Weekend reading links

1. China's beggar-thy-neighbour trade policy, titanium dioxide edition.

LB Group produced titanium dioxide at $1,500 a tonne in China, including subsidies, nearly half the estimated $2,800 a tonne cost to produce in the UK... China became a net exporter of titanium dioxide after 2010, with exports rising from just 48,000 tonnes that year to more than 1.7mn tonnes in 2025, creating a global glut of excess production that coincided with a wave of factory closures outside China. Over that 15-year period, factories with a combined capacity of nearly 1.3mn tonnes were shut down in Asia, Europe and the US, according to data compiled by industry analyst Reg Adams, who has tracked titanium dioxide markets since 1993. Chinese capacity hit 5.7mn tonnes at the end 2025.

2. John Burn-Murdoch points to the aspiration gap among today's youth, or the gap between their actual incomes and their expectations. 

Even though today’s young adults, and graduates in particular, are over-represented in the top quartile of the earnings distribution, they are also far more likely to be at the bottom than the top for earnings relative to reasonable expectations. In both the UK and US, even though only 10 percent of graduates are in the lowest earnings quartile, one in three is in the bottom bracket for earnings relative to expectations.

The average thirty-something university graduate in the UK today sits at the same rank of the earnings ladder as the average high school graduate did in 1995 and the average high school graduate today sits at the same rank as someone who never completed school in 1995.

Are today’s twenty- and thirty-somethings earning more than their parents did at the same age? Yes. But their relative position in society is lower than their parents’ was, and their position relative to their peers and expectations is significantly lower. Since it’s the latter that drives satisfaction, young adult malaise should come as no surprise.

3. The US AI spending estimates pale in comparison to the money spent on railways in the late nineteenth century. 

By 1890 railway companies in the US alone had issued about $5bn worth of bonds. Adjusting for inflation that equates to about $180bn in today’s money. However, this understates the enormous scale of the undertaking, because the US economy was much smaller then. In 1890, $5bn was about one-third of America’s GDP, so the investment spree was arguably the equivalent of spending over $10tn today. It also resulted in an epic, generation-defining crash. In 1873, Jay Cooke & Co, the premier investment bank run by America’s dominant financier at the time, suddenly collapsed under the weight of unsold railway bonds. This caused a giant financial crisis and ushered in what was long known as the Great Depression, until the even larger one in the 1930s.

4. McKinsey Global Institute have identified 18 future arenas of growth.

Their performance over the 2022-25 period validates their prioritisation.

They added about $18 trillion in market capitalisation in the last three years.

5. The 2 hour mark in a marathon is broken as Sebastian Sawe of Kenya wins the London marathon.

Both Sawe and Assefa were wearing Adizero Pro Evo 3 shoes, which were only unveiled a few days before the race. Known as “supershoes”, such ultralight, high-tech trainers cost hundreds of dollars a pair, but are worn only once in competition races by elite runners. Since the release of the Nike Vaporfly, the first supershoe, in 2017, the number of men and women breaking new time barriers has risen sharply. Based on a UK size 8.5, the new shoes worn on Sunday by Sawe and Assefa weigh just 97 grams, according to Adidas, making them 30 per cent lighter than the German sportswear company’s previous design. They also cost $500 a pair.

Also this. 

6. Power subsidy facts of the week.

7. Ajay Shah points to an important opportunity in the Gulf as the post-war reconstruction starts.

The region of the Persian Gulf will have capital expenditure for massive construction and engineering projects, expanding to perhaps $150 billion annually. Simultaneously, the geopolitical environment dictates investment in military capability. Procuring new defence systems to protect against drone and missile attacks will require approximately $100 billion annually. We may then envision this combination of engineering and defence procurement as a new pathway for demand of $250 billion a year into the global economy from the GCC... A lot of the projects in West Asia will be done by global firms, using Indian workers. Remittances from Indian workers will do well. Renewables, drones and missiles, oil and gas engineering: These three areas are important in export markets. The domestic environment in these areas is relatively subdued. Indian firms will do well by trying to obtain revenues from the coming engineering boom in the West Asia, and from the global boom in renewables and defence.

8. So far Apple has ploughed back its massive cash surpluses to buyback more than 40% of its outstanding shares!

This is an important moat for Apple (its profit after tax is set to touch $125 bn this year!).

Around 40 per cent of Apple’s profits now come from services, led by App Store commissions and Apple’s cut of the revenue Google makes on its gadgets. This makes it look less like an innovative tech leader and more like a powerful gatekeeper able to extract tolls from those who want to reach the estimated 1.5bn people with iPhones... Apple’s shares are still close to their all-time highs, reflecting the market’s generally sanguine view that it doesn’t need to join the ruinously expensive AI race that is consuming much of the tech world. Instead it can just sit back and take a cut from distributing the AI services of others to its massive user base.

9. Xiaomi is trying to compete with Tesla et al in the European premium brand market. 

Just two years after building its first car, China’s largest smartphone maker has already delivered 650,000 electric vehicles — on par with the number of Tesla vehicles sold last year in the world’s largest automotive market. Xiaomi founder Lei Jun, who has earned comparisons with Steve Jobs, now aims to take on Elon Musk’s company in Europe with its premium EVs known for their breakneck acceleration and advanced features... Since Lei announced his plan to build a car in 2021, Xiaomi stunned the global car industry with the launch of its first model — the Speed Ultra 7 sports sedan — just three years later... After the SU7 became one of China’s best-selling cars, its second model, the $35,000 YU7 that rivals Tesla’s Model Y with designs resembling Ferrari’s Purosangue model, received 200,000 pre-orders in just three minutes at last year’s launch... 

Xiaomi established an EV research and development centre in Munich last year, hiring more than 75 engineers. Many Chinese brands have rapidly expanded into Europe with prices roughly double those in China, yet they remain affordable due to advanced software... At its only EV factory in China, Xiaomi has deployed its own manufacturing methods and materials to bring down production costs while strengthening the durability of its vehicles. The plant, which produces a car every 76 seconds, has a 91 per cent automation rate with hundreds of robotic arms to assemble the cars while “autonomous mobile robots” carry car parts around the factory.

10. Announced Vs actual Trump tariffs.

11. EV prices are falling and ranges are rising.

Prices for lithium-ion batteries, the primary type used for E.V.s, have fallen to around $100 per kilowatt-hour in 2025, from $1,000 in the early 2010s, according to BloombergNEF. Battery density has gone up too. As battery costs fell and manufacturers built more E.V.s, ranges rose and prices fell. Tesla’s cheapest Model 3 climbed to a range of 321 miles this year, up from 220 when it was launched in the late 2010s, while its inflation-adjusted price decreased. Or consider the Leaf, which debuted 15 years ago. By 2016, the cheapest Leaf had 84 miles of range and cost around $30,000, the equivalent of $40,000 today. Nissan’s $32,000 2026 Leaf has a range of more than 300 miles.

12. Facts about German rearmament.

After loosening its constitutional debt brake last year to unlock virtually unlimited spending on the sector, Berlin intends to allocate €779bn to defence between 2026 and 2030 — more than double the previous five years. By the end of the decade — more than five years ahead of the 2035 target date — the country would surpass Nato’s goal of spending 3.5 per cent of GDP on the military, with an annual budget reaching almost €190bn.

13. The Strait Hormuz is one of the biggest global trade chokepoints.

The loss of oil supply is the highest in history.

And it has impacted the prices of several commodities.

14. Microsoft, Meta, Alphabet and Amazon are set to invest $700 bn this year on AI infrastructure.

15. Nice illustration of the conflict of interest problem that bedevils health care.

A graphical summary of chokepoints in global trade

After China’s rare earth minerals export restrictions and Iran’s blockade of the Strait of Hormuz, chokepoints in international trade have become a hot topic. Never mind that the biggest chokepoint in the world economy has long been the US stranglehold through the threat of sanctions. 

Martin Wolf has an excellent oped that illustrates the importance of the Strait of Hormuz.

I have used it as an opportunity to do a deep dive into chokepoints using Claude AI. 

Among maritime routes, the Strait of Malacca stands out as the most important chokepoint in terms of sheer volume. The Panama Canal is critical for the US. 

The table below maps each chokepoint across eight dimensions. Note that the Turkish Straits punch above their weight. While it carries only 3% of global seaborne trade, that includes around 20% of global wheat exports from Ukraine, Russia, and Romania, making them a food security flashpoint. The Taiwan Strait is classified as "critical (latent)", with 40% of the world's container fleet passing through it, and any escalation would instantly cascade through semiconductor and electronics supply chains globally.

This is a list of alternative routes and their respective detour costs. As can be seen, there is no viable alternative to Hormuz for Gulf states. A closure is modelled to push oil prices to $120–150/bbl.

Among companies, ASML (monopoly in EUV lithography machines), TSMC (64% of global pure play foundry, and almost all 3 nm and 5 nm), and Nvidia (92% of data centre GPUs) are standout corporate chokepoints. China, for materials and several inputs to manufacturers globally, stands out as the foremost national chokepoint. However, the mother of all chokepoints may perhaps be the SWIFT money transfer system controlled by the US. 

There are nine corporate chokepoints. The Western chokepoints tend to be policy-leveraged through export controls and sanctions. The Chinese chokepoints are leveraged through state-controlled industrial policy and export licensing. 

The hardest substitutability problems aren't the ones with the highest market shares, but those with the longest replacement timelines. ASML and heavy rare earths both require over ten years to replicate at scale. 

Let’s now examine India’s external vulnerabilities. India’s most acute dependencies are in the sectors of energy & fertilisers, pharmaceuticals, critical minerals & battery materials, and electronics & semiconductors, with China being the chokepoint country in all but the first. 

In defence, while India’s dependencies have grown more diversified, the vulnerabilities are widely known. The hidden defence vulnerability is naval gas turbines from Ukraine's Zorya-Mashproekt, and rare earth magnets used in radars and missile guidance - both of which sit on geopolitical fault lines. 

The pattern of leverage shows a sharp dichotomy: India's strategic vulnerability is concentrated in two countries - China (electronics, pharma APIs, rare earths, critical minerals processing, batteries) and Russia (oil, defence, fertilisers) - while its geographical chokepoint exposure sits at Hormuz, Bab el-Mandeb, and Malacca. The most acute vulnerabilities feature single companies as well: TSMC for advanced chips, CATL for batteries, Saudi Aramco/ADNOC for Gulf oil.

So how can these vulnerabilities be mitigated?

The table below has the proposed diversification measures categorised into three: short-term (focused on supplier diversification, strategic stockpiles, and emergency tariff calibration), medium-term (activate PLI schemes, trade agreements, and government-to-government deals (Saudi DAP 5-yr contract, Argentina lithium, Australia rare earths), and long-term (aim for genuine strategic autonomy). 

In conclusion, like any other economy today, small or large, India cannot eliminate dependencies. But it can change the politics of dependency by making suppliers compete and by retaining genuine substitutes for each input. The most successful precedent is the SIPRI defence data showing Russia’s share collapsing from 72% to 36% in just a decade, achieved through sustained policy effort and friend-shoring.

Some thoughts on the RBI's exchange rate management policy

The pressure on the rupee in the aftermath of the Gulf War has generated considerable attention and discussion. I have blogged here on the implications of the Gulf War on India’s external account. 

This may also be a good time to examine the dynamics driving the rupee downward. The rupee’s weakness is nothing new. Since the beginning of 2025, the rupee has been the weakest-performing EM currency, behind only the Turkish lira. As reported here, the rupee has weakened from 107 in early 2025 to 92 in the 40-country trade-weighted real effective exchange rate index, despite the RBI intervening heavily to backstop the decline. In fact, since October 2024, foreign investors have pulled out at least $45 billion, and their shareholding in Indian equities is currently at a 15-year low.

The graphic shows that the rupee held steady for two years, from at least the beginning of 2023 to the end of 2024, on the back of rupee purchases to prevent it from depreciating and find its level. In fact, compared to an annual USD-INR volatility of 5% in the 2000-22 period, the INR-USD volatility fell to just 1.8% during this period, the lowest in over 20 years, lower even than the 2000-2004 period when INR was effectively pegged! 

This drastic volatility suppression, combined with India’s higher inflation (CPI averaging ~5%) vs trading partners (2-3%), produced the biggest REER overvaluation build-up in the emerging-market universe during this cycle. The rupee’s 40-currency REER (base 2015-16) peaked at 108.14 in November 2024, and since then has depreciated sharply to below 95 by March 2026. This depreciation has been far in excess of any peer.

Similar trend is visible with respect to USD too. The rupee stands out for its unique flat trajectory through 2022-24 even as peers depreciated substantially in response to the Fed tightening cycle. However, since Oct 2024 the rupee has depreciated steeply, overtaking several peers.

It becomes clear that the rupee was held artificially overvalued for over two years. This, by itself, should have been reason enough that pressure mounted for a corrective depreciation. In addition, there was the pressure from the spike in oil prices (and associated worsening of the external account, already weakening from the tariffs and FPI repatriation) and the general trend of risk-off and capital flight to the safety and liquidity of the dollar. 

By itself, the Gulf War would have put enough pressure on the currency. But its combination with the stress built up due to the forced overvaluation amplified the capital flight induced by the Gulf War, thereby exacerbating the pressure on the rupee and worsening the depreciation when it happened. 

The table below is a quantified decomposition of what drove the 11.9% depreciation. It shows two alternative decompositions at the peak (Mar 2026), which capture the overshoot moment, and at current levels (Apr 2026), after partial reversion. 

At peak (Mar 2026), the biggest driver by far was the overvaluation correction (63% of the fall), which is the “hidden cliff” the RBI’s peg concealed and which was unique to the rupee. The general market volatility (36%), experienced by all peers, was a secondary driver, reflecting genuine dollar/EM repricing. The net overshoot, at least till now, has been negligible.

Has there been a Dornbush overshoot? Rudiger Dornbusch's 1976 overshooting model predicts that when exchange rates are flexible, but goods prices are sticky, a monetary or policy shock causes the exchange rate to overshoot its long-run equilibrium before reverting. In simple terms, if the currency has been artificially propped up, the "stickiness" is extreme, and therefore, when the adjustment finally comes, the overshoot magnitude is larger than in a regime of continuous flexibility. However, the Dornbusch overshoot and reversion are not yet visible. The reversion might happen in the coming weeks.

So what are the lessons?

By maintaining the rupee as a de facto pegged currency from 2023 to October 2024, the RBI accumulated an 8% REER overvaluation that had to be corrected. When the regime shifted — Trump election, FPI outflows, US tariffs, Iran war — the correction was both deeper and faster than peers experienced, precisely because the catch-up component (8pp) was additive to normal drift (3.8pp). The rupee is now at or near its new equilibrium of ~94-95, down 11.9% from Oct 2024.

The RBI’s 2022-24 intervention pattern - buying ~$400bn in forex reserves while keeping the rupee rigid - converted exchange-rate risk into reserve-allocation risk. When the regime shifted, reserves fell by $80bn in four months without preventing the correction. Further, the sharp Mar 2026 overshoot caused imported inflation, margin stress on exporters who had hedged at 84, and a sudden repricing of corporate foreign-currency debt. A gradual depreciation path through 2023-24 (releasing 3% per year against the peer-consistent rate) would have spread this adjustment at much lower systemic cost. The rupee has done exactly what a freely-floating currency would have done gradually over 3 years, but compressed into 18 months because the peg delayed adjustment, and with serious credibility cost (for investors). 

The speed of adjustment was consistent with Dornbusch dynamics (7.2% in a single month from Feb to Mar 2026 is unprecedented for INR). However, the second half of the Dornbusch pattern - reversion toward long-run equilibrium - has not so far materialised, though it could yet in the coming weeks. The rupee is currently 94.10, only 0.8% below its 94.86 peak. This is within noise, not meaningful reversion. 

This is a teachable moment on currency management for central banks. Policies that keep a currency overvalued are always counter-productive, especially for developing countries that are always at risk of being caught in an episode of sudden stop and capital flight. When such episodes are triggered, the overvalued currency invariably experiences a steeper slide and greater overshoot, with all attendant consequences. Most importantly, steep devaluations convey a macroeconomic instability signal to investors. It increases the country risk for investors, who must now factor in the likelihood of episodes of sharp depreciation risks while making their investments. It is a dent in the central bank’s credibility. 

The rupee is going through one such episode. The original sin may have been committed in the 2023-24 period.