It’s Much Worse Than We Thought | Chinese Economy | China & AI Safety | Huang Qifan

Happy Monday, everybody. Welcome to a new episode and a new week of China Update, where we discuss leading political, economic and geostrategic analysis on the world's number two economy. My name is Tony. Today's episode was brought to you by Greenland Mines. More on them later. Once again, I'm filming in my hotel room. Please forgive the informality of this environment. And one quick piece of housekeeping before we jump into the main stories. I will be in London next week. There will be a meetup in London. So if you're in London and you'd like to come, of course, it's completely free. All are welcome to attend. It's a great opportunity for us to meet in person. I would love to see you there. Please send me an email. The address is in the description below and I'll send you the details for the meetup. Now, with that said, there is a lot to cover. Let's jump in. China's rising debt burden is narrowing the government's room for stimulus, complicating efforts to revive weak domestic demand as policymakers prioritize advanced manufacturing and technological competition with the United States. Debt servicing is expected to absorb 19.2% of the central government's general public budget this year, up from 12% in 2014, according to the conference board. Combined central and local government interest payments are projected to reach 1.4 trillion yuan in 2026, compared with approximately 348 billion yuan in 2014. This is worth repeating because it's important. For every dollar China's central government spends, 20 cents goes to paying interest on debt, and that's just the central government. The pressure is particularly severe for local administrations, where debt interest payments have increased by around 16% annually over that period. A prolonged property downturn has also eroded land use sales revenues weakening a crucial source of funding Morgan Stanley estimates China's public debt will reach 122 percent of GDP by the end of 2026 an increase of 48 percentage points from its pre-pandemic level the mounting obligations reflect an investment-led growth model that has relied heavily on borrowing to finance state-backed projects. When all debt in the system is measured, it sits at around 300% of GDP. Incredibly high levels. Meanwhile, the economy needs support. Growth slowed to 4.3% in the second quarter, below the government's annual target range of 4.5% to 5%, amid weakening retail sales and falling fixed asset investment. Beijing recently announced mortgage interest subsidies and reduced interest costs on a funding facility, where the analysts see limited impact. Barclays characterized the measures as modest, while Goldman Sachs estimated the potential fiscal subsidy at up to 100 billion yuan spread over five years. China could finance a larger intervention through additional central government borrowing, economists argue, because Beijing remains less indebted than local authorities. But its broader fiscal commitments are substantial. Goldman Sachs puts the augmented deficit at approximately 10% of GDP, compared with the central government's roughly 4% deficit. Spending priorities further constrain their response. Authorities are directing resources towards science, technology and strategic industries, while ageing increases social security and healthcare demands. The central government has been transferring more revenue to financially strained local administrations. Strong exports, particularly AI-related electronics, appear to reinforce Beijing's preference for supporting industrial competitiveness rather than launching broad household-focused stimulus. For now, economists expect officials to accelerate spending already approved in this year's budget. That may provide some relief, but it leaves unresolved the larger challenge of strengthening consumption while debt costs consume an increasing share of public resources. The result is a constrained policy response. Faster execution and targeted support with limited scope for sweeping demand stimulus, many investors have been anticipating. Next up, China's central bank has rejected claims that the currency is undervalued, signaling resistance to European demands for currency appreciation as trade tensions deepen. In a position paper late last week, the People's Bank of China argued that the exchange rate adjustments cannot resolve structural global imbalances. It attributed China's export strength to industrial competitiveness rather than currency manipulation, insisting Beijing neither pursues competitive devaluation nor targets a specific exchange level. The statement coincided with negotiations between EU Trade Commissioner Maroš Šefčovič and Chinese Commerce Minister Wang Wentao, which we covered last week. European officials increasingly argue that an artificially weak Chinese RMB or yuan gives Chinese exporters an unfair advantage, contributing to the bloc's widening trade deficit. German Chancellor Friedrich Merz has claimed the currency is undervalued by 25% to 30%. The IMF estimated that China's inflation-adjusted exchange rate was undervalued by 12% to 20% in 2025. Beijing challenged the use of IMF assessments as definitive evidence, arguing that no universally accepted method establishes a currency's equilibrium value. The dispute persists despite the yuan's normal appreciation. It has strengthened 4.3% against the dollar this year, while the euro has fallen more than 10% against it from its January peak. Beijing also blamed global imbalances partly on excessive consumption and persistent fiscal deficits in other countries, while reiterating commitments to expand Chinese domestic demand, something it has not been able to do for years. The paper suggests currency policy will remain a difficult bargaining issue, although China pledged to begin reporting foreign exchange operations to the IMF in 2027. it offered limited detail leaving questions about transparency and exchange rate management unresolved for trading systems now next up we have two more important developments to cover but first the sponsor of today's video is greenland mines the greatest geopolitical contest of our lifetime is already underway on one side america and its allies on the other bricks and the expanding network of strategic partners the prize isn't simply trade it is supremacy and ai and ultimately superintelligence. Whoever wins AI possesses an advantage unlike anything since the atomic bomb. But here's what Silicon Valley sometimes might forget. AI is physical. It needs electricity, chips, data centers, satellites, cooling systems, robots, drones, and minerals. 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We now return to regular coverage. China has proposed new protections for gig workers seeking to strengthen labor rights in a sector where employment arrangements often leave workers outside traditional legal safeguards. Ministry of Human Resources and Social Security released the draft measures for public comment just over the weekend. If adopted, they would extend protections to workers subject to company management whose arrangements do not fully qualify as formal employment relationships. The proposals cover minimum wage protection for this intermediate category, reasonable working hours and consultation and disclosure requirements concerning workplace algorithms. They also address dispute resolution, government oversight and legal liability for violations. Many principles appeared in national guidance issued in 2021 and detailed guides published in 2024. The draft would place them within a more enforceable regulatory environment, backed by explicit responsibilities and penalties. For platform companies, stronger obligations could increase operating costs and pressure profit margins. However, uniform national standards could also discourage destructive competition based on cutting labor costs and intensifying workloads, something that just simply falls on some of the poorest workers in the economy. The initiative reflects Beijing's concern that exploitation and insecurity among tens of millions of workers could threaten social stability, and become a political issue. Implementation will determine whether the measures deliver meaningful improvements. Their impact will depend on effective oversight, accessible dispute mechanisms, and companies' compliance with the rules. And finally for today, the warm language surrounding General Secretary Xi Jinping's recent Washington summit with US President Donald Trump is giving way to more complicated realities, as renewed trade pressure and military competition expose the limits of the diplomatic thaw. Despite both leaders praising the meeting, Washington remains frustrated with Chinese rare-earth shipments. UK-based Reuters reports that the United States has slowed approvals for aircraft parts exports to China, seeking leverage in continuing trade negotiations. The measures reportedly include slower export licensing and limits on quantities of components authorized for China's state-owned aircraft manufacturer Comac to prevent stockpiling. Officials have also considered additional licensing requirements covering landing gear and aviation hydraulic fluid. These moves underline how both governments continue to use strategically important supply chains as bargaining tools. China's control over critical minerals provides leverage, while its aviation industry remains exposed to restrictions on American technology and components. Meanwhile, reports suggest Beijing wanted a more ambitious summit program. According to the Hong Kong-based South China Morning Post, Chinese officials proposed engagement with American business leaders and the public, discussions covering numerous diplomatic and security issues and artificial intelligence talks between executives from both countries. U.S.-based Wall Street Journal separately reported that Xi's delegation requested a private West Wing room where he could rest with his wife Peng Liyuan and declined a proposed working lunch. There are also tentative signs of cooperation, however. CNN reports that American and Chinese officials have discussed reciprocal visits to nuclear facilities, potentially including national laboratories and nuclear testing sites. Such exchanges could build confidence, although discussions remain preliminary. At the same time, security competition around Taiwan continues. Taiwanese media reporting indicates that the Pentagon plans to station two expert representatives at Taiwan's defense ministry, while Defense Minister Wellington Koo has described increasingly close exchanges with Washington. Separately, the United States reportedly plans to deploy an anti-ship missile system to Japan's Yonaguni Island during joint exercises. Located approximately 110 kilometers from Taiwan, the island occupies a sensitive position. Together, these developments suggest the summit has preserved dialogue without resolving the underlying disputes, a conclusion we came to at the time. Trade negotiations, possible nuke confidence-building measures, and military preparations are proceeding simultaneously, leaving the relationship vulnerable to renewed confrontation, even as both governments seek to demonstrate that engagement can still produce meaningful results. okay that is today's episode of china update thank you so much everybody for watching have a good monday have a productive week and i hope to see you for the next episode tomorrow