China has reason to be proud of having created a bureaucracy system dating back to the Song dynasty a thousand years ago, and beyond. It is a system at least partly based on meritocracy, it is true, but it is also susceptible to other forces, including ignorance, loyalty, selfishness and “just following orders” syndrome. This centralized system, a prime replacement candidate these days, it would seem, for the Western governance model, has an enormously focused impact when there is a single clear goal in place – the creation of a high-speed rail network, the expansion of solar/wind power generation capacity. But just as with the “nose swab” economy that developed during the COVID era, there is also the problem of bureaucratic inertia. How to stop something that is being blindly auto-implemented when it’s not working but nobody is checking?

A case-in-point right now is China’s state grid. A truly breakthrough system in so many ways. But… the latest news, from the SCMP in Hong Kong, is that the way the national grid has been built, a mad race by officials to bring huge amounts of solar and wind energy online in line with instructions from the Center, has resulted in huge amounts of waste. This in no way detracts from the positives of what is happening—the China system is absolutely right to build out renewable energy capacity, and the super high tension transmission network that can transport electricity over huge distances. But, says the SCMP, “China wasted enough wind and solar power in the first half of this year to cover all new electricity demand” due to bottlenecks in grid absorption.

Another grid problem, fundamentally systemic in nature, is the continuing expansion of coal-fired generation ahead of the 2030 carbon deadline. It all points to massive waste which of course is endemic of state-owned structures anywhere in the world. Private investment capitalism has its faults, for sure, and so does transparent representative government, but there is at least more oversight and less chance of massive wastage. We will in due course see how the investments on AI on each side of the Pacific play out: one private driven, the other system-led.

But one way or the other solar is going to overtake fossil fuels in China far faster than it will in the US. And that is a positive for China. But the waste along the way is noteworthy, nonetheless.

Have a great and sunny weekend! And by the way, we are planning on expanding CER content starting very soon. More to follow…

Mr Xi is going to Washington to meet with Mr Trump on September 24, it was just announced. Both leaders have a constant parade of foreign dignitaries who come visit, but these two are special. And the way they interact, in the context of the tricky US-China relationship, is the most extraordinary theater. Trump’s recent visit to Beijing featured a great show of Chinese respect, followed almost immediately by a visit by Mr Putin. Mr T was granted special access to the heart of the exquisite imperial garden that is Zhongnanhai, while Mr X will get to see the construction work on the ruins of the East Wing. Trump’s talks with foreign leaders, seated on either side of an increasingly ornate fireplace, are often exercises in psychological warfare. With many of them, Mr T insults and threatens, but that ain’t going to be how it is with Mr X, who Trump often says he admires greatly. Mr X, for his part, tends to seem aloof. The dynamics are curious and perplexing, and one wonders how they play into the actual discussions on bilateral relations, which become more fraught all the time.

AI is one of the big topics, with the US accusing China of hoovering up all the data and methodology of US AI models. But then again, the US could do the same back, and maybe does, who knows. OpenAI also just announced it had a rogue AI agent that had done the same thing with another US AI model—allegedly on its own volition. We said a few months ago that with regard to the island, the period leading up the mid-terms in November was probably particularly dangerous, but currently there is—famous last words—no sense of anything in the immediate offing. Then again, China is always as it is, until the day when it is not. What Mr T’s real position on the island is, who knows.

There are lots of other topics to discuss, including trade and the Iran war, which just goes on and on, no doubt on balance to the glee of Mr T’s guests on Sept 24. But overshadowing the talks are the mid-terms, and the prospect that there might be enough of a blue tsunami in November to offset the red election machinations to the extent that Trump is somehow restrained, or at least mightily distracted, for the remainder of his term. The mid-terms truly are the most significant thing in prospect for the world at present. And then there is Ukraine, where China’s little brother seems to be having a lot of trouble, despite massive support. So much for the bros to discuss or to avoid discussing!

Meanwhile, the summer proceeds as if none of this mattered. Have a great weekend!

China this week reported the official GDP growth number for Q2, which was a surprisingly low 4.3%, although the aggregated first half number of 4.7% is still within the target range for the year mandated at the beginning of the year, which is between 4.5 to 5%. This seems like a good opportunity to sum up the state of play with China’s economy, and our view is that it is basically bifurcating. On one side, is the high-profile stuff, the batteries, the robots, the AI, the EV car exports, it’s going well. Exports year on year are up 20% and China is racking up trade surplus records regularly. But the real economy that impacts on most of China’s 1.4 billion people is really not in good shape. It’s not so easy to define the state of the economy because transparency is sort of fading ever further. But the heart of China’s economy for the last 30 or 40 years has been the property market, and that market slumped five years ago and even today there is no sign of any substantial recovery. Real estate development investment for the first half compared to last year is down 18%, and new homes prices in June were reported down again, this time 3% from the same time last year. Land sales also continued to decline which has huge implications for local government finances.

The trade surplus in H1 was up a staggering 37% on the previous year. Which sounds great, but it’s actually a negative in many ways in terms of the economies of other countries. The global economy needs to be in good shape for China’s export bonanza to continue.

Consumer spending is crucial, and the State Council just announced new policies trying to boost it. Clearly this is not easy to achieve. Total retail sales of goods & services was up just 3%.

The exchange rate of the RMB is a big issue, and it was up around 3% over the H1 period. The Shanghai stocks market has also done okay, riding on AI stocks and Wall Street exuberance.

The second half of the year is going to be challenging. The domestic problems are proving intractable, and the geopolitical backdrop is getting more complex all the time. Mr. Trump’s address to the American people late this week raises the stakes in terms of the complexity and sensitivity of China-US relations and no matter how it plays out that is going to be messy. 

Have a great weekend anyway.

China’s economy is not in good shape, but exports are still booming—auto exports up 70% in the first half of 2026 even as domestic auto sales fell 20%. Total auto exports in June topped one million in one month for the first time, which considering this was from a standing start just a few years ago, is just stunning. The German, US and Japanese auto industries are shaking in their boots. And this is not the only industry. At the heart of the export surge is Chinese expertise, efficiency and value for money, but there are other factors too—systemic coordination, the rigorous control of the RMB’s value, and massive subsidies and benefits provided to chosen companies and sectors. Europe and the US, but also the Global South—many countries have to face this question: what is the long-term consequence of this ever-building China export drive?

Europe in particular is now in a fascinating position—its relationship with the US is unravelling even as the reality of China’s impact becomes clear. But will these two issues finally convince these countries to actually come together and coordinate policies and actions? Divide and rule is a strategy that the Chinese are very familiar with, and that has to be seen as the context of Chinese Foreign Minister Wang Yi’s trip to four Nordic countries earlier this week. The EU seems to be ever more vocal on the need for protective measures and is apparently increasingly willing to face the various factors playing into the Ukraine conflict. But with what result?

There are signs the Global South is getting the point too, though it is harder for these countries to respond effectively. South Africa’s recent decision to raise tariffs on certain Chinese imports, such as autos, in order to encourage Chinese brands to localize production, or at least assembly, is a good example. We will see to what extent other countries are able or willing to emulate such an approach.

At the heart of all this are tectonic factors such as the World Trade Organization—now basically a dead letter, it seems—the destabilizing influence of Trump on just about everything, and the controlled RMB exchange rate and other China systemic issues. Massive problems all awaiting some kind of resolution. When and where can we expect a break point, and in which direction does it all break?

Have a thoughtful weekend.

One of the core goals of China’s five-year plan just begun and an overall strategic economic direction is what is known as the low-altitude economy, and that means the use of all that space between the ground and the tops of buildings, and the altitude used by commercial aircraft. Drones have developed so far and fast in the past decade, and have provided the opportunity to look at all sorts of ways to moving goods and people from one place to another with maximum efficiency. But how easy is it to integrate the concept of the low-altitude economy into the real economy, into real life, particularly the major cities, and the answer is that it always seems slightly beyond the possible. Sort of like China’s currency being made fully convertible on the current account. It’s always going to happen in just a few years’ time, but never actually gets done.

We were talking recently to an entrepreneur, the founder of a state-funded “low-altitude economy company” producing drones with the capability of carrying one or several people with great speed and efficiency from one place to another over relatively short distances, and his confident view was that within three or four years, we would be seeing drones carrying both human beings and freight buzzing around in the air of China’s major cities. 

We’re not saying that’s not possible, because anything is possible in China. But especially in the major cities, one mistake, one error, one drone falling out of the sky into a crowd, one drone slamming into a building and everything changes. And of course, the risks involve not just drones. There are also small private planes. Speaking of which, there was the incident on Sunday in Beijing involving a plane that hit the façade of Beijing’s tallest building, an incident in which the pilot died and 13 people were injured. The official announcement later in the week was the pilot was a 66-year-old man who was depressed. The details are really not so important. The point is how to control airborne devices skimming around urban areas at high speed. The point is the problem of control. How to address a threat caused by an airborne device which is suddenly moving in an unacceptable direction. What is the response time required and what response should there be? Is it fighter jet or is it other drones? How to offset the risks? 

Right now, there is reported to be a nationwide ban on private planes flying. Overall, the low-altitude economy is undoubtedly a huge opportunity in terms of tourism in remote areas, sort of an extension of the use of helicopters. But drones should be safer than helicopters because they have many more motors. Having said that, and in spite of the news, we would still prefer flying machines with wings.

Have a good weekend!