We have to recognize how enormous a trend this is. The South Korean government, along with Samsung Electronics and SK Hynix, have allocated 520 billion US dollars to keep South Korea in the AI race. Can we see any kind of a pledge like that in Europe? Nothing so far comes close to that.
Welcome to China Decode. I'm Alice Han.
In today's episode of China Decode, we're discussing big money moves in the AI arms race, China's latest strategy to increase its global influence, and the Californication of Chinese diets. That's all coming up. But first, let's do a quick check-in with how the markets are starting the week in China. On Monday, markets finished mostly higher after sentiment improved on easing geopolitical tensions and renewed risk appetite. The Shanghai Composite was up 1.16%, the CSI 300 rose 1.21%, and the Shenzhen Component added 0.19%. Financial stocks led the way, with Industrial and Commercial Bank of China up 0.98% and the Agricultural Bank of China up 0.81%.
All right, let's get into it. A lot of news this week in the AI world, starting with Apple, who raised prices on the MacBook and the iPad in some cases by around 20%. AI is to blame, but not because of new features. It's because of the growing chip shortage as chip makers prioritize orders for companies like Nvidia. Now, Apple is reportedly lobbying the Trump administration for permission to buy chips from blacklisted Chinese DRAM company CXMT. Meanwhile, Chinese AI company DeepSeek has just announced plans to double its headcount in some departments and is preparing to take outside investment for the first time ever. James, a lot of exciting things happening in the world of AI, not just in the US, clearly in China too. And the first one really is this Apple story. You know, not only will consumers have to confront price rises globally of Apple products, but now Apple is really stretched in terms of capacity for memory as well as chips. And this speaks to a broader supply shortage that we're seeing. It explains why DRAM prices from the Korean companies have basically doubled in the last few months. And this is, I think, a perfect entry point for some of the Chinese players like CXMT, which is China's big chipmaker in the space, to enter and potentially cater to the Apples of the world. But I think the bigger political question is whether or not the Trump administration, you know, is going to ultimately clear CXMT for sales to Apple or to American companies, because right now, as you know, it's technically on a list banned by the Pentagon because it's blacklisted as a company that's aiding the People's Liberation Army of China. Now, this is not a ban that creates legal tendencies for an Apple or a company trying to buy CXMT chips, but it does carry a lot of reputational risk. So, the big question is: a) will there be a change of tune from the Trump administration, and b) will Apple try to risk it in order to get, you know, more DRAM?
That's a great question, Alice. Just to take one step back. I think what we're in now is RAMageddon. And obviously this is because, as you've described, the frenzy for AI is causing this chip shortage, and the shortage focuses on memory chips, hence the RAM in RAMageddon, because RAM stands for random access memory. And the reason that AI is causing the shortage is because data centers that are needed to train the large language models use a lot of these memory chips. And so that's the situation that we're in. I think it'll take a long time to build new capacity here because it takes a long time to build new chip factories, and that's what needs to happen to increase the supply of these memory chips to ease this RAMageddon situation that we've got at the moment. We have to recognize how enormous a trend this is. And I think that was thrown into sharp relief today by the incredible announcement from South Korea. The South Korean government, along with Samsung Electronics and SK Hynix, have allocated 520 billion US dollars to keep South Korea in the AI race. This money is going to be spent in lots of different areas, including building new chip factories, but also building AI data centers, robotics, and all of that. So this just shows how huge the trend that we are trying to describe really is. I don't think this is the biggest industrial policy move in history. It's not as big as the Belt and Road Initiative by China, and it's not as big as the American New Deal as a percentage of GDP. That is, but 520 billion US dollars being spent by a single country and a couple of companies just shows how crucially important the AI race is, and also being able to get enough memory chips to power the large language models that train AI really is. So to come to CXMT, is the US going to approve Apple to use chips that are made by CXMT in China or not?
It's a really big call for the White House, isn't it? Because all along the US has been saying we want to deny China a leg up in the tech, and allowing America's most impressive tech company, or certainly one of them, perhaps after Nvidia, perhaps level pegging with Nvidia, allowing one of America's most impressive tech companies to buy Chinese chips made by this CXMT company, which is a very proficient maker of memory chips and does so at a pretty low price, will be a huge leg up to China, and therefore it will be countering America's broad strategy of trying to keep Chinese tech contained, trying to keep its advance contained. I really wouldn't like to call it, to be honest. It's so hard to call this White House. They seem to flip-flop on these policies all the time. So all I think we can say is that the pressure is going to be intense, and that pressure will grow because, as I said at the beginning, this is a structural trend. The world is not going to be able to supply masses and masses more memory chips in short order. It's going to take a long time to build the factories that are going to have to make these memory chips to ease the supply bottleneck. So, you know, the pressure is only going to intensify.
And do you think that with the midterms and potentially a blue wave or a Democratic sweep through the House at the very least, that it'll make it even harder for CXMT in the same way that, say, four years ago in 2022, Apple said that it wanted to buy from Chinese maker YMTC? It was, I wouldn't say legally blocked, but it still was not allowed because it was blacklisted by the US administration, and Apple didn't move further on it. There seemed to be parallels between YMTC back in 2022 and CXMT today. But am I wrong to overindex on the congressional part of things? Because I do think that if you take out Trump, the congressional committees and House representatives tend to have a very anti-China view, and this extends to the technology race where you saw obviously the passing of the legislative Build and Match Act, which has affected ASML. But am I right to be thinking about the midterms as really another key data point in terms of worsening relations between US and China and affecting technology?
I think you're absolutely right, Alice. There's no question that in general Congress is more, as you put it, anti-China, or, you know, that they're more competitive when it comes to the US-China tech race. You know, the mood is definitely that this is a crucial battle that America needs to win, and therefore they need to disadvantage China whenever they can. However, having said that, we need to look at the economic effects of this as well. And you've just mentioned the way in which the various different Apple products are rising in price. So the MacBook Air jumped in price from $1,099 to $1,299. The entry-level iPad Air also rose by a similar magnitude. And so what we've got here is clear inflationary pressure moving through not just Apple products but the whole gamut of electronic products. When you add that to the inflationary pressures that we're already getting in terms of oil prices from the Middle East, and the fact that US inflation is rising and is at fairly high levels, a trend that we see across Europe, by the way, then the question is: if inflation in the US really starts to bite in coming months, then will Congress remain so adamant on its anti-China policy or on its policies to disadvantage China in the tech race, or will they think, you know what, guys, we need to just let in the cheapest products as quickly as possible to keep inflation under control? So what we've got, I think, is a dynamic picture. I don't really think we can call it, but I do think that the will of Congress will start being fairly in favor of containing China, but then inflationary pressures, if they really begin to take off, could undermine that stance.
Yeah, it definitely undermines the affordability issue or set of concerns that the Trump administration clearly was worried about even before Iran hit people's baskets and the gas pump prices. I want to take this back to Apple itself and how it fares in this real, I would say, pecking order for chips. This is a competition for chips in a time where capacity that you've referenced, James, is already constrained, and I almost feel that the right way to think about it is that the hyperscalers that are creating the frontier models, you know, your Claudes and your ChatGPTs, will get first preference. You know, we've got 700, north of 700 billion of capex going into data center rollouts throughout America. It seems to be basically, I would say, a frenzy to get as many chips as possible, and because they can pay for it. The real, I think, preference is for the, you know, SK Hynixes and Samsungs of the world to be selling to these hyperscalers as opposed to Apple, and meanwhile prices rise across the board. I think the markets have reflected this somehow in the sense that Apple stock has already fallen more than 6% on the news of the price hikes last week, and that's a steeper single-day drop since Liberation Day tariffs last April that Trump launched. I almost feel as though the market is expecting that Apple is going to have to eat the cost, and that the final bearer of the cost will have to be everyday consumers in China, in America, globally, because we're going to have to deal with more expensive electronic goods because of the shortage of chips.
Yeah, completely. I mean, I think we're in this for a good long time, actually. The DRAM prices surged nearly 100% in the first quarter of this year. There's another 60% jump expected this quarter. This is not going to go away. You know, we are in a structural shortage of DRAM and RAM chips. So RAMageddon, I think, is going to last for quite some time. We're just at the beginning of the trend. We don't know all of the permutations, but I would say an inflationary spike, you know, which broadens through various tech products, is highly likely. And you know, we've already seen the inflation that's coming from oil prices. So we could be in for a rough few months ahead.
Yeah, very, very interesting. So quickly on DeepSeek, you know, that's been in the news again, and in general China has been in the news. This is the new xAI model that says that it is as good as Mythos. This is the new model that's come out of China in the cybersecurity space. DeepSeek has just said that it wants to double its workforce, and that it is now open to external investors. It's close, apparently, to finalizing a $7.4 billion funding round, largely driven by Tencent, CL, the battery maker, as well as China's state-backed National AI Investment Fund, which is a consortium of both private and public companies in the technology space. So, you know, it's clear to me that DeepSeek is still a darling, even although we've seen in the last year or so that sometimes ByteDance comes ahead. You know, it's still, I think, very unclear who is going to be the leader in the AI model race, but it seems clear that DeepSeek isn't off the list. There's a lot of, what I'm hearing from my China friends is that there's a lot of enthusiasm about getting involved in this round, and still a lot of positivity about DeepSeek. But I thought this was interesting because of one of two things. One is that, you know, these models in China are super competitive, and I've been hearing that their use cases and adoption are rising outside of China quite exponentially. And the number two issue that I want to raise is the fact that these funding rounds, and this is just $7.4 billion, tiny compared to the amounts that are being raised by, you know, Anthropic and OpenAI in America. Again, I want to bring this home because you see this both in the valuation of Chinese tech companies publicly listed, but you also see this in the size of the funding rounds, is that they tend to be much smaller. I mean, I would say maybe even less than half of what you see in Silicon Valley, which I think is interesting. And I haven't yet figured out why the ticket sizes are much smaller. Suffice to say that my friends who are knowledgeable in the investment space just say that this is normal given the profitability, the scale, and the capital market depths in mainland China compared to Silicon Valley.
I think those are really interesting points. I just think that this DeepSeek move is yet again evidence of how vibrant the whole large language model and AI sector is in China. And we see several companies, Chinese companies, battling for primacy. There's the Alibaba Qwen. There's DeepSeek that you've already mentioned, and there are several others. We don't know which one is going to come out on top. We don't know how many leaders the market can take. You know, that's another thing. Are we looking at a mature market where there are one or two big providers at some point in the future, or are we looking at a cluster of different LLMs that do different things? My sense of it is we may well be looking at a small number, and so, you know, time is of the essence. Maybe that's one of the reasons why DeepSeek is keen to raise money and to kick on. But anyway, I just think the battle between US and China on AI is as vibrant and competitive as ever. And now we've seen, as I mentioned at the outset, South Korea, the South Korean government and two big South Korean companies ready to put up 520 billion US dollars to up their challenge in the race. You know, this is going to get bloody. The margins are going to vanish or turn negative, in my view. It's going to be highly competitive, highly bruising, I would say.
Okay, very interesting. Okay, we'll be back with more after a quick break. Stay with us.
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Welcome back. Chinese Commerce Minister Wang Wentao is in Brussels early this week for a meeting with EU Trade Commissioner Maroš Šefčovič, which comes as fears of an EU-China trade war continue to bubble up and European leaders express more concern for China's trade surplus. The effort to maintain good relations with the EU comes in a year where Chinese President Xi Jinping has already hosted more than a dozen world leaders and made particular inroads with so-called middle-power countries, especially as an alternative to an increasingly volatile US. So, James, we still haven't, at the point of this recording, figured out what is being negotiated or announced between the Chinese and European counterparts in Brussels this week. Two main points that I would flag that I think are worth considering. Number one is the fact that, you know, the EU is in a really dire position. China's goods trade surplus with the EU hit $360 billion 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 probably a record trade surplus in 2026, even though last year was already a record at $1.19 trillion in terms of China's full trade surplus with the EU. So there's that hanging like a sort of Damocles over the relationship. And the second point that I would raise is that there has been some more 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. 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.
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. 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 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. 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 underplay 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 €3 onto packages that come from China if they have a value of over €150. So this is aimed to reverse or to stop what is being called by the European Commission the desertification of Europe's high streets. 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 €3 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, and last year it was valued at €5.9 billion. So virtually €6 billion. So you can see there's been a huge increase in this type of small package.
