, curbing local protectionism and duplicated construction. — Executive vice-president, China Institute for Development Planning Tsinghua University; Former deputy director, Second Economic Bureau of the Central Financial and Economic Affairs Commission (三里河，25 August)

Yao Yang (姚洋)：The prevailing explanation that China is passing through a “gear shift” period while transitioning from property to an economy driven by technology obscures the pressing need to focus on boosting weak demand. Property and construction are huge industries, and there is space for it to expand as rural populations continue to move to cities, or migrate from third- and fourth- tier cities to first- and second- tier cities. Furthermore, while a strong property sector does not suppress the development of high tech, excessive investment in high tech sectors can crowd out consumption as it reduces local governments’ ability to subsidise household consumption. The idea that local governments may eventually be able to replace income previously generated by property through returns on equity investments in technology sectors is “extremely naïve”. — Dean and Professor, Dishui Lake Advanced Finance Institute, Shanghai University of Finance and Economics (姚洋说, 21 August)

Sun Liping (孙立平)：The controversy surrounding recent statements by a Peking University professor on social security for gig workers draws attention to a salient fact: China’s flexibly employed population is growing rapidly, and the traditional “five social insurances and one housing fund”, financed jointly by employers and employees, is not adapted to this kind of work. The professor suggested that gig workers with irregular schedules enjoy a greater degree of “freedom” and that it therefore does not make sense to include them in the same social-security system as those in formal employment—a claim that is difficult to accept. However, her core proposal of introducing an “unbundled” and flexible system of social-security protection for mobile workers would function well as a transitional arrangement towards fuller protection in the future. — Retired Professor of Sociology, Tsinghua University (老孙荐读, 26 August)

8. Going Out

Qin Hui (秦晖): The traditional Chinese overseas infrastructure model is precisely the opposite of the colonial model—rather than using local workers for hard labour, Chinese firms dispatched their own migrant labour abroad. However, this is now changing as rising wages and local resentment push Chinese firms towards local hiring. The Tindouf–Béchar railway illustrates this “integration with international standards”, with skilled workers and managers coming from China and locals performing the heavy labour. As such, China’s “low human-rights advantage” is being eroded, though the old model has not disappeared, as demonstrated by the BYD “slave labour” case in Brazil. — Professor Emeritus of History, Tsinghua University (失語者, 7 August).

Ju Yue (琚悦) & Chen Qi (陈琪): Global critical-mineral value chains are shifting from a model in which “resource-producing countries supply minerals and China processes them” towards one in which “resource-producing countries retain the value chain”, diminishing China’s control over processing capacity. Across resource-rich African countries, export controls, industrial-chain localisation and changes to ownership and operating rights are turning temporary interventions into structural norms. China must move beyond the role of “resource acquirer” towards “two-way empowerment”, using joint ventures, technology sharing and local processing to align investment with African development goals. — Lecturer and Researcher, respectively, Baize Institute for Strategic Studies, Southwest University of Political Science and Law (白昃研究, 23 August).

9. AI & Tech

Huang Yutao (黄宇韬): The key arena of competition between Chinese and US AI is shifting to one of ecosystems, rather than purely the performance of the models. The Trump administration has rescinded many of the Biden restrictions on global exports, emphasising export of the “full stack”. As China cannot replicate this model, it is focusing on “token exports”, a non-monopolistic business model that is attractive to price-sensitive users. However, Chinese token exports generally run on overseas data centres—a far cry from the ideal of using local electricity and national compute. The main challenges for this model are balancing overseas and domestic demands for inference and establishing trust in Chinese companies’ handling of overseas data. — Assistant Research Fellow, Global Governance Division, Institute of World Economics and Politics, Chinese Academy of Social Sciences (FT Chinese, 24 August).

Hou Hong (侯宏): The emergence of strong voices in the US tech industry in support of competing on the open-source front signifies a growing US industrial consensus on the importance of ecosystem diffusion to national AI competitiveness. However, while Chinese companies’ open-source approach may serve the national interest, the reality is that the difficulty of earning profits on open-source technology means that the industry’s future business model is uncertain. The open-source model may yet find a way to “save itself”: Kimi recently modified its K3 open-source terms to require overseas cloud platforms deploying its model to sign a separate agreement, departing from the classic definition of open-source and offering a potential profit-making path forward. — Assistant Professor of Management, National School of Development, Peking University (侯宏文存, 16 August).

Liu Shaoshan (刘少山): Energy is not currently the main price constraint of artificial intelligence model-inference costs, but as agentic AI develops, a cheap supply of energy will become a major source of China’s comparative advantage in AI. At present, cheap electricity can partially relieve the pressure that poor chip efficiency might place on operating costs. However, it is not enough to simply continue providing data centres with cheap electricity. To avoid idle capacity, policy needs to focus more on improving actual utilisation rates through better coordination between computing and grid supply, as well as developing the capacity to provide compute services to overseas customers, at lower costs than the US. — Director, Embodied Intelligence Centre, Shenzhen Institute of Artificial Intelligence and Robotics for Society (环球时报，26 August).

10. State & Society

Ding Xueliang (丁学良): This year’s Fields Medals have prompted reflection among mainland scholars: whereas the winners had access to five-to-ten-year research funding, Chinese mathematics and basic-science researchers complain that annual reporting requirements push them towards projects seeking “quick success and immediate benefit”. Government funding should not favour applied disciplines while cutting support for abstract theoretical research. Some discussion encouraging students to study abroad has already been abridged, yet the winners’ decision to pursue postgraduate study in the West was crucial. Internationalised teams are also less prone to rigid hierarchy, arbitrary administrative interference and senior researchers abusing their positions. — Professor Emeritus, Hong Kong University of Science and Technology (學人, 2 August).

Li Houchen (李厚辰): The debate over whether Fields Medallist Wang Hong should return to China reveals a deeper consensus that an individual’s career is a national question open to collective judgement. Even official commentary’s “tolerance” over Wang Hong staying away implies that her choice requires permission. This system of absorption is not accomplished through propaganda alone, but is a Chinese-style logic in which investment amounts to a claim over someone’s person. The real question is whether those ordinary researchers who have no Fields Medal also have the right to choose where they live, whom they work with and whom they thank. — Independent scholar and columnist (看理想, 10 August).

Yu Huiwen (于会文): To promote a system in which cadres can “go up and down”, cadres must genuinely be able to “go down”, with the “soft ailments” of mediocrity and laziness treated as grounds for demotion alongside the “hard injuries” of disciplinary or legal violations. Hohhot is responding by turning cadre evaluation from “judging horses” to “racing horses”, using monthly tracking and differentiated performance indicators to identify officials for removal. Since the reshuffling of Hohhot’s Party and government leadership teams in 2021, 11 cadres have been removed from leadership teams for shortcomings including weak public-engagement skills and an inability to handle difficult and complex situations. — Member, Standing Committee of the CPC Inner Mongolia Autonomous Regional Committee; Party Secretary of Hohhot (求是, 1 August).

Yang Zaiping (杨再平): The principal fetter on China’s economy is now the resurgence of “ultra-leftist” ideological currents, which have caused a lack of confidence among private businesses, foreign investors and the market. The old planned-economy system has largely been reformed, but the process is not complete. The basic spirit of reform and opening since Zhu Rongji’s period can be summarised in three words: marketisation, rule of law and internationalisation. This was true then and will remain true for a long time to come—successful reforms must retain continuity rather than constantly “flipping the pancake”. — Founding Secretary-General, Asian Financial Cooperation Association (IMI财经观察, 16 August).

Liu Dong (刘东) & Zhang Jun’an (张君安): The “debt spiral” among young people is a defensive strategy for survival in an uncertain environment and a consequence of structural risks being transferred downwards onto vulnerable groups. Online-lending platforms and illegal credit providers target young people who urgently need funds or lack self-control. The government should increase subsidised rental housing, improve subsidies for training and education, as well as strengthen the social-security system’s buffering role. Regulators should also impose strict combined credit ceilings on young people who don’t have stable repayment capacity and prevent borrowing from multiple lenders. — Associate Professor and Head of the Department of Social Work and Lecturer in Social Work, Shanghai Business School (文化纵横, 26 August).

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Why China’s Football Problem Is an Economic Problem | Li Xunlei| (28 August)

Li Xunlei, chief economist at the securities firm Zhongtai International, is among the most engaging proponents of economic rebalancing in China. In the this article, he cites China’s World Cup qualification woes as among the consequences of a growth model that prioritises fixed-asset investment. With returns on investment falling and growth in local government debt outpacing GDP growth, Li presses the case for an urgent shift towards growth anchored in household consumption. He argues that failure to carry out such a shift represents an obvious, but neglected, risk factor in China’s economy—what one might also call a “grey rhino”. Read here

Xu Jilin on the Politics of Resentment among China’s Youth (26 August)

In this piece, introduced by Timothy Cheek, Xu Jilin dissects the phenomena of “lying flat”, “involution”, and the troubling attitudes of China’s youthful “post-90s” generation. That attitude, expressed in the low motivation of lying flat and distrust of the meritocracy described as involution—in which more work does not result in advancement—is described by Xu as yuanhen, “resentment” in simple terms. Xu’s essay is both a recognition of the social experience of this generation (and a useful introduction to readers of Sinification) and also a warning to those with the power to give this youth some hope and opportunity. As he concludes, “These are grave questions that China must now confront in earnest.” Read here

Sun Liping and Li Daokui Debate China’s Disconnected Growth (20 August)

Whether expressed as “strong supply, weak demand”, overcapacity or some form of a “K-shape”, a consensus has emerged that insufficient demand is the central weakness of the Chinese economy. The persistent debate centres on how best to fill that demand gap. Here, Li Daokui argues that while new industries have failed to expand sufficiently to replace the old ones, the deflationary “black hole” of local government finances has exerted a cooling effect on the entire economy. In the same edition, Sun Liping provides a riposte to Li Daokui’s diagnosis. Read here

Understanding Europe’s “China Shock” Anxiety | Huang Yiping (19 August)

The full-scale trade war that Huang Yiping warns of here has not yet come to pass, but the reprieve may be temporary. Huang is very much an establishment voice and he doesn’t stray far from the mainstream framing, but he takes European anxiety far more seriously than most and makes an important concession along the way. This should offer some encouragement to EU policymakers, who for years have felt that their concerns have fallen on deaf ears. However, those same policymakers may be less heartened by Huang’s reading of European fragmentation and his later recommendation that China “bypass highly politicised EU-wide negotiating frameworks”. Read here

Strong Supply, Weak Demand, Little Urgency? | Economic Digest: July 2026 (14 August)

“K shaped” is July’s defining buzzword, with a flurry of articles exploring China’s simultaneous boom and bust in different parts of the economy through this alphabetic metaphor. Taken together, this edition contains a remarkable range of competing prescriptions, but many do converge around a sense that insufficient demand and economic imbalance require a more urgent policy response. It is ironic then, that the most recent piece in the collection—Zhang Jiqiang’s reading of the Political Bureau of the CPC Central Committee meeting held on 30 July—concludes that, in Zhang’s opinion, “the urgency of stepping up policy support is not high.” Read here

Dreaming of Zhu Rongji’s China | Zhao Jian (14 August)

The death of Zhu Rongji, the former premier of China who spearheaded market-oriented economic reforms during the 1990s, was announced on Wednesday. This obituary is by the economist Zhao Jian, an advocate of renewed marketisation and an admirer of Zhu’s forceful approach to driving through a series of state enterprise restructurings and market-oriented reforms. Judging by the article’s removal from WeChat a day after publication, it may have touched a nerve. Nominally written as an obituary for Zhu, the piece is really his lament for a bygone era when Chinese society felt confident and people said what they really thought. Read here

Advantage Does Not Equal Victory | Digest: July 2026 (4 August)

The celebratory mood that followed the Trump–Xi summit in May seems to have run its course. The prevailing assessment of US–China “strategic stability” remains broadly optimistic, but July’s commentary offers a more sober assessment of China’s strategic environment. July’s strongest writing qualifies confidence in China’s rise—American retrenchment is adaptive rather than terminal, the trade war is survivable but unavoidable and China’s growing power is running ahead of the institutional, diplomatic and intellectual capacities needed to translate it into durable gain. Read here

N.B. Sinification features a broad spectrum of voices, ranging from conservative hawks and state propagandists to more moderate and liberal thinkers. Readers are encouraged to bear this diversity in mind when engaging with the content.

In the following article, he cites China’s World Cup qualification woes as among the consequences of a growth model that prioritises fixed-asset investment, but fails to generate sufficient household wealth or employment opportunities. In his telling, the financial insecurity which results from this model intensifies educational competition and pushes children towards pathways with clear career returns. Youth football participation loses out.

There are, in addition, more serious concerns than the poor performance of China’s first eleven. With returns on investment falling and growth in local government debt outpacing GDP growth, Li presses the case for an urgent shift towards growth anchored in household consumption. He argues that failure to carry out such a shift represents an obvious, but neglected, risk factor in China’s economy—what one m…

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Today’s edition opens with an introduction by Timothy Cheek, Professor in the Department of History and the School of Public Policy and Global Affairs at the University of British Columbia. A leading authority on modern Chinese history, his research focuses on the history of the Chinese Communist Party and intellectuals in twentieth-century and contemporary China. He published The Intellectual in Modern Chinese History in 2015 and, more recently, has co-edited The Chinese Communist Party: A Century in Ten Lives (2021). He also runs a collaborative project entitled “Revisiting the Revolution”, translating recent PRC scholarship on China’s modern revolutionary and social history. Many thanks to him for contributing to this newsletter. — James and Thomas

Xu Jilin (b. 1957) is a well-known Shanghai academic and public intellectual who has been widely translated and featured in Sinification. An active public commentator as well as prolific historian of Chinese intellectuals and political c…

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Economists of a Keynesian bent, such as Yao Yang, Yu Yongding and Zhang Ming, all concede to varying degrees that the pre-2021 economic model had problems. However, they all argue that the most urgent task is to repair local government balance sheets in order to restore economic activity in traditional construction and manufacturing. They suggest that reform to the economic model, whether in favour of emerging industries or household consumption, would be too slow and inadequate to meet the current challenges of stagnant demand, investment and employment.

Such thinking was prominent in a recent, widely shared speech by the Tsinghua economist Li Daokui. Li argues that while the new industries have failed to expand sufficiently to repla…

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The EU has said that talks must yield “tangible results” before the next ministerial-level meeting in October, but many of the Chinese analysts we’re reading see the underlying conflict as structural and persistent.

Since Huang delivered this speech, Beijing has also formalised its answer to “China Shock 2.0” with a Ministry of Commerce position paper that explicitly rejects the claim that insufficient domestic demand is contributing to excess capacity, instead rebranding China’s industrial rise as “China Opportunity 2.0”.

Huang is very much an establishment voice and he doesn’t stray far from the mainstream framing, but he takes European anxiety far more seriously than most and makes an important concession along the way.

He begins with the defence (China is making progress in rebalancing its economy towards consumption) and continues with a long diagnosis of Europe’s myriad problems, but he also concedes that China can no longer simply overlook the external pressures created by its large trade surplus. China, he argues, must move beyond “simply invoking the broad macroeconomic benefits of free trade” to take fuller account of the effects its surplus has on partner countries.

That this concession feels refreshing says something about the tenor of the wider debate, which is largely focused on shifting the blame for Europe’s economic malaise away from China.

This should offer some encouragement to EU policymakers, who for years have felt that their concerns have fallen on deaf ears. However, those same policymakers may be less heartened by Huang’s reading of European fragmentation and his later recommendation that China “bypass highly politicised EU-wide negotiating frameworks”.

— Jacob Mardell

1. The “China Shock 2.0” narrative refers to the widening of China’s external imbalances, particularly as Chinese competition at scale has begun to emerge in frontier and high-end manufacturing sectors.

2. Although China has made progress in pursuing rebalancing, its economic scale means it still faces considerable external pressure—the pressure its surplus exerts on other countries’ industrial structures cannot be overlooked.

3. Europe is particularly anxious because the sectors now under pressure are pillar industries that sustain employment and its high-income, high-welfare model.

4. Meanwhile, the US fears being overtaken in specific technologies but retains strong endogenous growth momentum and sees AI-driven automation, rather than Chinese competition, as the greater employment threat.

5. While China and the US lead on AI, and Northeast Asia supplies much of its hardware base, Europe struggles to translate its strong research assets into industrial scale.

6. Europe is not monolithic—France and southern Europe lean towards protection, while Germany and northern Europe are more restrained—and there is no shared model for turning “economic resilience” into policy.

7. China and Europe may be the last hope for preserving an open, multilateral international economic system—a bilateral trade war would deliver a major shock to global trade and supply chains.

8. China’s approach should therefore shift from emphasising “competitiveness” to pursuing “win-win” outcomes, taking full account of trading partners’ capacity to absorb the impact of China’s trade surplus and their likely policy responses.

9. China should stay firmly committed to expanding domestic demand and stabilising property without returning to speculation, while more effectively communicating its rebalancing policies abroad.

10. Five areas of practical cooperation would allow both sides to draw on their respective comparative advantages: green transition, high-end manufacturing, industrial AI, high-end services and third-party markets.

Name: Huang Yiping (黄益平)
Year of birth: 1964 (age: 62)
Positions: Dean, National School of Development, Peking University; Dean, Institute of South-South Cooperation and Development, Peking University; Director, Institute of Digital Finance, Peking University; Peking University Boya Distinguished Professor
Other: Member, Monetary Policy Committee of the People’s Bank of China
Research focus: Macroeconomic and financial policy; international financial system; rural economic development
Education: Bachelor’s degree in Agriculture [Agricultural Economics], Zhejiang Agricultural University (1984); MA (Economics), Renmin University of China (1987); PhD (Economics), Australian National University (1994)
Experience abroad: Senior Lecturer, Australian National University (1994–2000); General Mills International Visiting Professor of Economics and Finance, Columbia Business School (1997–1998)

CHINA–EUROPE RELATIONS ARE MARKED BY BOTH ICE AND FIRE, AND COOPERATION IS THE ONLY WAY FORWARD
By Huang Yiping (黄益平)
Published by China Finance 40 Forum on 12 June 2026
Adapted from a keynote speech at the 488^th CF40 seminar on 31 May 2026
Translated by Cherry Yu
(Illustration by ChatGPT)

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My remarks today are based mainly on impressions and judgments formed through recent exchanges in Europe, though not all of them relate directly to Europe itself. I should say at the outset that I do not endorse labels such as the so-called “China Shock 1.0” or “China Shock 2.0”. However, for the sake of discussion, I will use these terms provisionally. In an era of globalisation, shocks of this kind have always existed, whether in the rise of German and Japanese manufacturing or the dominance of US and UK finance. The real issue is how different countries respond and adjust.

At present, “China Shock 2.0” has become one of the most heavily hyped topics internationally. During our visit, it surfaced in virtually every setting, from bilateral meetings and think-tank discussions to roundtables with political and business figures, all centred on the structural challenges it is seen to pose.

The so-called “China Shock 1.0” refers to the wave of exports that followed China’s accession to the WTO, as large volumes of traditional manufactured goods—from low-end light industrial products and textiles to toys—entered international markets and had a discernible impact. Objectively, however, the structural impact of that earlier shock on many developed economies was not as large as is often assumed. Many labour-intensive industries were already moving offshore, and even if China had not absorbed that capacity, it would likely have shifted to other low-cost economies. As some American economists have argued, the decline in manufacturing employment across developed countries was not simply the result of China’s rise, but reflected the combined effects of technological progress, automation and changes in the global division of labour. In short, this was a dynamic process of change.

By contrast, the so-called “China Shock 2.0” mainly refers to the widening of China’s external imbalances over the past few years, particularly as competition at scale has begun to emerge in frontier and high-end manufacturing sectors such as electric vehicles, lithium batteries, photovoltaics, high-end machinery, industrial robots and semiconductors. The main difference from the past is that these are sectors developed countries had spent decades cultivating, and where they believed they held secure competitive advantages. Yet China has performed remarkably well upon entering these fields, supported by its complete industrial chain, large-scale production capacity and continually improving manufacturing processes. This is not to say that Chinese products have reached the very highest level in every subcategory. But judging from field research and industry data, many high-end Chinese products are already close to European standards, reaching around 90%, or even more than 95%, of that level. At the same time, the advantages of China’s domestic industrial chain can keep overall production costs 30% to 50% lower [than comparable European production costs].

[Note: A February 2026 report by France’s High Commission for Strategy and Planning estimates average China–Europe production-cost gaps of 30% to 40% at comparable quality, reaching 50% or more in some sectors. Huang’s specific 90% and 95% quality estimates could not be verified against a public source or clearly defined metric.]

In fact, over the past two to three decades, the Chinese economy has been moving gradually towards rebalancing and has made considerable progress. Recently, with France preparing to host the 2026 G7 summit, the French presidency commissioned the Centre for Economic Policy Research to produce a special report entitled “The New Global Imbalances”, for which I was invited to write the section on China’s economy. In reviewing the data systematically, I found that over the past two-plus decades, China has been moving towards greater balance over the medium to long term, whether measured by investment as a share of GDP, household final consumption as a share of GDP, or the current account balance as a share of GDP. In other words, rebalancing has indeed been taking place. [Note: This is a selective presentation of Huang’s own report, where the quoted consumption figures include both household and government consumption, yet remain below the 2000 level. Huang also identifies a persistent policy bias towards investment, although household consumption has improved modestly since its 2010 trough.] We have also noted that since 2018, China’s current account surplus has risen somewhat as a share of GDP, reaching 3.7% at one point in 2025, a rebound from previous years but still below the 4% warning threshold. What deserves closer attention is what has driven this marginal change.

[Note: The 4% figure was discussed as a potential surplus limit during the G20 rebalancing talks in 2010, but the G20 ultimately adopted non-binding indicative guidelines rather than a formal cap or warning threshold.]

Even so, at this stage China still faces considerable external criticism and economic and trade challenges over its external imbalances. The first reason is that China’s economy has become very large. Although China’s current account surplus as a share of GDP has fallen sharply from its historical peak of 10% to 3.7% in 2025, some experts have pointed out that the picture looks different when set against changes in the global GDP structure. Measured against the GDP of the rest of the world, the relative size of China’s surplus has in fact increased. This shows that once China has become a major economy, the existing scale of its surplus can still exert an impact on other countries’ industrial structures that cannot be overlooked, even as China continues to pursue rebalancing.

Second, there is the debate around “China Shock 2.0”. Europe’s sense of alarm is greater this time because these sectors were originally pillar industries that allowed developed countries to maintain their high-income, high-welfare systems. They worry that once Chinese products enter global markets in large volumes, they may well displace existing domestic industries. If that happens, and these pillar industries are replaced or placed under sustained pressure, will these countries be able to cultivate new industries to fill the economic gap and maintain their existing welfare spending? In advanced economies that have been more successful in developing high-tech industries and diversifying their economies, such concerns are relatively limited. But in much of Europe, where industrial structures remain closely tied to traditional high-end manufacturing, the pressures of industrial transition have become especially apparent. Put simply, for many developed countries, this round feels entirely different from the earlier era of low-end industrial relocation.

Let me give one example to illustrate some recent changes in the global distribution of emerging technologies and industries. The changes are especially clear in AI. China and the United States now form the first tier, performing relatively well in algorithm development, computing-infrastructure deployment and the commercialisation of applications. The UK is generally seen as belonging to the second tier, and also as doing reasonably well. During our exchanges there, our overall impression was that the UK’s upward momentum was quite clear, and that its attitude and position were somewhat more moderate than those of continental EU economies. Because the UK’s traditional manufacturing base is less substantial than that of Germany, France and other Western European countries, it is less directly exposed to substitution by Chinese high-end manufacturing and has more scope to expand into future industries.

In recent exchanges with industry and think tanks across different countries, we also noticed an interesting phenomenon that we had not paid much attention to before, which is that beyond China itself, Northeast Asia’s rise in AI hardware deserves close attention. Japan’s advanced materials and precision components, South Korea’s memory chips, and the advanced-node semiconductor fabrication and packaging-and-testing industries in Taiwan together provide a stable and well-developed hardware foundation for the global AI industrial chain, mainly in support of Western technology companies. Whether measured by investment and financing data in global capital markets or by capacity trends in emerging industries, Northeast Asia now appears to be entering a second wave of manufacturing resurgence.

Within this stratified global landscape of technological innovation, Europe appears to be in a somewhat awkward position. European interlocutors noted that, although their universities and research institutes hold a substantial stock of patents in frontier technologies and a strong cohort of innovative start-ups, these strengths have not yet translated into visible progress in commercialisation and large-scale industrial deployment. Europe has moved relatively quickly in building regulatory frameworks, from the digital economy and the implementation of GDPR data protection rules to stablecoin regulation and AI legislation. Yet the commercialisation and industrial application of frontier innovations do not seem to have kept pace with this institutional development. The reasons are highly complex, but the point of this example is that as emerging industries evolve rapidly, countries experience global industrial change differently depending on their resource endowments, policy arrangements and levels of development.

Within Europe, although the 27 EU member states have differing priorities and clear internal divisions, there is now one core concern shared across Europe: if its existing competitive industries are displaced by foreign products, and emerging industries cannot develop sufficient scale in time to fill the resulting economic gap, Europe’s medium- to long-term economic development will face serious challenges. To put it more starkly, Europe sees this not simply as a matter of concern over market competition but as a systemic challenge concerning the survival of its high-welfare system.

This also explains why there are clear differences between China–US and China–Europe relations on many economic, trade and technology issues. US anxiety initially stemmed from distributional tensions caused by the loss of blue-collar jobs among young people in small towns across the Midwest. Later, as China’s new energy, 5G, high-end equipment and other industries rose, this anxiety extended into questions of competition over the commanding heights of global technology and competition over the power to set international economic and trade rules. Overall, however, the United States still has strong upward momentum in industrial innovation. Its competitive advantages remain highly pronounced in frontier fields such as artificial intelligence, quantum computing, biotechnology and aerospace, as well as in technological innovation, industrial innovation, high-end manufacturing and financial services. The United States is concerned that China may one day overtake it in certain areas, yet its own economy as a whole still has strong endogenous growth momentum.

Recently, I met with industry contacts visiting from the United States, and when the conversation turned to Europe, they said its current concern is whether China’s industrial expansion will eventually lead to the loss of European pillar industries, jobs and household income. Americans had previously worried about these issues of manufacturing offshoring as well, and I remember Janet Yellen raising related issues when she visited our institute. According to this contact, however, Americans are now less worried about the employment problems Chinese industries might create for the United States, as the biggest variable affecting industrial employment at this stage is displacement by AI-driven automation. I do not know whether this judgment is backed by solid data, but his broader impression was that US sensitivity to China-related issues has shifted at this stage, marking a fundamental difference from Europe’s current situation.

Europe’s problem lies in the fact that its long-running high-welfare social model has relied heavily on the excess returns generated by the technological premiums and brand barriers of high-end manufacturing sectors such as automobiles, precision machinery and chemicals, yet these pillar industries are now coming under considerable pressure from highly cost-effective Chinese products. Europe also faces multiple development bottlenecks arising from its own internal weaknesses. During our field research in Germany, we heard a particularly interesting view that Germany’s vast stock of high-quality patents and specialised, innovative start-ups has not been matched by sufficiently developed domestic capital markets or a strong venture-capital ecosystem, leaving it without a smooth funding and incubation pathway and making it difficult to turn laboratory technologies into emerging industries at scale.

I said that China does indeed face some similar difficulties in industrial commercialisation. We had originally seen Germany as an important model for our own industrial transformation and upgrading, but as both countries move into a new stage of industrial upgrading, it now seems that China and Germany are facing a similar constraint, with a lack of direct financing holding back the commercial application of technological innovation. I wonder whether this might suggest that, at this new stage of development, traditional bank-led financial systems around the world are struggling to meet the needs of innovative industries, thereby posing even greater challenges for financial system reform across countries.

I came across a set of figures in the UK showing that a large share of Europe’s capital-markets business had once been concentrated in London. Since Brexit, only 4% of that business now remains there, while the rest has been diverted to continental European cities such as Paris and Amsterdam. Yet in the short term, these cities are unlikely to fully match the market depth and supporting legal infrastructure that once sustained London’s market position. Europe’s capital markets remain underdeveloped overall and have yet to play a major role in scaling up emerging industries.

[Note: ECB data indicates that London retained a major role in most euro-denominated financial-market segments after Brexit, although EU equity trading shifted sharply to continental venues.]

Meanwhile, Europeans attach great importance to regulation and standard setting in relation to innovation, and to some extent this may have dampened start-up activity by creating stringent compliance thresholds. In my view, all industrial regulatory rules ultimately need to strike a dynamic balance between innovation and risk control, and between industrial vitality and compliance management. The GDPR is a case in point: Europe has built a highly comprehensive system for protecting personal privacy, but years after its implementation, Europe has not seen the emergence of major home-grown global technology companies or large-scale big-data industrial clusters of its own.

The same can be seen in AI regulation, where Europe introduced tiered and classified AI regulatory rules at an early stage, an approach that has been studied and drawn on repeatedly in China’s policy research community. Regulation is differentiated according to risk level, with lighter oversight for areas without systemic importance and strict regulation reserved for those with systemic importance. The outcome is plain to see, with Europe producing very few home-grown, benchmark-setting AI companies.

[Note: The EU AI Act classifies AI systems by four levels of risk; “systemic risk” is a separate classification applied to certain general-purpose AI models.]

During our talks in Brussels, we also discussed stablecoins, and they noted proudly that their Markets in Crypto-Assets Regulation had been implemented far earlier than the various bills in the United States. I then asked why Europe’s own crypto industry and blockchain-related sectors had not achieved any obvious development at scale, given that the regulatory rules had been put in place so early. Admittedly, their legislative approach may place greater weight on risk control and on safeguarding the bottom line of financial security, which is an understandable policy choice. Yet judging from actual industrial outcomes, Europe’s own emerging technology industries have shown only limited signs of progress.

Across Europe, policy thinking is now widely shifting from its previous emphasis on economic stability towards a stronger focus on economic resilience. But there is still no common, workable plan for how to quantify and deliver that resilience, or which industries it should rest on.

At the same time, it is important to recognise that Europe is far from monolithic. Divisions of interest between northern and southern Europe, and between France and Germany, are also quite pronounced. France and the southern European economies are more directly exposed to imports of Chinese high-end manufactured goods and are therefore more inclined at the policy level to introduce various forms of protective trade legislation. By contrast, Germany and many northern European countries have a large investment presence in China, while the interests of their multinationals are deeply tied to the Chinese market, making their overall position more pragmatic and restrained. The fragmentation of priorities among the EU’s 27 member states and the normalisation of policy bargaining have also sharply reduced the effectiveness with which unified industrial policies can be put into practice. Against this backdrop, the EU has successively introduced new rules, including the Cybersecurity Act Revision and the Industrial Accelerator Act. Many of these measures are presented as security safeguards or industrial-support policies, but in reality they raise barriers to foreign investment and further securitise and politicise economic and trade issues.

[Note: Both measures were European Commission proposals at the time of the speech and, as of August 2026, remained pending under the EU’s ordinary legislative procedure.]

Although the EU continues to step up protectionist policies and raise trade barriers, China and Europe still have many deep-seated interests in common.

I think the most important question is what we should do if Europe’s economy faces industrial shocks and downward pressure on growth in the years ahead. At a meeting in Europe, I told the head of a leading think tank that as unilateralism, protectionism and great-power rivalry intensify globally, China and Europe may be the last hope for preserving a multilateral and open international economic system. The long-term survival of this system is therefore crucial, because a serious, large-scale trade war or economic confrontation between China and Europe would deliver a major shock to the global multilateral trading system and to global industrial and supply chains. The direction of US economic and trade policy is already clear to everyone.

The question, then, is how the current frictions and tensions in the bilateral relationship can be resolved. In my view, China’s approach to external economic and trade relations should shift from simply emphasising the “competitiveness” of its own industries to pursuing “win-win” [共赢] outcomes in bilateral economic and trade relations.

Now that China is a major economy—the world’s second largest, with manufacturing output accounting for more than 30% of the global total—any new round of export expansion or shift in its import structure will have a substantive impact on supply-demand balances in international markets, as well as on industries and employment in partner countries. If real livelihood concerns are not properly addressed, simply invoking the broad macroeconomic benefits of free trade is unlikely to win support from public opinion or policymakers in partner countries. China therefore needs to take full account of the capacity of partner-country industries to absorb the impact and of their likely policy responses when shaping its external economic and trade strategy, and to update its top-level strategic thinking accordingly [与时俱进].

More specifically, I think there are two practical directions. Internally, China needs to stay firmly committed to domestic economic rebalancing. In fact, we should already recognise—or be coming to recognise—that if we cannot steadily reverse the pattern of external imbalances, our own insufficient domestic demand and overreliance on external demand as a driver of growth will create risks to the sustainability of growth over the medium to long term. Rebalancing the economy by expanding domestic demand is therefore not only an external necessity for easing international pressure but also an internal requirement for China’s own high-quality development. Going forward, China will need to communicate its policies more clearly and effectively in multilateral settings and bilateral economic and trade talks, both to achieve win-win outcomes in bilateral trade and economic relations and to strengthen the foundations of its own outward-facing economy. Rebalancing will remain a crucial macroeconomic policy priority for a long time to come.

In the current macro environment, stabilising the domestic property market is therefore an economy-wide strategic priority and a key lever for expanding domestic demand and advancing macroeconomic rebalancing. The real-estate value chain connects dozens of real-economy sectors, including building materials, home renovation, home appliances and property services.The sector underpins large-ticket household consumption and local government finances, serves as the main form of asset allocation for Chinese households, and is closely linked to the financial system through bank credit, non-standard financing and other channels. Anchored in the basic principle that “houses are for living, not for speculation” [房住不炒], policy should focus in the short term on stabilising expectations, reducing inventories and protecting essential housing demand, while working over the medium to long term towards a new model of real estate development that supports both renting and home ownership [租购并举] through a coordinated set of targeted measures.

As for the specific areas of China–Europe economic cooperation, I have identified five practical areas that could be discussed and advanced jointly with European countries, allowing both sides to draw on their respective comparative advantages, deepen the division of labour and achieve mutually beneficial cooperation.

The first area is green transition, where cooperation is already largest in scale and has the clearest prospect of producing concrete results. China brings large-scale capacity across the full industrial chain in photovoltaics, wind power, energy storage and new energy vehicles, together with clear advantages in cost and industrial deployment. Meanwhile, Europe has accumulated deep expertise in green hydrogen, carbon capture, carbon-footprint accounting standards, new grid technologies and green project certification. Given the strong complementarity between their industrial chains, cooperation on green transition will be essential for Europe’s efforts to implement the European Green Deal and meet its carbon-neutrality goals.

The second area is collaboration and division of labour in high-end manufacturing. The two sides could explore a differentiated model of specialisation, with Europe focusing on high-value-added upstream segments such as core components, specialised materials, industrial software and chassis design, while China builds on its strengths in large-scale smart manufacturing, end-product assembly and deployment, and its vast domestic consumer market. Cooperation in the automotive industrial chain could serve as a model for binding upstream and downstream interests together [利益绑定] between upstream and downstream segments.

The third area is careful, sustained engagement in industrial AI and smart manufacturing. Europe has first-mover advantages in data compliance, privacy legislation and the development of global AI governance rules, while China has a vast range of industrial application scenarios, a large computing-power base and practical experience in implementing smart manufacturing. The two sides could avoid sensitive areas such as general-purpose foundation models and facial recognition and instead focus their cooperation on more practical projects such as smart factory upgrades and industrial digitalisation.

The fourth area is two-way opening in high-end services, a field that is relatively less politically sensitive and serves as a major source of Europe’s services trade surplus with China. In 2024, the EU’s services trade surplus with China exceeded US$50 billion, with intellectual property licensing fees alone surpassing US$10 billion.

[Note: Eurostat records EU services exports to China of €67.3 billion and imports of €45.5 billion in 2024, implying a surplus of €21.8 billion, not more than US$50 billion. The claim that intellectual-property licensing fees exceeded US$10 billion could not be independently verified.]

Sectors such as finance, insurance, commercial legal services, healthcare and high-end education are areas of clear European strength, while also matching China’s pressing needs as its domestic industries move up the value chain. Greater two-way opening in these areas would steadily expand the two sides’ shared interests.

The fifth area is joint development of third-party markets. China should initially bypass highly politicised EU-wide negotiating frameworks and instead partner with individual sovereign states with greater capacity for action, such as Germany and France. In Global South markets such as Africa and Central Asia, the two sides could jointly deliver projects in new energy, infrastructure and manufacturing parks, drawing on their respective strengths to open up additional markets.

To conclude briefly, current China–Europe relations are marked by both ice and fire. The “ice is thickening” as tariff barriers rise and protective legislation continues to expand, yet beneath the surface there remains a “warm current”: multinational companies continue to expand their on-the-ground investment in China, the green transition creates a compelling practical need for cooperation and both sides share an interest in preserving the multilateral system. Structural problems undoubtedly exist, but so does a solid foundation of deeply intertwined bilateral interests. The real question is not whether China and Europe should cooperate, but in which areas and under what rules. Even so, translating these broad principles into practice remains difficult, making this an issue that deserves sustained and close attention over the long term.

The other phrase that completely saturates July’s collection of articles is “strong supply, weak demand”. The K-shaped metaphor describes the divergence, while “strong supply, weak demand” serves as the semi-official diagnosis of the structural imbalance behind it.

Even Li Daokui, who ostensibly pushes back against the K-shaped consensus, is really arguing that the metaphor is a distraction from the fact that the Chinese economy has been running cold for three years. In other words, the diagnoses are common ground. What is still heavily contested is where the transmission mechanism from investment into household demand has broken down and therefore what remedy should be applied.

The nearest thing to an official position comes in the form of a Qiushi commentary on the household consumption rate, published under its anonymous “special commentator” byline, with CASS’s Xu Qiyuan credited as drafter. It concedes that the investment-heavy model was historically appropriate, but lacks “long-term rationality”, though it quickly forecloses the transfer-based remedies suggested elsewhere with its disavowal of “helicopter money” and warns that the household consumption rate must not be “reduced to a rigid assessment task”.

Compared with the tone of marked concern apparent in the rest of the selection, it appears relatively sanguine. One might even read it cynically as co-option, rather than an adoption of the diagnosis, given that its immediate policy message is “historical patience and strategic resolve”, or less charitably, business as usual.

In contrast, calls for an immediate fiscal response are widespread in July’s collection and a large group of authors, including Li Daokui, Zhang Ming, Zhao Yanjing and Jia Kang, call for the central government itself to expand borrowing. Li in particular argues that the central government must relieve local governments, which have become “black holes” of economic energy.

Shen Jianguang and Fan Lei make a more modest version of the fiscal intervention case, arguing that expenditure has simply fallen behind the budget schedule and that more timely implementation might still replicate the 2024 pattern of growth being “suppressed at first, then buoyant later”.

There is also a disagreement about what fiscal intervention should prioritise. Li Daokui and Zhang Ming focus on relieving the property sector and local government balance sheets while others would prefer to see a more direct shift towards households and consumption. Liu Shijin makes the latter case most explicitly, arguing that stimulus should be redirected towards consumption, social security and households. He also most clearly cuts across the structural reform vs. macroeconomic stimulus divide, explicitly arguing that it’s not an either/or choice.

Two of the strongest pieces explicitly question how much balance-sheet expansion can achieve in the first place. Yang Ruilong describes K-shaped divergence as “fundamentally a structural problem” and argues that fiscal and monetary stimulus alone is insufficient because aggregate policy is failing to transmit effectively into the manufacturing and mid- and downstream sectors.

Cao Yuanzheng also claims that fiscal and monetary demand stimulus may only work temporarily. His theory is that the foundation of the Chinese economy is shifting from individual firms to the entire industrial chain and that imbalance is rooted in changes to the microeconomic foundations of the economy itself.

Elsewhere, Zhou Junzhi, providing the mechanism behind the K-divergence, explains that exports are no longer translating into domestic investment and argues that the “basic foundation” of household consumption is already relatively saturated—a claim also echoed by Sun Liping.

For most authors, AI threatens to further complicate the imbalance. Lu Ting warns that the boom could widen China’s K-shaped divergence and Huang Yiping describes a “substitution spiral” in which automation cuts labour income, weakens demand and encourages further automation.

Zhao Yanjing and Peng Wensheng both highlight China’s AI investment gap with the US, but draw opposite conclusions—Zhao favours open-source competition designed to undermine US profitability, while Peng calls for government-led catch-up investment.

Yin Jianfeng and Zhang Yang are more sanguine on AI, arguing that the existence of structural bifurcation in the economy due to a combination of path dependence in government policy, AI development and the energy transition is a long-term fact, and that “learning to dance with the K” is the only way to survive.

Taken together, this edition contains a remarkable range of competing prescriptions, but many do converge around a sense that insufficient demand and economic imbalance require a more urgent policy response.

It is ironic then, that the most recent piece in the collection—Zhang Jiqiang’s reading of the Political Bureau of the CPC Central Committee meeting held on 30 July—concludes that, in Zhang’s opinion, “the urgency of stepping up policy support is not high.”

— Jacob Mardell

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Nominally written as an obituary for Zhu, the piece is really his lament for a bygone era when Chinese society felt confident, people said what they really thought and there was an assurance, felt by Zhao while watching leaders speak on the television, “that someone was holding up the weight of this country, that someone was giving his all for us”.

Zhao is unabashedly nostalgic. In expressing the wish that he might awake from a present-day dream and find himself back in the world of Zhu’s premiership, his piece is reminiscent of the “Dreamcore” aesthetic—a trend where internet users adapt hazy images of 2000s scenes to evoke nostalgia for an apparently simpler time. But instead of limiting himself to vignettes of danwei-distributed ice lollies and internet cafés, Zhao’s essay is a more overtly politicised form of Dreamcore. He regards Zhu Rongji together with Jiang Zemin, China’s top leader at the time, as the embodiments of that era’s sense of confidence. Compared to the relative freedom and perceived certainties back then, he describes the society of today as suffocating and draining.

Such nostalgia merits mention of the obvious: living standards have significantly improved in China over the last two decades. Zhao is acutely aware of this, and admits that trying to find a single culprit for the current feeling of hopelessness is like “throwing a punch only for it to land on cotton wool”. There is no one cause he can identify: the anti-corruption drive, deflating the property bubble—even “stability maintenance” by local governments and the online censorship that has left his essay peppered with euphemisms—can each be justified or defended on some rational basis. Taken together though, he sees them as constituting one problem: a broader loss of trust.

— James Farquharson

Name: Zhao Jian (赵建)
Year of birth: September 1980 (Age: 45)
Position: Founder and President, Xijing Institute; Professor, School of Business, University of Jinan; Director, Institute of Strategy, Shanghai Chief Economist Financial Development Center
Previously: Chief Economist, Bank of Qingdao; Director, Macroeconomic Research Centre, Ping An Bank
Research focus: Macroeconomic analysis
Education: Bachelor’s degree in Finance, Shandong University of Finance and Economics (2004); MA in Finance, Shandong University (2007); PhD in Finance, Shandong University (2010), jointly trained at the University at Buffalo, State University of New York
Experience Abroad: Visiting scholar, University at Buffalo, State University of New York (2009–2010); research experience at the Finance Laboratory, Niagara University

HE’S GONE. HOW I WISH THIS WERE ALL ONE LONG DREAM
By Zhao Jian (赵建)
Published by Xijing Research Institute on 12 August 2026
Human-edited machine translation
(Illustration by ChatGPT)

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He’s gone.

When the news came, I was scrolling through my phone. The obituary notice that popped up on the screen was so short that it left me dazed. So then, the man who once spoke on television with such powerful force of personality [挥斥方遒] and such ringing conviction [铿锵有力] had already reached the age of ninety-eight. The man whom we imagined would always be around—somewhere in the world—had really gone.

Suddenly, this world seemed like one long dream.

Late at night when everyone falls silent, I often lie staring, blankly, at the ceiling. Outside the window are the lights of a city that never go out. From downstairs, the footsteps of someone returning home late can occasionally be heard. I gaze around, observing this world and then myself. Where is this? Who am I? How did everything come to be like this?

I want to pinch myself. Really, pinch myself hard.

If it hurts, that would prove this is not a dream. But if that is the case, why does everything feel so unreal?

How I wish this were all just a long dream and that I might awake to find myself back thirty years ago. There were no smartphones then, no short-form videos and no screens filled by the purveyors of anxiety. The sky was blue, life moved slowly and people could say what they really thought [话是可以直说的]. We were poor then, properly poor. A month’s wages would not buy more than a few jin of meat. We lived in communal corridor blocks [筒子楼], travelled by bicycle and could only afford a new item of clothing at Chinese New Year. Yet people had a light in their eyes and a sense of standing on solid ground [心里有底]. Tomorrow was something they could see.

We believed then that hard work would be rewarded, that good things would come to good people and that things in this world could all be reasoned out.

Back then, he would pound the table on television, thundering that even “minefields” [地雷阵] had to be crossed and denouncing “tofu-dreg” [豆腐渣] construction projects.1 Sitting in front of our black-and-white televisions, we had the feeling that someone was holding up the weight of this country, that someone was giving his all for us [这个国家有人在扛着，有人在为我们拼命]. Reflecting on it now, that feeling of being protected, that comforting certainty that “if the sky fell, there would be someone tall enough to hold it up” [天塌下来有个高的人顶着], just seems like something from a previous life.

CCTV recently broadcast a documentary about Jiang Zemin [Note: Zhao employs the nickname “长者”, or “the Elder”2]. On the screen, he felt just as affable, wise and effortlessly assured as ever. Suddenly, I became aware that the people who shaped that era are leaving us, one by one.

They really are gone.

As people born in the 1980s, ours is the generation that was raised to adulthood by that era. We grew up listening to their speeches, and with their receding figures ahead of us. We assumed that this was simply how the world was meant to be: it had authority, direction, a prevailing theme [主旋律] and a clear sense of right and wrong, truth and travesty [是非曲直].

China was far less developed then than it is today. There were no high-speed trains, no aircraft carriers and no position as the world’s second-largest economy. The international situation was extremely turbulent and our domestic contradictions were a mess of tangled branches [盘根错节]. Everyone lived life on a shoestring. Meat was seldom seen on the dinner table and wardrobes held the same few clothes, worn over and over again. Yet strangely, people did not feel that life was hard.

Or rather, life was hard, but it was hardship sustained by hope [苦得有盼头].

And now? We have material abundance, choice, skylines bristling with high-rises and streets teeming with traffic. Open your phone and the entire world’s cuisine is yours to order. Open a shopping app and goods from around the world will be delivered to your door. So why, then, do we feel so empty [空落落] inside?

Anxiety is as pervasive as the air we breathe. A sense of suffocating heaviness clings to our bodies like a wet garment that cannot be removed. The most terrifying thing is the despondency [灰心]: not about any one thing in particular, but about everything. Work, marriage, children, the future… it all just leaves us feeling drained.

Is it my problem? Or has the world really changed?

I’ll make a stab at answering this.

Fighting corruption [反FB]? Absolutely correct, it was long overdue. Investigating arbitrary fees [清查S费]? Fine, rules needed to be established. Rectifying the property sector [整顿FDC]? That was necessary, someone had to prick the bubble eventually. Controlling the expression of public opinion? There also seems to be a case for that: there are all kinds of mad people out there and you can’t just let rumours fly all over the place [林子大了什么鸟都有，总不能让谣言满天飞].

Taken individually, each of these things makes sense. All are done “for your own good”.

So why, when they are all added together, does it feel so awful?

I thought about it for a long while. Basically—it’s as if all the trust has gone.

In the past, we believed that “when people are born, their nature is good” [”人之初，性本善”]. When we met a stranger, we would assume the best [先往好处想]. If we heard something, we would at least give it some credence [先信三分]. And now? Our default setting has become “human nature is bad”. Businesses must be cheating me, experts are duping me, policies are manipulating me and the people around me are definitely using me.

Bad vibes [戾气] have festered within society. Online, the slightest spark bursts into a conflagration. In face-to-face life, the slightest bump triggers an explosion. People no longer reason things out with one another, but fixate on their own standpoints. What they care about is no longer consensus, but winning and losing. Everyone sees themselves as a victim. Everyone believes that others owe them something.

But where exactly did things go wrong?

I’d like to blame some person, event or policy. Yet the more I mull it over, the more it seems that everyone is just doing their job. Officials are maintaining stability [维稳], entrepreneurs are making money, media organisations are chasing traffic and ordinary people are trying to survive. Who is at fault? It doesn’t seem like anyone is.

And yet, it also feels like no one can escape responsibility.

What is hardest to bear is this feeling of throwing a punch only for it to land on cotton wool [这种一拳打在棉花上的感觉]. You clearly perceive that something is wrong, but you cannot identify a concrete enemy. You want to issue a rallying cry [呐喊], but do not know to whom you should cry out.

It occurred to me later that, perhaps, the reason is actually quite simple.

We’ve grown old.

Even the youngest of those born in the 1980s are now thirty-five and the oldest are approaching fifty. We are no longer the youngsters who could play video games all night and still be bursting with energy the next day. Aches and pains have become routine, our medical reports grow heftier, our hair grows thinner and our stomachs grow larger.

We have collectively entered middle-age.

Physiologically, that is, but more so psychologically. Our hormones are retreating, our dopamine is diminishing and the filters through which we viewed the world are being stripped away, layer by layer. When we were young, we thought that “anything was possible”. Now we think that just staying alive is good enough. When we were young, we thought all the world was a stage. Now we think it is a cage.

Maybe, our surroundings have not actually changed. Judged by some measures, they have even improved. Perhaps what has changed is simply our bodily functioning and our state of mind.

It is like someone suffering from depression, to whom everything appears bleak and dim. It is not that the world has got dimmer, but that something is going wrong with his retina.

Even so, I still think back to that summer twenty [likely thirty] years ago.

Thrumming cicadas, ice lollies and the creak of an old electric fan turning to-and-fro. The news was playing on television, my parents were cooking in the kitchen and I lay belly-down on a bamboo mat doing my homework, wondering with whom I could play football the next day.

It never occurred to me then that those days would disappear, never to return.

Now, Premier Zhu [Z相] and the Elder are gone, the figures of that era facing their final curtain, one after another. Our generation, meanwhile, has been pushed from the audience and into the centre of the stage. We are even beginning to disappear behind that curtain ourselves.

Sometimes, I genuinely wish that all of this were nothing more than a long dream. I could awake to find myself still sprawled on the bamboo mat, the fan still turning, my parents calling me to come and eat and that familiar voice [Jiang, the Elder’s] still intoning from the television: “The Chinese people are invincible!”

But I know that this is not a dream.

A dream would not hurt this much.

So just let things rest.

Let go of those obsessions, abandon those illusions and lower expectations as far as they will go. Eat well, sleep properly and focus on living a good life. Stop asking what it all means, stop searching for answers and stop expecting the world to return to the way it once was.

Simply being able to focus on living a good life has itself become a wild hope.

Farewell, Premier Zhu.

And may we ourselves be granted a little more peaceful sleep within this dream.

(Even after repeatedly cutting and revising a commemorative article like this, I still won’t be able to publish it. Ha.)

The celebratory mood that followed the Trump–Xi summit in May seems to have run its course. The prevailing assessment of US–China “strategic stability” remains broadly optimistic, but July’s commentary offers a more sober assessment of China’s strategic environment.

Authors still assume that US primacy is weakening and China’s material power is growing, but they repeatedly ask whether those advantages can be converted into durable influence. As Zhou Li, a former vice-minister of the International Department of the CPC Central Committee, writes in an otherwise confident survey, “having an advantage does not equate to a winning position”.

Zheng Yongnian and Da Wei complicate familiar narratives of American decline. Zheng describes a waning hegemon whose decline is relative, protracted and non-linear, warning, “China must not lull itself into a false sense of security”. Da distinguishes the end of Pax Americana from the unresolved trajectory of American national power, while Wu Xinbo provides the policy prescription: “constructive strategic stability” rests on credible Chinese counter-pressure.

Elsewhere, Wu says that Xi Jinping’s four global initiatives require real resources to implement. His tone is far from critical, but the observation that “global governance cannot rely solely on conceptual initiatives” is nonetheless striking. Jin Canrong similarly acknowledges that China’s historically East Asia-centred statecraft has left it short of experience in managing genuinely global affairs, while cultural insecurity means confidence lags behind material strength.

AI coverage in July included commentary on Xi Jinping’s announcement of the World Artificial Intelligence Cooperation Organisation (WAICO) and the unveiling of a new Chinese AI model that allegedly rivals US competitors, but much of this commentary was boilerplate. Instead we included two pieces that resist triumphalism about China’s recent advances. While Zhu Songchun identifies dependence on US-defined concepts and paradigms as China’s deeper weakness, Huang Ping distinguishes mass-market success from American frontier leadership.

Among the pieces focusing on Chinese society, Yao Yang uses Wang Hong’s Fields Medal to explore weak female representation in senior politics and a revival of patriarchal ideas. Zhou Lian and Xu Jilin, and separately Dong Yue, focus on young people’s retreat from public life. Zhou and Xu attribute this retreat to repeated experiences of powerlessness, while Dong identifies a sub-group of highly educated home-staying “squatting youth” [蹲族], produced by an expansion of educational opportunities, but a lack of good jobs.

June’s “Going Out” section largely made the case for a new wave of outward investment—July’s selection focuses on its conditions and risks. Li Wei warns that China’s commercial footprint could outstrip the state’s capacity to protect overseas assets, while Liang Dong, Wu Ting and Wu Huimin argue that outward investment serves “dual circulation” only when profits and productive capabilities return home.

On the home front, Liu Shijin treats China’s “strong supply, weak demand” as the result of a production-first growth model that has outlived the shortage economy for which it was built. A fuller account of China’s domestic economy will follow in our forthcoming Economy Digest.

On Europe and its relations with Beijing, the tone is pessimistic about the prospects for resolving structural conflict, but broadly confident about China’s relative position. The most arresting argument comes from former Chinese trade diplomat Zhou Xiaoming, who says China’s support for a “strong, united EU” no longer serves Beijing’s interests: Brussels was imagined as an autonomous pole in a multipolar order, but has instead become an institutional centre of confrontation with China.

Ding Chun and Wu Jiwei, and separately Qin Shuo, reach softer conclusions. Ding and Wu describe EU–China industrial relations as “competitive coexistence”. Qin, a prominent business-media commentator, writes that trade conflict is a normal consequence of China becoming the axis of global manufacturing. His conclusion—that China bears responsibility for steering the contest towards a more open and balanced order—is refreshing.

Coverage of Britain’s new prime minister was voluminous but held few surprises: Long Jing expects broad foreign-policy continuity, constrained by existing security alignments and Britain’s diminished room for manoeuvre.

On the Middle East, Liu Zhongmin and Tang Zhichao see the Iran war accelerating the transition towards a “post-American” regional order—both predict deeper fragmentation and disorder alongside greater regional agency.

July also saw many pieces marking the tenth anniversary of the 2016 South China Sea arbitration award. Most were boilerplate, but Wu Shicun’s interview with the South China Morning Post stands out for warning that fixed Chinese facilities on Scarborough Shoal remain an option if Philippine and foreign patrols intensify. Wu’s threat fits a longer pattern, but remains notable. Bao Yinan offers a less confrontational route, proposing consent-based mediation through the new Hong Kong-based International Organisation for Mediation.

Neighbourhood diplomacy is another major theme of the month. Both Zhou Fangyin and Zhao Long describe an increasingly securitised environment in which US alliance policy raises pressure to choose sides. On China’s regional engagement, Zhang Yun reads Japan–Philippines maritime talks as part of Tokyo’s attempt to become a second centre of regional leadership, Mao Keji and Mao Yaxin interpret India’s reopening to Chinese investment as industrial necessity rather than strategic trust and Wang Youming expects Latin America’s rightward turn to complicate China’s position without dislodging it.

July’s strongest writing qualifies confidence in China’s rise—American retrenchment is adaptive rather than terminal, the trade war is survivable but unavoidable and China’s growing power is running ahead of the institutional, diplomatic and intellectual capacities needed to translate it into durable gain.

— Jacob Mardell

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1. US–China & Global Order:

   1. Zheng Yongnian on America as a “declining hegemon” whose relative decline coexists with renewed technological and coercive power.

   2. Da Wei on Pax Americana ending without settling whether American national power declines or revives.

   3. Wu Xinbo on:

      1. “constructive strategic stability” resting on credible Chinese counter-pressure.

      2. China’s four global initiatives requiring “real money”, institutions and trained personnel to become operational.

   4. Jin Canrong on China’s global experience and cultural confidence lagging behind its material strength.

   5. Zhou Li on accelerating US hegemonic decline and China’s systemic “ideas + strength + strategy” advantage.

2. Europe:

   1. Zhou Xiaoming on why China’s long-standing support for a “strong, united EU” may no longer serve its interests.

   2. Qin Shuo on trade war as a structural consequence of China becoming the axis of global manufacturing.

   3. Ding Chun & Wu Jiwei on China–EU industrial relations entering “competitive coexistence”, with selective cooperation surviving behind higher barriers.

   4. Sun Chenghao on NATO 3.0 becoming more militarily effective.

   5. Long Jing on Andy Burnham’s foreign policy being untested but constrained by circumstances.

3. Chinese Economy & Going Out:

   1. Liu Shijin on “strong supply, weak demand” as the result of China’s production-first growth model.

   2. Li Wei on China’s commercial expansion outrunning its capacity to protect overseas interests.

   3. Liang Dong, Wu Ting & Wu Huimin on outward investment serving “dual circulation” only when profits return home.

   4. Yang Ping on Chinese capital potentially undermining industrialisation in the Global South.

4. Middle East:

   1. Liu Zhongmin on the interruption, but not reversal, of the Middle East’s movement towards strategic autonomy, reconciliation and development.

   2. Tang Zhichao on the acceleration of a fragmented “post-American” order.

5. South China Sea:

   1. Wu Shicun on fixed facilities at Scarborough Shoal remaining an option.

   2. Bao Yinan on using consent-based mediation to manage practical disputes in the South China Sea.

6. Neighbourhood Diplomacy:

   1. Zhou Fangyin on “de-securitisation” and “de-geopoliticisation” as principles for keeping China’s neighbourhood from splitting into rival camps.

   2. Zhao Long on “doubt and fear of America” keeping states vacillating between strategic autonomy and tighter alliance dependence.

   3. Shi Yuanhua on a 64-state “greater periphery” including the United States and the case for China biding its time on Taiwan.

7. Regional Policy:

   1. Zhang Yun on Japan using the Philippines to become a second centre of power alongside Washington.

   2. Mao Keji & Mao Yaxin on India’s attempt to reduce reliance on China making it more dependent on Chinese goods.

   3. Wang Youming on Latin America’s rightward turn complicating, but not dislodging China’s position.

8. AI & Tech:

   1. Zhu Songchun on China remaining dependent on US concepts.

   2. Huang Ping on China’s “good enough and cheap” AI advantage facing a Huawei-style political blockade.

9. Society:

   1. Yao Yang on Wang Hong’s Fields Medal, patriarchal revival and Chinese women’ s shrinking horizons.

   2. Zhou Lian & Xu Jilin on young people’s retreat from public life and “dog-wisdom-ism” among knowledge elites.

   3. Dong Yue on graduate “squatting youth” [蹲族], produced by the mismatch between higher-education expansion and the lack of suitable employment.

1. US-China & Global Order

Zheng Yongnian (郑永年): The whole world may misunderstand the United States, but China cannot afford to do so. America’s decline is relative, not absolute and the decline of a major power is a long-term process. Multipolarisation is a long process and the US will remain the most important pole. Meanwhile, the nature of American hegemony is changing, from “constructive” to “destructive”. In important fields such as AI, American hegemony has not only failed to decline but is being strengthened and upgraded. The US practises protectionism in areas of goods trade where it lacks comparative advantage, but in fields where it possesses comparative advantage, it continues to advance globalisation, thus increasing the dependence of other countries. The American claim that “China is only a few days behind the United States”, satisfies the vanity of people in China while mobilising resources within the United States.— X.Q. Deng Presidential Chair Professor and Dean, School of Public Policy, CUHK-Shenzhen (大湾区评论, 4 July).

Da Wei (达巍): “Pax Americana” is coming to an end, but no conclusion can yet be reached about America’s rise or decline. America is actively dismantling the hegemonic system that it took the lead in constructing after the Second World War. MAGA is not a retreat from empire back to republic. It is a retreat from a liberal internationalist empire to the late-nineteenth-century imagination of a nationalist empire. America has not simply decided that it “does not want to be a hegemon” any longer. More accurately, America is unwilling to continue bearing the costs. Historically, leaps in American national power generally came from the opening of three kinds of frontier: geographical, institutional and technological frontiers—only this latter frontier remains available to the US. America’s national power may increase again, but “Pax Americana” is unlikely to return. — Director and Professor, Centre for International Security and Strategy (CISS), Tsinghua University (清华大学战略与安全研究中心, 1 July).

Wu Xinbo (吴心伯): Constructive strategic stability depends on credible Chinese counter-pressure, and every strike answered with equal or greater force. Repeated rounds of “fighting and talking” have changed expectations. Washington must now price in retaliation before acting. Planned trade and investment councils, fentanyl cooperation, maritime military consultations and the suspension of Taiwan arms sales indicate what stabilisation is able to deliver. However, Trump sees Taiwan as leverage for obtaining concessions from China, so Beijing should make sure to maintain pressure, repeatedly restate its red lines and respond forcefully to US provocation. Stability also remains exposed to US domestic politics—a Democratic House could use hearings, human rights, arms sales and investment restrictions to constrain Trump. Taiwan’s January 2028 leadership election and the November US presidential contest may bring significant changes. — Dean, Institute of International Studies, and Director, Centre for American Studies, Fudan University (思路打开, 6 July).

Wu Xinbo (吴心伯): America’s waning global leadership creates a historic opening for China, but Beijing’s four global initiatives still need to be translated into concrete outcomes. US leadership originally combined material power with progressive principles, but Cold War militarisation and intervention eroded its public character. Meanwhile, today’s reliance on sanctions signals declining diplomatic persuasion and credibility. Newer arrangements such as the Indo-Pacific strategy lack the appeal of post-war institution-building. Global governance cannot rely solely on conceptual initiatives, and if the UN headquarters one day moves from the Hudson to the Huangpu, China must prepare the necessary resources, physical space and professional talent in advance. — Dean, Institute of International Studies, and Director, Centre for American Studies, Fudan University (人大重阳, 3 July).

Jin Canrong (金灿荣): China may yet overturn Brzezinski’s prediction that America will be the last global superpower, but converting its underestimated strength into a genuinely global role requires experience and institutions that its historically East Asia-centred statecraft never developed. Unlike Western powers that were formed by centuries of colonial expansion, Chinese dynasties governed a vast, diverse society, but remained strategically defensive. China’s instinctive rejection of “G2” reflects resistance to being “praised to death”, but also a lack of preparation for global affairs. A separate legacy of Qing rule results in cultural self-denigration—China has grown to 1.95 metres but still thinks itself 1.2 metres tall. Development will reverse this insecurity, while US containment acts as a “good teacher”, training China for the world stage. China should ultimately practise an enduring “kingly way” [王道] of restraint, rather than the West’s “hegemonic way” [霸道]. — Wu Yuzhang Chair Professor, School of International Studies, and Director, Centre for China’s Foreign Strategy Studies, Renmin University of China (金金乐道编辑部, 9 July).

Zhou Li (周力): The American hegemonic system is accelerating its own decline and multipolarisation is deepening, while China possesses a systemic “ideas + strength + strategy” advantage in the emerging order. The US–Israel–Iran conflict demonstrated that military superiority, sanctions and unilateral pressure cannot secure political outcomes. Pakistan- and Qatar-led mediation and the reopening of Hormuz point towards greater regional agency and an American return to offshore balancing. Meanwhile, Western political dysfunction and central-bank gold repatriation signal declining trust in established institutions and the dollar-centred system, though this is “de-risking” rather than imminent de-dollarisation. China’s governance model offers an alternative to Western institutional crisis, but “having an advantage does not equate to a winning position”. European protectionism and a more extreme America remain major risks. Beijing must secure 15th Five-Year Plan technological breakthroughs, repair supply-chain weaknesses and maintain strategic composure. — Former Vice-Minister, International Department of the CPC Central Committee (习近平外交思想和新时代中国外交, 6 July).

2. Europe

Zhou Xiaoming (周小明): China should reconsider its long-standing support for a “strong, united EU”. European integration once suggested an autonomous pole capable of preventing a US–China bipolar order and a third world war, but Brussels has instead become an institutional vehicle for confrontation with China. Recent consultations pulled both sides back from the brink—China still values the European market and strategic autonomy and Brussels doubts it can withstand Chinese retaliation. However, the two sides cannot resolve the structural conflict rooted in Europe’s declining competitiveness and export controls on the advanced goods China actually wants to buy. The “systemic rival” label now overrides partnership, recasting interdependence as risk, keeping the investment agreement frozen and treating engagement with member states as “divide and rule”. Beijing should “discard illusions” [丢掉幻想], prepare for wider restrictions under the EU’s Industrial Accelerator Act and shift more effort to national and local governments, but retain cooperation with EU institutions where possible. — Senior Fellow, Centre for China and Globalisation (CCG); former Deputy Permanent Representative, Permanent Mission of China to the United Nations Office at Geneva (观察者网, 8 July).

Qin Shuo (秦朔): Trade war is a normal condition of China becoming the central axis of the global manufacturing industrial chain—just as China is the anchor of world goods, America is the anchor of world currency. However, compared with when the United States led globalisation, China will have more opponents because China’s industries inevitably face many more competitors. China should not “protect commerce with swords”, or create a “Chinese circle”. Rather it has a responsibility to guide trade war towards a new order. Chinese companies can do more to accelerate localised production, establish more complete compliance systems, respond better to carbon and ESG challenges, and accelerate market and supply-chain diversification. China also has a major card to play, that is, making its own market bigger.— Co-Director, China Business Civilization Research Centre; former editor-in-chief, Nanfeng Chuang and China Business News (秦朔朋友圈, 12 July).

Ding Chun (丁纯) and Wu Jiwei (吴佶蔚): China–EU industrial relations have entered “competitive coexistence” [竞争性共存]. China’s rise from workshop to same-market rival has moved competition from products and prices into investment conditions, technology standards and rules. However, deep interdependence persists and the most likely trajectory is selective cooperation behind higher barriers. Europe still possesses strong basic research capabilities, but it suffers from structural weaknesses in translating scientific and technological achievements into commercial productivity and risks falling into the “medium-technology trap.” The Sino-European contest in emerging industries like artificial intelligence is essentially a clash between “governance-driven” and “application-driven” paths. This competition will not be limited to a single product or technology contest, but will extend to multiple dimensions, including breakthroughs in underlying technologies, supply chain support and the formulation of industry rules. — Ding: Director, Centre for European Studies, Fudan University; Wu: Postdoctoral Fellow, Institute of Belt and Road & Global Governance, Fudan University (欧洲问题研究, 5 July ).

Sun Chenghao (孙成昊): “NATO 3.0” may become more militarily effective without becoming more politically united. China should not expect transatlantic differences to lead to the disintegration of NATO—instead it should expect NATO’s military industrial expansion to lead to more securitised European scrutiny of Chinese technology and supply chains. NATO is shifting towards the delivery of industrial capacity and sustained combat power and Washington seeks to transfer responsibility transfer, without relinquishing US leadership. Trump wants Europe to gradually transform from a “security consumer” to a “security provider,” allowing the US to allocate more strategic resources to the Indo-Pacific. NATO is beset by three contradictions: between the pursuit for strategic autonomy and dependence on the US; between European priorities; and between NATO members who diverge on shared values. NATO will neither disintegrate rapidly nor revert to its past. — Associate Fellow, Centre for International Security and Strategy, Tsinghua University (中美聚焦, 17 July).

Long Jing (龙静): Britain’s seventh prime minister since the Brexit referendum was open to cooperation with China at the local level, but will face a more complicated position as prime minister. Burnham inherits economic decline, social division and international uncertainty, as well as the risks associated with chronic leadership churn. This means that his priority is likely to be domestic repair rather than diplomatic reinvention. Lacking foreign-policy experience, Burnham will likely preserve Starmer’s interest-driven policy, stabilising ties with Washington, sustaining support for Ukraine, rebuilding practical European ties and widening relations with middle powers. — Deputy Director, Centre for European Studies, Shanghai Institutes for International Studies (SIIS) (中美聚焦, 24 July).

3. Chinese Economy & Going Out

Liu Shijin (刘世锦): Strong supply and weak demand are not the result of short-term fluctuations, but originate in an unbalanced pattern of growth supported by institutional and structural factors. At the beginning of reform and opening, China was a shortage economy and this growth model—characterised by high savings, high investment and high exports—was appropriate and possessed clear advantages. But when investment can no longer be expanded and begins to contract, as is the case in China, it becomes increasingly difficult to sustain. Excessive productive investment now suppresses returns, while strong exports are a reason for rather than a consequence of weak domestic consumption. Meanwhile, companies distribute too little income and household deposits are concentrated among the affluent. Only by reducing the savings rate and increasing terminal demand can capacity utilisation be raised. China should reduce its total savings rates, reform its tax system, encourage private enterprises to increase dividends, funnel RMB20 trillion of listed state capital into social-security funds, use 50 per cent of macroeconomic to address the problem, raise pensions to release consumption and use housing support to address the mismatch facing migrant workers. — Former Vice-Chair, Committee for Economic Affairs of the 13th CPPCC National Committee; former Vice-President, Development Research Centre of the State Council (中国宏观经济论坛, 7 July).

Li Wei (李巍): China risks falling into a seventeenth-century “Dutch trap” [荷兰陷阱] if its expanding commercial footprint outstrips its capacity to protect overseas assets, personnel and international routes. China should therefore focus on building a robust system to safeguard its overseas interests. Great-power competition is shifting from seizing wealth towards creating it through technology, commercial application and industrial ecosystems, putting “super-enterprises” on the front lines of geopolitical competition. Chinese companies need to achieve a genuine breakthrough in profitability, rather than simply in sales volume, to achieve sustainable progress. Although globalisation faces severe challenges, it is not coming to an end. Several questions remain: whether China can maintain its status as the “world’s factory” and further climb up the global value chain; whether the US can reindustrialise; and whether emerging manufacturing bases can replicate the industrialisation experience of the “Four Asian Tigers” — Wu Yuzhang Distinguished Professor and Deputy Dean, School of International Studies, Renmin University of China (财经, 2 July).

Liang Dong (梁栋), Wu Ting (吴婷) and Wu Huimin (吴慧敏): “Going global” is not the end goal. Outward investment matters only insofar as it feeds profits and productive capabilities back into China’s domestic economy, advances “dual circulation” and avoids industrial hollowing-out. China has yet to convert its vast domestic industrial advantages into a commensurate capacity to own and earn income from overseas assets. Notably, it still runs an investment-income deficit. Japan offers lessons—including its retention of domestic “mother factories”—but it’s not a model China can simply reproduce. Geopolitical fragmentation, investment restrictions and localisation requirements are replacing the sequential “flying geese” model with a sovereign-bounded “hive model” [蜂巢模式] of multi-centred local production, firms and suppliers moving abroad together. Ultimately, repatriated profits, personnel circulation and overseas R&D should return technology, standards and management capabilities to China. — CICC analysts; Wu Huimin is Executive Dean, CICC Global Institute, and Executive Head, CICC Research Department (中金研究院, 9 July).

Yang Ping (杨平): China’s current phase of exporting capital and productive capacity may damage the Global South’s national industries, triggering protectionism and resource nationalism. If Chinese expansion destroys Southern countries’ own industrialisation, China’s Global South strategy will have “turned entirely into its opposite”, creating new dependency rather than enabling development. Beijing must not conflate its commercial and strategic relationships with the Global South, and should instead coordinate China’s industrial development with Southern countries’ autonomous industrialisation. The “community with a shared future for mankind” requires a political economy that goes beyond generic claims of “win-win” cooperation. — Founder, President and Editor-in-Chief, Beijing Cultural Review (文化纵横, 16 July).

4. Middle East

Liu Zhongmin (刘中民): Renewed war has divided the Middle East into three loose power formations, but has not reversed the deeper shift towards regional strategic autonomy, reconciliation and development. The US- and Israeli-led Abraham Accords grouping now coexists with a Saudi–Pakistan–Turkey–Egypt “Sunni Diamond”, as well as Iran’s weakened but resilient “resistance front”. The new Sunni grouping is not trying to choose a camp or overturn the existing order, but to “find direction” and avoid marginalisation, while Saudi Arabia continues to uphold the two-state solution. This fragmentation has severely impacted, but not yet reversed the previous trend of easing tensions and pursuit of common development and it is increasingly difficult to shake the growing sense of strategic autonomy within the region. While US allies have been unable to completely break free from their security dependence on the US in the short term, they have significantly accelerated their diversification in security and diplomacy. — Professor, Middle East Studies Institute, Shanghai International Studies University (环球时报, 13 July).

Tang Zhichao (唐志超): The US–Israel–Iran conflict has accelerated the Middle East’s transition towards a “post-American era”. This will likely lead towards a more fragmented and disorderly, but more autonomous regional order. Washington’s Gulf security architecture has become a liability that attracts Iranian retaliation, while US forces have failed to protect partners or control Hormuz, shattering the myth of the invincible US security shield. The strategic development trend in the Gulf region has also been reversed, with countries falling into a new development–security dilemma. Regional fronts such as the “Four-Nation Group” of Saudi Arabia, Turkey, Pakistan and Egypt are coalescing and the fragmentation of the Middle East is further intensifying. The US strategy of using Iran as a breakthrough to contain China and Russia in the Middle East has been thwarted, with strategic cooperation between China and Middle Eastern countries deepening.— Professor and Deputy Director-General, Institute of West Asian and African Studies, CASS (当代世界, Issue 6, 2026).

5. South China Sea

Wu Shicun (吴士存): China will not proactively undertake further South China Sea reclamation, but fixed facilities on Scarborough Shoal remain an option. If Beijing builds, it will be because “external forces have left us with no choice”. Any Philippine vessel deliberately grounded at Sandy Cay will be towed away, although China itself does not intend to occupy the feature. Opening Taiwan-held Taiping Island to US or Japanese forces would cross a mainland red line if this developed into activity targeting the mainland or infringing Chinese sovereign rights. Beijing will likewise reject maritime delimitations reached without China that violate its sovereign rights. Practical cooperation should begin bilaterally with fish-stock surveys, catch quotas, coordinated licensing and pollution control. — Founding President and Chairman of the Academic Committee, National Institute for South China Sea Studies (South China Morning Post, 13 July).

Bao Yinan (包毅楠): The Hong Kong-based International Organisation for Mediation (IOMed) could provide China with a third-party mechanism for addressing selected South China Sea disputes without sacrificing the consent and procedural control that is lacking in compulsory arbitration. Proceedings at the IOMed require the agreement of all parties, allow any party to withdraw unilaterally and make only settlements that are formally concluded by the parties legally binding. China helped establish the organisation, was its first signatory, and five of eleven ASEAN countries have already joined. WTO disputes are excluded from its jurisdiction, but not sovereignty or maritime-delimitation disputes. UNCLOS allows parties to pursue consensual procedures before compulsory settlement, placing mediation within rather than outside the Convention. Scholars believe that a “salami-slicing” [切香肠] approach should be taken, prioritising “non-core disputes” [非核心争端] such as fisheries, marine environmental protection, submarine cables and pipelines and law-enforcement encounters. — Associate Research Fellow, Huayang Centre for Maritime Cooperation and Ocean Governance (亚太安全与海洋研究, Issue 3, 2026).

6. Neighbourhood Diplomacy

Zhou Fangyin (周方银): China should keep great-power rivalry from hardening its neighbourhood into opposing camps and make “de-securitisation” [去安全化] and “de-geopoliticisation” [去地缘政治化] central to regional cooperation during the 15th Five-Year Plan. Strategic competition among major powers is leading to a deterioration of China’s surrounding environment, with the US promoting the “de-Sinicisation” [去中国化] of supply chains and pressuring countries to introduce discriminatory policies against China. The securitisation of economic issues and the weaponisation of interdependence have become increasingly common in China’s neighbourhood since 2018, hampering regional integration. China possesses a significant military advantage compared to most of its neighbours, deterring other countries from provoking armed conflict. This provides space for China to firmly state its position, demonstrate goodwill and strengthen consultation with relevant countries. China should also deepen non-traditional security cooperation with its neighbours. — Professor, School of International Relations, Sun Yat-sen University (国际展望, Issue 2, 2026; via 爱思想, 16 July).

Zhao Long (赵隆): China’s neighbourhood will grow more unstable during the 15th Five-Year Plan as the US turns “island chains” into an “alliance chain” [盟链] and regional states oscillate between reducing dependence on Washington and binding themselves more tightly to the US. By forward-deploying partners and outsourcing costs, Washington is able to lower the threshold for military intervention. Trump’s “extractive partnership” produces both “doubt and fear of America” [疑美恐美]—unreliable commitments encourage greater autonomy and diversified ties, but fear of abandonment also pushes US-dependent states towards early declarations of support, over-compliance and surrendering policy space. European NATO members may back Washington’s Indo-Pacific strategy in order to keep US attention on Europe, even as Greenland threats and tariffs erode transatlantic trust. Beijing should build an Asian security model through shared security, respect for differences, dialogue, crisis management and low-sensitivity public goods, backed by BRI and RCEP cooperation, therefore strengthening neighbours’ resilience against external pressure. — Director, Institute for International Strategic and Security Studies, Shanghai Institutes for International Studies (SIIS) (国际展望, Issue 2, 2026; via 爱思想, 16 July).

Shi Yuanhua (石源华): China’s neighbourhood should remain the primary focus of its diplomacy until at least 2035. This “greater periphery” extends beyond China’s immediate neighbours to 64 states across six subregions and even includes the United States. China and the US form the two poles, while all other states are “middle countries” [中间国家] whose positions vary according to their interests rather than fixed bloc loyalties. This includes Japan, which, although clearly an ally of the US, may take a middle course between China and the US on certain issues. During the transition from “standing up” through “becoming prosperous” to “becoming strong”, China has gradually developed its own Indo-Pacific, or “Two-Ocean”, strategy. China’s north and west are relatively stable, while tensions in the east and south are more acute. The most important thing for China is to continue to grow stronger—it should wait until the time is ripe on the Taiwan issue, which may resolve itself without the need for military action, either through internal unrest in Taiwan or the US descending into chaos. — Distinguished Professor, Institute of International Studies, Fudan University (观察者网, 22 July).

7. Regional Policy

Zhang Yun (张云): Japan and the Philippines’ maritime-delimitation talks are less about drawing a boundary than about Tokyo’s attempting to move from subordination in the US system towards becoming a second centre of regional leadership alongside Washington. Tokyo is building direct links among American allies and “like-minded” states and Manila is an obvious partner because it is both a US treaty ally and a longstanding Japanese economic partner. The 2024 trilateral summit, Japan–Philippines Reciprocal Access Agreement and Japanese participation in Philippine exercises and live-fire anti-ship missile drills show that cooperation is moving from diplomacy towards operational military coordination. Japan’s rise to prominence can also reduce strategic costs for the US and under the Trump 2.0 framework, a new “US-Japan-Philippines-Australia” Quadrilateral Mechanism has promoted the deepening of strategic interaction between Japan and the Philippines. — Professor, Department of International Politics, School of International Relations, Nanjing University (中美聚焦, 6 July).

Mao Keji (毛克疾) and Mao Yaxin (毛雅欣): The Achille’s heel of India’s economic policy toward China is the paradox that it seeks to compete with China by utilising its capital, while simultaneously harbouring security concerns regarding Chinese investment. India has repeatedly oscillated between security anxieties, manufacturing ambitions and practical dependence, but guarding against Chinese investment has not yielded the expected results, with bilateral trade reaching new highs. This leaves India in the “double bind” of neither having reduced its dependence on China nor achieved its desired economic autonomy. Ultimately, India’s easing of approvals for Chinese investment in key industries does not mean it has abandoned its economic security logic. — Mao Keji, Associate Research Fellow, and Mao Yaxin, Research Assistant, International Cooperation Centre, National Development and Reform Commission (世界知识, Issue 13, 2026).

Wang Youming (王友明): Latin America’s rightward turn will complicate China’s position without dislodging it. Governments leaning towards Washington will still buy two “insurance policies”, of American political-security protection and Chinese economic support. The “Trump–Monroe doctrine” [唐罗主义] has become a coercive regional architecture, which combines military force and threats against Venezuela and Cuba with an “Americas Shield”—a critical-minerals alliance targeting the lithium triangle, a China-excluding “Silicon Peace Initiative” and open support for right-wing candidates. The consequences are already visible in Panama’s refusal to renew its Belt and Road memorandum, the revocation of a Chinese port concession and “cold politics, hot economics” under some right-wing governments. However, China remains difficult to replace as a commodity buyer, infrastructure provider and partner in the digitalisation and green development of mineral resources. — Senior Research Fellow, Department for World Peace and Security Studies, China Institute of International Studies (CIIS) (中美聚焦, 8 July).

8. AI & Tech

Zhu Songchun (朱松纯): Through the grand narrative of an “AGI race” and a capital bubble, the United States has successfully siphoned global capital into its domestic AI industry—the bubble will eventually burst, but the infrastructure will remain in the United States. Meanwhile, China ranks among the world leaders in the number of papers published, but its ability to define problems and open up new paradigms remains far too weak—China must abandon the mentality of a “follower” and stop copying the United States’ narrative framework. The true height of technological competition is autonomy in thought and narrative—this is, in essence, a cultural competition, not merely a technological one. We must break our “faith in data” and understand clearly that intelligence is led by values, not driven by data. Here the thousand-year exploration and discussion of the “heart” in Chinese thought points towards an AGI technological path based on Eastern philosophy and wisdom. — Director, Beijing Institute for General Artificial Intelligence; Dean, School of Intelligence Science and Technology, Peking University (知识分子, 19 July).

Huang Ping (黄平): Chinese AI has won the battle of “good enough and cheap”, but not the battle of “the strongest”, and America’s current restraint is a matter of choice, not a matter of capacity. Chinese models meet functional requirements while offering extremely good value for money, but America dominates the high-end market. America’s political toolkit remains largely unopened—Domestically, American companies using Chinese AI could easily be incorporated into a stricter regulatory framework, while America’s influence over its global network of allies is far stronger than it has so far demonstrated. Faced with this largely foreseeable blockade, China must prepare in advance. The limits of China’s power mean the best path is an indirect response, accelerating the depth of the global integration of its open-source ecosystem, focusing on the Global South and promoting local development of its weights. It should resist restricting foreign access to its strongest models. — Associate Professor and Assistant Dean, School of Public Policy; Deputy Director, Institute for International Affairs, Qianhai, CUHK-Shenzhen (大湾区评论, 15 July).

9. Society

Yao Yang (姚洋): Wang Hong’s Fields Medal shows what Chinese women can achieve, but the status of women in China is shrinking. In recent years, the space available for women to develop and flourish in China has shown signs of contraction. The socialist revolution launched a powerful movement for women’s liberation, and the number of women entering the workforce continued to grow with the transition to a market economy. However, the path for women into politics and public society is much narrower and within the senior cadre ranks there are only two female governors and no female provincial Party secretaries. Traditional thinking is returning, while overseas conservative thinking has also entered China, creating a trend of rejecting work to advance women’s rights. — Dean and Professor, Dishui Lake Advanced Finance Institute, Shanghai University of Finance and Economics (姚洋说, 29 July).

Zhou Lian (周濂) and Xu Jilin (许纪霖): Young Chinese are withdrawing from public life because repeated experiences of powerlessness have taught them that participation changes little. From the 1980s until around 2010, intellectuals and young people generally cared about public issues, but ten years ago, Chinese society underwent a significant change involving a turn towards the self and personal growth. Under the conditions of precarious and scarce employment, it is entirely understandable that young people treat “preserving the self” and “securing the present” as their primary objectives. Since reform and opening, those who received the greatest dividends were indeed the generations born in the 1950s, 1960s and 1970s. Among elites of this generation, the pathology is “dog-wisdom-ism” [狗智主义], meaning a cynicism that sees through hypocrisy but engages with it anyway, venting through irony rather than resistance. Meanwhile, China’s education system sets rules for children too early, limiting their creativity. — Zhou: Professor, School of Philosophy, Renmin University of China; Xu: Zijiang Scholar and Professor, Department of History, East China Normal University (许纪霖文化说, 13 July).

Dong Yue (董越): The mismatch between educational opportunity and job scarcity has produced a distinct group of graduate “squatting youth” [蹲族]—middle-class alumni of leading universities who remain outside of regular work, refusing jobs they regard as beneath the value of their education. They are distinct from those “lying flat”—rather than rejecting intense competition, their “squatting” is more strategic: through non-participation in employment, they resist competition they regard as unfair and standards of success they regard as alienating. Responses must move beyond the short-term logic of “forcing employment”. Structural and cultural problems require systematic solutions. Higher education should move from expansion based on scale towards high-quality development better adapted to economic needs and the government should improve social-security systems for freelancers, digital nomads and micro-entrepreneurs, providing low-cost environments for business incubation. — Faculty Member, School of International Education, Guangdong University of Finance (当代青年研究, 12 July).

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Zhou Juan on The Social Costs of China’s Education System | (29 July)

Zhou Juan’s striking claim is that Chinese children suffer not from an “excess of self”, but from selves that have never been fully formed. Academic competition divides pupils into over-disciplined “good kids” and withdrawn “bad kids”, but both are deprived of the free play, sustained relationships and unstructured time needed to develop judgement, empathy and emotional resilience. The result, Zhou argues, is a generation whose inner lives become narrow enough to be dominated by grades, adult approval, phones or games. Today’s silent, fragile and mutually alienated pupils will become tomorrow’s university students and will shape the country’s future class structure, Zhou concludes. Read here

Shi Zhan on RMB Appreciation and Building a “Shadow China” Abroad (22 July)

Shi Zhan goes beyond a call for companies to invest overseas, setting out a wider architecture for China’s next phase of globalisation. His argument—including his suggestion that renminbi appreciation could attract foreign buyers of Chinese government bonds, giving Beijing additional fiscal resources with which to cushion the resulting employment pressures—is striking. But what makes the piece especially relevant to European policymakers is the tension between the emerging “Made with China” narrative and Shi’s frank admission that only the “front end” of Chinese manufacturing will move abroad. Read here

Investing in People—or Just More Things? | Economic Digest: June 2026 (14 July)

Last month’s economics digest examines whether “investing in people” signals genuine rebalancing or simply repackages the country’s long-standing preference for investment. Chinese economists connect weak demand with strained local finances, increasing reliance on government and SOE borrowing, depressed household incomes and property-sector damage. They debate remedies ranging from rural pensions and social security to debt restructuring and institutional reform. Read here

Justin Yifu Lin on Pessimism about the Chinese Economy (9 July)

Justin Yifu Lin challenges three increasingly common diagnoses of China’s slowdown: state-sector overreach, demographic ageing and balance-sheet recession. He argues that weak growth stems primarily from the prolonged global slowdown since 2008, while state-backed infrastructure has supported private firms rather than displacing them. Education can keep “effective labour” rising despite ageing, and China’s vast household deposits suggest that weak consumption reflects confidence rather than insufficient resources. Notably, he treats pessimistic economic commentary itself as a cause of weak expectations. Read here

American Decline, Chinese Exposure | Digest: June 2026 (6 July)

June’s Chinese policy debate is confident about America’s relative decline, but less relaxed about the vulnerabilities accompanying China’s own rise. This digest tracks contrasting readings of Trump’s Taiwan policy, the US–Iran agreement, Europe’s growing resistance to Chinese exports and a new phase of firms “going out”. It also looks at North Korea’s nuclear status, Russia’s demographic contraction, weak domestic demand, AI-driven job disruption, social over-competition and dependence on overseas critical-mineral supplies. Read here

Zhang Jian on China, the EU and Russia “De-Risking” from the US (3 July)

Zhang Jian turns the language of “de-risking” back on Washington. China, Russia and Europe, Zhang argues, are simultaneously reducing their exposure to American finance, technology and security power, producing the effect of a collective response to US hegemony even without any formal coordination. Trump’s return has worsened Europe’s strategic position, improved Russia’s and expanded Beijing’s room for manoeuvre. Meanwhile, the digital euro, European defence autonomy and local-currency settlement all help weaken dollar dominance and bloc politics. Zhang likely overstates both Europe’s convergence with China and Russia and the deterioration of its transatlantic ties, but a CICIR vice-president treating Western fragmentation as an opening for China is a notable signal. Read here

N.B. Sinification features a broad spectrum of voices, ranging from conservative hawks and state propagandists to more moderate and liberal thinkers. Readers are encouraged to bear this diversity in mind when engaging with the content.