This is all about vibes. The Chinese understand this very, very well and they are willing to play the positive mood music for Trump coming in because he needs to score a real foreign policy game and he will try to do that in Beijing with nothing really substantive. Maybe a Chinese promise to increase AI purchases and Boeing purchases coming out of the summit.
Welcome to China Decode. I'm Alice Han.
In today's episode of China Decode, we're discussing the most consequential Trump-Xi meeting yet, how China is quietly absorbing Western innovation, and why Xi keeps purging China's top military leadership. That's all coming up. But first, let's do a quick check-in with how the markets are starting the week. On Monday, Chinese stocks rallied with the Shanghai Composite Index breaking above 4,200 points to hit its highest level in over a decade. Across the Shanghai, Shenzhen and Beijing exchanges, nearly 2,900 stocks were up. AI and related tech sectors led the rally, with memory chip stocks, Jang Bolong and Tongyo Technology jumping over 10%. China's government bond futures fell across the board, with the 30-year main contract dropping 0.39%, the 10-year falling 0.06% and the 5-year falling 0.03%. The 10-year government bond yield has been hovering around 1.75%, edging lower ahead of the Trump summit.
All right, let's get into it. This week, Trump heads to Beijing for one of the highest-stakes meetings of his presidency, sitting down with Xi Jinping as the world's two biggest powers try to steady a relationship strained by tariffs, technological conflict, Taiwan tensions, and now the fallout from the Iran crisis. The meeting is set to begin this Thursday, and on Friday, James and I will be going live on Substack to talk all about it. We'll analyze day one of the talks, outlining what's at stake and making sense of what comes next. We'll be joined by the wonderful Kevin Shrew, founder of the technology fund Interconnected Capital, who writes the popular blog Interconnected. Now, join us live this Friday, May 15th, at 10:00 a.m. Eastern time on ProfG+. If you go subscribe now, you'll get notified before we go live on Friday. You'll get the China Decode newsletter in your inbox every week, and you'll also be the first to know about future live streams James and I plan on doing more in the future. Go to chinadecode.profgmedia.com to sign up.
But let's talk about what we know before the meeting. On paper, the Trump meeting agenda concerns trade, rare earths, semiconductors, Boeing jets, American AI, and a possible new broad trade framework to manage economic competition. But hanging over every conversation is a much bigger question: whether Washington and Beijing are drifting toward managed rivalry or outright confrontation. The timing couldn't be more complicated. The Iran crisis, which remains unresolved, is looming over talks. And at the same time, Xi is reportedly pushing for softer US language on Taiwan in exchange for economic concessions. Beneath all of this is a growing reality. Both sides now openly acknowledge that the US and China no longer see trade and technology as economic issues alone. They see them increasingly as national security weapons. James, this is kind of like the Super Bowl for people like us who follow US-China relations. Whenever the big giants, the heads of state, meet, there's a lot of analysis that happens before, during and after. What is, if you were to look at it, what are your top predictions for what comes out of this summit?
That's right, Alice. It really is like the Super Bowl for us. It's a time when all the emotions collect together and we get a chance to talk about the state of the superpower relationship. I tell you, to me the big thing for this meeting, and I believe this is unprecedented, is that I think for the first time ever it is the Chinese president, more than the US president, that is the person with the upper hand. I think that President Trump goes into this meeting relatively weakened, at least compared to when he took power in January last year, and I think correspondingly Xi Jinping, China's president, is relatively strong. But just let me try to elaborate why I think this is the first summit between the US and China in history where the Chinese side has more power. The first sitting president to visit China was Richard Nixon in 1972. At that point there was no comparison between US and Chinese power in the world. The US GDP, I believe, was about 11 times that of China. Just as a little trip down memory lane, the first president of the US to visit China was in fact Ulysses S. Grant, who went in 1879. But that doesn't count because he was a former US president at that time, though he did spend six weeks in China. The last president to visit China was Trump himself back in 2017. And at that point I think we can all agree that the US was definitely the more powerful of the two countries. But where we stand now, and if you disagree with me please say so, Alice, I mean this is quite a big call I'm making, but where we stand now is the following. In nominal terms, the US economy is still bigger than China, but adjusted for purchasing power parity, China is at least a peer competitor when it comes to technological advancement compared to the US. China is of course by far the world's biggest trading nation. It's a much bigger industrial power than the US. It commands about one-third of the world's manufacturing output compared to about one-sixth for the US. And of course on the other side, the US has a much bigger and more impressive military than China. But my argument would be, unless you're at war, military strength doesn't really count for that much. I think that the key inflection point came last year when Trump had to roll back on the Liberation Day tariffs that he imposed on China. Now at that point, for a brief period of time, the US levies on Chinese imports into the US were about 145%. Then China hit back and it said that it was issuing restrictions on exports of critical minerals that US technology companies and its weapons manufacturers were dependent on. And within months the White House had backed down. It had lowered those tariffs from about 145% to what is currently an average of 47.5%. And I think that, to my mind at least, this shows that when it comes to economic power, China is able to weaponize somewhat more persuasive power than the US. We've seen it in the critical minerals, but China could also do it in other chokehold industries: active pharmaceutical ingredients, batteries, legacy semiconductors, and other items where China controls a massive amount of global production, typically hovering around 70 to 80%. So, I'm not saying that this upper hand that China has will last forever. Maybe Trump will pull something out of the hat at the summit, but at the moment, that's how I see it. I think this is historic in terms of US-China relations for this shifting power balance between the two. What are you seeing, Alice? What do you reckon to that call?
Well, I love a big call and I do agree with elements of it. Although I think I probably come out with it being somewhat even in terms of the playing field. And my framing for this summit is the question for both sides: what are your asks and what can you both agree on in terms of concessions? And on the China side, my sense, having just been there for a month, is that the Chinese care about three main issues and then two somewhat secondary issues. The three big issues are tariffs. They probably will want some minor reduction of the current effective tariff rate of a little bit above 30%. They probably want the Section 301 investigation to go away. Remember that was put into place as a response to SCOTUS striking down IEEPA. So there's a tariff issue. Number two, they will probably, I think, want more clarity on the freeze to export controls. And although I don't think there will be an announcement of loosening of some of the export restrictions on, say, chips, I think the Chinese will be pushing for a continued freeze on both ends, you know, export restrictions for chips in return for continued export restrictions for rare earths, which remember they remain in place according to the current framework until November. And number three, there is a strong push for the so-called inbound investment strategy, meaning that the Chinese are probably going to ask for Chinese factories like your BYDs or CATLs, battery makers, manufacturers, car makers, to set up plants in a JV structure or wholly owned Chinese structure in the US. That I think has been signaled quite strongly from Beijing in the last few months. And then the secondary issues I think about are really the geopolitical ones. Number one is Iran. Some kind of dialogue over how Iran is resolved. Although again I think the Chinese would rather sit in the back seat and let the other players like Pakistan, the Americans, the Iranians take the driver seat. And then number two is Taiwan. Although I sense, as we spoke about this previously, James, there will be less pressure on the Americans to change their rhetoric or language. I think the Chinese are more interested actually in another secondary issue which I think may come up again, which is North Korea. And so there may be some attempts on the sidelines to reconnect Pyongyang with Washington. You know, Trump may revive his conversations or have a phone call with Rocket Man again very soon after this. On the US side, very strongly, you see this from some of the CEOs that are invited. Jensen Huang has just pulled out, apparently he's not going to be coming, but the Boeing CEO is going to be attending. This is going to be a lean team of CEOs, but I think Trump is signaling that he wants more Chinese AI and aviation purchases coming out of this summit or in a future summit. And then Greer is coming along with Bessent from the USTR and Treasury Department respectively, and they I think will be pushing, you know, for more discussion about reducing the trade deficit. Although I qualify that this isn't... I think fascinating that you cited the 1970s. The statistics is pretty startling. The bilateral trade volume, this accounts for both exports and imports, the bilateral trade volume in 2025 between the US and China saw the biggest drop since 1979. That was the year in which the US and China officially declared formal diplomatic relations. So, you know, this is coming at a time where at least on the bilateral statistics front we're seeing in our contemporary memory the lowest levels of bilateral trade between the US and China. I think the US share of total Chinese exports to the world has halved since Trump last came to China in 2017. So it's interesting to see how, you know, really since over the last decade trade has become reduced. Although, you know, if you look into the numbers actually it's just being rerouted through these third-party countries, mainly in Southeast Asia and Mexico and whatnot. But what has become, I think, more prevalent since 2017, and I'm curious about your thoughts, James, is the dual-use nature of pretty much everything. You know, autonomous weapons, AI, even biotech and pharma. I think increasingly that basket of dual-use technologies has increased from both sides and you see that in the export restriction programs that they put into place. But the backdrop to this summit I think is very much going to be somewhat different to 2017, where I don't think it's going to be as much about trade. I think it's going to be more about some of these dual-use technologies. They do not get resolved, I think, from this summit alone. There will be more to come and I think Xi will go to the US at the end of the year. But my one-line takeaway is that this is all about vibes. The Chinese understand this very, very well and they are willing to play the positive mood music for Trump coming in because he needs to score a real foreign policy game and he will try to do that in Beijing with nothing really substantive. Maybe a Chinese promise to increase AI purchases and Boeing purchases coming out of the summit. But James, what's your... how do you think about the differences between 2017 and today?
Well, I mean, I was just going to say I completely agree with your point of view that, you know, the rhetoric around this summit is going to be fairly positive, I believe. But to my way of thinking there is going to be a disconnect between what the rhetoric says, the mood music, the vibes as you put it, and really what the security state in each country is thinking about the other. I don't think there's been the slightest change in that regard. I think both the security state in China and the security state in the US views the other as an implacable adversary. And so I think, you know, we're going to have another replay of this disconnect between positive vibes and then the deep state in both countries grinding away, undermining the relationship, sowing suspicion. And that's where, you know, the issue of dual use that you mentioned really comes in because technology is dual use these days. It is hard to get away from. The way in which technology has changed has meant that, you know, the internet, your computer, your phone, all of these things become, well, not exactly dual use, but they could be used for cyber snooping. They could be used by the deep state of the other side. And that's just some of the most commonplace technologies we have. When you're talking about, you know, this 5G or 5.5G telecoms cables that you lay under the ground, that issue of dual use becomes magnified. So I think that we're going to get a positive vibe from this summit. Both sides are going to try and do that. But in the background, the suspicion is going to maintain itself. The two areas that I think the two sides need each other the most at the moment is on the US side, it needs China to try to get to some kind of solution in the war in Iran and obviously to unblock the Strait of Hormuz. That is a critical interest that I think Washington feels right now and it needs China to use its agency to get Pakistan back again to energize, to lead the negotiations that might lead to some kind of resolution. And on the Chinese side, you've mentioned it already, Alice, they're always looking for something on Taiwan. Taiwan is so front and center for Chinese policy. Exactly what they might get is really not clear at the moment. They might be looking for some kind of positive statement by the White House, but I think they might probably be pushing for something a bit more concrete. Maybe a severe cut in US arms sales to Taiwan. Something like that. This is speculation on my behalf. I don't know.
That would be huge. I don't have sources on that at the moment, but I think China realizes that it has the upper hand and it's pushing hard for something more concrete. Whether they get it or not, that's another question. You think that would be too big to ask, right?
Well, I think it's a pretty big concession for the Americans to make. They still haven't formalized, and so far as I understand, Alice, right, they haven't actually delivered on those sales yet to Taiwan. I think that probably is significant because they didn't want to rock the boat ahead of the Trump-Xi meeting, but that would be unprecedented, at least from my understanding. Or do you not agree?
