I think, in a way, Trump's moves have probably pushed a lot of these countries — the Europeans, the Canadians, now maybe even the Brits — to adopt a softer trade policy towards China. There has been an understanding over the last few years that China is an overcapacity and a national security problem, but at the end of the day, there's a lot of money on the table.
Welcome to China Decode. I'm Alice Han, and I'm James Kynge. In today's episode of China Decode, we're discussing how China is pulling America's allies out of Washington's orbit, the problem with China's lopsided economy, and a viral app that exposes China's loneliness epidemic. 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, the Shanghai Composite index inched up 0.3%.
The Hang Seng index fell 1.1%, dropping to a one-week low on news of escalating trade tensions out of the US. Pharma got hit the hardest, with Hansoh Pharmaceutical Company declining 4% and WuXi Biologics 4.8%.
All right, let's get right into it. As the US-China relationship grows more strained, Beijing is aggressively courting America's allies. Canada is breaking with Washington to cut tariffs on Chinese EVs from 100% in exchange for access to Chinese markets. European regulators are testing China's homegrown C919 jet, and Beijing is dangling trade and diplomatic incentives across the European Union. The big question is: is this smart diversification or a strategic realignment that weakens US leverage?
James, a lot has been happening. Even in the last week, we've seen Carney's trip to Beijing. That's a pretty big deal. He got really high-level meetings. We also saw more recent moves of softening from the EU on China's trade, especially EVs. And then we've also got Greenland, that's impacting EU-US relations. How do you think about China's economic moves in the midst of all of these dynamics?
Well, it really feels to me a little bit like we've gone through the looking glass these days. I must say, so much is in flux in the international order that it's hard to disentangle cause and effect. It's hard to know which is a move and which is a countermove. But in what I'm calling the tumble dryer of international affairs, I think a couple of big moves into China's orbit really stand out. The first was, as you've just mentioned, Alice, Mark Carney, the Prime Minister of Canada, going to China last week. And the other big move is the intended visit to China by the UK Prime Minister Starmer at the end of the month. Both of these countries are the staunchest and longest-standing allies of the United States. And now we can see, certainly in the case of Canada, it's cozying up to China. And it was clear that China lost no opportunity to make propaganda capital out of this move at the expense of the United States.
Let me just tell you a couple of things that the Chinese media was saying. The China Daily, which is an official Chinese newspaper, encouraged the Canadian government, Ottawa, to adopt what it called, quote, 'strategic autonomy from Washington.' And the longer quote was: 'If Ottawa still chooses to subject its China policy to the will of Washington again in the future, it will only render its previous efforts to mend ties with Beijing in vain.' So it was a very clear warning that the Canadian government should not backslide, having made this visit and expended all this political capital to cozy up to China, that it shouldn't backslide from this position in the future.
Even more extraordinary comment came from a Chinese academic at Renmin University in Beijing. His name is Su Shoujin, and he said that Canada must be feeling a lot of unease toward the US these days because, quote, 'if the US can claim Greenland, then it might lay claim to Canada.' Just sort of extraordinarily bold statements coming out of Beijing. I mean, just a reminder that this is an official newspaper, the China Daily, and academics in China have a sort of semi-official status. I mean, they're allowed to put their interpretation on things, but they're not allowed to stray too far from central government thinking in Beijing. So I do think these are really very interesting.
Just before I come back to you, Alice, let me just go into Keir Starmer's visit at the end of the month. That is also going to be a really big moment in UK-China relations if it goes ahead. This is because it will be the first visit by a UK leader to China since 2018, and because the visit is coming across, as it were, the issue of this Chinese mega embassy in London. And in case listeners are not familiar with this, it's a very big story in the UK. The Chinese have a plan, and they want approval for the plan to build a huge embassy right in the center of London, so close to the City of London, the financial district, which is the heart of London. And part of this embassy is supposed to go over the fiber optic cables that supply the city with all of its information and all of its data. And so protesters and campaigners against this move have said that this is an unacceptable security risk. In other words, China could either tap into the information or potentially even cut the cables.
And so it is expected that this mega embassy will be approved. That's what my sources are telling me. It may happen as soon as today or tomorrow or early this week. And after that, Starmer will be allowed to go to Beijing and, you know, to conduct his diplomacy there. Though the move to Beijing from Starmer comes after considerable capital has been expended, and I would be expecting the Chinese, when Starmer gets to Beijing, also to be coming out with statements about strategic autonomy away from the United States. Though we are seeing, at least in these two examples, a move from some of the US's staunchest allies toward China's sphere of influence. I'm not saying they're part of China's sphere of influence now, but we're seeing them inching toward China. I'd say that's my take anyway. What are you seeing at the moment, Alice?
Well, I think we first need to distinguish the EU dimension from the Canadian dimension. And I'll start with Canada. It was interesting to me that less than a year ago, Carney campaigned on this concept that China was, quote-unquote, 'the biggest threat to Canada's security.' In a way, he had to politically make that point in order to, I think, win the election, if you recall. And he was definitely a latecomer and a dark horse in terms of the Canadian election last year. But since then, I think this is very much in lockstep with what I saw in Australia a couple of years back under Albanese when he joined as Prime Minister of Australia, bringing in a Labor government to Australian politics, is the fact that economic rationale wins at the end of the day. Even although China is seen as a national security threat, there's a lot of money that's on the table, and certainly there are winners and losers in Canada. The agricultural sector, I think, largely has been a winner. Oil makers in Canada probably have been the losers.
China is going to drop substantial tariffs on Canadian canola meal, lobster, crab, peas, and lower tariffs on canola seed. That's a big win for a lot of oil makers in Canada. But at the same time, and I thought this was pretty considerable, I was surprised by this, Canada is going to slash 100% tariffs on EVs from China to Canada. That's about 49,000 per year. And that, I think, when we think about the broader landscape of China's EV export machine, is going to be a huge loss for Canadian auto. But I think this move is politically calculated. To your point, James, Carney is unhappy with what is happening in Washington, and I think there is somewhat of a consensus amongst the Europeans and the Canadians, and maybe even the British, which you may be alluding to, James, that Washington's actions, maybe in Venezuela and certainly more recently in Greenland, are not in alignment with those countries' — the Europeans, the Canadians, and Brits' — views of the world order.
So I think, in a way, when we put Venezuela with Iran with Greenland, I think since the start of the year, Trump's diplomatic scorecard is probably in the negative territory, which is probably what's provoking some of these recent moves. And then it comes to the European dimension, where I had been predicting this, but I was a little bit late to the game in the sense that I had thought last year that the price minimums would actually be developed as a framework. It's probably only started to kick into effect as of a week ago, January 12th, when the European Commission said that they want to put a framework deal in place for price minimums for Chinese EVs. That is for Chinese automakers. That is considerable because China's biggest market for autos is the European market. And China is the EU's third-largest trading partner for goods and services after the US and UK. So for both countries, this is pretty considerable. China, I think, made about 10% of the EV market last year. That could rise significantly if we see more of a move to reduce the 45% tariffs, for instance, on Chinese EVs.
So I think, in a way, Trump's moves have probably pushed a lot of these countries — the Europeans, the Canadians, now maybe even the Brits — to adopt a softer trade policy towards China. There has been an understanding over the last few years that China is an overcapacity and a national security problem, but at the end of the day, there's a lot of money on the table and a lot of vested interests in those countries that want to see business still trickling through between the two countries. We can go into the numbers, but that's sort of my broad brushstroke view of why these countries are moving, it seems, in lockstep. And everyone will be convening in Davos, as you know. They're all convening on this sleepy, snow-capped town of Davos, where I think a lot of drama will happen.
Yeah. And I mean, Trump is going to be in Davos, and I must say, when Mark Carney was in Beijing making all these statements and, as I put it, cozying up to China, I expected Trump to come out with a considerable backlash, but so far he seems to be quite accepting of Canada's overture to China. He was asked what he thought of the agreement between Canada and China on trade, and he said, 'It's okay. That's what he should be doing. I mean, it's a good thing for him to sign a trade deal. If you can get a deal with China, you should do that.' So so far it seems that Trump is moderating his response.
But I would say that, you know, there is a risk for these allies of the United States. I'm talking about Canada, the UK, and really the whole of Europe. There is a risk because the US remains the most substantial economic and security partner of all of the countries in the West. And in the case of Canada, it's overwhelmingly so. Something like 74% of Canada's trade is with the US, and, you know, less than 10% with China. And in the UK, I mean, it's overwhelming. Our biggest investment and trade relationship, not to mention diplomatic and security relationship, is with the United States. So I think that, you know, there is a tightrope that these countries in the West are walking. They're trying to get the economic benefit of moving closer to China without annoying the United States so much that Washington creates a backlash against us. So it's a game of cat and mouse, I think, right now. And, you know, the world is so complicated right now. It's going to be interesting to see how this one plays out. I certainly couldn't call it.
I would agree with you, James. You know, the expression, 'while the cat's away, the mice will play.' I'm thinking maybe the Canadians and the Europeans are the mice in this analogy. As long as the US is subsidizing their national security and is running a trade deficit with those two trading blocs, Canada and the EU, it's just a natural bedfellow for those two regions of the world. Whereas China, the opposite, is a national security threat and is running massive trade surpluses. So I think this is a tactical, short-term move in order to extract some short-term gains rather than a strategic pivot. And certainly in the short term, some agricultural producers in Canada and the EU will benefit. Airbus, we haven't talked about, will likely benefit as well. China's already considering purchasing more French European aircraft, and Airbus's market share in China is already 55%, which just recently overtook US Boeing's market share. So there are some winners and losers, but I think I broadly agree with you, James. This is a tactical move as opposed to a strategic one. But we'll see how Greenland blows up, because if Trump's threat of tariffs do get put into place at 10% that he's threatening on the European countries, effective February 1, then we might be in for a broader EU-US trade conflict in mirror image of what we saw last year between China and the US.
Yeah, it's really hard to overstate how exercised people are in Europe about Greenland. A lot of people, policymakers, just can't get why the US is being so aggressive on this point. You know, they feel that there's a pathway to greater US influence on Greenland that takes a peaceful route rather than talking about some kind of military overture.
Yeah, I mean, this might be a little bit facetious, but there probably is no better way to unify the Europeans than to hit the Greenland button, which we've seen the last few days. All right, we'll be back with more after a quick break. Stay with us.
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Welcome back. China's economy is sending mixed signals. Exports and high-tech manufacturing are booming, according to the latest 2025 data. But lending is at its weakest level since 2018. Consumer confidence is soft, and the property sector remains in deep, deep trouble. As Beijing leans harder on technology, trade surpluses, and even the digital yuan to power growth, the question is whether this imbalance is sustainable or a warning sign ahead of the March National People's Congress meeting. James, let's go right into it. The economic data from 2025 as a whole year and the Q4 data have just come out. I'm excited to get into the weeds with you. What's your hot take on the data?
My hot take is that this data shows yet again what a highly lopsided economy China is. And I think there are two numbers that absolutely show this so clearly that it's so stark. There is one great strength in the Chinese economy, and there is one — well, there are several weaknesses that lead to a particular weakness. The great strength is that China is a high-tech manufacturing powerhouse that increasingly inspires awe around the world. And yet the weakness is that its economy is so poor at directing the fruits of this advancement to its people that the birth rate that we've seen in China last year has fallen to its lowest level since 1949. That's the communist revolution of 1949. So, you know, we've got these two amazing things going on: this hard-charging technological superpower now, which is a peer competitor of the US in technology, and an economy that can't even, you know, return the fruits of labor, as it were, to people so that they feel that they can have families and have as many kids as they like.
So the two numbers that I'd like to mention are high-tech manufacturing output that rose 9.4% last year, and the other number on the other side is retail sales, which grew only 3.7%. So what you've got is high-tech manufacturing growing at more than double the speed of the amount of money that people are spending on things to buy. And I think that really sums up the great contradiction of the Chinese economy.
But 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 gross 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. 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. They could easily fix this if they decided — and this is Michael Pettis's point, which I agree with — that they weren't going to do growth targets every year in the March National People's Congress and 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. 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.
Property investment dropped 17.2%. Again, that's double-digit negative territory, which has been in place, I think, over the last six years. And again, this is something that they haven't really addressed because politically, I think, they like the fact that, you know, they've tried to — 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. 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, you know, reducing mortgage rates, which again are 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 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 this is — I think 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, 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 an extension of the subsidy program to some extent for EVs and for other durable goods. 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.
