Weekend reading links

1. The world's food supply chain is deeply enmeshed in fossil fuels from the Gulf.

In 2024, for instance, Saudi Arabia, Oman and Qatar together supplied more than three-quarters of India’s ammonia imports and 30 per cent of Morocco’s. As a result, food production in south Asia and north Africa has become deeply dependent on Gulf nitrogen flows... About 70 per cent of the world’s ammonia is used in fertiliser production, and just under30 per cent of global ammonia exports originate in the Middle East... Roughly half of the world’s global seaborne sulphur passes through the Strait of Hormuz, with most of this produced by the Gulf’s state-owned energy companies — above all Adnoc, QatarEnergy, the Kuwait Petroleum Corporation and Saudi Aramco... Gulf countries account for 35 per cent of global urea trade; Saudi Arabia was the world’s largest urea exporter in 2024, while Oman ranked third. Monoammonium phosphate (MAP) and diammonium phosphate (DAP), two of the principal fertilisers used to supply crops with phosphorus, are also closely tied to Gulf production and export routes. In 2024, countries upstream of Hormuz accounted for 18 per cent of global MAP and DAP trade.

As Leiden University’s Christian Henderson has recently shown, Gulf countries have also become deeply enmeshed in cross-border control of large agribusiness companies throughout the Middle East as a whole. Egypt, the world’s second-largest urea exporter, offers a clear example of what this means for the production of fertiliser. A substantial share of Egypt’s export-oriented nitrogen capacity is controlled by Fertiglobe, a company in which the UAE’s Adnoc now holds a controlling stake and that claims to be the world’s largest seaborne exporter of urea and ammonia, according to its 2024 financial results. Fertiglobe’s Egyptian assets include the Egyptian Fertilizers Company, with an annual capacity of 1.7mn tonnes of urea and 0.9mn tonnes of ammonia, alongside Egypt Basic Industries Corporation, which adds another 0.7mn tonnes of ammonia. For comparison, Misr Fertilizers Production Company (MOPCO), which operates Egypt’s largest nitrogen fertiliser plant, reported 1.7mn tonnes of urea and 1.1mn tonnes of ammonia in 2024. About 44 per cent of MOPCO is owned by Saudi and UAE investment funds.

This level of dependence on the Middle East makes claims of food security ring hollow in countries like India. These countries can exercise chokeholds that can expose countries to deep vulnerabilities in their food security system. It is an area that needs to be kept in mind and diversification strategies should be pursued.

2. European luxury houses are struggling.

So far this year, nine leading European luxury stocks have lost at least a collective €140bn in market capitalisation, a bitter blow for an industry that was riding high during the first half of this decade, when LVMH was the continent’s most valuable company... The luxury sector, which supersized between 2019 and 2023, was already grappling with some hard truths before the conflict began. Middle-class shoppers who previously spent tens of billions of dollars on luxury items pulled back once their Covid-era savings and furlough payments ran out and the cost of living rose. Some 50mn luxury consumers exited the market between 2022 and 2024, according to a report by Bain, most of them aspirational shoppers who felt left behind by skyrocketing prices... the Chinese market, the motor of growth until 2023, has been hit by relatively weak consumption in the pandemic’s aftermath.   

And the problems in the Middle East will worsen matters, given that the UAE is an important market. 

3. India's contract manufacturers command much higher PE valuations than their much bigger global counterparts.

Take Dixon Technologies. Over five years, its revenue has grown nearly fivefold to about Rs 18,000 crore, helped along by the PLI scheme and by assembling for companies like Xiaomi and Google... And yet, for all that scale, the economics remain surprisingly thin. Profit margins hover around 2%. A meaningful chunk of profits comes from government incentives. More tellingly, even at this scale, Dixon still depends on imported components, external designs, and global clients. India may now assemble a significant share of the world’s smartphones, but much of the value still sits outside the factory.

What happens when PLI gets phased out?

4. Sobering statistics about higher education in general and specialised fields like Agriculture. 

A 2020 survey at the Tamil Nadu Agricultural University found that less than 12% of students thought of farming as a future career. Nearly 60% of students wanted to be government employees, and more than a quarter of them wanted to get into business and entrepreneurship. Only 3% said they wanted to work for private companies. And it’s not just about the students. Their goals come from practical considerations. Take the case of the University of Agricultural Sciences, Bangalore. Just a little over 16% of its total 882 students of agriculture got placed in 2023–24. It only gets slightly better in the postgraduate courses, where only 37% out of the 287 students were placed. The story is similar in other universities as well.

What does it tell us about the career prospects in specialised fields like agriculture when nearly 60% of students want to be government employees?

5. Some stock market facts on the Adani Group.

Adani Green is trading at a trailing price-to-earnings (P/E) multiple of 1,109X, compared to peer Tata Power’s 47X, according to data from market information provider Screener.in. And Adani Total Gas’s trailing P/E multiple is 473X, compared to Indraprastha Gas’ 18X... the shareholding patterns in Adani group companies... several of them shared common foreign portfolio investors (FPIs). And strangely, several of them had negligible investments in non-Adani companies. As a result, the percentage of shares effectively available for trading by the public was just about 5% in Adani Total Gas and 11% in Adani Green. The comparable figure for Indraprastha Gas is 55%, and for Tata Power, 53%... only one FPI owns more than 1% of Adani Green now, compared to 10 in December 2020. But that FPI—Asia Investment Corporation (Mauritius)—is still heavily invested in the Adani Group, with 93% of its holdings in Adani companies... LIC’s stake in multiple Adani Group companies has gone up over the last few quarters.

See also this and this on the conglomerates in the Indian economy.

6. The New Yorker essay raises the question of whether Sam Altman can be trusted.

Altman has a relentless will to power that, even among industrialists who put their names on spaceships, sets him apart. “He’s unconstrained by truth,” the board member told us. “He has two traits that are almost never seen in the same person. The first is a strong desire to please people, to be liked in any given interaction. The second is almost a sociopathic lack of concern for the consequences that may come from deceiving someone.” The board member was not the only person who, unprompted, used the word “sociopathic.” One of Altman’s batch mates in the first Y Combinator cohort was Aaron Swartz, a brilliant but troubled coder who died by suicide in 2013 and is now remembered in many tech circles as something of a sage. Not long before his death, Swartz expressed concerns about Altman to several friends. “You need to understand that Sam can never be trusted,” he told one. “He is a sociopath. He would do anything.”

This is a good portrait.

Altman is not a technical savant—according to many in his orbit, he lacks extensive expertise in coding or machine learning. Multiple engineers recalled him misusing or confusing basic technical terms. He built OpenAI, in large part, by harnessing other people’s money and technical talent. This doesn’t make him unique. It makes him a businessman. More remarkable is his ability to convince skittish engineers, investors, and a tech-skeptical public that their priorities, even when mutually exclusive, are also his priorities. When such people have tried to hinder his next move, he has often found the words to neutralize them, at least temporarily; usually, by the time they lose patience with him, he’s got what he needs. “He sets up structures that, on paper, constrain him in the future,” Wainwright, the former OpenAI researcher, said. “But then, when the future comes and it comes time to be constrained, he does away with whatever the structure was.” “He’s unbelievably persuasive. Like, Jedi mind tricks,” a tech executive who has worked with Altman said.

7. Guyana's dramatic oil-led economic transformation.

Guyana, a former British colony on the north-eastern flank of South America with a population of about 800,000, is undergoing rapid change following ExxonMobil’s 2015 discovery of about 11bn barrels of oil, one of the largest finds in decades. Crude production has since risen to more than 900,000 barrels per day, with consultancy Wood Mackenzie projecting that the government’s share of oil profits will total $41bn over the next five years. Between 2019 and 2024, Guyana’s GDP almost quintupled to $25bn.

8. India's trade balance sheet.

The cumulative exports (merchandise and services) during FY26 (April-March) are expected to be $860.09 billion, as compared to $825.26 billion in FY25 (April-March), an estimated growth of 4.22 per cent. A closer look reveals stagnation in merchandise exports over the last four years, with a negative CAGR (compound annual growth rate) of 0.42 per cent, while total export figures have been lifted by services exports, which grew at a CAGR of about 8.9 per cent over the same period... in April 2015, the government said that the objective of the Foreign Trade Policy 2015-20 was to double India’s share in global merchandise exports in five years. The reality is that since 2014, India’s merchandise exports have grown from $314 billion to $441 billion, a CAGR of 2.9 per cent, and India’s share in global merchandise exports has remained stuck at about 1.8 percent.

9. Ruchir Sharma points to the spectacular boom in South Korean and Taiwanese equity markets led by three semiconductor stocks - TSMC, Samsung, and SK Hynix.

Over the past year, these two nations accounted for 75 per cent of emerging market returns, and most of those gains came from just three stocks — all big makers of semiconductors... Together their profits are on track to top those of Apple, Amazon and Alphabet combined. Samsung is expected to increase operating profit more than sixfold this year to around $185bn, surpassing every member of the “Mag Seven” American companies other than Nvidia... TSMC is the most widely held stock, owned by 92 per cent of global equity funds. In comparison, Microsoft, the most widely owned US stock, is held by 84 per cent of those funds... Today, by some measures, emerging markets have grown even more concentrated than the US, with the leading five stocks accounting for a greater share of the index. While the top US stock (Nvidia) represents 8 per cent of the US index, the top EM stock (TSMC) accounts for a record 13 per cent of the EM index. In fact, based on MSCI methodology, TSMC now constitutes a larger share of the MSCI EM index than all the stocks in India put together.

10. China could boost consumption by cutting its high payroll taxes.

China levies European-level payroll taxes, creating a large wedge between the cost of employing a worker and their after-tax income — around 38 per cent. These taxes are also highly regressive, applied to income below a ceiling of three times the average wage. Payroll taxes raised 6.5 per cent of GDP in 2024, against just 1.1 per cent for personal income taxes. A dramatic, permanent payroll tax cut would therefore significantly boost consumption. It would put more money in workers’ pockets, especially lower-income workers with the highest propensity to spend. It would raise employment by lowering labour costs. And it would reduce informal labour by giving workers stronger incentives to participate in the social security system.

11. Striking facts about India's gold ownership.

Between 2011 and 2025, India imported approximately 12,670 tonnes of gold at a cumulative cost of roughly $609 billion. At the current spot price of $4,677 per ounce (as of 4 April 2026), that gold is now worth approximately $1.905 trillion. The $1.3 trillion appreciation alone exceeds India’s entire stock of foreign exchange reserves. No other asset class, government scheme, or financial product has generated comparable wealth for Indian households over this period. Data shows there is not a single year between 2011 and 2025 in which holdings have not at least doubled in value... Gold imported in 2015 for $35 billion is now worth $157 billion—a 350% gain... Even the pandemic year of 2020, when India imported just 430 tonnes at $22 billion, has returned $65 billion at today’s prices... Estimates from the World Gold Council suggest Indian households hold between 25,000 and 34,600 tonnes of gold. At today’s prices, that equates to a holding worth between $3.8 trillion and $5.2 trillion—roughly equivalent to India’s entire GDP.

12. Norway's brand equity of democracy and humanitarianism comes up against allegations of being a war profiteer due to rising oil prices, as it adds billions to its $2.2 trillion sovereign wealth fund. 

The country has earned about $140bn more in 2022 and 2023 from petroleum following Russia’s full-scale invasion of Ukraine than it did in 2021. Now, Nordea credit investment director Robert Næss has forecast Norway has earned at least an additional $8bn from the conflict in Iran, which shows no immediate signs of ending...

Norway was something of a regional laggard in terms of support to Kyiv in the early days of the Ukraine conflict, behind the Baltic states and on some metrics neighbouring Sweden and Denmark relative to the sizes of their economies. It has since somewhat caught up but its support as a percentage of GDP is still behind Estonia and Lithuania, according to the Kiel Institut’s Ukraine Support Tracker.

13. AI bests humans in table tennis.

An AI-powered robot has beaten expert table tennis players in a landmark machine-over-human triumph in a major competitive sport. The mechanical maestro, known as Ace, uses a network of cameras and AI to achieve the rapid planning and reaction times needed to compete. The invention made by Japanese tech group Sony highlights how researchers are using AI to improve robots’ ability to adapt to physical tasks they have struggled with, particularly those involving people... Ace beat three out of five elite table tennis players who had more than ten years of training, and scored 48 points versus 70 in two defeats to professionals, according to a paper published in Nature on Wednesday. The robot had improved further, Sony said: since the paper’s submission, it had played four further matches against humans, beating two elite players and winning one out of two matches against professionals. The robot handled spin and unexpected changes in trajectory caused by the ball clipping the net on its way over, the researchers said. It outscored the elite players in aces — points won directly from serve — by 16 to eight.

14. EVs make up half of car sales in China. Of the 27.8 m cars sold in China in 2025, 13.9 m were EVs accounted for 13.9 m, a steep increases from just 1.3 m five years back.

The government aims to have 28mn public charging facilities installed by the end of next year, up from 21mn at the beginning of this year. This would be enough to power about 80mn EVs (there are already more than 50mn on China’s roads). The plan targets underserved areas such as rural communities, as well as expressway service stations and public parking lots. State media estimated the three-year investment period would drive about $28bn in spending on equipment and construction. Chinese companies are also pouring billions of dollars into research aimed at improving EV range and charging speed. CATL, the world’s biggest battery maker, on Tuesday unveiled cells that power a car for 1,500km on a single charge. As battery technology and access to charging infrastructure improves, analysts expect consumers in lower-tier cities — who number in the hundreds of millions — will favour EVs.

15. India rural-urban income facts of the week.

According to the Institute for Competitiveness’ 2025 report on Income Inequality and Labour Markets in India, in 2023-24, the top 10 per cent urban income threshold of ₹44,000 was more than double the rural equivalent of ₹21,500. The top 1 per cent urban threshold of ₹90,000 was 80 per cent higher than its rural counterpart, up from 68 per cent in 2017-18. At the bottom, the urban floor of ₹6,000 was double the rural equivalent of ₹3,000, a figure that has remained flat in nominal terms over seven years.

16. Some striking graphics from a16z. The combined market cap for the 10 largest companies in the S&P is about six times larger than it was in 2015. 

Since 2023, Tech has been responsible for more than 60% of earnings growth.

While tech is big today, it’s still not nearly as big (relatively) as Transport (or Real Estate and Finance) ever were at their peaks in the 19th Century.

Finally, about 70% of today's market is in industries that were tiny or non-existent in 1900. While in 1900, the economy was basically textiles, iron, coal, steel, and tobacco, the rails to transport them, and the banks to finance them, today those sectors are a tiny fraction of the overall pie.

The idea of mandatory pre-litigation mediation

I blogged here and here about litigation involving the government in India.

Analysis of the data from the National Judicial Data Grid (NJDG) shows that Indian courts have around 5.58 Cr pending cases as of March 2026, which clog the judicial system and delay the delivery of justice. Worse still, the numbers continue to mount as the inflows far exceed the outflows. The case clearance ratio (ratio of cleared cases and registered cases) is 55-59% for the Supreme Court, 28% for High Courts, and 40% for subordinate courts.

The primary proposed solution to address the problem is to increase the number of courts and judicial officers. However, while required, this is unlikely to meaningfully address the problem. Like with Parkinson’s law, which is evident across sectors, cases are likely to expand to fill up the increased number of courts and judges. 

Here, it’s useful to bear in mind a central insight from the judicial process. Once a case is admitted, it takes years to close. For example, simple suits often take 2–5 years, property or corporate cases often take over 7–10 years, and the average High Courts’ pendency per case in 2022 was 5.47 years. 

In the circumstances, the best efforts should be made to settle the case at the admission stage itself, albeit without compromising the interests of the litigants. In other words, how can the pre-litigation process, in the form of an institutionalised mediation process, become more effective in screening and settling cases? This should become a major focus of the courts and governments. 

This is especially important since a major share of disputes that enter the formal legal system could be resolved outside it, at lower cost and with greater speed, if a credible, accessible, and abuse-resistant pre-litigation mechanism were in place. In this context, how about a digitally enabled, third-party delivered, court-overseen pre-registration screening and mediation (PRSM) framework that intercepts eligible disputes before they are formally filed and routes them through certified mediation?

On this, Italy, Turkey, and the US offer very good examples. Since 2010, Italy has had a mandatory pre-litigation mediation mechanism, which is delivered through private mediation centres, and has a settlement rate of 50%. It covers broad categories of civil disputes. The mediators are accredited, undergo mandatory training, and the settlements are enforceable as a court decree. Turkey has successfully adopted mandatory pre-litigation mediation since 2018, first for labour disputes and then for commercial and consumer disputes. In the US, there’s a mandatory court-annexed Alternative Dispute Resolution (ADR) framework, which is implemented through court-contracted private mediators and magistrates. It has a striking 70-85% settlement rate. 

There are some important takeaways from these successful examples. One, voluntary-only is insufficient, and where mediation is optional, uptake is less than 5%. Two, to avoid coerced settlement, the mandatory requirement must be for attendance at a first session. Three, in all the successful examples, third-party delivery works. Neither courts nor government agencies need to conduct the mediation; they need only set standards and enforce compliance. Fourth, to make it attractive, mediation must be measurably faster than litigation. Fifth, the binding constraint is mediator quality. In the absence of a rigorously monitored credentialing system, mediator quality can be a big failure node. 

Finally, the entire process must be done on a transparent digital workflow. This should include the random allocation of a certified mediator from the accredited registry, immediate scheduling of sessions, conduct of sessions in person or online dispute resolution (ODR) channel, digitally signed agreement (or opt-out, if the party prefers this) with the mediation log captured through an AI tool and automatically attached to the case file to be filed for orders that are enforceable under the Mediation Act 2023. 

Unfortunately, India’s current pre-litigation model, revolving around the district legal services authorities (DLSA), fails on all these counts — poor credibility, under-resourced, slow, untrained, and without a digital backbone.

This prelitigation mediation system should benefit from a diverse ecosystem of certified third-party providers. Apart from private professional firms, there should be bar-affiliated mediation centres, NGO or civil society institutions, industry/sector bodies, and the existing DLSAs. The mediators must be mandated to satisfy some minimum requirements, regardless of type - some minimum number of trained mediators per office, integration with the mediation workflow, financial audit, and other disclosures and safeguards. There should be zero tolerance for abuse and manipulation by mediators. The accreditation should be for 3-5 years and done through a combination of performance parameters drawn from its digital trails in the workflow, and through qualitative evaluation. 

The governance architecture should be three-tiered, covering the national, state, and district levels. There should be a single national digital platform that generates a unique Mediation Reference Number (MRN) for each dispute, links to the NJDG for court reference, and provides real-time dashboards accessible to all oversight tiers.

A big threat to the success of this endeavour will come from the political economy, specifically the legal ecosystem that currently benefits from protracted litigations and an ever-expanding pool of cases. Counsels will naturally find ways to throttle mediations. 

The critical success determinant will be the value that litigants see in adopting this path. This, in turn, depends on its efficiency and effectiveness. The fairness and quality of mediation are central to establishing the requisite credibility before litigants. This brings us to the earlier-mentioned binding constraint, the quality of mediators. Unfortunately, we cannot quickly develop a supply of good-quality mediators. It must evolve, especially in systems where human resource capabilities are weak. 

Without having a pipeline of good-quality mediators, mandating mediation requirements runs the risk of bad implementation and thereby tarnishing the idea itself. An illustration is the set of challenges associated with the insolvency resolution process, where inadequate capabilities and abuses by insolvency resolution professionals are major problems. Accreditation systems across facilities (clinics and hospitals, schools and colleges, ITIs and training institutions, and so on) have become compromised due to deficient capabilities and capture of accreditors. 

One solution would be to start small in a few locations (districts) and that too for a few selected categories of cases, coupled with intense training and other capabilities-building support. The initiative could be expanded gradually thereafter. It would also be useful to identify ways to align counsel's interests with the mediation process. One way would be to even pay the counsels a fee for successful mediation settlements.

The second China shock and the challenge facing its trade partners

A China shock 2.0 is in full play. It is destroying domestic manufacturing bases, upending international trade regimes, and triggering backlashes in advanced and developing countries. In addition to its economic consequences, China’s increasing weaponisation of its manufacturing dominance and the integration of trade and national security policies are alarming its trade partners. With the US decoupling under the policies of Trump 2.0, the frontline for China shock 2.0 is in Europe and Southeast Asia. 

There’s now a clear recognition that the global competitiveness of Chinese manufacturers goes much beyond their manufacturing efficiency. Instead, the former is substantively built on a massive foundation of subsidies, low-interest loans, cheap inputs, and so on. Its scale is such that these anti-competitive practices completely skew the playing field, cannot be matched by anyone else, and therefore cannot be allowed to go unrestricted. The challenge, though, is how to respond given that China holds pretty much all the cards in the manufacturing supply chain, especially all metals and intermediate inputs. 

What complicates matters is that the growth strategy being pursued has boxed Beijing itself into a corner. Subsidies, cheap credit and inputs have fuelled a capacity buildup in multiples of the domestic market, leaving export market expansion as the only outlet. Any pullback risks factory closures and job losses, stoking public discontent and worsening matters in a struggling economy. It also risks a cascade of corporate defaults that could imperil the financial system. In these conditions, even efforts to recalibrate the economy towards consumption would be extremely challenging. 

This post will examine these issues in greater detail, drawing from an excellent FT series on the second China shock and a new Rhodium Group report on how China came to dominate industrial metals.

1. This is a representative illustration of a story that has been playing out for years in industry after industry. 

Huang Xian’s product is about the size of his fist, a sensor that detects electrical current leakage and slots into electric vehicle chargers as a safety guard between the car and the grid. The device is not just a symbol of the innovation and accomplishments of China’s high-tech sector. It also reflects a trend eviscerating high-end manufacturing across the world, to the near despair of governments from Asia to Europe and beyond. The EV boom has propelled Huang’s sensor shipments to a projected 10mn units this year, up from about 20,000 in 2019, when his company Mega-Senway Electronic Technology entered the market. Back then it was still a niche product, supplied by a handful of German and Swiss groups that sold the sensors for roughly Rmb200 (around $30) — or more per unit. Mega-Senway made its first sensors for about Rmb40 each and sold them for Rmb100, leaving Huang with a healthy margin. As Chinese competition poured in, prices started to fall. European groups gradually exited the market. Huang’s Shanghai-based company now sells some sensors for as little as Rmb10 a pop. 

2. The scale of Chinese subsidies is staggering compared to the rest of the world.

Recent OECD analysis underscores the role of subsidies. Company-level analysis of Chinese industry by the 38-member organisation estimates that Chinese businesses are subsidised at between three and nine times the rate of their rich-world counterparts. As well as grants and tax breaks, the OECD data finds that the biggest subsidies come in the form of loans from Chinese state banks offering below-market rates to Chinese companies that undercut international competition.

The role of weak currency in driving the Chinese surpluses should not be underestimated.

Lower inflation relative to Chinese trading partners has led to a real exchange rate devaluation in the past three years, helping boost net exports and the current account surplus, which stood at 3.7 per cent of GDP last year. The IMF estimates the country’s real effective exchange rate — which measures the real value of the currency against a basket of competitors — is undervalued by around 16 per cent, fuelling the competitive advantage enjoyed by Chinese exporters. China has kept exports competitive by buying dollars and depreciating the currency, accumulating “shadow reserves” through a complex web of state-owned banks.

In this context, Michael Pettis makes an important point about China’s global competitiveness. 

“Analysts often confuse the global competitiveness of Chinese manufacturing with manufacturing efficiency but these are two very different things. China’s manufacturing competitiveness depends on an undervalued exchange rate, very cheap financing and very low wages relative to productivity.”

3. The first China Shock, famously documented by David Autor et al as having cost nearly 2 million jobs in the US and having caused significant localised deindustrialisation, covered lower-cost clothes and footwear, consumer electronics, furniture, and appliances. The China Shock 2.0 is about high-end manufacturing, covering products such as solar panels, wind turbines, heavy equipment, electric vehicles, batteries, robots, speciality chemicals, and so on. 

While the China Shock 1.0 did cause job losses in the advanced countries, it did not have the same effect as China Shock 2.0 is having since the advanced countries had been vacating the lower-end manufacturing and had been focused on high-end manufacturing, which the China Shock 2.0 threatens to upend. 

4. Soumaya Keynes points to some differences between the first and second China Shocks. For one, unlike the first shock when China’s goods export prices rose by about 40% in the 2000-07 period, they were at the same level in 2025 as they were in 2018. 

Another important difference is that while during the first shock, China’s imports rose as it bought the manufacturing equipment for its exports, whereas today it makes even these equipment and has not vacated the low-end manufacturing it dominated in its early stages of growth. 

5. There are two sides to this phenomenon. On the external front, domestic manufacturers in advanced countries are unable to compete with the flood of cheap, high-quality Chinese-manufactured products. This is causing deindustrialisation and job losses in these countries. 

On the domestic front, Chinese manufacturers, both public and private, have entered these industries in large numbers and built up massive manufacturing capacities, far in excess of domestic demand, and are competing fiercely by undercutting each other in remorseless price wars. There are over 125 EV companies and over 150 humanoid robot companies, all benefiting and kept alive by the generous flows of subsidies of all kinds. This phenomenon, described as neijuan, or involution, has resulted in a race to the bottom with steep declines in profitability. Everyone is innovating more and working harder for ever-diminishing returns, and volumes keep rising even as profits are shrinking or negative. 

It forces companies like Mega-Senway to move fast. Huang explains how they cut their own costs so dramatically over just a few years. First they acquired the factory that manufactured the sensors they designed. Then he visited nearby factories to study their best practices. A worker testing their finished sensors initially did it one at a time, he says. Huang redesigned the testing jigs to test four at a time, then eight, with a worker constantly loading or unloading batches. Now he has replaced the workers with robotic arms. “We would update our processes two or three times a year,” Huang says. “The pressure came that fast.” 

The five-year product cycles with annual price negotiations that the auto industry once ran on have disappeared, he says. One large automaker has cut out all middlemen and puts out tenders each month directly to manufacturers up the supply chain such as Mega-Senway. They submit prices, are told if they are the lowest or not, and submit again — round after round, until no one will go lower. Huang, in turn, has had to bring in more suppliers to pit against each other. “I’m being squeezed, so my only option is to pass my pressure on to them,” he says… Huang says he wishes he could escape the ruthless competition. “We started the company because we loved developing new products,” he says. “Now every year when I’m working through the budget, I’m asking how much can I squeeze out to invest in building something new.”

The phenomenon of involution has been amplified by similarly fierce competition among local governments and provinces. 

China has a ream of policies to help companies get off the ground, with local governments in particular battling with each other to offer the best subsidies, cheap land, financing and tax breaks to lure in manufacturers and seed new industries on their turf. The competition between localities can be so great that some businesses move from one place to the next as they chase subsidies and investment. They have become known as “migratory bird enterprises”.

All this creates a self-reinforcing spiral and a bad equilibrium from which breakout is difficult.

Corporate data provider Qichacha lists 1.2mn Chinese companies with “robot” in their name or business scope. Some have recently pivoted from fields like cosmetics, green energy or semiconductors. The founder of a robotics company in western China ticked off the subsidies that have helped him get started: grants to help his customers purchase his robots, subsidies to expand his factory vertically instead of horizontally, money for rooftop solar panels and energy storage and a “smart factory” plaque from the provincial government with more attached benefits. His competitors get the same benefits, he says, acknowledging it may have contributed to the onslaught of new rivals that has forced his prices down 10 per cent over the past year… The system creates more and more companies fighting for the same piece of pie, says Huang He, whose group, Northern Light Venture Capital, is an investor in Mega-Senway. The problems arise when the government money for nurturing companies becomes what sustains them, he says. “Local governments are reluctant to let their local companies fail,” he says. “That’s why overcapacity is so hard to fix.”

The way the Chinese system works, local officials have every incentive to protect their companies. Value added tax generates nearly 40 per cent of China’s tax revenue, and the central government splits the receipts with the localities where products are made, giving them a direct stake in keeping factories running. Adding local production capacity also creates the growth that officials are largely judged on, and any large-scale lay-off could threaten social stability, Beijing’s overriding priority. “Officials are scared of missing their GDP targets. Nobody is scared of overcapacity,” says another founder, who asks to remain unnamed. “As long as you’re manufacturing, there’s VAT revenue. Whether you sell [a product] or make a profit, that doesn’t really affect them.”.. Huang of Mega-Senway suspects some of his competitors are losing money on every sensor they sell and are being sustained by investment from local government funds… The result is that companies which should exit the market keep operating, sustained by government capital, especially China’s politically favoured industries, such as solar, wind, batteries and EVs.

6. The Europeans are emerging as the biggest losers from the China Shock 2.0. Their companies had maintained a competitive advantage in automobile manufacturing, engineering and high-tech manufacturing, which is now being dismantled clinically by Chinese competition. In fact, the surge in Chinese exports in the first three months of 2026 was driven by shipments to the EU by 21.1%, even as those to the US fell. High-tech products have driven the growth in Chinese exports to Europe. 

China’s trade policy is also tightly integrated with its national security policy, and nowhere is this more evident than in Europe, where China is trying to establish manufacturing facilities in countries like Hungary, Serbia, and Spain, to diversify supply chains and also gain access to the large EU market. 

Xi is explicit about his goal to foster foreign dependence on China’s advanced manufacturing, which Beijing sees as a source of leverage in an era of geopolitical shocks. Salvation for one country can look like the seeds of subjugation to others. The question for Europe is whether it should welcome Chinese investment or repel it… Spanish historian Florentino Portero said: “China’s trade policy is in fact part of its national security strategy. We are seeing how China is taking control of certain companies and integrating them into its own system at our expense.”

In response, taking a leaf out of the playbook that China used so effectively to catch up with the Western manufacturers, the EU recently announced a Made in Europe Bill (the Industrial Accelerator Act, IAA) that mandates Chinese manufacturers to establish facilities to share technology. There is a strong consensus among Europeans that “Europe must be a complete industrial base and not a mere assembly platform”.

The bill lets member states veto any FDI exceeding €100mn in strategic sectors if the investor is from a country with more than 40 per cent of global manufacturing capacity. Those sectors include batteries, EVs, solar panels and the extraction and processing of critical raw materials — all areas where China dominates. To win approval, investment projects must fill at least half of their jobs with EU workers and satisfy three of five other conditions. One is that the investment must be undertaken via a joint venture. Another is that the foreign partner does not own more than 49 per cent of the entity — a condition unpopular with Chinese companies, according to European officials. Other conditions cover the licensing of intellectual property rights, spending 1 per cent of revenue on research and development in the EU, and publishing a strategy for sourcing 30 per cent of inputs from the bloc. The legislation will give companies meeting its requirements access to public funding from the EU, national and regional governments. Without such financial support, Europe’s relatively high labour costs versus China make many industrial investments unviable.

7. Even more than the Europeans, the biggest losers from the China shock 2.0 may be its neighbours in South East Asia, who had been hoping to move up the industrial value chain when China shifts to ever more sophisticated products and services. But, as mentioned earlier, China seems unwilling to vacate any space in the manufacturing landscape. Worse still, its exports are destroying its manufacturing bases. 

They are becoming dependent on China for lower-value products, industrial inputs for manufacturing, and also finished goods like EVs and solar panels. 

China’s trade surplus with the 11-nation Asean bloc hit a record $276bn in 2025 — up 45 per cent from the year before — with strong growth in intermediate goods, including electronics and capital goods such as machinery used by manufacturers. Labour-intensive manufacturing sectors such as shoes and clothing have been particularly affected. In Indonesia, around 60 factories closed between 2022 and 2025, according to the Indonesian Textile Association… The textile association estimates that 250,000 jobs have been lost in the sector over the past four years… At the other end of the value chain, Chinese exports of EVs, batteries and solar panels to members of the Association of Southeast Asian Nations increased more than 50 per cent last year to nearly $22bn. Vietnam imported $84bn in electrical machinery and electronics from China last year, up 43 per cent, according to the Asia Society Policy Institute (ASPI) think-tank.

This flood of cheap Chinese imports and its impact on domestic manufacturing in terms of factory closures and job losses is already generating backlash in these countries.

Indonesian finance minister Purbaya Yudhi Sadewa said in March that Jakarta was considering measures to curb the growing dominance of Chinese products on the country’s e-commerce platforms. “If this continues without intervention, it would be as if we are handing over our domestic market directly to China,” Purbaya said… Liew Chin Tong, Malaysia’s deputy finance minister, has warned that Asian countries that long relied on the US as their export destination of “first and last resort” now risk crashing each other’s markets, “resulting in cut-throat price wars, involution and deindustrialisation of fellow Asian economies”.

8. There’s little to indicate that even with the rising global backlash at Chinese exports, including among developing countries, Beijing has any intention to change course and focus on domestic consumption. After the property slump and given the reluctance to rebalance towards consumption, manufacturing investments have emerged as the engine for sustaining the 5% growth target. Exports have become a convenient outlet to sustain growth and prevent domestic discontent through factory closures and job losses. 

9. The solar industry is a good illustration of all these distortions.

As Chinese factories rushed into solar, production capacity skyrocketed. The country has the ability to manufacture 1,200GW of solar panels annually, roughly double the 647GW installed worldwide last year, according to the China Photovoltaic Industry Association and energy think-tank Ember… local governments poured money into building solar plants over the past five years, contributing more than 50 per cent of funding for many projects. Almost none was built without local government capital involvement… 

“Why was it possible to build capacity exceeding global demand by double in such a short time?” asked Li Dongsheng, the chair of television and solar conglomerate TCL. “The key reason is the distortion of resource allocation and inappropriate local government participation,” he said in an interview with local media last month… In the solar industry, overcapacity has led to vast losses, which China’s top six publicly traded solar groups indicated would cumulatively total Rmb43bn for 2025. Yet the subsidies continue. One of those six companies, Jinko Solar, received Rmb1.3bn in subsidies in the first half of 2025 but still lost Rmb3bn in the period. Another, Trina Solar, received hundreds of millions of renminbi during the period… 

10. The Rhodium Group has an excellent report on how China managed to construct an “electro-state” that has electrified power generation and transportation, and has become so utterly dominant in the manufacturing of the likes of electric vehicles and batteries. Abundant and cheap electricity enables metals processing, which is the foundation of hardware manufacturing. It attributes this outcome to Beijing’s “expansion of cheap electricity, the agglomeration of upstream materials production (metals refining, synthesis, and fabrication, which are low-margin, energy- and capital-intensive businesses), and policies that enabled China to develop a dominant position in green technologies, while maintaining its competitive advantage in manufacturing of almost anything with an electric current.”

This is a good summary of the dynamics that led to the emergence of the electro-state:

Local government incentives to invest heavily and a financial system granting cheap credit to state-owned enterprises allowed Chinese energy-intensive industries to develop much faster than the growth of domestic downstream demand… Policy choices incentivized fully localized industrial clusters regardless of the costs of maintaining them, and central planners then prioritized the expansion of power supply and grid development to facilitate these investments.

11. It describes the explosive growth in manufacturing sector's power consumption. 

Nowhere is the dominance more pronounced than in metals refining. 

This is a very good description of the industrial metals processing and refining ecosystem. 

Ore bodies almost always host multiple metals, but the economic viability of extracting non-primary metals varies… These companion and by-product metals require specialized refining capacity to recover, which can be costly… There are several well-known examples of critical minerals that originate as byproducts of major host-metal supply chains… While some of these metals can be mined from dedicated deposits, if they are not captured during host-metal processing, they typically end up in tailings, slags, or other waste streams. Many companion and byproduct metals are traditionally considered too costly to extract, and as a result they often accumulate in waste piles outside processing facilities. Installing the additional capacities required to recover metals such as gallium, germanium, indium, or tellurium involve significant capital expenditures that are difficult to justify given the relatively small market size and historically low prices of these materials. In most markets, this makes recovery and processing uneconomic.

The challenge of the commercial viability of extraction, processing, and refining is overcome by China’s downstream manufacturing ecosystem.

Because Chinese mobile phone, battery, semiconductor, LED, and other manufacturers require stable supplies of minor metals, refiners can enter into offtake agreements that guarantee downstream demand from the domestic manufacturing ecosystem. This reduces commercial risk and allows smelters and refineries to justify capital expenditures for byproduct recovery in ways that are not feasible elsewhere. For minor metals, especially companion and byproduct metals, the offtake agreements are essential to start production. Major metals benefit from the ability to sell refined output to exchanges. Minor metals maintain a smaller set of potential customers because materials are produced for specialized purposes. Because minor-metal refineries depend on continuous operation, producing output without assured demand represents a material commercial risk that most firms are unwilling to assume.

The symbiotic relationship between refiners and manufacturers within the Chinese industrial ecosystem reduces uncertainty in upstream supply chains while also empowering incremental innovation in downstream manufacturing. The outcome is a supply chain that combines upstream metals processors with downstream metals consumers that simply does not exist anywhere else in the world… China produces 200 million televisions and 1.5 billion smartphones per year. Producing the TV sets guarantees offtake of 25 to 30 metals, while the phones require close to 60 metals. By establishing the world’s largest manufacturing base, the ecosystem ensures the greatest volume and diversity of offtake for processed metals and minerals. The total volume of downstream manufacturing enhances midstream processing competition for upstream materials to fabricate or process on behalf of downstream buyers.

There’s no way this tightly coupled ecosystem can be replicated anywhere globally. The only option is to start with this ecosystem and figure out ways to gradually diversify. 

The report is essentially a warning that Western efforts to diversify critical mineral supply chains face a structural disadvantage: China's advantage is not simply about individual metals or policies, but about the integrated system that links cheap electricity, processing expertise, state-backed finance, and massive downstream manufacturing demand. Replicating any one piece is feasible; replicating the whole ecosystem is a generational challenge.

12. By illustrating with the example of the metals manufacturing ecosystem, the report highlights the dilemma faced by China’s trade partners. On the one hand, continuing business as usual access to Chinese imports will invariably destroy their local manufacturing bases. On the other hand, domestic manufacturers will not only be uncompetitive with respect to Chinese manufacturers, but they must also necessarily rely on Chinese suppliers for critical inputs like specialised materials that go into manufacturing. 

When faced with such a dominant manufacturing power, there are very few choices. For sure, they must resort to tariffs and other trade barriers to restrict entry. The European IAA is a good example of an effort aimed at attracting Chinese investments on the condition that it would transfer technology and localise manufacturing, instead of mere assembly. But there are daunting barriers, including strong resistance and subversion by the Chinese investors. 

While no country, including the US, can compete against China, the situation changes when countries form supply-chain alliances to diversify and decouple from China. I blogged earlier, pointing to Kurt Campbell and Rush Doshi who have argued in favour of America forging alliances with like-minded partners to create a meta-economy that can outcompete China and manufacture at scale.

To achieve scale, Washington must transform its alliance architecture from a collection of managed relationships to a platform for integrated and pooled capacity building across the military, economic, and technological domains. In practical terms, that might mean Japan and Korea help build American ships and Taiwan builds American semiconductor plants while the United States shares its best military technology with allies, and all come together to pool their markets behind a shared tariff or regulatory wall erected against China. This kind of coherent and interoperable bloc, with the United States at its core, would generate aggregate advantages that China cannot match alone.

Unfortunately, the Trump administration’s policies are pulling in exactly the opposite direction in terms of antagonising and decoupling from its traditional alliances.