Tag: China

Bi-Weekly Geopolitical Report – On Lessons Learned: China and Consumption Policy (August 24, 2026)

Posted on by Amanda Ahne

by Bill O’Grady  | PDF

“From the errors of others, a wise man corrects his own.” – Publilius Syrus

China’s persistent trade surpluses have become an international problem. Through tariffs, the United States has reduced its bilateral trade deficit with China, but now Europe is facing an onslaught of Chinese goods. Simply put, China’s trade surplus is structural, a deliberate policy choice. When China joined the World Trade Organization at the turn of the century, its expanding trade surplus was called the “China Shock.” What’s occurring now is being dubbed “China Shock 2.”

Economists mostly argue that the reason for this policy is that China’s domestic consumption is too low. If China could lift consumption, more goods would be consumed at home, reducing exports. At this time, China has refused to make those sorts of changes.

In this report, we examine why we think Beijing has, thus far, refused to adopt consumption-expanding policies. First, we lay out the basic macroeconomic identities that show the mechanics of saving and investment. Second, we discuss the postwar economic structure that relied on the US providing the reserve currency and either supporting or actually supplying the reserve asset. We focus on Paul Volcker’s role in establishing the Treasury as a global reserve asset and how the US pressured Japan to reverse its export-promotion policies that it used so effectively from the 1970s into the early 1980s. Of course, Japan suffered a major bear market and three decades of economic stagnation as a result, and it’s logical to assume that Chinese officials are keenly aware of this history, which is likely why they have rejected the “advice” from the West. We conclude by discussing the ramifications of China’s rejection of an expanded consumption policy on the world economy and on markets.

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Note: There will not be an accompanying podcast for this report.

Asset Allocation Bi-Weekly – China’s Threat to the AI Investment Boom (August 17, 2026)

Posted on by Amanda Ahne

by Patrick Fearon-Hernandez | PDF

The artificial intelligence frenzy has arguably become the most important driver of US economic growth and financial market returns. Large technology firms ranging from established giants like Meta to upstart powerhouses such as OpenAI are spending billions of dollars to develop the most powerful large language models. To accommodate the models, many firms are spending huge sums to build enormous, power-hungry data centers. As shown in the chart below, that spending alone has been enough to offset the pullback in constructing traditional office structures.

Indeed, the investment in AI and AI infrastructure is now driving up demand for everything from concrete and steel to cooling equipment, computer servers, cables, microprocessors, and memory chips. Analysts estimate the AI investment frenzy accounts for perhaps one-third of current US economic growth. The result has been rising stock prices for firms ranging from semiconductor manufacturers to heavy equipment makers, despite increasing concerns about stretched valuations, rising debt, and daisy-chain investment deals. In our view, these trends have already made the sector look toppy and risky. Now, we’re seeing increased evidence that the competitive threat from Chinese AI firms could potentially be the catalyst that throws the US AI boom into reverse.

One problem for the leading AI firms in the US is that China’s firms have now essentially caught up with them technologically. At the end of July, for example, Chinese AI lab DeepSeek released a new coding model, V4 Flash, that tests show can perform almost at the level of Anthropic’s Opus 4.8, widely seen as one of the industry’s most capable systems. The strong performance by V4 Flash came just days after the release of another surprisingly capable Chinese model, Moonshot AI’s Kimi K3. According to tests, the performance of Kimi K3 rivals not only Opus 4.8, but also OpenAI’s GPT-5.6 Sol. From a “total user experience” perspective, many firms around the world may even consider the flexible, open-source Chinese models to be superior to US offerings.

At the same time, we think there’s an even more important development that could undermine the prospects of top US firms: extremely low pricing by the Chinese firms. For instance, DeepSeek has priced its new V4 Flash model at about $0.28 for the same amount of output that costs $25.00 with Anthropic’s Opus 4.8. The aggressive pricing by DeepSeek came one day after OpenAI slashed the price of its GPT-5.6 Luna model by 80% from its launch price three weeks earlier. At the new price, GPT-5.6 Luna costs $1.20 for the same amount of output that costs $0.28 with V4 Flash and $25.00 with Opus 4.8 (see chart below).

In our view, China’s predatory pricing moves shouldn’t be a surprise. Consistent with the Chinese Communist Party’s longstanding goal for the country to become a manufacturing powerhouse and dominate the world’s key industries, China has driven scores of foreign industries out of business over the decades. It has typically done this by subsidizing Chinese producers and/or forcing them to accept lower profits so they can undercut their foreign competitors. After applying this strategy to industries such as steel, rare-earth processing, automobiles, and electronics, Beijing would almost certainly be willing to do the same with a key industry of the future such as AI.

Some observers are holding out hope that even if China eventually dominates lower-cost AI services, US firms can still lead in the more sophisticated, higher-value AI services and therefore make good on their current investments. For instance, it appears that Anthropic is trying to position its cutting-edge models as a premium product worthy of premium pricing. However, DeepSeek’s aggressive new pricing move shows that Anthropic and other US firms are facing such an extreme competitive threat from Chinese AI firms that they may not be able to defend their top-tier pricing. Even as the US firms invest heavily in model development and infrastructure, raising their costs, the Chinese firms are proving they can create models that are essentially just as good but priced as much as 99% lower. As investors come to appreciate the Chinese threat, the AI frenzy in the US could become increasingly shaky.

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Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify 

Bi-Weekly Geopolitical Report – Dragon Boat Diplomacy: China’s Outreach to US Citizens (July 13, 2026)

Posted on by Amanda Ahne

by Patrick Fearon-Hernandez, CFA  | PDF

Developing global macro investment strategy doesn’t just involve geopolitical analysis, economic studies, and financial modeling — or at least it shouldn’t be limited to those disciplines. Relationships and conversations in real life can be just as important. To illustrate why, this edition of our Bi-Weekly Geopolitical Report discusses a reception and cultural performances that the author recently attended at the Embassy of the People’s Republic of China in Washington, DC. The experience offered an opportunity not only to see modern public diplomacy in practice, but also to assess Chinese cultural outreach in real life.

Serious geopolitical and investment research can certainly be focused on analyzing written reports and quantitative data. However, direct engagement with policymakers, diplomats, business leaders, and practitioners often provides context and perspectives that can’t be captured through analysis conducted strictly back at the home office. We therefore describe the event to illustrate the principle. As always, we wrap up the discussion with some implications for investment strategy.

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Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify 

Asset Allocation Bi-Weekly – China Cuts Its Energy Imports (June 15, 2026)

Posted on by Amanda Ahne

by Patrick Fearon-Hernandez, CFA | PDF

As we’ve noted before, the most immediate economic and financial market risk from the Iran war is the possibility of further price hikes for oil, natural gas, and some other commodities that depend heavily on shipping through the Strait of Hormuz. Because of the war, the strait has now been essentially shut down for more than three months. Global energy and other commodity prices have indeed increased. As shown in the chart below, near Brent crude oil futures prices jumped approximately 50% in the weeks after the war started on February 28. However, the escalation in prices has been relatively contained and prices have even started to fall back recently. That’s despite assurances from economists and energy analysts that prolonged closure of the strait would inevitably lead to further price hikes. In this report, we show that a massive pullback in Chinese energy imports has probably been a key reason why prices haven’t risen as much as feared, at least so far. We also show that the pullback in Chinese energy demand has helped set the stage for recent stock market dynamics.

The unexpected pullback in energy prices was a mystery in recent weeks, especially since official data and anecdotes suggested that the closure of the strait was forcing countries around the world to use up their inventories. For example, the International Energy Agency warned in its May market review: “The world is drawing oil inventories at a record pace as importing countries confront unprecedented disruptions to Middle Eastern supplies.” According to the IEA, global oil stocks had plummeted by almost 250 million barrels since the start of the war, with even steeper declines if stranded stockpiles in the Middle East are excluded. Such inventory depletion would normally be expected to boost prices.

More recent data appears to solve the mystery about why energy prices haven’t risen further and have even fallen back. Recent data shows Chinese oil imports have dropped to approximately 6.6 million barrels per day, down 38% from the average of about 10.6 mbpd in 2025. The drop of about 4.0 mbpd equates to almost 4% of current global oil demand. It could also offset much of the net reduction in global oil shipments through the strait, which analysts estimate to be between 6.0 and 12.0 mbpd.

Chinese energy imports and inventories are notoriously opaque, so these figures are uncertain. Nevertheless, if China really has cut its energy imports as indicated, it would go far toward explaining why energy prices have started to pull back, at least for now. We still believe that a long delay in opening the strait would keep alive the risk of further energy inventory depletion and renewed price spikes. However, China’s apparent disdain for paying elevated prices and its willingness to cut back deliveries is having a salutary impact on global prices and helping calm the world’s financial markets for now.

Going forward, if this trend continues, it will have big implications. For example, China’s ability to forego expensive energy imports helps validate its “all of the above” energy policy, in which it has invested in the full span of possible energy sources, ranging from coal, oil, and natural gas to nuclear, wind, and solar. China is now benefiting from the flexibility it has gained from having such a broad array of energy sources. We also think this situation illustrates how much economic flexibility China has gained from building its enormous strategic reserves of energy and other commodities. Although China won’t reveal the true level of its inventories, outside analysts estimate that they are currently several times bigger than the US’s Strategic Petroleum Reserve. It would be no surprise if governments around the world now take a lesson from China’s approach and try to adopt a similar all-of-the-above energy policy and start rebuilding inventories once the war is over and prices come back down.

For the financial markets, the decline in oil prices wrought by China’s import cuts has probably been a key reason for the recent modest retreat in inflation concerns and in government bond yields. For example, the yield on 10-year Treasury notes fell from about 4.65% in mid-May to about 4.45% at the start of June. We suspect this has encouraged investors to return to the frenzied buying of US large cap technology stocks related to artificial intelligence. It has also arrested investors’ early 2026 rotation toward value stocks. As we noted above, however, the continued war in Iran is likely still depleting energy inventories around the world, including in China. That likely translates into a continued risk of further energy price spikes and rising bond yields in the coming months if the war isn’t resolved.

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Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify 

Bi-Weekly Geopolitical Report – The Great Chinese Purge (February 23, 2026)

Posted on by Amanda Ahne

by Patrick Fearon-Hernandez, CFA  | PDF

One defining feature of the world today is the large share of the global population living under political systems that are authoritarian or moving in that direction. With 1.405 billion people, or about 18% of the global population total, China is the best example of that. Still, we suspect that many people in the West don’t appreciate how authoritarian the country is or how this structure can affect investment prospects both within China and around the world. After all, the end of the Cold War in 1991 allowed many in the West to adopt the pleasant notion that Communist dictatorship was a thing of the past. The great Chinese economic opening and reform program of the last four decades also helped obscure what was happening on the ground from Tibet to Hong Kong.

Now, under General Secretary Xi, a long program of purges in the Chinese military and defense industry has come to a head, driving home just how authoritarian the country has become again. In this report, we examine the purges and their potentially large implications for whether China launches a military seizure of Taiwan and discuss the likelihood that China can remain stable in the event that Xi dies or is incapacitated. As always, we wrap up with a discussion of the ramifications for investors.

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Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify