📬 China Update — End of Week Newsletter

Date: September 14, 2025
Your essential wrap-up on Chinese Political, Economic & Geostrategic developments

Let’s Jump In!

🔶 Top Story: Chinese Economy — How Bad Is It?

CSIS gathered four heavyweight China watchers to answer the (unfair but necessary) question: How bad is it? Their grades clustered 4–6/10 — a muddled middle that masks a sharper message: macro “blah,” tech world-class; deflation risk high; consolidation coming.

• The split screen. Scott Kennedy describes a bipolar China: dazzling tech clusters (EVs, drones, AI) alongside an economy “on its back” — overcapacity, swollen inventories, flat consumption, and a still-fraught property complex. Real growth holds up; nominal growth lags — the deflation tell.

• Grades.

  • Kroeber (6): Policy since late-2024 stabilized growth; excess-capacity phase peaking; long, messy shakeout ahead. Exports/tech are outperforming and Western protectionism is often a “paper tiger.”

  • Huang (5): Given housing and trade friction, ~5.3% real growth 1H25 is “amazing.” Manufacturing capex ~+10% in 2024; private consumption’s share rising toward ~40% (still low, but a post-2005 high). DeepSeek’s rise shows private-sector grit.

  • Aziz (5–6): China can print 4–5% real; the problem is doing so without deflation. Nominal growth is weak; inventories sticky; expect painful consolidation in EVs and advanced manufacturing — bankruptcies/foreclosures wrapped in the euphemism of “restructuring.”

  • Seguchi (4): Confidence soft, property malaise, local-finance strain; inland bright spots (Chengdu/Wuhan) can’t yet offset coastal drag.

• What to watch. No silver-bullet indicator. Kroeber focuses on nominal GDP (“what firms/households feel”): from a steady 8–11% (2016–22) down near ~4% lately. Aziz tracks industrial production (adjusted), customs-to-NA conversions, and private credit — which looks near stall-speed once you strip interest income. Huang flags vanishing series (youth unemployment revisions; private lending; migrant benefit enrollment) muddying the dashboard.

• Cyclical vs structural. Both, intertwined. Supply-side crackdowns help, but “soft budget constraints” keep zombie capacity alive. Without local-finance reform and harder exits, today’s cartel-ish “industry self-discipline” will relapse.

• Road map.

1.          Lift nominal growth (fiscal + deeper rate cuts).

2.          Let services lead jobs, especially for youth.

3.          Tighten local budget constraints to force real exits.

4.          Strengthen household balance sheets (land/social policy; rural incomes).

• The punchline. China’s property market has already collapsed; the wider economy isn’t collapsing — it’s deflating and consolidating. Whether this becomes leaner, innovative growth or a Japan-style slog hinges on pricing power, household confidence, and finally breaking the soft-budget cycle.

🚢 Economy I: Poor Trade Numbers — Surplus Big, Margins Thin

August exports rose +4.4% y/y (weakest in six months), imports +1.3%, surplus $102B. US shipments –33%, with diversion to ASEAN (+~23%), EU (+10%), and Africa (+26%). The reroute props volume, but prices and margins are eroding; industrial profits are –~2% YTD and new export orders are slipping. Translation: headline surplus ≠ healthy firms.

🇷🇺🇨🇳 Russia–China: Alignment Deepens, Terms Still China’s

Xi and Putin inked 20+ cooperation docs (AI to agriculture) and a “legally binding memorandum” on Power of Siberia-2 — but no price/timeline. Beijing keeps leverage, buying time while increasing sanctioned Arctic LNG 2 liftings. Sweetener: 30-day visa-free entries for Russians from Sept 15. Net-net: symbolism of unity; substance on China’s terms.

📈 Economy II: Engineering a “Slow Bull” (On Purpose)

Regulators want a managed, durable equity rise: loosen some short-selling curbs, police hype/illegal tips, nudge insurers long-only — and avoid 2015’s blow-up. Social platforms are damping “to the moon” chatter; CSRC talks “rational investing.” Reality intrudes: STAR names can still air-pocket (see Cambricon –14%). Meanwhile, complex quasi-snowballs are back, advertising 20%+ yields — proof that animal spirits never retire, they rebrand.

🇪🇺🇺🇸 EU–US–China: Talk of Secondary Sanctions

EU officials are sounding out secondary sanctions on buyers of Russian energy — code for China (and others). Unanimity hurdle is high (Hungary/Slovakia rely on Russian barrels), Germany frets over China raw-material exposure. Still, Treasury-to-Commission talks are intensifying. If Brussels follows Washington here, it’d be the sharpest transatlantic hit on Beijing yet.

🏀 Soft Power Watch: LeBron’s Full-Page Cameo in People’s Daily

People’s Daily ran a full-page interview with LeBron James: “Basketball is a bridge.” With Nets vs Suns preseason in Macau and an NBA House fan fest slated for October, the league is carefully re-entering the China market post-2019. Steph Curry’s parallel tour and a $60B sportswear race (Anta vs Nike/Adidas/Under Armour) add commerce to the diplomacy.

💱 RMB vs USD: Taking Share While the Dollar Wobbles

After the dollar’s bruising H1, Chinese banks report surging interest in RMB trade/finance. The PBoC is building an offshore liquidity network, Beijing is adding gold (now ~7.6% of reserves), and floating panda bonds for sanctioned Russian energy firms. The aspiration: a tripolar system (USD/EUR/RMB). The price of entry: more openness, predictable rules, macro stability — reforms still pending.

🧊 Deflation Watch: Producer Easing, Consumer Soft

PPI –2.9% y/y (first sequential improvement in 6 months), with coal/steel/metals firmer m/m. CPI –0.4% y/y (food –4.3%, veg –15%), but core CPI +0.9% (18-month high) as subsidies and durables demand help. Three-year deflation streak still bites profits/incomes/taxes. Without credible demand support plus enforced capacity cuts, the PPI uptick fades.

🌊 South China Sea: Scarborough Shoal Rebranded as a Nature Reserve

Beijing designated “Huangyan Island National Nature Reserve,” layering environmental rules (core/buffer/experimental zones) over its effective control. Practically: tighter access, new pretexts for harassment/exclusion of Philippine fishermen, and a legal veneer atop a 2016 PCA ruling China rejects. Expect Manila to escalate diplomacy; US-Philippine security ties likely deepen.

🚗 BYD Warns of an EV “Bloodbath”

At Munich’s auto show, BYD EVP Stella Li forecast ~100 of 130 Chinese EV/hybrid makers will be “pushed out.” Beijing’s crackdown on involution (price wars, stretched supplier payments) lifts discipline but compresses sales tactics; sector margins already slid to ~4.3% (from 5.7% in 2022). BYD hedges with exports (+130% y/y 1H25) and a Hungary plant, but tariffs, compliance, and brand hurdles loom. AlixPartners: ~15 viable PRC brands by 2030.

One-liner to leave you with

China isn’t falling off a cliff — it’s grinding down a mountainside. Whether it lands on a plateau of leaner, pricier growth or slides into a deflationary valley depends on three choices Beijing still controls: let exits happen, pay households, and price capital realistically.

See you next time!

Tony