Analysis

China’s economy continues to struggle in regaining its pre-pandemic gusto. With the added uncertainty of the incoming Trump Administration and the threat of anti-China tariffs, CCP officials are hedging by dramatically increasing exports ahead of potential restrictions. Chinese exports soared to a record $992 billion last year, leading some to conclude that the economy is healthy in its supply of global demand for Chinese-made goods. This is sending confusing signals to global markets. On the one hand, China’s trade surplus suggests that the Chinese economy is doing well. What is less clear, however, is that many Chinese companies appear to be selling goods for a loss, or are pursuing export-driven strategies amid a dearth of domestic demand. Trade figures alone therefore obscure as much as they reveal in terms of China’s economic health. 

These mixed signals are part of the CCP’s approach to the economy, which balances entrenched interests against much-needed reforms, albeit on the party’s terms. “Comprehensively Deepening Reform” (全面深化改革), for example, remains a key platform for Xi Jinping, although as with most central campaigns the details remain unclear. One key area for reform appears to be boosting domestic consumption, which is pushing Chinese companies to rely on exports to balance oversupply. This is also leading to issues with monetary policy, which the People’s Bank of China is attempting (somewhat unsuccessfully) to loosen without undermining the Yuan. Instead, falling stocks and bond yields at the start of the year appear to have rattled markets with the possibility of persisting deflation amid a lack of structural reforms that are necessary to stabilize the economy, but are unlikely to happen as they will ultimately undermine the party’s ability to compel the economy to serve its own ends. 

Given the uncertainty with the incoming Trump Administration and continued pressures on Xi Jinping to rectify economic growth, there is a high chance that Xi will attempt to assert even more party control over the economy in the coming years. The embrace of the euphemistically titled “Chinese-style modernization” (中国式现代化) means that party control is not only baked into the system, but is likely to intensify as officials at all levels of the party-state are incentivized to comply with directives from the center in ensuring that state-owned and private enterprises are aligned with party priorities. Despite this, several investors appear unaware of how these recent political changes are reshaping China’s investment environment. Government stimulus has yet to reinvigorate the economy as promised, structural changes are found wanting, low domestic consumer demand and confidence, and the risk of Trump tariffs collectively point to a bumpy road ahead for both China and the global economy. Those maintaining optimistic predictions for China’s economic rebound will therefore likely be waiting longer than they had hoped.

Analysis

Possibly the greatest challenge facing Trump will be what to do about China. The US faces a different animal in the CCP compared to when Trump entered office in 2017. China is now more confident, more politically, economically, and militarily powerful, and therefore more capable of achieving its foreign policy objectives compared to any point in the recent past. While this makes for a useful adversary, insofar as it is a foreign power against which the Trump Administration can rally support for a series of “anti-China” policies that may otherwise prove unpopular (like the banning of TikTok), this also means that the administration is facing a stronger opponent than before. 

The incoming administration continues to fill key roles as it enters office, with individuals named to national security roles that will touch on the US-China relationship. Individuals named to the National Security Council under Mike Waltz, for example, include Walker Barrett from the House Armed Services Committee, Ivan Kanapathy back at the NSC for East Asia policy, and Dave Feith for technology, with the latter two both having hawkish track records towards China. Perhaps unsurprisingly, the new administration will therefore be advised by individuals that broadly share the view of other appointees, like Marco Rubio, that China is an adversary and must be countered accordingly. This means that we will likely see a continued push for companies (and other countries) to increasingly “choose sides” between either the US or China in terms of technology, supply chains, and talent recruitment; to punish those found complicit in permitting infiltration by Chinese individuals or technology; and to pressure allies to think in zero-sum terms about their relationships on the world stage. 

The persisting challenge for these individuals, however, will be the extent to which they are able to capture the president’s ear (or at least the ear of the president’s closest advisors). In part, Trump’s decisions will be constrained by actions taken under Biden that will be difficult to walk back–like AI export controls–without taking a political hit for appearing “soft” on China. But the preponderance of pro-CCP voices among Trump’s inner circle, most notably in Elon Musk, suggest that foreign policy decisions may be made outside traditional policy channels. Investors and other businesses should therefore pay close attention to the court drama that looks set to unfold in Washington in the coming weeks to determine how the US may approach its China challenge.

Analysis

The Biden administration delivered a parting gift to the tech industry in the form of one final round of export controls on semiconductors and other AI-related technologies. Characterized as guidelines for the “responsible diffusion” of AI technologies, the proposed regulations are intended to smooth transactions between allies and partners, close existing loopholes, and prevent adversaries from acquiring advanced AI technology. The industry was quick to react. The DC-based lobbying group, Semiconductor Industry Association, expressed concerns that the new regulations would hinder America’s global competitiveness, while Nvidia went one step further, saying the policy would do nothing to help national security and then praising the first Trump administration’s handling of the issue. While the Biden administration has set an exceptionally long, 120-day listening period to allow the incoming Trump administration to make desired adjustments, it is expected that some variation of the law will go forward despite vociferous pushback from industry executives. 

We previously cautioned that business interests are at risk of being made subservient to national security interests, and these newest controls put paid to such concerns. The US government is clearly tying AI and related technologies to military concerns, and complaints about market manipulation have proven inadequate to sway policymakers. This outcome is also partially the fault of companies themselves, as Nvidia-made chips, for example, continue to turn up in China despite existing US controls; Taiwan’s TSMC also recently discovered their chips on Huawei products and was forced to reevaluate their sales protocols. This tension between national security and business interests is likely to persist into the coming administration. 

The new proposal also very explicitly divides the world into three camps: those who are trusted by the US (only 18 countries and corporate partners), a limited number of enemy states, and everyone else. This framework gives China, Iran, North Korea, and other “enemies” no incentive to cooperate with the US and every reason to undermine US efforts abroad. Moreover, the US has now functionally demanded that all other countries make a choice between aligning with the US or China. The problem, however, is that many countries may not pick the US. As Huawei continues to close the gap between their products and Nvidia’s, and China’s new Deepseek AI appears poised to offer powerful computing potential despite existing controls, however, countries will likely have access to cheaper and nearly equivalent, Chinese-made, AI technologies. While China may not be there yet, these new US controls run the risk of enabling China to build the global, AI infrastructure of the future rather than the US. This is itself a significant national security risk, and conversations about how to revise the new controls should keep such long-term considerations in mind.

Analysis

DeepSeek, a Chinese AI Lab, shocked many in the US when it released an open-weights model that outperforms the benchmark scores of Meta’s Lama models. DeepSeek’s new model is particularly noteworthy as it reportedly produced its model faster, with smaller processing power, and cheaper than its US competitors. DeepSeek also notably produced the model on slower Nvidia chips that were produced specifically for the Chinese market to comply with the Biden Administration's export controls against advanced AI chips. While chip controls are not proven useless by DeepSeek’s announcement–developers note the severe restrictions imposed by controls–the new model does highlight both the limitations of export controls and how these controls are inadvertently fostering innovation to navigate around the imposed constraints. Where DeepSeek has succeeded is therefore in proving that the US is not alone in AI model development, and that emerging models are capable of providing cheaper, faster alternatives for consumers.

DeepSeek also highlights how AI has become the new frontier in the US-China rivalry. As we detail above, export controls and attempts to shape the legal and regulatory limits of how US technology is used throughout the world comes with its own risks for backfiring. As pressure mounts on the incoming Trump Administration to counter China at every opportunity, AI and tech will likely be pulled closer into the government orbit (facilitated by advisors like Elon Musk). In response, the outgoing Biden Administration announced advancement of the US’s AI leadership, including opening up federal land for AI innovation activity or to be leased to private companies to build infrastructure, including energy-hungry data centers. The Trump Administration will likely want to continue with this approach, although there may well be fights over power supply and the pressures that data centers will put on the grid without additional investment in green energy technologies. As with all parts of the presidential transition, our advice is to watch this space. 

The Biden Administration’s announcement is a positive start, but will likely run into challenges with overseas partners, not in the least because the administration appears to have excluded some allies, like Poland, while embracing questionable partners, like the UAE, in its pursuit of “clean networks” that do not rely on Chinese technology. Collectively, the rapid pace of AI innovation and the pressure to achieve early-mover advantage will likely lead to both an increasing fusion between government and the tech sector, and a realignment of global trade towards exclusionary barriers centered around technology and its country of origin. Companies, particularly in the tech sector, should take note that this is a trend that looks set to continue.

Analysis

Chinese espionage efforts against the US and its allies combine targeted asset recruitment with broad cyber espionage, but recent reports suggest the CCP is preparing to launch a widespread and crippling cyber warfare against key areas in the US. Reports out of Guam, in particular, note how the island is increasingly targeted by Chinese cyber attacks as a front line in US-China grey-zone warfare. Guam is a key location for the US military in its forward preparedness against a future Chinese invasion of Taiwan, which increases its value as a target of Chinese espionage. China’s experiments in Guam, however, are likely emblematic of how the CCP is strategizing about how to slow future US military responses, as well as how to cripple key infrastructure in the US more broadly. If China can neutralize systems, power grids, and the like in the US, then the chances of the US’s swift military response to defend Taiwan are decreased. 

Much as with repeated reports of cable cuts in the Taiwan Strait and the Baltic Sea by Chinese and Russian vessels, cyber attacks on critical infrastructure should be seen as a similar “greyzone” tactic to further China’s military preparedness against the US. While this does not mean that China will invade Taiwan anytime soon, nor that China intends to attack the US directly, it does underscore how China’s strategic thinking about military preparedness is heating up for a potential future conflict. 

As part of his swan song, Biden’s executive order to promote cybersecurity innovation–part of a slew of executive orders covering AI and tech–demonstrates how the US is approaching these challenges, but responses at present are largely patchworked rather than comprehensive. For companies in cybersecurity, this means that there will likely be a boost to available US government funding for the private sector, but it also brings added risks of being targeted by politicians if company structures are breached or underlying vulnerabilities are exploited.

Analysis

TikTok’s day at the Supreme Court raised significant concerns about the platform’s future, with indications that the court may uphold the ban unless TikTok divests from its Chinese parent company, ByteDance, by January 19. The justices expressed skepticism about TikTok’s arguments, primarily focusing on national security risks associated with potential data sharing with the Chinese government. If the ban goes through, Chinese officials are reportedly considering selling TikTok’s US operations to Elon Musk as a potential solution to keep the app operational in America, though others have also expressed interest in the purchase. President-elect Donald Trump currently opposes the ban, but his shifting stance on TikTok has drawn criticism that his position is driven by self-interest rather than consistent principles regarding national security or public interest. With the impending ban set to take place one day after Trump’s inauguration, Trump is considering an executive order to suspend enforcement of the law for 60 to 90 days. 

If US policymakers hoped that a TikTok ban would force American users to consider safer applications with fewer China-related risks, an unforeseen, and certainly ironic, consequence of the ban is actively unfolding: the rise in popularity of the Chinese app RedNote or Xiaohongshu among American users. Xiaohongshu (小红书), until recently, featured an almost exclusively Chinese audience and specialized in selling Western luxury products. In a proactive response to the ban, many American creators and users are migrating to the platform to protest the ban and employing the hashtag “TikTokRefugee.” 

Additionally, many creators who gained fame on TikTok are hedging their bets, hoping to replicate their success on Xiaohongshu, seeking new opportunities for engagement and monetization within the rapidly expanding Xiaohongshu American community. For now, Chinese users seem to welcome the self-titled refugees, with some users joking that American users can reconnect with their Chinese “spies,” or even asking American users for help on English assignments. As with all online interactions between Chinese and foreign individuals, however, the app’s openness to these interactions will likely be short-lived as the CCP tries to restrict Chinese citizens’ access to external sources of information. Users hoping for a new social media paradise will therefore likely be disappointed all too soon.