What I found so fascinating digging deeper into the data was the fact that actually a lot of the robots are not being bought by families or consumers. They're actually being bought by these government-backed training centers that do what is called teleoperation training data. So humans are remotely guiding these robots through physical tasks and then they sell whatever data they generate from those tasks back to the robot makers to improve their AI.
Welcome to China Decode. I'm Alice Han.
In today's episode of China Decode, we're discussing the largest defense budget in Taiwan's history, the man who built China's biggest property empire, who has been sentenced to life in prison, and getting to the bottom of who is really buying and using China's humanoid robots. That's all coming up. But first, let's do a quick check-in with how the Chinese markets are starting the week. On Monday, markets were down thanks to a broad tech sector sell-off, with news from Alibaba leading the sell-off. The Shanghai Composite was down 0.59%. The Shenzhen Component fell 2.13% and the Hang Seng was down 1.89%. Biggest gainers included CNOOC up over 4%, China Coal up around 3.5% and Ping An Insurance up 3%. All right, let's get into it. We'll start in Taipei where the government of Taiwan has approved a proposed 2027 budget this week that would push defense spending past 1.12 trillion Taiwanese dollars, or roughly 35 billion US. That's an 18.2% jump from this year, but the budget still has to make it through Taiwan's opposition-controlled legislature. Well, James, before we get into the politics minutiae of whether or not this gets passed, this is pretty considerable given that if you recall, earlier this year, there was some speculation that Trump's 14 billion arms sales package would go through. It seems like he's paused that. It's unclear whether or not he's going to revive that package in a time in which a lot of missiles and ammunition are being used up in the Middle East. So the big question is, will this spending actually be significant for Taiwan's battle preparedness?
I'm a little skeptical. When I compare Taiwan to Ukraine, for instance, what strikes me is the relative backwardness of the Taiwanese military and the lack of preparedness. There's 170,000 active troops in Taiwan, now 300,000 active troops in Ukraine. Taiwan currently spends about 2.1% of GDP on the military. Ukraine seriously ramped up in 2021 spending as a share of GDP and that's gone up to 40%, which is considerable to say the least. But beyond that, it seems like everyday Taiwanese people don't have the same sense of battle preparedness and bellicosity when it comes to mainland China as the Ukrainians do towards Russia. Maybe I'm misreading this. But when I go to Taiwan, and even mainland China, I don't sense this degree of urgency that one would have sensed in the years leading up to the Russia-Ukraine crisis. Maybe I'm misreading this. We can get into the specifics of some of the military equipment and hardware, which I think is considerable, but my big takeaway is that I just think that Taiwan will not be in the same place if war strikes that Ukraine has been. And Ukraine has really surprised to the upside the fact that it has been able to weaponize asymmetric capabilities. It has really been able to dig deep into its population for both active duty and reserves. I think Taiwan might be a different story.
Yeah, Alice, I mean, my sense of this, the importance of this 18% rise in proposed defense spending for next year. To me, what it means is that Taiwan's threat perception towards the mainland, towards China, is rising. And I think we can also see that in the recent military exercises that Taiwan conducted. The reason why, of course, and I'm sure all of our listeners are well aware of this, the reason why this is such a hot topic is because we have a three-way dynamic here. You have mainland China on one side and then on the other side you have Taiwan and the United States. And of course in 1979 the United States signed the Taiwan Relations Act. Now this does not legally commit the US to use military force to defend Taiwan. But what it does do is it requires the US to provide Taiwan with the tools and arms needed for self-defense and to maintain US military capacity to resist threats against Taiwan's security. So, it's a somewhat vague form of words, but if you ask me, what it means is that it doesn't mean that Uncle Sam will be fighting alongside Taiwanese soldiers against China necessarily. Of course, the US could choose to do that, but it isn't required to do that by this act. But what it does mean is that the US is very much involved in the arms that Taiwan needs to defend itself against a potential threat from China. And so that's the key background and that's why I think both this new budget that Taiwan is proposing and the military exercise that took place earlier this month are key because to me they both mean that the threat perception from Taiwan to China is rising. So the military exercises were really quite interesting. They were super realistic this year. In the past, quite a few of these Taiwanese exercises have been somewhat ceremonial, but this year, the exercises went on double the length of time from last year. They lasted for about 10 days. There were about 20,000 to 22,000 Taiwanese troops taking part. And the nature of the exercises was supposed to mirror or to echo the chaos of war. The exercise was being undertaken by Taiwanese troops with a decentralized command and they were simulating urban warfare, bridge and intersection defense, as well as a communication blackout drill in major cities such as Taipei. And the other thing that was being simulated was how Taiwan would respond to a blockade of the island by China. So you can see, I think through the details of what took place in this military exercise, that Taiwan is getting very serious about preparing for an invasion. Now I want to be absolutely clear. This does not mean that there will be an invasion. Nor does it mean that I am predicting an invasion. I'm absolutely not predicting an invasion. But it shows that Taiwan is getting, I would say, much more serious. And to my mind, that's where this budget, the increase of 18%, taking this budget to above 1 trillion Taiwanese dollars, that's 31 billion US for the first time. And I think it just shows that Taiwan's getting more serious. Now, if you ask me, this is a natural response to the increased bellicosity or pressure that Taiwan is experiencing from China. The People's Liberation Army, that's China's huge army, routinely sends warplanes across the median line of the Taiwan Strait. The Taiwan Strait is the rather large waterway that flows between Taiwan and the mainland. And also it's sending naval vessels close to Taiwanese waters. So mainland China has also conducted many large-scale military exercises near Taiwan. So the temperature on both sides of the strait, I would say, is rising. I think you made the excellent point, Alice, that this doesn't add up to any clear and present danger as far as we know right now. Is that the way you see it?
Well, firstly, I agree with you, James, that right now the Taiwanese are getting more ready to, let's say, put it this way, have a degree of self-sufficiency in military terms. And the reason I say that is because I think that the policy on conscription has been a pretty strong signal that they are more worried about the threat of a showdown over Taiwan with the mainland. So before 2008 there was a two-year mandatory military service. This is true of a lot of neighboring countries, whether it's, you know, there's a strong tradition of military service in a lot of neighboring countries in the region. If you look at South Korea and also Singapore. But then in 2013, they phased that out and replaced it with a four-month conscription that was largely, you know, for voluntary work. And then just two years ago, so 2024, they brought back one-year military service as part of the conscription program, again suggesting that the Taiwanese government is getting more worried about the domestic combat readiness of the Taiwanese population. But here I may differ from your assessment, James, so correct me if I'm wrong. I don't think it's so much the threat that they're perceiving from China as it is the threat of America withdrawing, because you rightly do point out the fact that embedded in the Taiwan Relations Act going back to 1979 is this degree of strategic ambiguity that the US, I think, deliberately put in terms of the language such that it is not clear what American involvement or deterrence would look like if China did a blockade, a quarantine or a full-scale invasion. And so within that gray zone, so to speak, the US has been, I think, largely happy to support Taiwan through arms sales. Like I said just now, we haven't seen the $14 billion, which would have been a record package, go through this year. I doubt it will go through and certainly not before she meets with Trump in the US on September 24. So then that builds a case for the Taiwanese to say, 'Hey, if Trump and the US and Britain are not going to back us and they're not going to supply us with arms, then we've got to look to our own population and to our own industrial complex for combat readiness and capabilities.' And again, this leads me to my next question. I'm curious if you have a thought on this. Have there been lessons from Ukraine for Taiwan? Because I think there are some parallels in terms of Russia and China being significantly larger than Ukraine and Taiwan respectively. Russia and China are nuclear powers. Ukraine and Taiwan are not. And similarly, Ukraine and I think Taiwan will have to fight to some extent asymmetric warfare given the capabilities disparity. And here, just in recent years, it looks like the Taiwanese have shifted away from some of the traditional military equipment that they're getting from the US to developing their own indigenous anti-ship missiles, UAV drones. Again, I think that's been a big lesson from Ukraine that actually drones can have a real asymmetric impact on the battlefield. And also laying down sea mines as well to disrupt PLA submarines and carrier vessels. I want to get your sense of that trend because based on conversations over the years really, I think the direction of travel from people that I've spoken to in Taiwan is that, hey, the Americans are not reliable allies. We need to look to ourselves.
Yeah, I must say I have also heard that. I've been to Taiwan a couple of times over the last couple of years and having, I used to be based there and I've met Taiwanese people coming over here as well and that sense is definitely on the rise. I would say the level of US commitment towards stepping in with military force in the event of a conflict between China and Taiwan, I would say the level of Taiwanese confidence that that would happen is declining, dwindling, perhaps even dwindling sharply. But the truth is that we just don't know. You know, this is a decision that will be taken by the US president and the people around him at the time of whatever conflagration occurs and there are so many scenarios for what type of conflagration might occur between China and Taiwan. There's the full-on invasion scenario, but increasingly these days, what we hear is gray zone tactics, a kind of a blockade or a partial blockade or a drone swarm over Taiwan or knocking out critical Taiwanese infrastructure and issuing ultimatums. There are so many permutations as to how China could decide to pressure Taiwan that it's very hard to give a clear answer on how the US might back Taiwan in that instance. So, you know, it is just a very subtle and complicated and also evolving picture, I would say.
Okay, we'll be back with more after a quick break. Stay with us.
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Welcome back. A court has just closed the book on one of the most dramatic corporate collapses in modern Chinese history. The founder of China Evergrande, Xu Jiayin, was once China's richest man and has been sentenced to life in prison for large-scale financial fraud. James, I remember many years ago that he would be on TV. He'd be on the cover of magazines. For a period of time he might have been the richest man in the world, but certainly the richest man in China. And his story was really the story of the rise of real estate developers, private real estate developers in China in the early 2000s going into around 2021. And here we see a real breaking point in the industry and in the fate of Evergrande. As I recall, just before the real estate crackdown, Evergrande, in its heyday, was not just a real estate developer. It was also issuing wealth management products. It was in the financial sector. There was talk about it creating its own electric vehicle, its own automobile. So it really was expanding into a conglomerate across sectors and was a huge part of China's vibrant private sector. But there was a lot of financial scandal associated with this company. At some point there were people who were trying to get their money back from these wealth management products that were effectively a form of financial fraud. So it isn't surprising that this guy has basically been issued this sentence of life imprisonment and it's a signal that not only is the central government unhappy with a lot of the financial fraud but also I think the political corruption that the private sector has unleashed. You know, if in previous discussions we've talked about the corruption that has happened at the local government level between the private sector and local government officials. This certainly was the case through most of the early 2000s, 2010s. So, you know, this is, I think, the final chapter of what was once one of China's biggest real estate developer stories. What's your take on this, James? Because you also lived through much of this period, too. The heydays.
Yes. I lived through the heady days of Evergrande and also the downfall of Evergrande. I was in Hong Kong at that time and you know, my first reflection is, my goodness, how the mighty fall. Xu Jiayin, as you said, was China's richest man at one point. And my other reflection following close on the heels of that is this is a cautionary tale that is relevant today. We've got a lot of money piling into Chinese technology stocks and other types of stocks both in Hong Kong and in Shanghai and the Shenzhen market as well. And you do have to wonder how many fraud cases are lurking beneath the surface in some of these star Chinese stocks. And the reason I say that is because Evergrande was an investor darling. You know, it was a huge company. It was, I think, the most valuable real estate company in the world. And so what emerged was a huge accounting scandal. PwC, which is a British accountancy company, acknowledged that its audit work for China Evergrande Group fell unacceptably below expected network standards. And this auditor PwC was separately fined $62 million by Chinese regulators and $166 million US by Hong Kong authorities. That was in April 2026 for its role in signing off on the inflated financials that the Evergrande Group had put through. And when you look at the numbers involved here of those inflated financials, they really are quite stunning because the regulators found that the flagship unit, which is called Hengda Real Estate, inflated its 2019 revenue by 214 billion renminbi and its 2020 revenue by 350 billion renminbi, 78% of the total revenue recorded. So we're talking really big numbers here. I mean, this is a major issue. What I would want to say about how relevant this is today is that, you know, a lot of money is piling in. Are there other frauds lurking beneath the surface that we don't know about? Of course we don't know about them. We didn't know about Evergrande at that time. It's hard to overestimate what a darling Evergrande was at that time. The whole world knew about Evergrande. Xu Jiayin himself was a flamboyant character. He had an immunology center at Harvard University named after Evergrande. Xu Jiayin had bought a professional football club. He had expanded into sectors such as EVs, bottled water, entertainment. He donated, as I said, to elite educational establishments around the world. So, this guy had everything going for him. He was riding high. And now, as the house of cards has collapsed, we see what it was built on. So, I do think it is relevant for today. I'm not trying to spook people by suggesting that all Chinese stocks are fraudulent, but this is a big case of fraud.
Yeah. And it affects the local governments, right? You know, at its height, and this is pre-crackdown in around 2021 on the real estate sector, there's some good economic data that suggests that the real estate sector and real estate-related activities including construction and services are about as much as 30% or were as much as 30% of the GDP. This was pre-2021 crackdown. So, this is a huge part of the economy. So it's a huge part for a lot of local governments and here the Evergrande story became, I remember writing a piece about this when Evergrande first defaulted on its bonds back in 2021. There was a big question about whether or not this was a Lehman crisis moment for China in the sense that again here you saw a property-related bubble bursting that could have macro contagion effects and also financial contagion effects. But what has been clear since then is that effectively local governments have been forced to buy up some of the liabilities. They've been forced to make good on some of the projects that Evergrande and other real estate developers left behind. But the sum of liabilities is astonishing. Total liabilities that Evergrande defaulted on was $300 billion. It's still the world's largest corporate litigation for the property sector. And home prices haven't really recovered since then. Home prices are still by some metrics 20% from their peak. And this was back at around 2020. So the story of Evergrande is not just the story of the fall of Vanke and other big Chinese private developers. It's the story also of the real estate sector really being taken down by these crackdowns from the central government. And I don't think we're going to get back to the heady days as you call it, James, of the roaring 2000s-2010s because it's clear that right now the central government, Beijing that is, doesn't really want to see the property sector reflate into the bubble that it was pre-2021. Right.
