Analysis

China's economy appears to be in a Schrodinger state: it is faltering amid a lack of necessary structural changes; while simultaneously out-innovating the West and aggressively dominating global markets. How can both be true, and what does that mean for US companies?

This seemingly contradictory position manifests in distinct ways. A cooling economy has incentivized a rise in nationalist sentiment that the party leans into when it needs to reassure its members that it retains a strong grip on Chinese society. In the past week, for example, this dynamic manifested through Xi Jinping’s touting the CCP’s domestic “successes” in Xinjiang and foreign championship of a new China-led multilateral world order. These statements create flashy media moments for Xi, but they also underscore a pivot in state propaganda away from talking about the economy to instead emphasizing nationalist messaging designed to rally support in challenging times. 

Nationalist rhetoric belies some hard truths for China’s economy: immense imbalance, flatlining domestic demand, and overall slow growth that make for a challenging time ahead of next month’s announcement of the next five-year plan. One way in which the CCP is addressing this is by heavily steering the private sector to better align with the party’s goals. Intense support for Chinese firms, particularly in capital-intensive R&D, underscores how the party views businesses as political actors from whom it can demand political outcomes. Amid domestic economic woes, the party’s capture and exploitation of the private sector for party-state purposes is therefore likely to intensify in an attempt to plug the multiple leaks in the country’s metaphoric hull. 

Moreover, the CCP is pushing Chinese companies to look for opportunities outside China’s borders to compensate for slower domestic demand. When the CCP talks about a new world order that puts China at the center, it sees Chinese corporations as a key mechanism by which to achieve this ambition. Nationalist rhetoric is therefore not just bluster. It indicates a trend towards a total fusion between the CCP and China’s private sector. 

What may seem like two contradictory positions–a weak economy but with aggressively expanding corporations–are therefore closely related as the party attempts to take complete control over China’s economy. This means that Western companies face a fundamentally unfair fight against not only Chinese competitors, but ultimately against these corporations’ CCP backers and the state resources that they can mobilize. As Chinese businesses expand into new markets, this competition will globalize, meaning that US companies will need to strategize carefully to avoid being forced out of markets by predatory Chinese competitors. While a weak Chinese economy may seem advantageous for foreign companies to take advantage of, it therefore may actually spell challenging times for US companies around the world.

Analysis

Two major US delegations visited China this past week: one from congress, the other of US venture capital leaders. By any measure, these visits are a big deal; no congressional delegation has visited China in the past six years. Led by Adam Smith (D-Wash), members of congress met with Politburo member He Lifeng and Defense Minister Dong Jun. Meeting He Lifeng, in particular, underscores his position as China’s US trade “tsar” responsible for managing engagements with US Treasury Secretary Scott Bessent and continuing the engagements of Bessent’s predecessor Janet Yellen. 

He Lifeng’s position as one of the party’s top finance and trade figures, not to mention his strong ties to Xi Jinping since they worked together in Fujian Province in the 1990s and early 2000s, suggests that China is at least paying lip service to bilateral engagement. Yet, as we wrote in our previous edition of the Red Report, these visits are unlikely to ease China’s negotiating position or even change China’s fundamental policies in any way. The biggest bilateral issues–tariffs, trade, critical minerals, and geopolitical competition–are all unlikely to shift anytime soon. This is in part because China views its ascendency (and the US’s decline) as both ongoing and inevitable: CCP leaders see their negotiating hand as strengthening, not weakening, over time. While China will likely drip feed the promise of smaller possible deals to pretend that it is still interested in engagement, major changes ahead of a possible meeting between President Trump and Xi are unlikely.

One issue raised by the delegation was that of reducing “non-tariff barriers to US companies seeking to do business in China.” In other words, how can US businesses invest fairly in China, or in China-dominated industries, amid the party’s blatant favoritism for domestic firms and framing of foreign companies as a threat to national security? Last week, a visit to China by a group of VCs from Western renewable energy firms sought answers to this question, but instead reported shock not only at the speed and scale of Chinese innovation, but also in how Chinese breakthroughs will massively disrupt Western businesses. The VCs reported that most Western startups in fields ranging from battery manufacturing to solar and wind energy will be unable to compete with Chinese peers that are flush with state-backed cash and political support, and therefore are increasingly “uninvestable.” Instead, VCs will likely search for Chinese partners that can provide better technology at cheaper prices compared to Western competitors. 

This represents a dramatic and potentially catastrophic turn for Western renewable companies, not to mention the security risks of having Chinese technology pervade critical infrastructure throughout the West. The real question is whether this is unique to the renewables sector, which has suffered double pressures from a surge in Chinese investment amid a severing of US government support. Given broader context, China’s expansion into multiple technology fields suggests that renewables is the first of many sectors that Chinese firms will seek to dominate, and to which US businesses will need to react. Moreover, as other countries become increasingly reliant on Chinese tech products to provide essential services, this increasing dependence will likely make global leaders more amenable to China’s corporate and political aims, including the exclusion of US competitors from key sectors. 

Short of either major government investment, anti-dumping protections, or business coalitions within key sectors–a neo-mercantilism, if you will–US companies will therefore need to think strategically about how to either balance the integration of Chinese products with security concerns, lobby for industry protections, or plan for how to pivot as Chinese competitors become increasingly emboldened to expand aggressively into US markets. Contrary to the more positive takeaways from last week’s congressional visit, the VC perspective therefore paints a far bleaker, but perhaps more accurate, vision of what a China-dominated future might look like.

Analysis

The US and China have struck a deal to save TikTok. While the full details are still emerging, both the US and Chinese sides have expressed confidence that a deal will be finalized following the most recent round of trade negotiations in Madrid. 

For President Trump, who has made saving TikTok a central concern of his campaign–at least since changing his position following a $40 million campaign donation from TikTok investor Jeff Yas–this appears to be a win. To resolve the long-standing security concerns about the app, particularly regarding its governance structure and content algorithm, TikTok US–the ByteDance subsidiary through which the app currently operates–will be restructured into a joint venture, with American firms holding six out of seven new board positions. More importantly, the content algorithm that has been key to the app’s success will be licensed to US cloud services company Oracle, which has stored TikTok US’s user data since the company’s regulatory troubles began in 2020. Whether or not Oracle will be allowed to adjust the algorithm–which some pundits think is a possibility–the formal details have not yet been released. At the very least, it seems that US user data will be completely stored on US servers and unavailable to Chinese parent company ByteDance. While the technical details are ironed out, this is a welcome announcement for small businesses that rely on the app as a core part of their sales strategy (and are still finding success despite the elimination of the de minimis rule), and TikTok plans to double merchandise sales in the next year.

What China is getting out of this deal is less clear, although hints at loosening trade restrictions suggest possibly significant changes to the status quo. In a statement following his call with Trump, Xi Jinping signaled his general approval of the new deal, couching the agreement in terms of conducting fair trade and enabling each other’s mutual benefit. The official Chinese readout, however, specifically includes a line on “reducing investment barriers” (减少投资障碍), in addition to more general rhetoric about cooperation toward shared goals. Reducing investment barriers could mean anything: from relaxing or eliminating export controls on semiconductors and other advanced technologies to de-barring certain Chinese companies from doing business in the US, or even reducing the power of CFIUS to block Chinese companies’ potential US operations and investments. Whatever it turns out to be, though, US companies should be preparing for the return of Chinese competitors to the US market. 

Whether or not US companies will also see an easing of restrictions on doing business in China remains to be seen. As reported above, US companies are already struggling to compete in China due to strong PRC government preference for working with domestic companies. This fact is, of course, compounded by China’s state-backed industries having access to non-tariff subsidies, and capital beyond many US private companies’ means, in turn making it difficult for them to appear as worthy business partners. One would hope that, if the US government intends to open the American economy to more Chinese business, that it will have secured a reciprocal deal for US companies that are willing to take the risk of doing business in China.

Analysis

Huawei’s newly public three-year AI hardware roadmap marks a shift in posture. Once quiet about its AI chips, Huawei is now projecting strength, signaling to both domestic and international audiences that it has neutralized chip restrictions as a primary U.S. lever in ongoing negotiations. By unveiling future-looking plans rather than incremental updates, Huawei is offering reassurance that its R&D cadence remains intact despite constrained access to advanced U.S. semiconductors.

Tencent’s parallel messaging reinforces this theme of resilience. At the Global Digital Ecosystem Summit, Tencent Cloud President Qiu Yuepeng declared the company had “fully adapted to mainstream domestic chips,” a claim intended to showcase progress in replacing U.S. technology. Yet, uncertainty lingers. Industry observers still expect Tencent to remain the largest buyer of NVIDIA’s AI solutions in China, suggesting that adaptation is partial rather than complete. The tension between public positioning and market realities highlights how Chinese firms balance national policy expectations with performance-driven business imperatives.

Beyond semiconductors and AI chips, Beijing is rolling out whole-of-nation initiatives in adjacent domains, with robotics as a prominent example. As detailed in Sunny Cheung’s Jamestown Foundation report on China’s robotics industrial policy, the strategy follows a familiar playbook: exploit overlap with adjacent industries (electric and autonomous vehicles), localize core components (sensors, actuators, control systems), and mobilize local governments to tailor action plans to regional strengths, such as medical robots. With China already producing high volumes of robotics-related patents and publications, the sector demonstrates how industrial policy hedges against chokepoints in the global semiconductor supply chain.

The bigger story is that Beijing is using export controls as a catalyst to accelerate self-reliance narratives across multiple sectors. Huawei’s roadmap, Tencent’s chip adaptation claims, and robotics’ policy integration illustrate how China is positioning itself not just to weather restrictions, but to reframe them as proof of US dependence risks. For multinationals, this messaging underscores the dual reality: China’s firms remain tethered to US technologies even as they trumpet indigenous breakthroughs. The semiconductor playbook—containment through capacity freezes—may prove harder to replicate in sectors like AI software and robotics, where indigenous policy scaffolding already creates insulation against leverage.

Analysis

China’s highly advanced espionage technology is increasingly finding buyers overseas. Having developed a sophisticated system for surveilling society and strict internet control, China’s model for social engineering is attractive to autocrats (and some democracies) around the world. Sold as a “smart cities” solution, Chinese monitoring–essentially espionage against its own citizens–has found buyers from Kazakhstan to Ethiopia, as the leaders of these countries look for blueprints on how technology can preserve and tighten their autocratic rule at home. This is not just about Chinese-made CCTV cameras, although they are an issue; rather, it is an entire AI-supported technology network for monitoring (and anticipating) citizens’ every move.  

For governments in places like Kazakhstan, China provides a ready-made mass surveillance and response system. For China, it gets to define what a new global security architecture not only looks like, but perhaps more importantly that these systems are entirely dependent on Chinese technology and sustained good relations with Beijing. For governments to continue reaping the benefits of mass surveillance and the ability to crush dissent, they must stay in China’s good books. This is not to mention what happens to the data collected by Chinese products now operating within monitoring systems across the world, almost all of which is certainly being channelled back to China. 

Through the export of mass surveillance ecosystems, China is not only rewriting the global security order. It is making an order dependent on Chinese technology, with Beijing at the center. Through a combination of co-opting existing institutions like Interpol, whose Emirati president has lauded China’s security approach, to creating new forums like the Global Public Security Cooperation Forum in Lianyungang, China is shaping the world in China’s image. 

For US companies operating in a growing list of countries, this significantly increases the risk that company IP, sensitive information, and employees will likely fall under the watchful eye of Chinese-made surveillance systems. Moreover, governments in these countries will be incentivized to report about US company activity through information collected via China’s smart cities’ infrastructure. Discussions about exports of Chinese “smart cities” should therefore be a cause for concern among US businesses that will likely require enhanced physical and digital security to counter China’s unprecedented global monitoring and data harvesting capabilities.