Weekend reading links

1. As grocery prices rise and popularity ratings dive, President Trump rolls back tariffs on certain agricultural products where import reliance is high. 

Trump issued an executive order on Friday afternoon saying that imports of certain goods that were generally not grown or produced in the US would no longer be subject to “reciprocal tariffs” — the high levies he set based on emergency powers starting in April. The president’s order said the tariff exemptions would apply to common and tropical fruits including oranges, tomatoes and bananas — as well as cocoa, coffee and tea. Beef imports were also included in the list, as well as spices and some fertilisers, according to a factsheet provided by the White House.

Beef prices have surged in the US, with the average price of a pound of ground beef rising 13% in a year, while uncooked steaks rose 11%, leading to steakhouses raising prices or trimming portions or both.

The exorbitant tariffs of 50% on Brazil, the world's largest beef exporter, have been a major contributor. 

Before the Trump administration levied a sweeping 50 per cent tariff on Brazil in July, the US had been steadily increasing imports from Brazil in order to keep up with domestic demand. In the first five months of 2025, the US imported some 215,000 tonnes, more than double during the same period in 2024. After July, the effective rate for out-of-quota Brazilian beef rose to more than 76 per cent. Exports to the US, Brazil’s second-largest beef market year-to-date, fell 41 per cent in September to $102.9mn.

2. Continuing on the tariff front, Switzerland has reached an agreement with the US to lower tariffs from 39% to 15%, the same rate as EU exports to the US. In return for the deal, Swiss companies have promised to invest $200 billion in the US by the end of 2028. White House has said at least $67 of the investment would occur in 2026, and Swiss businesses would set up apprenticeships and training programs in the US. 

This also follows trade deals with Argentina, Guatemala, El Salavador, and Ecuador over the week. 

3. Good news on the South African economy, as S&P upgrades sovereign ratings for the first time in two decades to BB, two notches below investment grade, on the back of reforms and fiscal revenues. 

The rolling blackouts that hamstrung the economy have largely been avoided this year and Eskom, the state power company, returned to profit after eight years of losses and reliance on government bailouts... S&P said the upgrade reflected South Africa’s recent record of budget surpluses, excluding interest payments, and less financial pressure from Eskom... After a decade in which GDP expansion remained below 1 per cent, there have been other positive developments. The country was recently removed from the Financial Action Task Force’s grey list while the survival of the government of national unity has improved investor confidence. This week, the government cut its inflation target for the first time this century to 3 per cent, bolstering a rand rally...

S&P said it expected South Africa’s GDP growth to pick up to 1.1 per cent this year, from 0.5 per cent in 2024. South African assets have stood out this year even in the midst of a rally in other emerging markets, while the rand is up about a tenth against the dollar in spot terms. The Johannesburg all-share index has risen about a third this year, or nearly 50 per cent in dollar terms. The yield on South Africa’s 10-year rand government debt has fallen from 11 per cent in April to about 8.7 per cent.

3. The latest in rent-seeking by the Trump family is a report that the Trump Organisation is in talks to bring a Trump-branded property to a $63 billion government-owned project that is set to transform the historic Saudi town of Diriyah into a luxury destination with hotels, retail shops, and office space. The Organisation is also talking to bring Trum branded property to other developments in Saud Arabia. 

The negotiations are the latest example of Mr. Trump blending governance and family business, particularly in Persian Gulf countries. Since returning to office, the president’s family and businesses have announced new ventures abroad involving billions of dollars, made hundreds of millions from cryptocurrency, and sold tickets to a private dinner hosted by Mr. Trump... In Saudi Arabia, a Trump tower is planned for Jeddah, and two projects have been announced in Riyadh. A Trump hotel and tower has moved forward in Dubai, the largest city in the United Arab Emirates. And a golf course deal in Qatar has put the Trump family in business with a government-owned real estate firm there... Each venture generates licensing fees for using the Trump name... Licensing deals can be lucrative, particularly if a development does well. Often, a company is paid for the use of its name and is not required to invest any money in the project itself. The Trump Organization’s licensing agreements are not public, making it impossible to know the terms.

4. Sustainable high growth rates in India is not possible without broad-basing aggregate demand. More here. 

5. Corporate India's R&D problem in a graphic.

And global comparison.

And it does not seem to be improving.

Most of the top six sectors saw a dip in their share in the R&D expenditure by Nifty 100 companies during FY23-25.

6.  Retail is an illustration of the deeply price-sensitive and low-margin nature of Indian market. 

Foreign brands including West Elm, Pottery Barn and Superdry have stores in Reliance’s shopping malls in upmarket Mumbai. However, those joint ventures have largely struggled to gain traction with shoppers in India, where the per capita income remains less than $3,000. The conglomerate’s foreign brands business housing these joint ventures lost Rs2.7bn ($30mn) in the financial year through March 2025, according to the latest available accounts... Reliance’s high-profile partnership with fast-fashion retailer Shein has also been underwhelming... Shein’s app has been downloaded just 11mn times so far, according to market intelligence firm Sensor Tower. Its discount prices are largely matched, if not undercut, by many Indian ecommerce and fashion retailers, say analysts... Blinkit, Swiggy and Zepto, which together control more than 90 per cent of the quick commerce delivery market and compete with Amazon and Walmart-owned Flipkart. None of the companies are profitable.

7. Arvind Datar has a good explainer of the telecommunications adjusted gross revenue issue that the Supreme Court has just allowed for reconsideration (after having created the problem in the first place).

8. Even as Delhi grapples with toxic air pollution levels, here's something from England.

In my home country of England, levels of PM2.5 — fine particulate matter which is widely seen as the most damaging pollutant to human health — have plummeted. A report by the Institute for Fiscal Studies describes “remarkable progress” over the past two decades. Between 2003 and 2023, the average level of PM2.5 roughly halved in every region of England, and almost everywhere is now already below the target the UK government set for England for 2040.

Also India's VC industry facts

The country has created more than 120 unicorns, start-ups valued at more than $1bn, according to Tracxn — the third highest number after the US and China. Indian and international venture capital firms have invested $96bn over the past five years, according to consultants Bain, in around 8,000 funding rounds. Most of this has come from foreign investors but the domestic long-term capital base is developing fast, from family offices to insurance companies and pension funds.

9. The remarkable precision of Chinese economic forecasts raises red flags.

10. The spectacular reduction in the cost of renewable energy.

Since 1976, the price of solar modules has fallen by 99.6 per cent. With each doubling of installed capacity, the price fell by 20 per cent.

11. Janan Ganesh may well be spot on with his assessment of Rachel Reeves, the British Chancellor of Exchequer,

Rachel Reeves: one of life’s triers, but never cut out for this particular office at this particular time. At next week’s Budget, she will announce a second round of tax rises, which she said would never come. She has spent 2025 fanning and then dousing speculation about certain levies, such as higher income tax, with predictable effects on confidence. (A Tory who behaved like this would be called a vandal.) Most workplaces, including newspapers, contain staff who are out of their depth but survive because the boss is too embarrassed to fire them. They just tend not to be the second-highest person in the organisation.

And on her boss, the Prime Minister, Keir Starmer.

There were warnings about Starmer’s character in opposition. He let others stand up to Jeremy Corbyn, whom he served in shadow cabinet. He let others fight woke dogma, until the tide turned against it. Even now, he makes liberal use of human shields. Notice that every crisis for Starmer quickly becomes a conversation about his underlings. His then chief of staff Sue Gray used to be the problem. Now it is her successor Morgan McSweeney. What rotten luck the prime minister has with recruitment. The British are having to relearn a lesson that Theresa May should have fixed in their minds forever. Don’t assume that uncharismatic people have hidden depths. Being boring does not make someone a “technocrat”. One can be dull and inept.

12. Britain has the biggest difference between the bottom and top tax slabs. 

According to the latest figures from the OECD, 45 per cent of top earners’ salaries goes on taxes and social contributions, compared with 29 per cent for the average worker, for a top-to-middle gap of 16 percentage points. Scandinavian gaps come in at about 12 points. Northern Europe’s social democracies tax everyone from bottom to top at a moderately high rate. In Britain, taxes at the top are comparable to Denmark and Norway but the average Briton is taxed less than the average American.

13. John Martinis, Professor of Physics at the University of California, Santa Barbara, and the winner of 2025 Nobel Prize in Physics, poses a manufacturing challenge to realise quantum computing.

Anyone who has looked inside a modern quantum system can see the truth of this. Look at the diagrams or pictures of devices and what do you see? A jungle of wires and discrete components, all designed to cool and control a single, small chip hidden at the bottom of the cryostat. We have reached a stage where the complexity of the plumbing completely overwhelms the quantum device itself. My vision is that the entire, spaghetti-like control system must be replaced by a single, integrated chip. Think of it as the transition from the room-sized mainframe computers of the 1960s to the microchips of the 1970s and beyond. That transition wasn’t an innovation in abstract mathematics; it was an industrial engineering marvel. We need cryogenic integrated circuits to operate at the very low temperatures required for superconducting qubits. Using this approach, we can put not hundreds but 20,000 high-fidelity qubits on a single, clean wafer, and then achieve the target of millions of qubits per system by interconnecting those wafers. Quantum computing must adopt state-of-the-art chip manufacturing — the same technology that builds billions of transistors into every modern smartphone. This means getting rid of outdated, inefficient methods, such as the 60-year-old lift-off fabrication process used in the development of quantum computing chips, which simply is not clean or scalable enough.

He sees this as an industrial engineering challenge for the US and wonders whether the modern culture distracts from its realisation.

When the classical semiconductor industry offshored much of its fabrication capacity, it shifted technological leadership overseas. I do not wish my scientific legacy to simply mint a few more billionaires... I wonder whether modern culture, with its focus on the latest result and aggressive marketing, makes the necessary, difficult and frankly less glamorous work of deep industrial engineering harder to justify and fund. But the path to scalable quantum computers is paved with high-tech fabrication equipment, not just high-impact papers. It is time for the superconducting qubit community to shift its focus from chasing the next algorithmic demonstration to tackling the immense manufacturing and engineering challenge that lies ahead. The moment for foundational scientific discovery needs to give way to the era of industrial manufacturing.

China's economic and political risks are rising

This post will continue the exploration of China’s economic and political vulnerabilities as geopolitical tensions rise with the US and the West. 

A narrative has taken hold that China’s manufacturing dominance is a source of vulnerability for the rest of the world and an instrument that the country can weaponise to promote its strategic interests. This weaponisation of product manufacturing overlooks the economic dependence of the exporting country on global markets, especially for an economy where domestic consumption is subdued, exports are a major share of manufacturing capacity, and the manufacturing supply chain is localised in product clusters. 

The last part is especially important insofar as it means that any reduction in exports can immediately inflict locally concentrated pain in terms of assembly lines idling, factory shutdowns, and job losses. Discontent arising from this is more salient and politically troubling than those pains that are diffused economy-wide. 

The political economy sting of the China shock that David Autor and Co. have documented owes primarily to the concentrated nature of its impact on certain industrial towns due to factory closures and job losses due to imports from China of those specific products. In the aggregate sense, at 2-2.4 million job losses in the 1990-2007 period, its impact on the US economy would be marginal. 

Manufacturing supply chains are mostly concentrated in clusters. Typically, most of the manufacturing of a product will come from a few clusters. This means that the manufacturing capabilities and base are heavily localised, sometimes in just one or two locations. This leaves the manufacturing base deeply vulnerable to being eliminated when faced with export competition, like that coming from China. Instead of an incoming missile physically destroying the main weapons arsenal, the incoming exports are closing down the main centre of manufacturing of that product and forcing the product ecosystem to disintegrate. 

The converse of this phenomenon is China’s vulnerability. China is especially known for the cluster nature of its manufacturing ecosystems, where entire towns are monocultures of specific products. There are more than 500 such specialised towns, with some being responsible for 63% of world’s shoes, 70% of its spectacles, and 90% of its energy saving lamps.

This approach is like that of a country that has concentrated its weapons systems into specific locations, thereby leaving them vulnerable to single air strikes that can take down entire locations. 

Sample this about coffin-making,

The coffin-makers of Zhuangzhai, a leafy township of 100,000 people in the eastern province of Shandong, are a case in point. Between them, Zhuangzhai’s three main manufacturers export 740,000 coffins annually, almost all of them to Japan. With just under 1.4m deaths in Japan last year, that gives one Chinese township something around half the Japanese coffin market.

This is a source of immense strength. It creates an unmatchable manufacturing eco-system. So production is not easily replaced, even if Japan wants to diversify away from China,

The largest local firm is Yunlong Woodcarving, which ships 20,000 coffins to Japan each month. Its 56-year-old founder, Li Ruqi, has coffin-making in the blood... In 1995 his firm began supplying a Japanese coffin-maker with panels decorated with phoenixes and lotus flowers. Most were carved from the wood of the paotong, which grows all around Zhuangzhai... Some Japanese clients did try sourcing coffins in Vietnam and Indonesia, he concedes. But they found that workers in South-East Asia lacked “discipline”, so returned to Shandong. His corner of China has paotong trees, skilled labour and trusted suppliers. “Price-wise, talent-wise, this place is pretty far ahead,” he says.

However, it is also a source of risk, as seen by the plight of the bra-making town of Gurao. How many Guraos would it take to trigger domestic discontent?

This manufacturing strategy has consequences that go far beyond the domestic polity. An illustrative example is that of tomato paste, whose exports to the main customer, Italy, and Western Europe, have collapsed this year after allegations of using forced labour and misleading origin labelling by companies. The Italian farming association led a high-profile campaign against the Chinese paste costing less than half of that made domestically, and the adulteration of premium Italian-made paste with imported paste. 

Tomato News, which tracks the global processing industry and trade, estimates China has a stockpile of 600,000 to 700,000 tonnes of tomato paste — equivalent to roughly six months of its exports… While China’s total tomato paste exports by volume fell 9 per cent year-on-year in the third quarter of 2025, sales to western EU countries dropped 67 per cent, and Italy’s purchases were down 76 per cent, Tomato News said…Chinese customs data shows the value of processed tomato exports to Italy plunged to less than $13mn in the first nine months of 2025 from more than $75mn in the same period of last year… China processed 11mn tonnes of fresh tomatoes into paste in 2024, up from 4.8mn tonnes in 2021, according to Tomato News. With European demand collapsing, the Asian nation has more than halved the volume of the fruit processed to an expected 3.7mn tonnes this year.

The western Chinese region of Xinjiang, populated by the minority Uyghur community, has become a major centre for tomato cultivation and processing in recent years. 

The article is a great illustration of how parts of the Chinese economy have emerged primarily to serve export markets. 

Tomatoes, which were introduced to China after European colonisation of the Americas, play a relatively minor role in Chinese cuisine. One of the Chinese names for the fruit can be translated as “foreign aubergine”, while the other means “western red persimmon”. But China has turned Xinjiang, home to the mainly-Muslim Uyghur minority, into a low-cost, export-oriented tomato paste production hub spearheaded by large state companies, one of which is a subsidiary of the paramilitary Production and Construction Corps that helps run the region… Xinjiang’s tomato industry has been dogged by allegations of use of forced Uyghur labour. In 2021, the US banned tomato paste imports from Xinjiang, citing such concerns… A BBC documentary last year alleged some Uyghur prisoners and detainees were forced to harvest tomatoes that may have wound up, via Italy, on UK supermarket shelves. The report prompted retailers fearful of a scandal to put pressure on Italian processors not to use Chinese paste.

Such purely export-focused manufacturing development will be deeply strained as the backlash against cheap Chinese exports spreads from the US and Europe to developing countries. China is certain to face a reverse China shock arising from the squeeze on exports to the rest of the world. 

This dynamic comes on top of an investment boom that is clearly flagging slumping. Fixed asset investment shrank a record 1.7% in the first 10 months of the year, with Bloomberg Economics estimating investment dropping by as much as 12% in October, the fifth successive monthly decline. 

This is on top of stagnant infrastructure investments, declining property investment, and slowing growth and outlays in manufacturing. Infrastructure investments have slowed as local governments have been left with declining property market revenues and have focused on deleveraging. 

The property market crisis has been a major drag. The property market has a disproportionate impact on the economy, contributing directly and indirectly to between 20-25% of the GDP, being the primary financing source for local governments, and the main source of household wealth. The negative wealth effect from the property market slump has been a dampener on consumption. Worryingly, the property market has been on a continuous downward trend since the beginning of 2021. 

The hostile external environment has squeezed manufacturing investments. The manufacturing sector has been experiencing the phenomenon of “involution,” characterised by price declines resulting from intense competition and excess capacity. Noah Smith has a good description of the associated problems.

This so-called “involution” results in misallocation of capital, reducing productivity growth and ultimately slowing GDP growth. By destroying profit margins for even the best-run Chinese companies, involution damages their ability to invest for the future. The excessive corporate competition from involution contributes to China’s overwork problem, because it gives companies an incentive to work their employees to the bone in order to get a competitive edge. And worst of all, involution drives down prices, causing deflation that exacerbates the value of the debt left over from the property bubble.

While sectors like electric equipment and machinery, solar panels, and batteries have seen declines in investments, they continue to stay elevated in the EV industry. In fact, the EV industry looks set to be ground zero for a manufacturing implosion arising from intense competition, massive excess capacity, and low margins. 

Bloated by excessive investment, distorted by government intervention, and plagued by heavy losses, China’s EV industry appears destined for a crash. EV companies are locked in a cutthroat struggle for survival… Dunne Insights, a California-based consulting firm focused on the EV industry, counts 46 domestic and international automakers producing EVs in China, far too many for even the world’s second-largest economy to sustain…To woo customers in this crowded market, China’s EV companies have been slashing their prices, making profits slim. In most economies, the market would sort out this mess by culling the weakest players…In China, state support or ownership of automakers extends the life of struggling businesses. Local governments are also reluctant to lose the jobs they bring, so officials prop up unprofitable companies. The city of Wenzhou recently helped arrange financing for an EV maker called WM Motor, to get the company’s local factory humming again. The city of Hefei rescued the EV start-up Nio in 2020, but the publicly listed company continues to lose money—$1.6 billion in the first half of this year.

Despite these losses, the government has so far been unwilling to pull the plug on EV investments since it sees EVs as a great opportunity to fortify China’s global manufacturing dominance. 

China’s state-led EV program, by design, has been predatory. By subsidising these companies, China sought to edge out more established automakers in the U.S., Europe, and elsewhere. Beijing’s economic planners are willing to sacrifice something as frivolous as profitability to fulfill their dreams of building an internationally competitive car industry. China “sustains a lot of inefficiency at home in order to dominate industries and markets globally,” Dunne told me.

This is one more illustration of Beijing’s resolve to use its manufacturing dominance to expand its global power. 

As I blogged here, illustrating the capital efficiency and productivity problems, there are hard limits to such inputs and an investment-driven growth model. Even China can’t sustain direct subsidies to manufacturing, which makes up 15-35% of the profits of companies. Any pathway for sustainable economic growth must involve raising the remarkably low consumption share of economic output. 

The disproportionately low share of domestic consumption, at less than half the economic output, has been a persistent distortion in the Chinese economy. 

Rebalancing the economy away from investment towards consumption is the only way for an economy as large as China to build the foundations for sustainable economic growth. But the Chinese government has consistently avoided treading into policies to boost domestic consumption. This is all the more surprising now, given that consumer confidence has remained stuck at the lows it plummeted in the aftermath of the COVID-19 lockdowns in early 2022. 

This time too, Beijing has predictably stepped in with supply-side stimulus measures of various kinds. As the Bloomberg article writes, “A total of 1 trillion yuan in stimulus has been approved since the end of September to spur capital expenditure and replenish local coffers, with the effects likely to become more evident in the coming weeks.”

Finally, all these problems must invariably collide with the domestic political economy and strain the social contract between the Communist Party and the Chinese people. In a recent article, Helen Gao has a nice description of the contract.

China has long thrived under an unspoken social contract: The Communist Party granted the people more freedom to improve their livelihoods in return for political obedience. To many Chinese, the government is no longer holding up its end of the bargain.

She describes the internal situation in China. 

Internationally, China looks strong. It is America’s only rival in terms of the power to shape the world… That muscular facade is punctured here in China, where despair about dimming economic and personal prospects is pervasive. This contrast between a confident state and its weary population is captured in a phrase Chinese people are using to describe their country: “wai qiang, zhong gan,” roughly translated as “outwardly strong, inwardly brittle.” Many now feel that the very state policies that have made China appear strong overseas are hurting them. They see a government more concerned with building global influence and dominating export markets than in addressing the challenges of their households… 

Youth unemployment is so high that last year the government changed its calculation methodology in a way that produced a lower number. Even the new figure remains alarmingly high. An estimated 200 million people get by in precarious careers in a gig economy. Consumers, many of whom have seen their net worth shrink in an intractable housing market crash, are cutting back on spending, trapping the economy in a deflationary spiral. The sense of economic insecurity is leading people to forgo marriage and starting families, worsening a national decline in population. Popular frustration also is sharpening the divide between the haves and the have-nots — hardening public resentment against those who are perceived as parlaying economic or political connections into opportunity while most people face dwindling prospects. And mental health problems are believed to be rising, as evidenced by a spate of indiscriminate stabbing sprees and other violent attacks in the past couple of years.

Noah Smith points to similar findings from a PBoC survey. 

Chinese households became more pessimistic last quarter and their view of the jobs market fell to the worst ever, according to a survey by the central bank…Consumers turned increasingly negative about income, employment, and prices in April-June, the poll showed… The data also revealed that people’s willingness to consume dropped to the weakest since the outbreak of the pandemic, with almost two-thirds of respondents saying they want to save more, while an employment index fell to a record low…The data also showed a shrinking percentage of respondents expecting consumer and housing prices to rise.

In this context, when history is written, the Xi-Trump trade deal of October 2025 that postponed tariff escalation by a year may well come to be counted as a gift to China, a massive Trumpian self-goal. While the dominant narrative in the US and elsewhere was of a victory for Chinese strategy and diplomacy, the real story may well be one of the US blinking first and failing to call the Chinese bluff. It was an opportunity lost for the US to tighten the screws on China at a time when its economic and political faultlines were clearly visible.

Weekend reading links

1. On Shein's business strategy.

Shein’s low prices and vast choice led to meteoric success in western markets, particularly the US. Algorithms scour the web for trending ideas and feed them to designers, who then place orders with a network of about 7,000 contract suppliers, many clustered in Panyu, a manufacturing suburb of Guangzhou. The company tests the popularity of new designs via ultra-small orders, only ordering more when it is sure there will be demand. This model allows Shein to offer millions of designs at any one time, according to a person familiar with the company, compared to tens of thousands at other mass market retailers.

2. China is upending the politics of climate change and energy transition.

Countries like Brazil, India, and Vietnam are rapidly expanding solar and wind power. Poorer countries like Ethiopia and Nepal are leapfrogging over gasoline-burning cars to battery-powered ones. Nigeria, a petrostate, plans to build its first solar-panel manufacturing plant. Morocco is creating a battery hub to supply European automakers. Santiago, the capital of Chile, has electrified more than half of its bus fleet in recent years. Key to this shift is the world’s new renewable energy superpower: China. Having saturated its own market with solar panels, wind turbines and batteries, Chinese companies are now exporting their wares to energy-hungry countries in the developing world. What’s more, they’re investing billions of dollars in factories that make things like solar panels in Vietnam and electric cars in Brazil. In effect, Chinese industrial policy is shaping the development trajectory of some of the world’s fastest-growing economies... 

But these countries are increasingly meeting large portions of their energy needs with renewable power, both for the cost savings and for energy security reasons. Many are trying to reduce the amount of fossil fuels they import to relieve pressure on their foreign currency reserves. Rapidly falling prices of Chinese technology are enabling them to do that... Ethiopia last year took the extraordinary step of banning the import of new gasoline-powered cars. Nepal reduced import duties on electric vehicles so much that they are now cheaper than cars with internal combustion engines. Brazil raised tariffs on all car imports to compel Chinese automakers like BYD and Great Wall Motors to set up plants inside Brazil.

This is the important point

With Chinese exports of solar panels, wind turbines and batteries hitting records this year, Beijing increasingly has a vested interest in making sure the rest of the world moves faster in adopting renewable energy. Many American and European leaders have expressed alarm at China’s growing dominance, which has undercut their own industries. But at the summit, plenty of emerging countries seem fine with the arrangement. “You can’t insist that China has to lower its emissions” and then, later, “complain that China is putting cheap E.V.s all over the world,” Mr. Corrêa do Lago, the Brazilian diplomat shepherding this year’s international climate talks, known as COP30, in the Brazilian city of Belém, said. “If you are worried about climate, this is good news.”

3. Notwithstanding the rocketing valuations, the bull case for AI is in this stat and graph.

Those worried about an AI bubble can point to S&P 500 capital expenditure as a fraction of GDP being higher than the levels seen during the dotcom bubble. Yet, the equivalent capex numbers are only about 40 per cent of operating cash flow — far lower than the over 70 per cent levels seen during the dotcom mania.

The headline result of the study from researchers at Zhejiang and Columbia universities — Generative AI and Firm Productivity: Field Experiments in Online Retail — was simple. Most of their GenAI experiments increased revenue, in some cases by a large margin. The largest gain was recorded when the platform added an AI assistant before the point of purchase — sales rose by 16.3 per cent and the conversion rate, the share of visitors who become buyers, increased by 21.7 per cent... Smaller and newer sellers, along with less experienced buyers, saw a disproportionate lift... An even tougher comparison, which pitted a hybrid AI system that escalated complex issues to humans against a team of human agents, produced an 11.5 per cent sales increase. This dovetails with what we’ve seen at HSBC in experiments in which we pit AI against humans in investment research. The results suggest AI is best used to augment human analysts, rather than trying to replace them.

4. Striking statistic about the value of electricity demand management at a time when data centre demand for power is surging.

One study from Duke University found that if data centres agreed to curtail their consumption just 0.25 per cent of the time (roughly 22 hours over the course of the year), the grid could provide power for about 76GW of new demand. That’s like adding about 5 per cent of the entire grid’s capacity without needing to build anything new.

5. PLI statistics

Launched in FY2022, these schemes span 14 sectors with total expected capex of close to Rs. 4.0 trillion under these initiatives. As of March 2025, capex of ₹1.8 trillion has led to incremental sales of ₹16.5 trillion, with exports accounting for 30–35 per cent of this growth... Only 16 per cent of the total incentive outlay (₹3 trillion) is expected to be disbursed or become eligible by end-FY2026, with the balance contingent on future production and sales milestones... The incentive scheme for mobile Phones has transformed India from a net importer to a net exporter of mobile phones. Production increased by 146 per cent between FY2021 and FY2025, and exports have risen eightfold. Despite this, local value addition remains limited, with high-value components still largely imported.

6. Changing attitudes towards Israel among Americans. 

According to a Gallup poll earlier this year, 59 per cent of Democrats said they were sympathetic to the Palestinians, compared to 21 per cent for Israelis. Back in 2001, more than 50 per cent of respondents said their sympathies lay more with the Israelis, versus 16 per cent who sympathised more with the Palestinians... A separate Washington Post poll last month found 32 per cent of Jewish Americans thought the US was too supportive of Israel, up from 11 per cent just over a decade ago. “Polls show that 77 per cent of Democrats deem what has happened in Gaza to be a genocide, and that Israel should be held accountable,” said Chi Ossé, a Democratic member of the New York City council and strong supporter of Mamdani.

7. How much energy does AI consume?

A GPT-4 model can use up to 463,269 megawatt-hours of electricity per year, according to research by academics at the University of Rhode Island, University of Tunis and Providence College. That is more than the annual energy consumption of more than 35,000 US homes.

8. The disappearing Chinese military leadership due to Xi Jinping's anti-corruption purges raises questions about the professionalism of the Chinese armed forces.

When the Communist Party's Central Committee met last month, 27 senior PLA officers who formed 64% of its members with a military background were missing, either due to investigation or having been removed from their jobs or party membership. 

9. India's digital economy fact of the day

While India’s population of 1.4bn offers enviable scale, its market has proven difficult to monetise. According to Sensor Tower, Indian internet users downloaded 24.3bn apps in 2024 and spent 1.13tn hours on them, but total spending was just $1bn.

10. Credit rating agencies are again in focus after the rise in defaults in the private credit industry.

Second-tier shops that have shot to prominence by catering to the booming private credit market, which has grown to some $3tn in recent years. Smaller, specialist providers such as Morningstar DBRS, Kroll Bond Rating Agency, HR Ratings and Egan-Jones have seized market share by offering private capital groups the chance to shop around. Some of the world’s biggest asset managers, including Blackstone and Apollo, are now among the most frequent users of ratings from firms beyond the big three. But as sudden bankruptcies at First Brands and Tricolor have fuelled fears that cracks are emerging in the private credit universe, some financial heavyweights are warning that ratings arbitrage could pose risks to the wider financial system... UBS chair Colm Kelleher said, “What you’re seeing now is a massive growth in small rating agencies ticking the box for compliance of investment.” Private letter ratings are not disclosed publicly, but can be used to determine capital requirements.

As private capital groups have boomed — and piled into the insurance industry, buying up life insurers — so has the demand for private letter ratings on everything from debt issued by individual portfolio companies to slices of asset-backed securities packaged into bonds destined for investment-grade buyers. Insurers affiliated with the private capital groups use those investment-grade credit ratings to trim the capital they are required to have to back their long-term obligations to retirees. As their needs have grown, the big private capital firms have turned to the smaller agencies as they seek a faster, more flexible service to suit their complex needs... Egan-Jones, which first began issuing private ratings in 2014 and now has more than 22,000 transactions to its name, has come under scrutiny for the sheer volume of ratings it has been able to issue with relatively few analysts in very little time. Egan-Jones has just 20 or so analysts and managed to issue more than 3,600 ratings last year alone, making it the most prolific grader of loans to individual businesses. Egan-Jones told the FT it had issued another 3,400 so far in 2025.

Hard limits to China's growth model

Much of what is written in the media, including in this blog, about China is about its spectacular economic growth to catch up with the US, and its manufacturing dominance. 

Rana Faroohar has a contrarian piece which makes the rare bearish case on China. She points to three facts about China in support. 

First, despite new pledges to raise consumption, the mathematics and politics of doing so are as tricky as ever. Second, while global diplomacy is now Beijing’s game to lose, it has made many fewer gains than it should have so far, given the low-hanging fruit. And third, autocracy remains a hard sell globally, which will make it difficult for China to ever replace the US (or even Europe) in terms of soft power.

I had blogged here about post-peak China. 

On this track, there’s an important paradox about China. Even as it has assumed leadership positions in innovations across sectors, its economic productivity growth has been slowing down. Tej Parikh has a set of excellent graphics that tell the story. This blog will explore this in greater detail and see how it could potentially constrain the country’s growth prospects. 

According to the Australian Strategic Policy Institute, China became the global leader in 57 out of 64 critical technologies between 2019-23, up from leadership in just 3 between 2003-07. It leads today not only in manufacturing EVs, batteries, renewables, etc., but has almost caught up with the West on AI, quantum technologies, and biotech. 

But this leadership in innovation and manufacturing has not translated into productivity growth, where its TFP has slowed down considerably and is now grossly underperforming the East Asian miracle economies. 

China’s industrial policies may have misallocated resources in a big way, thereby creating excess capacity, deflation, and keeping alive poor performers. IMF economists estimates that these subsidies, estimated at 4.4% of GDP in 2023, may have cut its TFP by 1.2% and GDP by 2%. They have tended to flow to better-connected firms, and raised entry barriers, thereby misallocating both talent and finance. 

For each success story like BYD or Huawei, there are countless others who are bleeding subsidies, making losses, and will collapse. Analysis by ASR finds that over 25% of listed non-financial firms had earnings before interest and tax-to-interest coverage ratio below 1 in 2024, up from around 10% in 2018. 

China’s paradox of the co-existence of excellence in manufacturing innovation with declining productivity growth is a reflection of the inefficiencies in its industrial policy. China’s much vaunted manufacturing dominance has come at a prohibitive cost in terms of misallocation of resources and talent. 

I have blogged here pointing to China’s sharply rising incremental capital output ratio (ICOR). Even as investment has been range-bound at 43-45% of GDP since before the global financial crisis, the ICOR has nearly tripled from below 3.5 to touch 10. This period has also coincided with economic growth declining precipitously from above 12% to just 4%. As the graphic shows, high investments rates brings ever less growth. 

Here is an updated version of the ICOR trends generated from the WB WDI series for investments and GDP growth. 

This misallocation has led to the perpetuation of inefficient firms, the accumulation of massive excess capacity, and the excessive leveraging of local governments and firms. In general, it has also created an economic system that is primed to maximise output with little regard for demand, continuously capture and expand export markets in a beggar-thy-neighbour dynamic, and is oblivious to policies required to boost domestic consumption. This trend is also encouraged by the country’s politico-bureaucratic system, where leadership at provinces, towns, and counties are evaluated on performance (and promotion up the party hierarchy) based on expanding economic output.

There are at least three hard stops to this model. One is the importance of productivity growth in maintaining reasonable GDP growth in an economy faced with a shrinking labour force, an increasing share of the services sector in the economy, and declining efficiency of investment. An IMF working paper shows that China TFP compared to the technology frontier (US=100) in 2017 lagged even middle-income countries. 

The paper points to a major problem of limited market entry and exit and lack of resource allocation to more productive firms in manufacturing. 

Over 1998–2013, most of the increase in productivity—two-thirds—came from the entry of new firms… The other primary source of growth was improving productivity of incumbents, which contributed 40 percent. Over the entire period, firm exit contributed negligibly to manufacturing productivity growth, reflecting one of several possibilities. Poorly performing firms either did not exit or exited but accounted for only a small percentage of aggregate output. Or the productivity of some firms that exited was average or better. Similarly, there were no gains from reallocating resources (labor, capital, and intermediate inputs) to more productive firms, which would have increased aggregate productivity, all else equal. In fact, the contribution was slightly negative. In advanced countries, this is the most important source of productivity growth, and thus stands out as a possible major source of future productivity growth in China. After 2007, average manufacturing productivity growth in China decreased almost by half. The most important reason for the decline was that the contribution of better entrants disappeared. In some sectors, the contribution of new entrants was actually negative, implying that these firms entered the productivity distribution lower than the sector average.

As I have blogged in China Updates, there are reasons to argue that these trends on exit have worsened in recent years, 

Eswar Prasad has highlighted China’s productivity problem. The country’s TFP growth (RHS) has been stagnant at about 1 per cent over the last decade.

He has explained why this is a big problem.

China’s capital to labor ratio is only about 28 percent that of the United States. However, recent investment has been driven by the public (state) sector rather than the nongovernmental sector. In 2022, for instance, state investment amounted to 44 percent of total fixed asset investment, a significant increase relative to the corresponding ratio of about 36 percent during 2017-2018… in China state-owned enterprises, which have collectively received a disproportionate share of bank credit, have typically not generated strong returns on those investments. The recent collapse in nongovernmental investment growth, with state investment accounting for nearly all of the growth in overall fixed asset investment in 2022, is a sign that private businesses might be wary of increasing investment when they see the economic and political environments as unfavourable. Moreover, China’s capital to output ratio is in fact about 50 per cent higher than that of the United States. This reflects lower levels of total factor productivity (TFP) and human capital in China relative to the United States. This implies that increasing investment might not be the optimal way to generate growth. 

This is another useful paper on China’s productivity paradox. 

Second is the ongoing backlash from export markets. Chinese exports to the US are already shrinking, and the same will be true for other advanced economies in the days ahead. As I have blogged on multiple occasions, and Arvind Subramanian and Shoumitro Chatterjee have written, China’s exports are now threatening to destroy the industrial bases of developing countries. 

Today, China’s manufacturing trade surplus stands at roughly $2 trillion, about $1.4 trillion of which comes from low-skill goods… Chinese imports still account for about 1.5 per cent of the West’s gross domestic product (GDP)… Accounting for almost 4 per cent of LMICs’ combined GDP, the import shock from China represents a larger (and growing) share of their economies than imports of high-skill goods do in developed countries… compare China’s share of low-skill exports among LMICs to its share of the global workforce… The wedge between China’s export share and its labour-force share — roughly 28 percentage points — suggests that China continues to occupy “excess” export space that could otherwise support tens of millions of manufacturing jobs in poorer economies.

Finally, there is the investment model hitting the debt ceilings for corporates and local governments. Since 2010, government debt has risen from 34% of GDP to over 86% today, and this is most likely a gross underestimate given the large value of off-balance sheet debts of local governments in the form of local government financing vehicles (LGFVs). 

Household debt has risen from 18% in 2009 to 62.5% in 2024, and more than doubled over just the last decade. This is amplified by the fact that property accounts for nearly 60% of household wealth in 2019. These, coupled with restrictive regulations like the hukou system and deficient social safety nets, mean that household consumption, which is already low in China’s share of national output but whose growth is the only way for China to reach a sustainable growth path, is likely to remain subdued. 

The government somehow (perhaps more by luck and throwing the kitchen sink at the problem) managed to stave off a financial crisis from the popping of the real estate bubble in 2020-21. It has instead diverted the credit flows to manufacturing to build up capacity and capture foreign markets. 

The fact that most major banks are state-owned adds one more layer of distortion by allowing the government to keep infusing credit to failing firms to prevent systemic crises. This happened in the aftermath of the real estate bubble bursting, especially when the Evergrande crisis threatened spillovers and a meltdown. This is likely to recur with the manufacturing firms in green technologies and the like. 

It can be said with confidence that if we were talking about any other country, the macroeconomic indicators and their trends, and the dominant economic and political environments, would clearly point to an imminent economic slowdown or crash. The market would be full of shorts for the economy. As Eswar Prasad writes,

The underpinnings of China’s growth seem fragile from historical and analytical perspectives. Things that must end do often end suddenly and in unpredictable ways.

However, in the case of China, we need to take into account the government’s rich track record of adept handling of potential crises and vulnerabilities. But even expertise and luck have their limits.