Analysis

The Chinese Communist Party (CCP) continues to struggle with how best to address structural issues within the Chinese economy. The fear among CCP leaders is that China has reached a point of “involution” (内卷), a process where greater inputs to the economy do not yield a proportional increase in output. In other words, the CCP is nervous that despite adding additional labor or resources, the Chinese economy is becoming less productive or even crashing. For foreign companies (and countries), this idea is not new: China’s overcapacity and dumping of products to undercut foreign competitors is a common tactic that has roiled global markets. It is only recently, however, that CCP leaders appear to be fearful that this same process could ruin China’s own internal market.  

Questions of how to avoid this economic malaise dominate discussions of how the party should promote internal competition and competitiveness as a driver of growth, rather than as an excessive force that causes companies (and workers) to crash out of the economy. China’s leaders are particularly fearful that excessive competition is encouraging price wars between companies, which provoke firms to reduce prices in a race to undercut competitors, but which potentially cause firms to crash out of the market. China’s leaders explicitly called out price wars as an issue that demanded legal recourse, with the party publication, Red Flag, questioning the utility of “involution-style” excessive competition (“内卷式”竞争) as hampering, rather than spurring, growth. The CCP’s main mouthpiece, People’s Daily, similarly called for the elimination of excess competition as a drag on China’s corporations, highlighting the importance that the term now occupies on the minds of China’s leaders. 

Yet while both publications noted that excess competition was largely a result of “imbalances” in supply and demand, neither directly called out “overcapacity” as a major driver for China’s current economic challenges. This is, in part, because overcapacity is a sensitive issue that requires state-owned enterprises and private corporations alike to rein in production and supply, which is challenging in a system that has historically measured success (including career advancement) in terms of production output. Despite this, recent nods from the party center suggest that this issue is on the table. Dealing with overproduction in the ecommerce and auto industries seems to be where the party is directing its initial attention, but current trends suggest that the party may roll this out to other sectors. Promoting domestic demand will also likely continue to dominate the party’s efforts in the coming months. 

Watching how the party handles involution will tell investors and businesses alike a lot about the direction of China’s economy. In theory, managing overcapacity should prevent Chinese goods flooding markets, a key concern for the EU and the US, and help raise profit margins in affected industries. Yet decreased supply from China, depending on how it happens, may also raise prices for consumers and lead to shortages of components or other key supply chain parts. Hoping that the CCP deals with these key issues is therefore, at best, a short-term solution for US companies, albeit one that should be monitored closely. Rather, companies need to be increasingly strategizing about how to outperform Chinese competitors through enhanced innovation, service, quality assurances, or other means. After all, the CCP will only ever make decisions that benefit the party’s interests, even at the expense of China’s own corporations (let alone foreign businesses).

Analysis

US Secretary of State Marco Rubio was set to make his first trip to Asia this week, with plans to visit Japan, South Korea, and Malaysia. The trips to Japan and South Korea were canceled, however, to focus on troubles in the Middle East. The Secretary’s upcoming and anticipated future engagement in the region, while ostensibly about negotiating trade deals and participating in regional governance meetings, also suggests a possible recentering of China in US foreign policy and the advancing of a US strategy for Chinese containment. 

There are, of course, tariffs to negotiate. Tensions have been especially high between the US and Japan, with a deadline this week for the two countries to reach a bilateral trade agreement that will spare Japan the Trump administration’s proposed 24% tariff on Japanese goods; South Korea is facing the reinstatement of similar tariffs and equally pessimistic about their odds of reaching an agreement by the July 9 deadline. 

At the same time, and perhaps more importantly, there are export controls to enforce and loopholes to close. Japan has reluctantly agreed to align with the US and the Netherlands on imposing export controls on chip-making technology to China, following a similar move by South Korea last year. Malaysia’s development of AI-related data centers has exploded in the last few years, with industry growth far exceeding government regulation; they have already been the target of Chinese espionage. Rubio’s remaining visit to Malaysia and anticipated trips to Japan and South Korea, then, are not merely about moving trade negotiations forward, but likely part of a more comprehensive plan to close loopholes that provide China with advanced technology which is critical to national security.

A strategy of containing China is further supported by Secretary Rubio’s recent meeting of the Quad–Japan, India, Australia, and the US–in Washington DC. While Chinese military concerns were not directly discussed, much of the meeting was focused on supply chain resilience, in general, and rare earth metals, in particular, bringing clear, if implicit, attention to China’s monopoly on the resources. The meeting resulted in the Quad Critical Minerals Initiative. While details are still emerging, its purpose appears to be creating a China-free rare earth supply chain.

In short, while US-China trade talks have progressed–with China promising to approve sales of rare earth metals and the US eliminating restrictions on electronic design automation tools necessary for semiconductor production–these other meetings between the US and key players in the region suggest that the trade-war tensions may not be subsiding but rather diffusing into Asian regional politics. Companies should therefore remain vigilant in selecting new regional partners and ensure that they comply with US laws and regulations, as increased US pressure is likely to be exerted as trade tensions evolve.

Analysis

Southeast Asian governments face a three-way tension among popular pro-China economic sentiment, elite preferences increasingly favoring Beijing alignment, and US security commitments. This creates unprecedented political volatility as US tariffs of 10-49% force rapid supply chain adjustments while "layered bloc" dynamics allow strategic ambiguity—for now.

Populations across Thailand, Indonesia, and Malaysia favor Chinese economic engagement but distrust Beijing's military intentions. In Vietnam and the Philippines, educated urban populations lean toward US security ties while rural groups support Chinese economic cooperation. Southeast Asia's political and business elites increasingly favor strategic alignment with Beijing, creating a dangerous disconnect with national security policies still anchored to US commitments. Vietnam faces 46% US tariffs with ongoing negotiations through July 2025. Malaysia and Indonesia pursue exploratory tariff talks as part of broader US engagement with 20 ASEAN partners. Trade volatility is driven by both bilateral tariff policies and shifting public sentiment that influences investment risk assessments.

The 10-49% US tariff regime means single-country manufacturing bases are unsustainable. Companies need production flexibility to shift volumes among Southeast Asian countries within 6-12 months as tariff structures remain fluid and politically driven. Traditional political risk models miss the rural-urban divides and elite-public misalignment that can trigger sudden policy shifts. Companies in politically sensitive sectors (semiconductors, energy infrastructure, transportation) must track sentiment across demographic segments, not just government positions. Southeast Asia's refusal to choose sides creates opportunities for businesses willing to navigate complexity. Successful companies will maintain operational flexibility across competing frameworks (IPEF, Belt and Road, EU initiatives) rather than betting on US or Chinese alignment. 

Increasing political volatility across Southeast Asia is constricting traditional investment timelines. Companies can no longer rely on short term return horizons.Instead, companies should prioritize markets where they can achieve profitability within 18-24 months and focus on countries with predictable "layered bloc" strategies (Singapore, Thailand, Indonesia) rather than those caught in acute alignment pressures (Philippines, Vietnam), due to the rising risk of sudden policy shifts and alignment pressures. Current indicators suggest that alignment ambiguity will become impossible as the US-China competition intensifies. Ultimately, corporate success in regions in the crosshairs of US-China tensions–like Southeast Asia–will require a willingness to adapt to highly dynamic conditions and be prepared for the eventuality that they will be forced by state governments to engage exclusively with the US or China.

Analysis

For the CCP, the tech industry is not just an important sector for the Chinese economy. Rather, the CCP considers tech, and in particular AI, as a political panacea that will resurrect economic growth, hone China’s military advantage, tighten surveillance against dissent, and position China–not the US–as the global leader. To this end, increasing party intervention in the tech industry is injecting political priorities into China-based tech companies to attract crucial tech talent, particularly (though not exclusively) from US universities and competitors. 

The latest iteration of this is from the Guangdong Provincial Department of Human Resources and Social Security announced an expanded initiative to attract and retain technological talent in cutting-edge fields, including in AI development. The initiative is part of the Guangdong-Hong Kong-Macau "Greater Bay Area" project that aims to create a Chinese equivalent of the San Francisco Bay area’s tech specialization, complete with a rebrand of a key tech industry area as “Returning Valley” (广州归谷科技园), which, in case the intention was unclear, is a homophone of the Mandarin for Silicon Valley (硅谷). The emphasis on “return” also underscores the intent to attract “returnee” talent, that is Chinese talent trained at overseas universities and companies who then opt to return to China to develop their skills, build companies, and contribute to China’s tech innovation ecosystem.

State-driven initiatives like the Guangdong “Greater Bay Project” underscore how the CCP uses state mechanisms through provincial and regional levels to attract returnee talent for the private sector. State financial support to these initiatives means that US-based tech employees that hold Chinese passports will likely be offered attractive salary and benefit incentives to relocate back to the PRC. It also increases the risk that Chinese tech companies recruiting in the US will likely have ties–through funding, political connections, or otherwise–to state-owned enterprises and Chinese political operatives. 

US-based tech companies–particularly those working in fields like AI innovation–need to pay particular attention to attempts by Chinese entities to poach employees through extremely attractive packages, including six- and seven-figure salaries. These efforts often operate through recruiters like JD.com and XPeng, which recently launched international “genius” hiring programs to attract AI researchers worldwide to relocate to China, and that often operate by approaching individuals at industry conferences. In the short term, US tech companies should implement detailed guidance and reporting mechanisms for employees that are likely to be approached. This is particularly the case with PRC nationals who will likely be targeted first, often with too-good-to-be-true packages, as they are more likely to be amenable to relocating back to China (and leaving an increasingly hostile environment in the US). In the longer term, however, US tech companies will need to grapple with how to compete not only with Chinese companies, but ultimately with the CCP as a driver of financing and advantageous policies for China’s entire tech ecosystem.

Analysis

Recent moves by the US to compromise with China over trade negotiations, including allowing sensitive tech exports to resume, do not mean that the espionage threat against US businesses has diminished. Recent cases of corporate espionage highlight how China’s intelligence organizations use a “Harvest Now, Decrypt Later” approach, whereby intelligence operatives try to collect information on a broad range of topics–the “trawler net” approach–and harvest encrypted communications in anticipation that quantum cryptanalysis can break the encryption down the road. 

Some governments are wising up to this persistent threat to corporations and national security alike. Recent attacks against Canada’s telecommunications network, for example, came just a few days before the Canadian government announced a ban on Hikvision, a Chinese state-controlled manufacturer, and one of the world’s largest manufacturers of civilian and military video surveillance equipment. The US added Hikvision to the Bureau of Industry and Security (BIS) Entity List in 2019. At the same time, a US court ruled that Huawei must face criminal charges in the US for trying to steal technology secrets from US competitors and lying to banks about its connections to Iran. These cases add to the US Department of Justice’s indictment of twelve PRC citizens for cyberespionage activities targeting US based technology companies, government agencies, contractors, journalists, and CCP critics.

Despite these legal moves, however, Chinese espionage persists in the targeted recruitment of individuals–the “line caught” approach–to provide sensitive information, often unwillingly, to intelligence operatives. This month, for example, the FBI arrested a PRC national for allegedly trying to recruit US Navy personnel, in a parallel case to earlier this year when the FBI issued indictments for US Army soldiers, two active duty and one former, whose charges included bribery and theft of government property to sell to the PRC. In a separate case from earlier this year, a former Federal Reserve senior adviser received $450,000 from Chinese intelligence officers who posed as graduate students to obtain restricted US financial and economic information.

Each case underscores how the CCP employs a combination of mass data collection and extremely targeted recruitment of key individuals to obtain sensitive information. CCP espionage is a constant. It will persist even if the US finalizes a deal with China, or, as in the case of the UK, the threat of Chinese espionage is downgraded to try to salvage potential trade deals. It is imperative that companies understand the importance of this threat in targeting employees, particularly in sensitive sectors, who may try to exploit collaboration, meetings at conferences, or other seemingly legitimate means to recruit individuals. Failure to do so may prove catastrophic.