Analysis

China’s leaders continue to face a barrage of internal and external challenges, ranging from collapsing domestic consumption, to declining corporate profitability, managing imposed export controls, and pivoting the economy away from selling to US consumers and towards alternative markets. Yet,China’s economy appears to be remarkably resilient in the face of ongoing external pressures. Despite myriad challenges, not to mention deep structural problems, the Chinese economy exhibits a high capacity for absorbing economic shocks that might sink other economies. Indeed, as we previously argued, senior CCP officials are using shocks to the Chinese economy as a catalyst for making political choices that might otherwise have proven too painful for Chinese consumers, including pivoting supply chains away from the US and towards domestic buyers or alternative markets. 

One reason for this is that the CCP continues to prioritize a highly interventionist approach to steering the economy to serve its political–not economic–agenda. In the case of declining corporate performance and a worsening labor market for example, senior CCP leaders would rather intervene heavily through expanding the state-owned sector to soften rising unemployment, even where that means increased inefficiency (and potentially crowding out private sector competitors) in the economy. One challenge is therefore that China’s private sector, where state intervention may be most needed to maintain employment levels and consumer confidence, is less responsive to government controls than the state-owned sector. This both dampens some of the levers available to Chinese policymakers and incentivizes state entrenchment in the market. It also exacerbates the government's uneven interest in supporting certain industries–particuarly tech–over others. 

Top-down moves to steer the economy may give the impression that China is capable of effective control of externalities. Yet while the economy appears to have been relatively insulated thus far from the pain of the trade war with the US, this does not mean that Chinese consumers–and in particular the property and banking sectors–do not feel its effects. Rather, investors and US companies should anticipate mixed and seemingly contradictory information about China’s economy and its capacity to weather geopolitical storms. Consequently, companies looking to China either because of business ties to the country or as a bellwether for the global economy need to focus on information from their specific sector or industry. This is particularly the case for sectors like tech, which enjoy far greater political–and therefore, by extension, economic–attention and will likely demonstrate overperformance compared to other sectors. For companies attempting to make strategic decisions about engagements in China, macro-level analysis will therefore only likely go so far. 

Analysis

China’s capacity to weather global economic storms will likely be tested in the coming weeks as hostilities ramp up between Israel and Iran. Iran is a major supplier of oil to China, which provides a secure (and cheap) energy supply to Chinese ports while extending an economic lifeline to Iran in the face of Western sanctions. 

In particular, Iran’s inability to sell oil openly on global markets means that it is unable to look for a higher bidder to buy its reserves. Meanwhile, China’s willingness to buy Iranian oil means that it gets a cheap source of foreign oil, with few other buyers offering to pay more for the same product. Recent US attempts to crack down on Chinese tankers and ports that handle Iranian oil imports have therefore angered Beijing. Degrading Iran’s ability to sell its oil, or taking any actions that increase the price of oil, challenges China’s energy security.

In return for oil, China’s relations with Iran have become increasingly close in recent years. Iran joined BRICS in 2024 and serves as a key pillar of Beijing’s growing Middle East engagement. Thus, Beijing views the attacks on Iran as an attack on a key ally. While China is likely keen on having US attention pivot back towards the Middle East (and therefore away from Taiwan), CCP leaders are unlikely to be rejoicing. Iran and Russia both absorb much of the heat from the West that might otherwise be directed at China. Having both Moscow and Tehran weakened undermines China’s global position and makes for more unreliable partners. 

In response, Beijing is caught in a bind: help Iran and risk further isolating other global partners that it needs while the Chinese economy divests from the US and looks for alternative markets, or abandon Iran and sever a crucial and inexpensive energy supply. Iran’s threat to close the Straits of Hormuz, for example, will hurt China’s oil imports more than any other country. While China’s ultimate ambition is energy autonomy, its current reliance on Iran is therefore a sore spot in the CCP’s attempts to reduce its economic–and therefore security–choke points. 

This is a pressure point that the US government is exploiting, possibly with an eye to driving China back to the negotiating table over trade. Companies should therefore follow not only the US and Israel’s likely continued engagements in Iran–and especially a potential spike in oil prices–but also how Iran looms in ongoing US-China negotiations, particularly if China demands a cease to US hostilities in exchange for reopening rare earth metal exports. The question remains which side will ultimately benefit most from using Iran as an additional chip in negotiations.

Analysis

The US and China agreed to a framework to ease trade tensions, which includes the easing of Chinese rare-earth export controls and the US allowing Chinese students access to US universities; China will maintain 10% tariffs on US goods, while the US will maintain 30-55% on Chinese goods. The US has indicated that it will keep the tariffs in place past the August 10 deadline for removing them, agreed on previously at the US-China talks in Geneva, signaling that future negotiations will be necessary to make further progress. 

As tariff numbers appear to stabilize, the Japanese company Nippon Steel’s $14.1B acquisition of US Steel may signal a new way of doing business in the US. Although former President Biden previously blocked the acquisition on his way out of office in January, Trump reversed Biden’s decision but placed specific conditions on the deal. While Nippon Steel owns 100% of the common shares, it has given a “golden share” to the US government via a National Security Agreement. While the details are yet to fully emerge, the share is said to prevent relocation of the company’s headquarters, the changing of its name, or the closing of plants without due process. It also came with a promise from Nippon Steel to invest $11B in the US by 2028. 

The deal suggests a new way for companies to deal with rising US tariffs and to secure access to US markets. While not tantamount to a state-owned enterprise, like those in China, the involvement of the US government in the running of a private company represents a new approach used by the Trump administration for guaranteeing its desired control over the private sector. Giving up these rights is also a strategic move for Nippon Steel, which has been making efforts to localize its production in major markets (the company previously built a blast furnace in India to secure their market share there). Following the administration’s steel tariffs, originally levied at 25% and raised this month to 50%, creating a similar “domestic” supply of steel in the US is part of Nippon Steel’s  strategy to circumvent current trade wars and guarantee future access to critical markets. 

While the most recent round of London talks seems to have stabilized US-China trade relations, this is not the whole picture. It is important to understand that tariffs are still up 30% from January, before President Trump took office and China began its retaliatory export controls, and that companies are still confronting rising costs of doing business. The US’s European allies, for example, are still suffering from US universal tariffs on all goods, on the one hand, and residual Chinese export controls on rare earth metals, on the other. Barring exceptions like Nippon Steel, Japan finds itself in a similar situation. While devising solutions to the rare earth dilemma is at the heart of the current G7 summit, the hard truth of the matter is that there is no short-term solution, and companies need to brace for shortages or higher prices as they create supply chain resilience for the long-term. The take-away here is that, although there are instances of companies succeeding in the current environment, they are exceptions that prove the broader rule: most companies around the world are and will continue to suffer from the rising cost of doing business brought about by the residual tariffs and related trade barriers.

Analysis

The US-China trade war is reshaping how–and where–the tech industry is sourcing, manufacturing, and selling products. Recent reports that Chinese engineers circumvented US export controls on sensitive technology by flying with suitcases containing hard drives to Malaysia, with the intention of using that information to build AI models using Malaysian data centers that run on advanced Nvidia chips, highlight the extent to which Chinese tech companies can flaunt current restrictions. These reports, while sensationalist, highlight a much deeper challenge for the tech sector regarding where and who manufactures tech hardware, with both the US and China increasingly attentive to private companies’ attempted workarounds to restrictions. Third countries, like Malaysia, will likely increasingly lose their middleman status as a haven for US and Chinese companies looking to mask their manufacturing origin or intended destinations. 

From the US side, attempts to create clean networks free from Chinese infiltration both at home and among US allies manifests in multiple forms. The US is pushing its allies, like the UK, to wise up to the threat of Chinese investments that will expose critical infrastructure and corporate IP to hostile competitors. It is unclear how effective this drive from Washington will be given the Trump administration’s slapping of tariffs on US partners. But at least some are following Washington’s lead, particularly when they have the most to lose from a potential withdrawal of US support. Taiwan’s decision to blacklist Huawei, for example, suggests that close US partners may seek to ban Chinese tech as a way to remain on the Trump administration’s good side.

At the same time, the US Department of Commerce is weighing revoking authorizations for chipmakers Samsung, SK Hynix and TSMC to restrict access to US technology at their plants in China and prevent leakage of US sensitive technology into Chinese products. For these chipmakers, the loss of access to US technology likely means weakened products and a decline in competitiveness against local Chinese manufacturers, which combined with massive state backing from the CCP into Chinese tech manufacturing will spell hard times for foreign chipmakers in China. In pushing for clean networks, the US may therefore be inadvertently severely undermining US companies’ ability to compete in global markets. 

While this is currently a pressing concern for the tech industry, other US companies with business interests in China may also face future pressure to sever their China engagements. Watching how the US and China constrict or control the tech sector is therefore a potentially valuable indicator for how government pressure on corporations may evolve in the future.

Analysis

China is investing heavily in AI as a new frontier in its espionage arsenal. As governments introduce AI into military and intelligence methods, Chinese political and military leaders see AI’s potential for targeting foreign countries and companies with more efficient and accurate intelligence collection and analysis. Military intelligence, in particular, is investing in the weaponization of AI to both scrape information on foreign targets and to generate disinformation capable of flooding social media platforms at an alarming scope and speed. 

In a sign of China’s embrace of AI for military and intelligence purposes, at least one military academy in China under the direction of the People’s Liberation Army’s (PLA) Information Support Force (信息支援部队) is taking the lead in training new recruits in AI and other related technologies. As China develops its military capabilities to rival the US, AI will likely be one frontier that China will seek the advantage in applying AI to real-time, complex military planning and systems from logistics to coordinating defenses and targeting. 

Chinese corporate competitors and Chinese military units, intent on staying ahead of the latest industry innovations, are increasingly likely to target companies involved in AI innovation. This is particularly the case for companies involved in developing automatic data processing or machine-learning methods, both of which are central to intelligence-gathering efforts that will increasingly be capable of outstripping human efforts. But it is also the case that companies with sensitive IP, but that are not themselves involved in AI innovation, will likely face increasing attacks from China’s dual-use approach to information extraction and data harvesting. 

The challenge facing the US private sector is therefore that espionage efforts are neither limited to US military targets, nor constrained by human capabilities. To defend against such threats, companies therefore need to realize that they are already targets, and act accordingly to protect their sensitive IP against such attacks.