China Decode: Did the U.S. Push Its Allies Closer to China?

20:56Alice Han:And I think that really sums up the great contradiction of the Chinese economy. But you'll have your own view on this, Alice.

21:04James Kynge:I agree with your first principles view, which is that this is a deeply skewed, imbalanced economy. The data points that stood out to me, so exports made up a third of Chinese GDP last year. That's the highest level since 1997. And growth capital formation, which is a more accurate measure, to my mind, of Chinese investment in the economy rather than fixed asset investment contributed just 15%. And that's the lowest since 1997 too. Ten years ago, those numbers would have been flipped. You would have seen an economy that was more driven by fixed asset investment rather than exports. But certainly, as we've discussed previously, James, the fact that they've had to crack down on fixed asset investment on the real estate sector, on local government debt has all contributed to the need to ramp up and juice up the export machine.

21:54James Kynge:And so I think we're seeing a China in 2025 that is heavily imbalanced and skewed towards supporting its exports rather than finding more productive areas to invest. One last data point that I thought was pretty interesting was the fact that private investment, which is again a good indicator for the domestic confidence of investors and businessmen, private investment fell 6.4%. And this is in lockstep with households who, in the latest PBOC data, have increased their propensity to save rather than to spend. And again, reinforces this point that as long as this economy remains really imbalanced, they're going to have to use either fixed asset investment and or exports rather than domestic consumption to drive growth.

22:42James Kynge:They could easily fix this if they decided, and this is Michael Pettis' point, which I agree with, that they weren't going to do growth targets every year in the March National People's Congress in the government work report. But the fact that they are wedded to these, say, 5 % growth targets means that they need to invariably keep juicing the economy. And this brings me to the March NPC meeting, which should be held in the first week of March, my sources seem to tell me that it's going to be a 5 % GDP target. So the same as last year, that the fiscal deficit will be at least 4%, if not higher.

23:16James Kynge:Now that is a historic high for Chinese fiscal balances. And every indication points to the direction of the central government taking more debt on its balance sheet, which again, by global standards is pretty low at around 20%. So they have the fiscal space to do so. But that means invariably, I think that there will continue to be support for the export sector. But I also think that there will be more support through some of these local bond programs for fixed asset investment. Because I think if I were in Beijing's seat right now and I looked at the economic data in both Q4 but also 2025 as a whole, I'd be very worried about the huge fixed asset investment slump and worried about the property investment slump, which we also have talked about.

23:59James Kynge:property investment dropped 17.2%. Again, that's double digit negative territory, which has been in place, I think, over the last six years. This is something that they haven't really addressed because politically, I think they like the fact that they've succeeded in deflating the real estate asset bubble. But I remember writing a piece five years ago saying that this is not a financial risk, but it's a macro risk because as soon as the property sector, which is about a quarter of GDP historically, if not more, stays at depressed levels, that's going to have massive knock-on effects for household balance sheets, for spending, for consumer and business confidence.

24:40James Kynge:So I would expect that they, going into the March NPC, will probably do a bit more to support the real estate sector. And that will probably look in the form of reducing mortgage rates, which again, is still historically very low, reducing some of the constraints to first home buyers as well in certain cities as well. And then more broadly, I think, probably reintroducing some of that whitelist financing program to effectively get banks to lend to developers so that they can finish their properties that have been bought but not yet sold. So when I put it all together, it's important to remember that in spite of China's economic largesse, there's still a lot of structural problems.

25:22James Kynge:And it's hard for me to see that the government is really adequately dealing with this with a solution in mind. But I will end with my takeaway from the CEWC. So, you know, I don't think we've talked about this, the Central Economic Work Conference that convened at the end of December, which is oftentimes a very good signal for what is going to happen in the March government work report for the subsequent year. They were basically pointing towards more support for domestic consumption. So there was a reintroduction or rather an extension of the subsidy program to some extent for EVs and for other durable goods.

25:58James Kynge:Now, there probably will be some subsidy program for services is my expectation in March. But this is, again, too little too late because ultimately they will keep having to juice both manufacturing and, I think, fixed asset investment next year.

26:12Alice Han:Yeah, I think it all boils down to a very simple equation. If China cannot right its lopsided economy, then sooner or later, and we're probably talking about later, several years in the future, this economy will crash. And the solution to the problem is simply to return more of the fruits of China's advancement to its people. In terms of per capita disposable incomes last year, the average in China was US$6 ,070. That was up just 5%. So what you're seeing is a lot of resources going into gunning the high-tech sector of the economy, making China the manufacturing superstar in the world, but at the expense of returning more of the earnings to ordinary people, to workers, white collar and blue collar.

27:10Alice Han:If China can't return more of the fruits of its advancement to those people, then they're not going to have enough money to spend in order to buy the things that China makes. And China is going to remain in this deflationary spiral going forward. And the world is going to have to continue buying incredibly cheap Chinese products and thereby boosting China's export performance at the expense of competitors all over the world. So, you know, I think a lot of economists really hope that China can do something to stimulate per capita disposable incomes in China. But my guess is that will not really happen in 2026?

27:52James Kynge:Yeah, it's hard to see if real estate sector remains quite depressed because, you know, at its peak, it was about 70 % of household wealth. So if you think about the knock-on effects of that on household balance sheets, it's pretty considerable. But I have long held the view that until we see meaningful increases in wage growth, which I think is another way to look at your point about per capita disposable income, it's hard for me to see a meaningful boost in consumption. And thus far, the Chinese government has what I call a supply-side approach to boosting consumption and not a demand-side approach, because all they're really trying to do is subsidize the cost of goods and maybe even coming into March services.

28:32James Kynge:So I take your point. This is hard to see. And it sounds a little bit like you were describing common prosperity, James, which has kind of died off as a subject. But I completely agree. I think that everyday Chinese need to capture more value in the economy in order for China to rebalance towards a consumer services-based economy like Japan and the US. And I think what a lot of people don't realize, and this is a point that I hear time and time again when I'm in China talking to think tank people, is that there's a considerable population, several hundred million in rural China, whose per capita disposable income are significantly more depressed than their urban peers, who could see significant upside if they get moved and urbanized into the tier one, tier two, tier three cities.

29:19James Kynge:So there's still a lot of upside, I think, but it will take intelligent policymakers to try to capture that. And I haven't yet seen signs, but we should definitely read the tea leaves of the March government work report very, very closely and the five-year plan, which will be announced as well at the March NPC meeting. All right, let's take one last quick break. Stay with us.

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31:25James Kynge:Welcome back. A bleak new app is going viral in China, and it says a lot about the loneliness epidemic. Its original name was Are You Dead? and the app asks users who live alone to check in every 48 hours or it alerts an emergency contact The name of the app has recently been changed to De Mo Mo which one of the app's founders explains comes from combining death with some nonsense syllables With as many as 200 million one-person households projected by 2030 its popularity is being seen less as a morbid humour and more as a signal of a growing loneliness and safety crisis among young people. James, let's get right into this.

32:08James Kynge:I was alerted to this through a couple of friends in China. So it's a kind of comic macabre element to what I think is a real problem in China, which is the loneliness problem and the aging problem.

32:21Alice Han:Yeah, no, I mean, I just think it's so stark that more than the entire population of Japan in China are people living alone, you know, people between the ages of 20 and 49 living alone, not having very much social contact. A lot of their contact with other people comes through these apps. We all know what it's like. I mean, I suppose we've all sat at home and doom scrolled. I've been ill last week, so I was doom scrolling quite a bit sitting at home. And I tell you, your mental health really gets affected by that, you know. So my heart goes out to these young people in China, you know, they're often alone at home or working in these jobs, which don't remunerate very well.

33:08Alice Han:We've just been talking about the weakness of consumer demand linked to the fact that people's salaries are quite low. And then, you know, when people do go to the office. They're often very long hours in regimented jobs. And I think this is part of the reason why we're seeing the Chinese birth rate now fall to its lowest level since 1949, when the Chinese Communist Revolution took place. I mean, China has a whole slew of social problems. And I did spend a little bit of time reading online some of the testimonies of young people being affected by this loneliness epidemic. And it is honestly very sad.

33:52Alice Han:You must have seen quite a lot of these yourself, Alice.

33:55James Kynge:Yeah, I have noticed this in the last five, six years that I've been traveling to China. The way in which everyday young people live, I think, is quite isolating. A lot of them tend to be more plugged into the digital matrix than in everyday life. And a lot of them are only children as well. My cousins are all only children. And as a result, unsurprisingly, you've got this dimension of the Tangping, which is to lie flat and have this kind of nihilistic worldview. You know, what is the point of working or striving or struggling or doing well in your guacal exam and going into a tier one university?

34:34James Kynge:I think this is all part and parcel of the fact that in China, you know, young people don't really feel like there's a sense of of economic momentum and growth. And they don't have siblings. And at some point, you know, 20 years down the line, they're going to have to be responsible for their aging grandparents as the single caregiver, really. And then you add to this the other dimension, which we also discussed, declining marriage rates. So the number of unmarried people in China between the ages of 20 and 49 reached 134 million in 2020. That's bigger than the entire Japanese population. And over the last decade, marriage registrations have been cut about 50%, so in half, effectively.

35:18James Kynge:This is, again, I think, feeding into this single, lonely state of a lot of Chinese youths. And then on the older end of the scale, you hear a lot of stories about elderly Chinese who get abandoned by their children or their grandchildren. Their spouses have died, and they're effectively single and alone. And so I think this app really speaks to a pressing need societally amongst Chinese, everyday Chinese, to feel like they matter and that their life counts. It's interesting to see how China has evolved over the last, call it, four decades, the first two of which was about aligning towards a capitalist regime.

36:02James Kynge:The next decade was about high-speed growth. and I sense that there is a kind of moral vacuum and a self-questioning about what is it all for. Some people, in the case of my parents, for instance, and a lot of their peers, go towards religion. Buddhism is on the rise. We have to look into the numbers, but just anecdotally, almost everyone I know, their parents are now Buddhists overnight, over the last decade. And then some of them go towards the digital ecosystem, the digital life. and as a result I think we end up with a society in China that is actually more isolated than it has ever been and remember this is a very family driven society if you go back to Confucian thought and Confucian writings the society is based around family but what happens when the family only has one child and then it's one you know middle-aged person taking care of elderly people I think that is the society that we're increasingly confronting in China But James, have you actually come across people in China who have felt lonely?

37:08James Kynge:The reason I feel reluctant to ask this question somewhat is that unlike in the West, where I think it's more open as a discussion, the loneliness epidemic, to talk about being lonely. This is a Chinese expression, hankudu. Like it's not really a phrase that you hear a lot in China. And so to what extent are people being self-reflective or acknowledging that they are lonely? Have you come across that?

37:33Alice Han:Yeah, I mean, when you were talking there, I was thinking of a close friend I have in China who has turned towards Buddhism. And she's been living alone, I guess, for at least 25 years now. And, you know, her life derives meaning from the Buddhist faith that she's adopted. and she travels to places in Qinghai and Tibet where they have a sect of Buddhism over there, Tibetan Lama is Buddhism, and she gets a great deal of meaning from those experiences. But she is, I think, lonely, and she has said that to me before. And there's a whole nexus of rather personal pressures that she feels in her life.

38:16Alice Han:I'm not saying this is peculiar to China, you can see it all over London as well. But it is a human condition, I think, that we are seeing more and more of in China right now.

38:26James Kynge:And then we also haven't discussed the declining fertility rate aspect of this as well. You already mentioned that China's childbirth rate is at its lowest since 1949, I believe. When I think about the next generation, that is also going to have an impact on who takes care of these older women and men who decide not to get married and have children? Is it going to be the state? That is a big question mark because, you know, the pension scheme is not as established as it is, say, in Japan or even in the US. So that is going to be a big political economic question, I think, for the Chinese government moving forward, because thus far, any attempts to increase fertility has been universally, I think, problematic across all countries.

39:12James Kynge:I don't see any real instance in which the government has been successful globally in really boosting and stimulating the fertility rate. But I think this is something we should definitely track because I get the sense every time I go to China that more and more people are interested in being online, being on their phones rather than being in community. And I'm hoping that there is going to be a counter-cultural movement towards that. I'm already seeing some signs that people want to do community trips out in nature, for instance. But this is a country that I think historically has been very communal.

39:45James Kynge:And to move towards this kind of unitary ecosystem where people are more plugged in online than with each other, I think is going to be a new normal for the Chinese society. All right, James, this is prediction time, one of my favorite times. What is your prediction as you peer into the future this week?

40:02Alice Han:Well, I'm pivoting from our conversation completely this week. My prediction is about the chip wars. Last week, the US gave formal green light to NVIDIA to sell its H200 chips to China. That was lifting a previous ban imposed by the US. but Chinese officials who have been speaking to media reporters on condition of anonymity have said that the NVIDIA H200 chips will not be permitted to enter China. So the US gives the green light, China gives the red light. My prediction is that this game of cat and mouse will continue for most of this year And I think it shows something fundamental about the chip wars between the US and China.

40:54Alice Han:And that is that China is catching up with the US in chip technology. In fact, in 2026, it's going to be a horrible year for NVIDIA sales in the China market. That's because Chinese companies like Huawei, Cambricon, MoreThreads, we've mentioned all of those in previous episodes, are now producing chips that, if combined into superclusters, can compete with NVIDIA superclusters on performance. So to get down to brass tacks, my prediction is that NVIDIA's market share for AI processors in China will crater this year. They will fall very, very sharply. I'm not exactly sure how big a fall we're talking about, but in 2024, they had 66 % of the market.

41:48Alice Han:This year, I reckon they could fall to below 20 % of the market. So it's a very, very big call. I'm aware of that. But I think this is a massive, massive shift.

42:00James Kynge:This is kind of naughty for me to ask a follow-in prediction slash question. Do you think that pushes Jensen Huang to ask Trump, please, can I send them more leading-edge chips?

42:10Alice Han:Blackwells. Leading-edge Blackwell chips.

42:12James Kynge:What do you think will be the change in calculus from Jensen and Trump in the midst of that?

42:17Alice Han:I think you're dead right about Jensen Huang. He will be asking the White House to sell black whales into China because black whales are so much more powerful than the H200s. Chinese buyers would definitely want to get hold of black whales. Whether the White House will exceed is another matter. We'll just have to see. I'm not ready to call that one.

42:39James Kynge:Yeah, I'm sympathetic to this view because there is an argument which I find quite convincing that part of the reason China is trying to restrict these AI processes from NVIDIA isn't just to support domestic variants, but also to put pressure on Jensen to get them higher quality chips. I think that that's quite conceivable and it might actually happen in 2026. So my prediction is somewhat chip tangential in the sense that it is about AI. We just saw Meta purchased one of the big agentic AI companies, Manus, and that company moved to Singapore over a year ago. I think we're in a next generation of global AI Chinese companies that are increasingly going to move out of China, headquarter in, say, Singapore, and then have more of a global footprint.

43:24James Kynge:Some of them may decide to exit through U.S. markets, through private sales, or through public listings. But I sense that these new generation of AI tech companies, AI native tech companies, are going to be looking at what didn't work for Baba and Tencent, mainly that they stayed Chinese tech companies, and go, well, we need to find a way, like by Dan's did, to desinicize, move out of the Chinese market so that we have even more global reach and global footprint. That is my prediction. So we'll probably see more companies move to Singapore, more discussion of acquisitions from some of the big US tech companies buying these Chinese AI companies because, you know, as we've talked about, these AI companies in China are very, very innovative, cheap, energy efficient.

44:13James Kynge:So there's a comparative advantage for, say, a Meta or a Google to purchase them. That is my hot take for 2026. All right, that's all for this episode. Thank you for listening to China Decode. This is a production of Prof G Media. Our producers are David Toledo, Eric Janikis, and Ness Smith-Savadoff. Thank you to Catherine Dillon, Drew Burrows, Billy Bennett, Dan Shalan, William Flynn, Jesse Millwood, Gil Espinoza, James Patton, and Isabella Kinsel for production help every week. Make sure to follow us wherever you get your podcasts so you don't miss an episode. Talk to you again next week.

45:03Support for the show comes from Harvey AI. Laws, craft, forged through repetition. sharpened by judgment, perfected in the details most people never see. Practice made perfect is Harvey's belief in relentless refinement, in turning complexity into clarity, pressure into precision, and experience into advantage. Legal work isn't just about knowing the law, it's about applying it carefully, consistently, and under real stakes. Harvey is an AI platform built specifically for legal practice, helping teams analyze large volumes of documents, draft with precision, and collaborate securely across complex matters.

45:34It doesn't replace expertise, it strengthens it. making teams faster, more exacting, more certain. Today, more than half of the AMLA 100 use Harvey as part of their workflow. Learn more at Harvey.ai.