The Dark Secret China Doesn't Want You To Know

Happy Tuesday, everybody. Welcome to another episode of China Update, where we discuss leading political, economic, and geostrategic analysis on the world's number two economy. My name is Tony. Let's jump in. China is approaching a milestone that would have seemed remote when Deng Xiaoping launched his economic reforms in 1978. Its income per person is nearing the World Bank's threshold for high-income economies, roughly a quarter of a century after it joined the World Trade Organization since accession in 2001, China's economy has grown from 1.3 trillion U.S. dollars to nearly 20 trillion U.S. dollars, while exports have increased roughly 13-fold. For many Chinese households, however, the gains offer less financial security than those figures suggest. The reduction in poverty has been enormous. The World Bank estimates that close to 800 million people escaped extreme poverty after reforms began, accounting for about three-quarters of the global decline over that period. When Xi Jinping declared victory over absolute poverty in 2021, however, Beijing was using a benchmark equivalent to only $2.30 a day. At the World Bank's $8.30 benchmark for upper-middle-income economies, more than a fifth of China's population still lived below the poverty line in 2022. Representing hundreds of millions of people. Crossing the high income threshold would change China's classification while leaving those households facing the same bills. The property downturn has made those bills harder to manage. Real estate accounts are about 47% of household assets now, used to be close to 70 to 80%. And housing prices have fallen roughly a fifth from the 2021 peak. For families that counted on their home to finance retirement or cover an emergency, the decline has... given them another reason to hold cash. Household bank deposits have roughly doubled since 2019 to around 165 trillion yuan, even as Beijing has repeatedly urged consumers to spend more. The public safety net gives families little room to draw down these savings. Unemployment insurance reaches only about a third of the workforce, and a minimum monthly rural pension rose by just 20 yuan, approximately $3, this year to 163 yuan. For younger workers, the prospect of steady income is also less certain. Unemployment among 16 to 24-year-olds outside education stands at around 18%. Together, these pressures help explain why household consumption remains near 40% of GDP, compared with roughly 55% to 70% across high-income economies. The distribution of income has shifted sharply since Deng's reform. In 1978, the top 10% of earners and the bottom half each received about a quarter of national income. The top 10% now receives more than 40%, while the bottom half receives less than 14%. That wider gap helps explain why Xi's pledge of Common prosperity is difficult to reconcile with an economy and economic strategy that continues to direct substantial resources toward advanced manufacturing and technology. China's factories already produce more than 70% of the world's electric vehicles and roughly 80% of its batteries and solar panels. Weak domestic demand increases the pressures to sell that output abroad, where tariffs and trade barriers are rising. In the early years after WTO accession, China's exports were dominated by products such as toys and textiles. Its manufacturers now compete directly in industries that advanced economies see as central to their own growth and employment. Demographics will make it harder to keep household support modest. China is expected to have around 400 million retirees by 2035. Economist David Daokui Li estimates that providing a livable pension to roughly 130 million rural elderly people would cost 1.25 trillion yuan a year, or about 4% of government spending. A larger pension would raise incomes for some of China's poorest households and could reduce the need for working-age relatives to save for their parents' care. Beijing's choice is how much public spending to redirect toward households After decades of prioritizing investment. But such a redistribution of government spending at a time when debt is already historically high for the Chinese government will mean that some of Xi's and the Party's more ambitious global goals will have to be greatly curtailed. Ultimately, the decision will shape how much of China's next phase of growth comes from what its own citizens can afford to buy. Next up, a Hong Kong court sentenced pro-democracy activist Joshua Wong to a further 10 years in prison late last week drawing condemnation from Britain and the United States. Wong, 30, has been behind bars since 2020 and is the only Hong Kong activist to have been prosecuted twice under the city's controversial national security law. Wong pleaded guilty in September to conspiring to collude with foreign forces. Prosecutors accused him of working with exiled activist Nathan Law to urge foreign governments to impose sanctions, blockades or other measures against China. High Court Judge William Tam described the offence as grave. He said Wang had travelled to the United States to seek foreign intervention before Beijing imposed the security law in 2020, making this prosecution retroactive. After the law took effect, Wang continued to share social media posts by law calling for sanctions, the judge said. Wong rose to prominence as a teenage leader of Hong Kong's 2014 Umbrella Movement, which pressed for genuinely competitive elections. His first national security conviction stemmed from a separate case involving an unofficial primary election organised by the city's opposition in 2020. Hong Kong police welcomed the ruling. Steve Lee, a senior national security police official, said he hoped Wong would gain a better understanding of China and abide by the law after his release. Britain's Foreign Office said the sentence showed that the law was being used to punish political expression. It urged Beijing and Hong Kong authorities to uphold the rights and freedoms guaranteed under the 1984 Sino-British Joint Declaration. Next up, we have one more development to cover, but just quickly, if you're getting some value from today's episode of China Update, as always, it's a big help if you just hit that like button, consider subscribing if you'd like to continue to be on top of updates like today's, and if you'd like to go the extra mile and help me keep China Update financially sustainable, I rely on your support to keep going. Patreon and BuyMeACoffee links are in the description below. And finally for today, we continue with our ongoing coverage of Nvidia's... Crisis. Veteran China analyst Bill Bishop observed on all this today, quote, There is now a media feeding frenzy around the revelations of Jensen Huang's admitted affair with the suspected PRC, People's Republic of China, spying sales to Megaspeed and improper meddling into investigations into Megaspeed. Each new story looks worse for NVIDIA executives and for the United States Department of Commerce. It is also a perfect storm of hubris, salaciousness, espionage, Greed and corruption, and I believe there is much more to come. greed, and greediness. We did a deep dive yesterday, and we also touched on some of this on Saturday's episode, so we continue to supplement that commentary today. The U.S. Commerce Department paused its work on a suspected AI chip smuggling investigation after NVIDIA's top lawyer contacted officials about the case. The U.S.-based The New York Times has reported, The inquiry focused on whether Singapore-based Megaspeed International had Diverted advanced NVIDIA chips to China. The disclosure comes as NVIDIA investigates its chief executive's relationship with a Megaspeed executive who has been accused of being a Chinese spy and Congress weighs tighter chip export controls. In late summer 2024, NVIDIA General Counsel Tim Teter called Jeffrey Kessler, the Commerce Undersecretary who oversees export controls, To ask whether his bureau had been involved in Singapore's detention of Megaspeed executive Alice Huang. This is according to reporting by US-based Bloomberg. Singaporean police had questioned Huang and barred her from leaving the country. People familiar with the matter told Bloomberg that Kessler's bureau had played no role in that action. Teter told Commerce Investigators by email that Kessler had authorized NVIDIA to contact them, according to the Times. Several officials questioned the communication because Nvidia remains Remained a potential subject of the inquiry. Commerce alerted partner law enforcement agencies and the Justice Department asked the department to pause its work. Commerce complied, frustrating agents who had spent months building the case. U.S. officials had separately asked NVIDIA to audit Megaspeed. NVIDIA initially said it had accounted for the hardware, but Bloomberg reported that Megaspeed had imported 50,000 more chips than NVIDIA found at its data centers. The reporting did not establish where the chips went. Teta later told a White House official that NVIDIA had stopped doing business with Megaspeed, according to Bloomberg. Megaspeed served as an intermediary between chip suppliers and companies seeking computing capacity, with China's Alibaba among its major customers, according to the Wall Street Journal. The UK-based Financial Times separately reports that Alice Huang and business partner Kangwei Pitched investors on a Southeast Asian data center project with several hundred million dollars in early 2025, citing Alibaba as a client and their ability to secure advanced chips. NVIDIA has opened an internal investigation following Chief Executive Jensen Huang's disclosure on Sunday of an affair. The Times reported that Secretary of State... Marco Rubio warned officials about the relationship and that U.S. officials, citing classified surveillance, had concluded that China's Ministry of State Security had recruited Alice Huang. China's foreign ministry rejected the allegations as groundless. The intelligence underlying the reported assessment has not been made public. The scrutiny extends to sales Washington expressly authorized. In separate reporting, the New York Times found little evidence of an Operating presence in China for Numatrix, a company that passed Commerce's National Security Review and was cleared to assemble NVIDIA's H200 chips into AI systems. The approval followed President Donald Trump's decision to allow H200 sales to China subject to government review. Lawmakers from both parties were already seeking to attach chip export restrictions to the annual defense bill. U.S.-based Politico reported that Democrats backing the effort now plan to seek tougher limits. Now, we end today's video in this part with more observations made today by veteran China analyst Bill Bishop. Quote, my understanding is that the allegations about Huang and his girlfriend were very tightly held inside the U.S. government. It would be very interesting to learn who leaked it and why now, so close to Trump's meeting with Xi at APEC. If the Trump administration does not tighten chip export controls, I think Congress will. Any material new restrictions will further threaten the very tenuous US-China stability. On the Jensen Huang-Alice Huang affair, you have to give the MSS credit for running another successful operation. They are good and getting better. I've seen some takes that it is no big deal he had an affair with an alleged PRC spy because he needed no pillow talk convincing to push for looser export controls. But that misses a few things. He is, was, text and phone buddies with the President, so if he divulged anything about his conversations with Trump to her, or his thoughts about Trump, or chatter about China policy, or frankly anything from Trump, that would be valuable to any foreign intelligence service, and especially to China's MSS. Was she ever alone with his phone or computer, say when he got up to use the bathroom? Our NVIDIA IT device. Policies for travel to Taiwan and Singapore looser than those for travel to the mainland. What value would there be to the MSS to have physical access to the devices of NVIDIA's CEO? He is the chip allocator-in-chief, so a good relationship with him likely meant more chips for the Megaspeed front company and the entities back in the PRC. With a new Congress, expect subpoenas and public hearings in which he is trashed and he and Nvidia are further damaged. That seems like a win for the MSS to have such access to the head of the most important company in the world and to now get to watch as politicians and shorts attack him and Nvidia. But the backlash may make it much harder for export-controlled chips to make it to PRC firms inside China. I hope that Congress will demand full transparency on all the institutions and individuals in D.C. funded by NVIDIA to advocate for looser chip export controls. NVIDIA's money has had a meaningful impact on D.C.-China policy, especially around export controls and personnel. It is rare that there is just one lie, so don't be surprised if the blast radius from this mess expands. Okay, that is today's episode of China Update. Thank you so much, everybody, for watching. Have a good Tuesday, and I hope to see you for the next episode on Thursday.