China Decode: Apple's China Chip Play, DeepSeek Seeking Billions, and the Californication of Chinese Food

22:54James Kynge:Two main points that I would flag that I think are worth considering. Number one is the fact that the EU is in a really dire position. uh china's goods trade surplus with the eu hit 360 billion dollars in 2025 a 15 increase on 2024 and it's very likely in fact i think it's inevitable that it's going to expand in 2026 based on the first half of 2026 already and so we're up for a probably a record trade surplus in 2026 even though last year was already a record at 1.19 trillion dollars in terms of china's full trade surplus with the EU. So there's that hanging like a sort of Damocles over the relationship.

23:39James Kynge:And the second point that I would raise is that there has been some wiggle room in the sense that Europe has entertained conversations with Chinese counterparts as a way to balance against what it sees as a non-committal, volatile Washington administration, and especially because there was no love lost over the Iran issue and the ensuing energy crisis that it produced, particularly for the Brits and the Europeans. And the reason I raised this issue is that I was pleasantly surprised that they had agreed finally in January to price floors, so export price floors for Chinese EVs going into Europe.

24:20James Kynge:And that would be a way to obviate the tariffs, you know, close to 40 % that have been put on Chinese EVs by Brussels. But now it seems that there's a threat to something that hasn't yet been targeted, which is the hybrid market. So PHEVs, hybrid plug-in cars, with Brussels potentially entertaining tariffs on hybrid vehicles because of just the influx, you know, the surge in Chinese hybrid exports to Europe. So it seems like on the one hand, Europe is screwed economically because of an ever imbalanced relationship. At the same time, it wants to, you know, continue to talk to China, to use China to balance against America, to try to fight in a way maybe this is uncharitable for relevance by engaging with the Chinese.

25:08Alice Han:No, I'm afraid it isn't too uncharitable. Alice, I think you put your finger on it. My sense of this is potentially even more stark. You know, the trade numbers that you mentioned, shocking as they are, the fact that this year the trade deficit that the eurozone has with China will reach almost 400 billion euro. Although those numbers are shocking, they don't even describe the importance of what's going on here. What is happening here is that this inflow of Chinese imports, most of them high-tech these days, and priced at levels that European companies simply can't compete with, is wiping out Europe's industrial base.

25:55Alice Han:And I say that very bluntly. I believe it's true. I believe that within five or maybe 10 years, Europe's industrial base will have been wiped out by Chinese competition, unless there is a significant move, either in terms of self-restraint by the Chinese that you've already alluded to, or in terms of major trade barriers erected by Europe. My current sense is that Europe at the moment simply lacks the unity for genuine trade barriers with China. And that's because, you know, you can have these European representatives who go to China, such as we have right now, but they have their hands tied behind their backs because several member countries of the EU, often Spain, which is benefiting from an inflow of Chinese investment, or countries like Hungary, which have longstanding warm relations with China, are not prepared to back very strong European trade.

27:04Alice Han:barriers against China. And Germany, which is, of course, the most powerful country in the Eurozone, flows one way and then the other. We're never very clear which way the wind is blowing in Berlin. And so I think that this visit will be the same as all the other visits. The Europeans will talk up a storm, but deliver very little in concrete terms in terms of genuine barriers or genuine protective measures to protect European industry against what I believe is the extinction or close to the extinction of Europe's industrial base. And the reason I say that, I mean, this is the topic that I spend most of my time researching.

27:50Alice Han:The reason I say that is because I see sector by sector how cheap and how good the Chinese products are in terms of their technology content. And then I compare that to what the Europeans are able to do. And the gap is huge. I don't want to undersell the Europeans too much. There is news today that the European Commission will put a small new tariff on small parcels that come into Europe. It's going to put three euros onto packages that come from China if they have a value of over 150 euro. So this is aimed to reverse or to stop what is being called by the European Commission, the desertification of Europe's high streets.

28:45Alice Han:Basically, a whole load of shops in Europe's high streets are going to the wall or going out of business because people can just order online super cheap products that come from China. And so this additional charge of three euros is intended to stop that. The number of low-value parcels coming into Europe has more than quadrupled. In 2022, it was valued at 1.3 billion euro. And this, sorry, last year, it was valued at 5.9 billion, so virtually 6 billion euro. So you can see there's been a huge increase in this type of small package.

29:28James Kynge:It's funny that you raise this, James, that the Europeans have finally gotten onto the de minimis requirements that the Trump administration, if you recall, put into place last year. And there's just a Nikkei piece that came out showing how Chinese these merchants on Temu and Sheen, you know, these are the ones doing these low-cost goods, have actually found loopholes through logistic networks and through false import declarations in order to even avoid the de minimis requirements in the U.S., which are, I think, around$800. Anything above$800 needs to be subject to tariffs. so I look at that bit of regulation that you just cited James and I go well not only is that too little too late but you know will as we know off is often the case with Chinese merchants will they find loopholes because they're pretty canny and smart and I think I probably take that scenario which is that they will find loopholes to avoid even these requirements but I want to bring it home to one sector in particular because we've talked about chips just now.

30:39We discussed ASML last week, and we mentioned that Washington was putting more

30:44James Kynge:pressure on the Dutch chip maker. This is a bit of a left-field question, but what I've learned from the South Korea example, and we see this reflected in per capita GDP now overtaking the UK, the market cap of Taiwan and South Korea both overtaken the market cap of the London Stock exchange, primarily driven by TSMC, Samsung, SK Hynix. What we learned from the East Asian Tiger example is that maybe you shouldn't try to compete with China on autos because China will always be able to price compete you now that it has the scale. And maybe you should be competing on the more value added industries in chip making, right?

31:24James Kynge:Chip equipment, chip making. And here, ASML really is the leader and prime, maybe even the sole example. But I try to figure out why, in particular Europe, the Germans, the French haven't really gone into that. And maybe you don't have a view, but it seems puzzling to me at a time where they're still desperately trying to compete with the Chinese on autos, increasingly on chemicals, where China is becoming even more competitive. But whereas they should really be shifting their attention to defense tech, to chip making, to some of the more higher value added industrial technological products. It seems a little bit of a, I think, fruitless attempt.

32:01James Kynge:Some of the European analysts are recommending a quote-unquote reverse Deng effect. And if you recall in the 80s, Deng Xiaoping, who was the leader at the time, was mandating foreign companies to do tech transfers in exchange for access to the Chinese market. And now the Europeans are saying the same to Chinese companies like CATL and BYD. We have seen some increase in greenfield investment in Europe in the last year or so. But, you know, I'm hearing from the Chinese is that they don't want to have all their eggs in one basket and export their IP and tech to Europe. They want to have some of the more critical IP staying at home in China.

32:41Alice Han:Yeah, this is such a big topic, Alice. We could do a whole episode on this. I think you're absolutely right. What we have at the moment is the result of, I'm afraid to say, a couple of decades of complacency in Europe. Complacency at many different levels. I'm not just talking about the Eurozone. We definitely have complacency here in the UK, especially with regard to industrial policy. Look at what's just happened in South Korea. 520 billion US dollars being pledged to go into the AI race. Can we see any kind of a pledge like that in Europe? Nothing so far comes close to that. Now, there are all kinds of reasons for this.

33:28Alice Han:It would really take a long time to go into them. But where is European industrial policy? Where is the clarity of European bureaucrats in the Eurozone, in the national countries, saying, we need to prioritize this sector or that sector. We need to recognize that this particular sector is all, you know, the game is already over. China's already won. So let's not put resources into that. There is very little clarity at the moment. I think Europe has just woken up to the fact that China is a peer competitor in technology with the US and has left Europe far, far behind. This is in spite of the fact that many of us have been writing this for many years.

34:14Alice Han:Why has Europe been so slow to wake up to this crisis? I really don't know. But that's the situation we have at the moment. Just to answer your question on reverse dung, in other words, getting Chinese investors to invest in factories in Europe, and as part of the price for the entrance into the Eurozone market, having to form a joint venture to maybe hand over technology to a joint venture partner. I completely agree with your take. I think although Europe may want this, and I don't think it's a bad objective for Europe to have, I think it's a good objective, there are so many complications with it right now, one of which is you'll see a flood of Chinese investment going into countries like Morocco.

35:03Alice Han:Morocco has a trade agreement with Europe, so they can manufacture in Morocco and export into Europe without extra duties. So why wouldn't they do that and keep their technology rather than invest in Europe with a joint venture partner under conditions that force them to hand over technology. So, you know, we're into a very complicated period in EU-China relations. At the moment, I would say the cards are mostly with China. And this is largely because European member states do not have unity over what trade policy they should adopt with regard to China. This is a structural European problem. And for as long as there's no unity, there will be no clear policies.

35:54James Kynge:Okay, let's take one last quick break and stay with us.

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38:25James Kynge:Welcome back. There's a new sign that the middle class in China is growing and changing. The Economist reports that there's a quote-unquote Californication of food happening in this segment of the population. I've been shocked. I mean, this is completely an observational statement as opposed to being backed by data. but the amount of overweight people that I see in China in the last couple of years compared to a decade ago. And you can look at it in terms of GDP outcomes. You can look at it in terms of access to food. You can look at it in terms of people's work habits and sedentary lifestyles.

39:04James Kynge:But it is interesting that as we've seen the prevalence of obesity rise, we're also seeing this pivot towards organic food, towards eating better, knowing where your food comes from. I've never, you know, it really has happened since COVID. I've never ever been in a Chinese supermarket prior to 2020 where I've seen, you know, and these are not necessarily the best high grade, you know, Beijing, Shanghai supermarkets. They're pretty run of the mill, but you will get organic fruits, you know, they're packaged really nicely. As you know, people really care about how their fruits and food produce look.

39:40James Kynge:But people are getting educated about the provenance of food, the importance of organic. And you see a lot of these live streaming organic farmers in China who are on Kuaishou, for instance, live streaming about their produce. They sell direct to the consumers via the platform. You have this real dichotomy between a population that is increasingly obese, although not to the level of the U.S.'s. I think it's around half in terms of the share of population relative to the US, which is around 40%. But at the same time, you're seeing a real supply side and a demand side push for organic products.

40:23Alice Han:Yeah, I mean, the Chinese middle class at 500 million people, obviously, if those people wanting to eat healthier and to prioritize their health, as you said, then this theme of the Californication of the Chinese food market is going to run and run and run. And already, I'm absolutely amazed by some of the numbers that we're seeing emerge, particularly in terms of the amount of money that some people are willing to pay for premium products in this regard. There's a caviar company in China. And of course, China is these days the world's leading producer of caviar. It's making organic caviar. It's called Kaluga Queen.

41:16Alice Han:And it's supplying Michelin star restaurants all over the world. And the caviar prices from companies such as this range from about 3 ,000 to 9 ,000 euro or 3 ,150 US dollars to 9 ,450 US dollars per kilogram. So that's an enormous amount of money, it seems to me, but there's a ready market for that in China. Going even more extreme, we've got something called the caterpillar fungus. Now, this is not on everybody's dinner plate every day, but these are hand foraged from the Qinghai Tibetan Plateau. I'm sure you've heard of this or you've seen these being sold in markets in China. They're just little funguses.

42:10Alice Han:They look a bit like cucumbers, but very small.

42:13James Kynge:I've actually seen them before. I've tried them in Yunnan.

42:16Alice Han:Have you?

42:16James Kynge:I've never tried them.

42:17Alice Han:What are they like? I mean...

42:19James Kynge:I had them in a big mushroom hot pot in Yunnan in Kuoming. And the texture was, I couldn't remember the taste, but the texture was really interesting. If anyone's a mushroom enthusiast, you should definitely go there. Apparently, half of the world's mushroom breeds are from Yunnan, just this province in southern China.

42:38Alice Han:Well, Alice, you were having a very expensive meal there, if they were genuine, because wild premium Chinese caterpillar fungus sells from anywhere from$20 ,000 to over$110 ,000 per kilogram. So, yeah, I mean, it's just incredible. I remember once meeting some guys who go foraging for these fungi when I was in China as a journalist. And, you know, they would spend days and weeks camping on the Tibetan plateau trying to find these fairly small fungi, aren't they? I mean, they're not very big. I mean, their size of your thumb may be. So, you know, what we're seeing at the moment is this trend of middle-class Chinese becoming more health conscious, as you say, partly in order to avoid what they're seeing in terms of the large, you know, increasing number of obese people in China.

43:41Alice Han:But, you know, just to live healthy lifestyles. And then at the top end of this trend to eat healthy, we're seeing incredible premium prices for luxury products. And, you know, given the fact that we're still at the beginning of the Chinese organic trend, I reckon that we're going to see higher prices and more interest in buying the very luxury products as time goes on. We've got some numbers saying that Chinese sales of organic food were$16.7 billion US dollars in 2024. That was up about 19 % from 2023. Just as a point of comparison, the US organic sales in 2024 were$71.6 billion US dollars. So obviously, we can see that the US market is still much bigger.

44:37Alice Han:But as we mentioned at the top, 500 million Chinese are now in the middle class. If these guys really take this trend to their heart, we're going to see Chinese organic food sales go in one direction only, I'd say.

44:54James Kynge:I'm really bullish on the organic food market relative to the luxury bag market or luxury goods market because my spidey sense from the culture is that people would rather eat well at this point. I feel like we've had a bit of a pivot in the cultural zeitgeist where people want to live well, be well, eat well, as opposed to buy expensive foreign flashy logo goods. And so as a result, we have now China as the third largest organic product consumption market in the world. I think it's not unrealistic that that might end up being the biggest, just given the size of the population, especially the middle class.

45:41James Kynge:And we also have a lot of supply side shifts that are supporting it. So, for instance, there's a Norwegian Nordic Aqua company that does aquaculture of fish, including salmon, in land-based tanks in Zhejiang. Yunnan, which we just mentioned, which really has the amazing, I think, topography and geography to support agriculture, is becoming a blueberry and avocado hub. You now have these Fresh Hippo, Alibaba platforms that just create organic food supply chains that go direct to consumer. In the market, the organic farming area itself in 2024 has doubled from a decade before. So it used to be less than 0.4 % of the country's total farmland.

46:25James Kynge:Now it's 0.7%. That's still not a huge size in the scheme of things. I think there's more room to grow. But it certainly points to the fact that I think on the supply and demand side, we're seeing a lot of positive trends supporting the organic food industry in China. And I think this is just the beginning. There's a forecast that by 2028, it'll reach about 31 billion US dollars, doubling from 2022 levels. So I'm pretty optimistic about this. And I think that beyond China, this has big implications. So I was just in Florida where I was hearing because of the greening of oranges in Florida, they're importing a lot of oranges from China.

47:07James Kynge:And I have this theory that as the agricultural sector gets more developed and the quality of produce gets higher, we'll start to see China being an agricultural power. So another example that I think is super interesting is I was actually in Piedmont two months ago with a friend. And that's an area that's known for growing some of the kiwis and supply to Italy. But they've been competed out by Chinese kiwis that are much cheaper and more plentiful. And this is also happening in the mushroom market. I was in Yunnan two years ago. And there's an Italian guy there that says the majority of the dried porcini sachets and dried porcini mushrooms come from Yunnan, come from China.

47:46James Kynge:So I think we're in the first innings of China becoming a really interesting agricultural power. All right, James, you know what time it is. It's prediction time. As you peer into the future this week, what do you see?

47:58Alice Han:I'm going back to this issue of inflation. I think that some of the issues that we were mentioning at the top will coalesce, And we will see China's export of inflation turn consistently positive for the first time since 2023. There is something in China called the Export Price Index. I reckon that in a few months' time, we'll be seeing China exporting inflation consistently month after month. This is partly because of what we were talking about in terms of AI and chips and those pressures feeding through into the electronic supply chain. And it's partly due to what we're seeing in the Middle East in terms of oil prices, which are affecting the inflationary environment all over the world.

48:52Alice Han:The reason why I think this is such a crucial topic is that if China starts to export inflation, then I think we're going to see Europe in particular catching more inflation. And that really starts to hit countries that have high debt service requirements, which is pretty much all of the countries in Europe right now. If they catch inflation, if they import more inflation, they might have to raise interest rates. And that will increase the amount of money that they have to pay to service their debt. So I'm afraid it's bad news. I see China exporting more inflation as the year goes on.

49:34James Kynge:Really interesting. And that also plays into some of the political dynamics for the midterms, right, in November in the U.S.

49:41Alice Han:Absolutely. Really interesting.

49:42James Kynge:All right. So my prediction is in the oil market. I mean, we've since got something like a bit of a shaky MOU between Tehran and Washington. now the big question is how plausible is it that this peace will hold and what does it mean for oil markets but i think one thing that we can be certain of is that in the next couple years china's oil demand will peak the iea says it's between 2027 20 to 30 that will start to see peak chinese oil demand i would take um the bet that it's closer to 2027 to 2028 because i think one of the big takeaways from the Iran crisis. But also the ongoing, I think, stress to oil supply globally is that China needs to rapidly diversify away from crude oil into, say, natural gas, into coal to chemicals for the petrochemicals, feedstock pipelines, into electrification of traditionally diesel-powered trucks.

50:42James Kynge:So I would take the bet, and this might ultimately be a bit of a risky bet, but that by 2027, we'll start to see signs that Chinese oil demand is going to peak. And that's about 15 % of global demand for oil. So China is still a considerable player. And as China slows down in its oil demand, that's going to have massive implications for oil prices globally. All right, that's all for this episode. Thank you for listening to China Decode. This is a production of Prof G Media. Make sure to follow us wherever you get your podcasts so you don't miss an episode. And we'll talk to you again next week.

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