China Decode: How the Iran War Inflation Will Impact China

22:58James Kynge:But one of my big takeaways before I throw it over to you was that actually there was more meat on the bones in terms of supporting consumption. Now, whether or not the fiscal multiplier of consumer subsidies is strong enough to really have a meaningful boost to growth remains to be seen. But I was pleasantly surprised by the fact that they dedicated a greater portion of the special treasury bond issuance to consumption boosting programs. Aside from that, there was, as we expected, a huge focus on investment and technology. There was a creation of a new financing instrument to do that specifically.

23:38James Kynge:But I think that that was my biggest takeaway is, hey, they actually seem to be a bit more serious about this rebalancing effort. What did you think, James?

23:45Alice Han:Well, I was sort of looking more into the long term. As you say, Alice, there's so much happening in the world now. I tend to want to cling on to something which is long term, a policy that we can sort of invest some trust in for the future. And so I was looking at the 15th five-year plan, and that was fleshed out, as you mentioned, during this session, to me, there were several pretty important aspects of it. The first is that there's one really new focus and one crucial geopolitical reality. And a couple of other points I'd like to mention. The new focus was artificial intelligence. It was hugely important to this 15th Five-Year Plan.

24:33Alice Han:And the crucial geopolitical reality, I think, is self-reliance. This ran through the document like a mantra. There are so many different Chinese words for self-reliance, so I couldn't add them all up. But it really was the most important theme, I would say, throughout the whole document. And we're talking about self-reliance in every way. technological self-reliance, energy self-reliance. We've just been talking about the very fractious situation in the Straits of Hormuz. China effectively wants to ease itself off all of the chokeholds that the West has over China and at the same time assert its own choke points on countries around the world, particularly the West.

25:22Alice Han:The two points that I'd like to mention are that there didn't really seem to be any sign that China wants to do much to rein in its huge trade surplus with the rest of the world. The trade surplus, as you know, reached 1.2 trillion US dollars last year. And reading the various different documents that came out, it doesn't look like China plans to do anything about that. The other thing that it doesn't look like China plans to do anything about is this overcapacity issue in industry. Vast overcapacity in various different Chinese industries, which China's trade partners says are effective subsidies for Chinese companies, meaning that China is able to export products around the world at unbelievably low prices.

26:15Alice Han:But let me briefly come back to AI. I would say that what we saw both in the government work report and in the 15th five-year plan should add up to a whole new descriptor for what China is as a country. My descriptor for the last decade or so has been that China is a techno-authoritarian superpower. Now I would like to add that China is an AI animated techno authoritarian superpower. I realize that's an awful mouthful. It'll almost certainly never catch on, Alice, but I'm going to go with it for now because I think that really describes the essence of what China is. We shouldn't think about China as a communist country or a country ruled by a communist party.

27:04Alice Han:We should just focus on the fact that it's a techno-authoritarian superpower. In other words, an authoritarian country in which technology is important, both in its own right, because China's climbing the technology ladder at a rapid rate, and I would say leading the rest of the world in technology, and also because China uses technology to enforce its authoritarian model. But now, over the next five years, we're going to see all of this animated by AI. And I just give you a couple of little bits of evidence and then come back to you for your reflections. But AI was mentioned 373 % more than it was in this 15th, in the 14th five-year plan that was obviously published five years ago.

28:00Alice Han:This is the single biggest increase of any word used in the 15th five-year plan document. And let me just describe what is meant by AI and the AI Plus Action Plan, according to these documents. The plan is to integrate AI across industries, aiming to boost productivity, combat China's demographic headwinds, and achieve technological self-reliance. These are all the top priorities of the Chinese state for the next five years, and AI is central to all of them. And we've mentioned before that China plans to deploy AI in 90 % of the economy by 2030. So that's really what struck me. There's quite a lot of other things, including, you know, so-called emerging pillar industries of the economy and all of that.

29:01Alice Han:But I'd like to get your sense of it, Alice. What are you making both of the work reports and the 15th five-year plan?

29:06James Kynge:Well, I'm glad you talked about self-reliance. I couldn't agree more because on the one hand, you have this admission in the government work report that China needs to slow down. So actually, the fact that it's doing a more modest than previously expected last year, at least growth target of 4.5 to 5 percent. By the way, that's the lowest growth target since 1991. That suggests to me that they are okay with seeing a slowdown and willing to put more investment, so to speak, not necessarily into, I would say, largely inefficient, historically inefficient infrastructure development, but into what they call high-tech manufacturing and technological innovation.

29:49James Kynge:And the two things that struck me as quite significant in the government work report were the following. Number one, the National Venture Capital Guidance Fund, which was teased at last year's Lianghui two sessions and formally approved last December, is mentioned in this report. And it's actually quite interesting in its structure. I'll be curious to see how it pans out. It's a fund that's designed to act as a public, private, almost angel investor for investments in early stage tech companies. And the idea is to leverage state-backed financing, but at the same time have some of the fundraising being supported by these private VCs and private angel investors so that there is a more efficient allocation of financing into these new technological innovations.

30:35James Kynge:That's the first thing that was interesting to me. And the second one that was interesting to me was the creation of this new financing instrument that they just introduced. It's one of these policy-based financial instruments. There was an additional$800 billion, you know what I mean, of that being used to stimulate greater private sector investment, mainly in artificial intelligence, it seems, the digital economy and consumption infrastructure and spending. And when I put all of these elements together, to your point, James, what is interesting coming out of this work report is this feeling that they need to really get ahead of the curve on technological innovation, A, but at the same time, they need to have supply blockchain resilience across not just advanced technologies, but also these choke, what they call in previous work reports and the previous 14th five-year plan, choke point industries, these choke point industries.

31:27James Kynge:So some of them are like semiconductors, high-end instruments, software, advanced materials, biomanufacturing, the list goes on. So it seems like they really are putting the money where their mouth is, so to speak, at least in this government work report and the new five-year plan. And I think we're at the beginning of a big sea change in Chinese technology. And it's interesting, in the last few days, Xi has talked a lot about healthcare in China, advancing modern healthcare, making drug discovery cheaper and faster. So beyond some of the traditional industries, we're seeing, I think, a big policy support for technology, not just in the terms of the advanced frontier, but also in terms of making sure that China has supply chain resilience such that, you know, if there's ever a war over Taiwan, say, then it can largely, you know, be in a good position and not be, you know, taken on the back foot as the Americans were on rare earths, for instance.

32:32Alice Han:Absolutely. I think, you know, in summary, what it looks like is five years from now, China wants to be in a position where if a crisis like the one we're seeing in the Straits of Hormuz erupts, China will be so self-sufficient and so self-reliant in all of its economic needs that it will stand unmoved and supreme, kind of aloof from the rest of the world, unable to exact its geopolitical policy wherever it looks and wherever it goes. I think that is basically the aim of Chinese statehood that we can see coming through the five-year plan and the work report this time.

33:13James Kynge:Okay, let's take one last quick break. Stay with us.

33:24Andy Browne:Ambassador Rahm Emanuel served as President Obama's chief of staff, an administration that had to deal with its fair share of global conflicts. He dealt directly with Israel's prime minister and thought plenty about the threat from Iran. But Emmanuel told me that the pace of action from this president in the Middle East is giving him whiplash. In 15 months, this president has taken military action against eight countries. I just just in 50. Now we got three more years to go. In 15 months, I ran twice, but you have Syria, Iraq, Somalia, Venezuela. Venezuela. I'm losing Nigeria. Today Explained, in your feed every weekday and on Saturdays too.

34:12Andy Browne:After decapitation strikes against Iran's leadership, what can we expect next in the escalating war?

34:17Alice Han:The big question is, if there is going to be a next strongman in Iran, what kind of strongman will that person likely be? I don't think that there's going to be another powerful cleric, supreme leader.

34:31Andy Browne:I'm John Feiner. And I'm Jake Sullivan. And we're the hosts of The Long Game, a weekly national security podcast. This week, we sit down with Kareem Sajipour to discuss what to expect in this next phase of the war against Iran. The episode's out now. Search for and follow The Long Game wherever you get your podcasts. Are Democrats their own biggest problem? You know, a party becomes defined by who their central figure, who their quarterback becomes. Democrats haven't really anointed a effective quarterback since Barack Obama, pretty much. And this week, the Atlantic staff writer Mark Leibovich joins me to discuss the state of the Democratic Party and which races to keep an eye out for this midterm election.

35:14Andy Browne:The episode is out now. Search and follow Stay Tuned with Preet wherever you get your podcasts.

35:24James Kynge:Today, we're joined by Andy Brown, China columnist at Semaphore, to discuss global tensions, the future of U.S.-China relations, and the geopolitical ripple effects of the war in Iran. Andy, thanks so much for joining us today, and welcome to China Decode.

35:39Scott Galloway:Thanks for having me. Great to see you.

35:41Alice Han:Andy, thanks very much for joining us. I think, you know, nobody probably knows how consequential the U.S.-China relationship is more than you do. You've lived in China for more than two decades, I think I'm right in saying, and now you're based in Washington. You've covered it for various different news organizations. But surely right now, we're at a particularly pivotal moment with so many things happening in the world. Alice has just mentioned these geopolitical fault lines. How do you see the US-China relationship evolving over the short and medium term, please? So, James, you may be surprised to hear that we don't hear much about China in Washington, D.C.

36:30MAGA has gone silent.

36:33Scott Galloway:And the China Committee, the Congressional China Committee, is a shadow of its former self. And amazingly, at the State of the Union address, China got zero mentions. And it's amazing when you compare that with the Biden administration, where everything was about China. They framed much of their economic agenda around China, their industrial agenda, their diplomatic, political agenda. It was all China, China, China. And, you know, you've had a national defense strategy come out, which is a part of the wider national security strategy, which also doesn't make much mention of China. And Pete Hegseth is talking about, you know, we want a stable peace.

37:28Scott Galloway:And there's no talk about competition at all. He talks about needing or wanting respectful relations. So it's pretty clear from this side that the United States is trying to get a stabilized relationship with China going. Now, part of that is technical. You know, they are very, very keen for the Trump-Xi summit to come off. They want this to be a spectacular success, another win for China. So that's part of it. And of course, it doesn't mean that the structural differences in this relationship have gone away. Of course, they haven't. Still huge, still an enormous absence of trust between these two superpowers, but also, you know, issues around technology, trade, investment, data, privacy, espionage, and all the rest of it.

38:22Scott Galloway:That hasn't gone away. But it seems to me that we're in a truce, ultimately, and both sides want to keep it that way.

38:28Alice Han:But why is that, Andy? I mean, is it that America these days is focused elsewhere in the world and it doesn't want to have to deal with the problem of a China relationship going south? Or is it perhaps that when China restricted rare earth exports to the US last October, the US really got a wake up call and they realized that they're now dealing with a power that is perhaps approaching peer status to the United States. and they're effectively, to use the vernacular, they're running scared. I think it's all of the above.

39:05Scott Galloway:So you've got the midterms coming up, and Trump definitely doesn't want to have a big blow up with China before then. He wants wins. The way he measures not just the relationship with China, but relationships, bilateral relationships generally, the metrics is the trade balance. And so I think that he feels that a trip to China could get him a big win, and he doesn't want to upset the apple cart before that. And also, he's just, you know, Trump is, people have said, he's the least hawkish member of his own administration. So in some ways, he sets the tone. I mean, even people like Marco Rubio, who were uber hawks back in the day.

39:52Scott Galloway:I mean, Marco Rubio came out just the other day and said that the United States wants strategic stability with China. And part of it is also the MAGA agenda, right? I mean, this is a retreat to the Western Hemisphere. So much of the action pre-Iran was on the Western Hemisphere. And sure, some of that was bank shots against China, getting rid of Hutchison Guampo from the two ends of the Panama Canal, snatching Nicolas Maduro, friend of China, putting pressure on Canada, Mexico over trade. Actually, even Greenland, the China threat was invoked for Trump's so far aborted grab for Greenland. So, you know, there is a focus on America's own hemisphere, but also just the sense that America is overextended, right?

40:45Scott Galloway:The restrainer's argument seems to be winning the day. America can't be stretched everywhere. Now, of course, they're embroiled in war again in Iran. and the last thing they want is a blow up over Taiwan or the South China Sea.

41:01James Kynge:Well, I find this really fascinating, Andy. Thanks so much for the overview of the American perspective. I want to cycle now to the Chinese perspective. We've got potentially Trump going to Beijing for the second time with the red carpet no doubt being rolled for him in early April. How do you think Chinese policymakers are treating this summit? What is going to be on the table from the Chinese side? What do they want to get out of the summit? And do you think related to this Iran question that a more prolonged conflict in which the U.S. gets bogged down is cycling through its precision missiles is to the advantage of China?

41:36James Kynge:Because there's certainly an argument that as this draws out longer, this could bog down American military assets in the region and China can quietly build up its military war chest, its capabilities. What was interesting to me to end my question is that the government work report this year that just came out, there's a line in which they've changed language around Taiwan. They say they want to resolutely combat Taiwanese independence, as opposed to last year when they wrote they wanted to resolutely oppose Taiwanese independence. So, again, to string this all together, is there a threat of Taiwan looming beyond the summit?

42:13James Kynge:What's your take on the short-term and medium-term outlook?

42:15Scott Galloway:There's a lot there to unpack. Let's start with the summit. The Chinese figure that Trump is their best hope, that if they're going to do a deal with any U.S. leader, it's going to be with Trump. He's non-ideological. He's focused on trade. If you believe people like John Bolton, there's no interest whatsoever in human rights, no interest in trampling on any of what China would call its core interests. So they want this summit to make, they want to give Trump the time of his life in China. They're going to roll out the, don't forget this is a state visit. So what I'm hearing here in DC is that working groups in China have been running around trying to put together a very ambitious package.

43:05Scott Galloway:They want an impressive package and they know that in dollar terms, it has to start with a T. Okay, quite what that package is going to be. I hear all sorts of talk about putting together some huge investment fund to invest in the U.S. businesses around potentially EVs or chemicals or areas where China has real strength. The problem that the Chinese side is encountering is that just not getting much reaction from the U.S. side. Partly that's because the U.S. is distracted in all various parts of the world, not least Iran. But also because it's not at all clear that USTR actually wants to do a deal with China.

43:55Scott Galloway:I'm hearing that Jameson Greer in USTR is thinking it would be much happy with some kind of managed trade between the US and China, something that looks like barter. OK, we're going to decide, you know, we're going to we're going to buy one hundred billion dollars worth of stuff from China. China is going to going to buy so much from us. It's kind of like a managed trade, almost barter arrangement. And of course, the last thing that Trump wants is for U.S. companies to embed themselves more deeply into China. He wants the opposite. He wants re-industrialization. He wants U.S. companies to invest more at home, less in China, so that you don't have that incentive.

44:37Scott Galloway:I've also heard that so far, very few, if any, big CEOs from U.S. companies with interests in China have been tapped to accompany Trump on his trip. Now, that doesn't mean to say they're not going to go. These trips always come together at the last moment. But it means that as of now, none of the usual suspects that you think might accompany Trump to China are going. And that makes the Chinese rather nervous. I mean, here they are putting together these enormous banquets for him in the Great Hall of the people saying, here are 2 ,000 guests. You know, who's coming from your side? So we also haven't had—we had one principals meeting.

45:24Scott Galloway:I think it was in November. I think we have another one coming up. So things could change. but the U.S. just doesn't have the bandwidth that's what I'm hearing at a bureaucratic level to deal with a trip of this size. So let's moderate our expectations for this visit. There is no grand bargain to be had. This isn't a Nixon in China moment, although it could actually be an opportunity for a reset.

45:48James Kynge:So if I'm hearing you correctly, Andy, it's a photo opportunity moment where Trump might get his dollar sign teas as well as a Peking duck happy meal. It's really just going to be optics as opposed to anything substantive. Is that right?

46:01Scott Galloway:Well, no, there will be deals. So, you know, we've all reported on China. We know that China's great at sweeping things together, coming up with big numbers. No doubt there's going to be a soybean deal. No doubt they're going to be buying more Boeings. So they will try to make this add up to something that looks big on the investment side. I think that what they understand is that it's going to have to look bigger and better than whatever the Japanese gave to the United States, maybe bigger and better than what the Japanese and the Koreans together gave. It's got to be impressive. And Trump is unquestionably going to want that.

46:46Scott Galloway:If war in Iran goes badly, he'll want to change the subject with a big deal in China. If the war is going well, he'll want a back-to-back trial.

46:56Alice Han:Andy, just thinking about one aspect of the U.S.-China relationship, which has been in, well, I guess in decades past and until quite recently, the glue in the relationship. And this is the corporate America investing in China, selling in China, and really helping to influence, I suppose, people on Capitol Hill and US politicians to be more friendly to China. I'm just wondering if that is still the situation. I ask this for a couple of reasons. The first is we've got Xi Jinping and the National People's Congress. He's talking about self-reliance. He's talking about technological self-sufficiency.

47:40Alice Han:Does China's future really have a place for corporate America? Or are the big American companies going to be sort of eased out of the China market over time. And, you know, if that happens, where is the glue between the US and China? How do you see that whole really important scenario playing out?

48:01Scott Galloway:Well, in spite of all the doom and gloom about business performance in China, US companies continue to invest. US companies continue to earn decent profits out of China, And not just U.S. companies. I mean, you look at, I just saw the investment numbers for Japan. In spite of what's happening with Takeichi and the huge blow up over Taiwan, Japanese companies continue to that. Look at Germany. Mertz was accompanied by 30 CEOs. German companies are pouring investments into China, even though their automakers are being decimated in the Chinese marketplace. And the reason is you can't not be in China because it's China, as you very well know, that sets the competitive environment for status for the world.

48:47Scott Galloway:Right. So, you know, in global competition, winners and losers are going to be settled in the China marketplace. So you have to be in China. U.S. companies know that they have to be in China. And look, you know, Chinese, China needs the investment. It needs the competition for its own companies. It doesn't want to be North Korea. And it wants to be a global player. And it is, in terms of technology, so much of the input on Chinese technology products and exports comes from the United States, Japan, South Korea. We often overestimate this whole issue around self-reliance. I was just talking to somebody the other day, a company that strips down products and looks at where the value is.

49:39Scott Galloway:And on the iPhone, it's still 50 % of the iPhone comes from the United States, 30 % comes from Korea, 12 % from Taiwan, very small percentage from China. So China needs the world. And this isn't autarky.

49:52James Kynge:With your point about the iPhone, Andy, isn't the real threat to a lot of these foreign companies and investors that China is just making cheaper, more plentiful versions of the Apple iPhone? that we're seeing a style of self-sufficiency that really is about replacing some of the products and goods that the West has been able to provide and sell in China with Chinese variations. You know, you see this in EVs, you see this in iPhones, you certainly see this in other green technologies as well. Isn't that the risk? And shouldn't, you know, we all carry a grain of salt when they talk about opening up.

50:28James Kynge:Certainly, I saw in the government work report, There's talk about services being opened up to foreign investors, especially in telecoms, biotech, maybe even digital finance and education. How seriously should we take those policy intentions?

50:42Scott Galloway:Don't forget the pushback, right? I mean, tariffs, sanctions, embargoes, not just from the West, but also from developing economies. Southeast Asia wants to have an industrial sector. It doesn't want to be bossed around by China. uh in look at indonesia putting up enormous tariffs to chinese products so china doesn't have it all its own way and it understands that it has to be and it is a an integral part of the global economy and unless it does allow companies in uh it's going to face increasing pushback around the world including in the united states but for u.s companies i guess that the issue is this or for policy makers the issue is this how do you how do you compete uh one way of doing it is to put up tariff barriers so we're seeing that sky high barriers and then your companies shelter behind them there's a big risk and a national security risk because your companies then become less competitive you end up like habana cuba um which is which is a real threat a real risk now that Detroit is running.

51:49Scott Galloway:Or potentially you team up with Chinese players, licensing arrangements, JV arrangements. And that actually may be something that Trump and Xi and their teams can be talking about now ahead of this summit.

52:04Alice Han:Andy, just switching the focus for a second, you've lived in Taiwan. And as I mentioned earlier, you've lived in China as well. Do we expect anything new in terms of US policy towards China on Taiwan. Obviously, Taiwan's been, you know, one of the most neuralgic areas of the relationship. Is there a sense, to put it bluntly, that the US is now losing appetite to protect Taiwan against China in the event that China launches a military adventure against Taiwan? And if that's the case, are we seeing the beginning of U.S. policy towards China over Taiwan softening? In other words, to sort of get closer to the idea that one day China will probably take back Taiwan.

52:55Scott Galloway:It's actually very interesting reading the press now in Taiwan and how they're interpreting what's happening in Iran. And they're actually quite encouraged. The way it's framed over there is that the United States is weighing in on the side of human rights, democracy, freedom in Iran. And they find that quite encouraging because, as you know, there is a narrative over there that's gaining increasing traction that you can't trust or rely on the United States anymore. Plus, this idea that Israel is this small democracy struggling in a neighborhood of autocracies, particularly, of course, Iran is a sponsor of terror.

53:42Scott Galloway:And they kind of identify as the Asian Israel against, you know, the Chinese behemoth. So that takeaways from what's happening in Iran is actually quite mixed. I think, look, on the question of will the Chinese go in, they're studying this very, very carefully because obviously an invasion of Taiwan would be preceded by precisely the kind of decapitation, carpet bombing that you're seeing now in Iran unleashed by the U.S. and Israel. The difficulty for the Chinese is that unlike in Iran, where the U.S. are bombing to Iran, hoping that this is going to potentially trigger an uprising and regime change, a bombing campaign against Taipei has precisely the opposite effect.

54:36Scott Galloway:It intensifies the resistance. So the question is, well, would this be an opportune moment for the PLA to have a go at Taiwan? I would think not. 50 % or more of the Chinese high command have just been taken out in a purge. On the other hand, they're very, very happy to see the U.S. bog down in Iran. And they're very happy to see the U.S. depleting its stock of munitions in Taiwan, which gives China some leverage now over the situation across the Taiwan Strait. Is that going to be, is that a prelude to invasion? I very much doubt it. Xi Jinping has got his hands full right now, as we've just discovered from the National People's Congress, with an economy that is in very, very poor shape.

55:29James Kynge:Andy, thanks so much for your time and talking with us today.

55:32Scott Galloway:Thanks for having me.

55:35James Kynge:All right, before we go, some big news. China Decode is now available on Substack. Subscribers will get ad-free episodes, our exclusive newsletter, and a place to engage with James and me and other listeners. Find us at chinadecode.profgmedia.com. 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 Janikas, and Ness Smith-Savadoff. Thank you to Catherine Dillon, Drew Burrows, Billy Bennett, Dan Shalon, William Flynn, Jesse Millwood, and Gil Espinosa for production help every week. Make sure to follow us wherever you get your podcasts so you don't miss an episode.

56:20James Kynge:Talk to you again next week.

56:21Andy Browne:Thank you. 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. It doesn't replace expertise. It strengthens it, making teams faster, more exacting, more certain. Today, more than half of the AM Law 100 use Harvey as part of their workflow. Learn more at Harvey.ai.