80% Crash_ China's Crisis is Much Worse Than We Thought _ US-China Trade War

Happy Monday everybody, welcome to a new episode and a new week of China Update, where we discuss leading political, economic and geostrategic analysis on the world's number two economy. My name is Tony, it's a big episode today, a lot to cover, nice start to the week, let's jump in. And first up, over the weekend, US-based Bloomberg Economics published an excellent deep-dive report titled The True Cost of China's Falling Prices, which argues that deflation on the data is already pretty bad, with prices of everyday goods plunging and the share of loss-making companies at a 25-year high. To begin with today's video, we will unpack some of the salient points of that report. Beijing officials call China's current deflationary malaise involution, a self-defeating spiral of overcapacity and ruinous competition. But for a 24-year-old Yang Zhifeng, the word is simpler, twisted. Since graduating two years ago, Yang drifted between low-paid jobs, her short-lived cocktail stall collapsed under the weight of deep discounts from food delivery rivals. Now surviving on meals costing barely $1.40 US, she admits she's become, quote, the kind of consumer who destroys businesses like mine, end quote. Yang's story captures a nationwide downturn that official statistics only hint at. This Bloomberg report's analysis of nearly 70 everyday products showed prices falling far faster than China's Muted Consumer Price Index suggests. Among 67 tracked items, 51 have dropped in price over the past two years, from potatoes and beef shanks to rents and BYD cars. Even housing and durable goods show steep declines. The slide signals more-than-cheaper groceries. China's economy is caught in a brutal deflationary loop. Weak demand depresses prices, squeezing company profits, curbing investment and reducing wages, which in turn further saps spending power. The International Monetary Fund expects China's consumer inflation to average zero this year, while the Bank of Korea has warned that Beijing's slump could export deflation to its trading partners. How does one export deflation? Well, manufactured goods cannot be sold domestically, so massive inventories are sold at a loss overseas, forcing producers in those countries to slash prices to compete. Thus, the deflationary spiral can be exported. Behind the scenes, the industrial sector is under even heavier pressure. The GDP deflator, a broad gauge of price changes across the economy, has fallen for ten consecutive quarters, signaling entrenched weakness. Prices of polysilicon, the key import for solar panels, have plunged to one-fifth of their 2022 peak, an incredible 80% price collapse. Steel rebar has sunk to an eight-year low. A Bloomberg survey of about 6,000 listed companies shows how deeply this pain runs. More than a quarter reported losses in the first half of 2025, the highest proportion in at least 25 years. Even survivors are reporting thinner margins, delayed investments and hiring freezers. Beijing is not blind to this danger. In July, Xi Jinping's government vowed to curb, quote, malicious competition, end quote, and reign in discounting wars. The announcement briefly lifted commodity prices and market sentiment, yet few economists believe these measures will spark a turnaround. Quote, the deflationary problem is systemic, end quote, says Logan Wright, director of China Markets Research at Rhodium Group, end quote, it can't be easily fixed with short-term stimulus, end quote. For many middle-class families, the downturn has already hit home. Erica Chen, a former internet firm executive in Beijing, once earned more than US$330,000 a year after taxes. Her husband worked at a multinational technology company. They owned two apartments, sent their son to an international school, and employed three nannies. But after layoffs swept through the tech sector, both lost their jobs. The nannies have been dismissed, the private school replaced with a public one, and Chen began live-streaming to make ends meet. Quote, people say shopping is cheaper now, from restaurants to skincare. Maybe that's true, but it's none of my business anymore, end quote, she said. Across China, private sector wages grew at their slowest pace on record in 2024, and in some industries actually fell. That trend has continued into this year. Even in high-technology fields like AI and green energy, starting salaries are down 7% from their 2022 peaks. Multinationals such as Apple, Volkswagen, and Starbucks have all reported declining China sales, while household savings have soared to an unprecedented 110% of GDP, a Economists warn that if prices continue to fall for a third straight year, China could face a prolonged stagnation, reminiscent of Japan's so-called lost decades. Once deflation expectations become entrenched, they are notoriously hard to reverse. Quote, if prices are down for three years and inflation doesn't come back, end quote, cautions Zhu Tian, economics professor at the China European International Business School. Quote, then people will believe it won't come back. And that's when China becomes Japan, end quote. Of course, when Japan became Japan, it was already wealthy. China, on a per capita basis, remains far from it. Next up, we have two more developments to cover, but just quickly, if you want to continue to be on top of updates like this on China as well as China's relations with the world, consider subscribing to China Update at the bell notification icon and you will be. If you're getting some value from today's episode, don't forget to hit the like button. Patreon and BuyMeACoffee links are also in the description below if you'd like to help keep the channel financially sustainable. Next up, global finance heavyweights are rediscovering their appetite for China. At the Hong Kong so-called International Financial Leaders Investment Summit last week, Morgan Stanley CEO Ted Pick and Goldman Sachs CEO David Solomon struck notably bullish tones on Chinese markets. Pick told U.S. media that confidence among global asset managers is, quote, returning, end quote, with China again becoming a capital destination, quote, too big to ignore, end quote. Solomon went a step further. After praising China's market normalization and forecasting that international investors would return by 2026, he boarded a flight straight to Beijing to meet Vice Premier Hu Lifeng. Their meeting signals renewed momentum in U.S.-China financial engagement, rather, following the recent Xi-Trump encounter in South Korea. Hu Lifeng welcomed Goldman to, quote, continue investing in China, end quote, while Solomon pledged support for the, quote, high-quality development of China's capital market. Part of the optimism is rooted in strong market performance. China's A-shares have rallied over the past year, supported by the so-called National Team of State-Banked Funds, which held 222 stocks worth nearly 4 trillion yuan at the end of Q3, dominated by financial giants like Agricultural Bank of China and ICBC. With policymakers pledging deeper market access for foreign capital, even the world's most cautious bankers appear to fear missing out on China's rebound, though evidently these lenders, who have been stung before badly, have rather short memories. And finally for today, the Trump administration has introduced sweeping so-called Poison Pill clauses in new trade deals with Malaysia and Cambodia, marking a sharp escalation in Washington's use of economic policy as a strategic weapon against China. The clauses, embedded in two agreements signed the week before last, allow the U.S. to terminate the pacts if either partner joins a rival trade arrangement deemed to, quote, jeopardize essential U.S. interests or pose a material threat, end quote, to national security. Trade experts say that these provisions amount to a diplomatic loyalty test for smaller Asian nations that maintain close economic ties with both the U.S. and China. Simon Evonette, professor of geopolitics at IMD in Switzerland, says the clauses effectively grant Washington unilateral powers to end deals, transforming trade agreements from commercial tools into instruments for managing powers' foreign policy alignments. The Malaysia deal also obliges Kuala Lumpur to coordinate with U.S. sanctions and economic restrictions, quote, ultimately poison pill provisions turn trade agreements into tools of geopolitical leverage, end quote, Evonette noted, contrasting them with narrower triggers in the 2020 U.S.-Mexico-Canada agreement. The new approach coincides with Washington's consideration of 40 percent so-called trans-shipment tariffs on Chinese goods rerouted through Southeast Asian ports, a move likely to deepen divisions across the region. Negotiations with Thailand and Vietnam are also underway, and analysts are watching closely to see if similar poison pill conditions emerge. Malaysia's pact has already drawn domestic criticism, with opponents arguing it undermines the nation's sovereignty. The government countered that it merely requires consultations before any major policy shift. Trump's whirlwind ASEAN tour, which included meetings in Kuala Lumpur, secured tariff reductions for Malaysia and Cambodia but left talks with Thailand and Vietnam unresolved. The U.S. push has prompted a counter-response from Beijing. General Secretary Xi Jinping quickly embarked on a Southeast Asian diplomatic tour, while ASEAN signed an updated trade pact with China covering US$771 billion in annual commerce. As both powers tighten their economic grips, smaller Asian nations face renewed pressure to choose sides, or face increasingly narrow ground to stand on. Okay, that is today's episode of China Update. Thank you so much everybody for watching. Have a good Monday, have a productive week, and I hope to see you for a new update tomorrow.