Weekend reading links

1. Case study of US toy maker, Learning Resources, on the challenge of diversifying away from China.

While you can move your manufacturing out of China, it’s much harder to move China out of your manufacturing.

Some snippets highlighting the point above. 

The toymaker offers about 2,000 products; a few years ago more than 80% of them were produced in China by companies that tapped into the country’s countless vendors of plastic resins, paint pigments, computer boards and other materials... China has about 10,000 toy manufacturers, versus roughly 100 factories in Vietnam skilled enough to produce for export... This lack of scale means less competition to bring down prices, crucial for toys, where margins typically stand in the single digits. Learning Resources is moving batches of about two dozen products at a time to Vietnam, a time-consuming and costly process. Each toy requires as many as a half-dozen heavy steel molds, which are mostly made in China. Ruffman estimates it will cost about $5,000 to move each mold to Vietnam—adding millions of dollars in expenses that contribute nothing to the bottom line... Vietnam’s output per employee is as much as 40% lower. That’s because Chinese factories have invested heavily in automation and can rely on an experienced workforce... China’s combination of expertise and infrastructure “doesn’t exist anywhere else”.

2. Avocado farming comes to India. It can generate annual income of about Rs 4 lakh per acre, net of all expenses. 

Currently, demand within India is met largely by imports which are doubling every year. In FY24, India imported 5,040 tonnes which climbed to nearly 12,000 tonnes in FY25. This year, the imports are likely to cross 20,000 tonnes (the imports during the first quarter of FY26 was nearly 7,400 tonnes). Come to think of it, a few years back, in FY21, imports were a mere 234 tonnes... Despite the growing popularity of avocados among farmers, it’s only the well-off who are getting into it. The reason is simple: for orchards to yield a remunerative return, it takes 4-5 years from planting. The costs range from ₹4-5 lakh per acre (apart from the land cost). Just one sapling of avocado can cost anywhere between ₹800 to ₹2,500 (about 150 saplings can be planted in an acre) depending on the variety and rootstock... As per a June 2025 estimate from Rabobank, the global avocado market is around $20.5 billion. The report estimated that global avocado exports are likely to touch 3 million tonnes by 2026-27, from one million tonnes in 2012-13. Today, India imports about 90% of the avocados it consumes from Tanzania (as the produce is duty free), with smaller volumes coming from Australia and Kenya, among others.

3. For all the talk of China competing with the US on AI, the latter dominates VC funding in the field.

And AI computing power too is concentrated in the US

4. FT has a graphic which shows that Germany, the centre of capital goods manufacturing, has now become a net capital goods importer from China!

For about two decades up to the pandemic, Chinese demand for German engineering goods and cars was seemingly insatiable, fuelling the Merkel-era growth in corporate profits, employment and economic activity. Since the pandemic, however, China is “increasingly beating Germany at its own game”, says Spyros Andreopoulos, founder of Frankfurt-based consulting firm Thin Ice Macroeconomics. On average, Chinese capital goods are 30 per cent cheaper than those of Europeans. Crucially, manufacturers in the Asian superpower have also closed the quality gap. Since the start of 2025, Germany is now running a trade deficit in capital goods with China over a rolling 12-month period. That is a first since records began in 2008. Chinese machinery exports to Europe roughly doubled to around €40bn in over six years and may reach €50bn this year, according to industry association VDMA. While German premium car brands like Audi, Porsche and Mercedes-Benz were the first to feel the pain, capital goods makers have started to get similarly pounded... 

Goods coming out of China are no longer cheaply made, lower-quality knock-offs, if they ever were... When it comes to speed, they have surpassed Western rivals by a mile, needing half the time to turn a new idea into a finished product. Shorter product cycles mean quicker learning... Philipp Bayat, chair of Munich-based compressor maker Bauer Kompressoren Group, gives a striking example. He needs a new wire-processing machine for one of Bauer’s European plants. A quote from a Swiss-based European company stands at €130,000, compared with one from a firm based in China’s Zhejiang province for less than €28,000.

4. Sander Tordoir makes the case for Buy European policy to counter the rising imports of Chinese automobiles that threaten to destroy Europe's automotive industry.

Europe’s car industry employs more than 10 million people and accounts for a larger share of private R&D spending than any other industry... Thanks to widespread subsidisation and genuine innovation, China’s global car exports are exploding, and European exports are being squeezed out of global export markets, starting with China. EU car exports to the United States (US) almost doubled between 2019 and 2024, but President Trump’s 15 per cent tariffs and his rollback of EV subsidies will deal another blow. EU domestic demand, meanwhile, is weak... Rather than tampering with regulations, EU policy-makers should ensure that demand from Europe’s huge single market, with 450 million consumers and a vast corporate sector, spurs European production. That primarily means supporting demand through consumer subsidies, with a buy-European clause co-ordinated across member-states... 

To align demand-support schemes across the EU, the Union should Europeanise the French eco-bonus. The French model, with its carbon-based scoring system, is the most practical template to adopt across member-states. It effectively steers demand toward European-made EVs and filters out Chinese production, because it limits subsidy to EV models produced in low-emission supply chains... To support its car sector, Germany has just committed to reintroducing EV subsidies. Equipping them with the eco-bonus would align Germany with France and support a buy-European policy. Italy and Spain, which are reviewing their subsidies next year, could then follow suit... 

Household EV purchases backed by subsidies would cover only 40 per cent of the total European car market. Over 60 per cent of EU new registrations are company cars which already benefit from sizeable subsidies. Support schemes for corporate EVs should also be conditional on European content requirements. Ensuring that buy-European subsidies apply to both markets would also allow Germany to secure demand for premium models, common in corporate car fleets, while France, Spain and Italy gain scale in the smaller cars which are more common in the household market... because buy-European clauses would be open to producers across the EU, the policy would not require policy-makers to pick ‘winners’. German tax incentives would also help French producers, and vice versa. A harmonised EU framework could avoid subsidy fragmentation, foster competition in the European market, and level the playing field with China, which excludes foreign vehicles from its own subsidy schemes.

5. Top Chinese companies are training their AI models overseas to skirt the US ban on the sale of Nvidia chips.

Alibaba and ByteDance are among the tech groups training their latest large language models in data centres across south-east Asia... there had been a steady increase in training in offshore locations after the Trump administration moved in April to restrict sales of the H20, Nvidia’s China-only semiconductors... Over the past year, Alibaba’s Qwen and ByteDance’s Doubao models have become among the top-performing LLMs worldwide. Qwen has also become widely adopted outside China by developers as it is a freely available “open” model.Data centre clusters have boomed in Singapore and Malaysia, fuelled by Chinese demand. Many of these data centres are equipped with high-end Nvidia products, similar to those used by US Big Tech groups to train LLMs. According to those familiar with the practice, Chinese companies typically sign a lease agreement to use overseas data centres owned and operated by non-Chinese entities. This is compliant with US export controls as the Biden-era “diffusion rule” designed to close this loophole was scrapped by US President Donald Trump earlier this year.

6. This is important for China to remember as tensions between it and Japan rise. 

“The more pressure China exerts on Japan, the more Japan feels compelled to prepare, recognizing the growing danger — Prime Minister Takaichi’s approval ratings are rising, and the Japanese people’s sense of crisis is also increasing,” said Ichiro Korogi, a professor of international studies at Kanda University of International Studies.

7. Is there anything China wants to import from rest of the world?

There is nothing that China wants to import, nothing it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to. For now, to be sure, China is still a customer for semiconductors, software, commercial aircraft and the most sophisticated kinds of production machinery. But it is a customer like a resident doctor is a student. China is developing all of these goods. Soon it will make them, and export them, itself. “Well, how can you blame us,” the conversation usually continued, after agreeing on China’s desire for self-sufficiency, “when you see how the US uses export controls as a weapon to contain us and keep us down? You need to understand the deep sense of insecurity that China feels.” That is reasonable enough and blame does not come into it. But it leads to the following point, which I put to my interlocutors and put to you now: if China does not want to buy anything from us in trade, then how can we trade with China?

In the circumstances, what can China do?

Beijing could take action to overcome deflation in its own economy, to remove structural barriers to domestic consumption, to let its exchange rate appreciate and to halt the billions in subsidies and loans it directs towards industry. That would be good for the Chinese people, too, whose living standards are sacrificed to make the country more competitive.

8. Europe's CBAM makes India's steel less competitive compared to China's.

Over one-third of India’s 6.4mn metric tonnes of annual steel exports go to Europe, which will implement its divisive carbon border adjustment mechanism (CBAM) on January 1, a tax on polluting overseas producers aimed at protecting EU industry from being undercut by cheaper but dirtier imports. India’s European exports are expected to be disproportionately affected by the new rules, with Chinese steel imports subjected to an average tariff of 7.75 per cent compared with India’s 16 per cent levy, according to the Net Zero Industrial Policy Lab at Johns Hopkins University... India is “less efficient” compared with other major steel-producing nations, with an emissions intensity of 2.5 tonnes of CO₂ per tonne of crude steel compared with the global average of 1.9 tonnes.

9. The rise of psychiatric disorders in the US is disturbing. 

A diagnosis of attention deficit hyperactivity disorder is practically a rite of passage in American boyhood, with nearly one in four 17-year-old boys bearing the diagnosis. The numbers have only gone up, and vertiginously: One million more children were diagnosed with A.D.H.D. in 2022 than in 2016. The numbers on autism are so shocking that they are worth repeating. In the early 1980s, one in 2,500 children had an autism diagnosis. That figure is now one in 31. Nearly 32 percent of adolescents have been diagnosed at some point with anxiety; the median age of “onset” is 6 years old. More than one in 10 adolescents have experienced a major depressive disorder, according to some estimates.

10. Alan Beattie calls peak Trump tariffs, even as affordability and cost of living become a rising issue in US politics. 

The meeting in October with Chinese President Xi Jinping, in which Trump backed down after threatening a massive escalation of tariffs, now looks a lot like an inflection point. Last week, having remained composed in the face of Trumpian invective against the criminal prosecution of his coup-fomenting predecessor, Brazil’s President Luiz Inácio Lula da Silva, was rewarded with massive cuts in US tariffs on food. Fellow Central and South American countries Argentina, Ecuador, Guatemala and El Salvador got similar relief, and so probably will the EU. Canada has yet to be clobbered with the additional 10 per cent tariffs Trump threatened for the heinous crime of accurately quoting Ronald Reagan in a TV ad. Reports suggest he will soften or shelve forthcoming tariffs on semiconductors.

Gillian Tett writes

Four months ago, US President Donald Trump announced 40 per cent additional tariffs on Brazilian imports (creating 50 per cent total levies), because he was furious about the country’s legal investigation into Jair Bolsonaro, its former president, and its clampdown on US Big Tech. But President Luiz Inácio Lula da Silva defiantly hit back at the bullying — boosting his domestic popularity — and defended the courts. A Brazilian judge has now sent Bolsonaro to jail. And those tariffs? Last week, Trump declared that “certain agricultural imports from Brazil should no longer be subject to the additional [40 per cent surcharge]”. In plain English: Lula won.

India remains the only country to have not benefited from the Trump retreat.

Is populism the transition to a return to the traditional left-right political system?

This blog has repeatedly argued (see this, this, this, this, and this) on the need for the progressive and centrist parties to break free from the grip of the educated and the business interests.

Reinforcing this point is Thomas Piketty in an interview by Joel Suss. Piketty identifies three big ideologies since the industrial revolution - nationalism, liberalism, and socialism. 

The nationalist side is what you see with all the anti-migrant movements in France, in Britain, et cetera. Trump is certainly a nationalist, both on the anti-migrant, ethnocentric dimensions, but also in his sort of extractivist discourse with respect to the rest of the world. The pure liberal, pro-business camp has been weakened considerably by rising inequality and stagnating middle class income. These days, I think you cannot be re-elected anymore with a basic pro-business agenda. Look at the Conservative party in Britain — the electoral base that’s going to be happy with this is so narrow that you will never be re-elected. This is why the right-wing party [Reform UK] and even sometimes a billionaire like Elon Musk are turning to the sort of nationalist, anti-migrant, anti-left discourse because they feel this is the only way — to put it in a very cynical manner — to try to get the popular vote. 

Then you have the democratic socialist side, you can call it the left-wing or more egalitarian side. This political family has been incredibly successful historically. It has built the welfare state and brought prosperity and equality to an extent that nobody could have imagined a hundred years ago. But they have sort of stopped thinking about the future. They have become in some cases just a force of conservation, of defending the welfare state, defending the social system. 

He makes an important point about the agenda of wealth redistribution. 

It’s just a practical, rational question of how you share the wealth, how you share the tax burden, how to share power. And I think, historically, the building of the welfare state system, progressive taxation — this is not a populist achievement, this has been a rational, socialist, democratic achievement, which now nobody is questioning… Every time you have a party that is trying to push for equality and redistribution you also always have some elite who try to portray this party as populist.

And why the discontent from widening inequality and stagnating living standards has been captured by the right-wing populists, despite their coalition with the corporate interests.

I think the left has not been very good at redefining its agenda for several reasons. The main reason is that the left has been a victim of its own success. The welfare state has become a reality — nobody really wants to return to a situation before [the] first world war where total tax revenue and public spending will be less than 10 per cent of GDP. Now the only question is: do we stabilise it at 40 or 50 per cent in some European countries or do we keep going up… The other reason is educational expansion. Because it was successful, it has built a new class of highly educated people voting for the left… But if you grew up in a small city or small village, it’s just more difficult to access universities than if you grow up in a large conurbation, for a given parental income, given social characteristics. For all sorts of reasons… the allegiance to the left in this process of educational expansion has turned around completely — it used to be the case that the less educated would vote for the left… so the left has to redefine equality in access to education which makes people with lower social class origins, and particularly people in the smaller cities, feel more respected. 

It’s not just about education; it’s also access to hospitals, access to public transportation. It’s easy to criticise people who use their car when you have the metro in London. The entire movement of educational expansion, health expansion and also ecological concern has created a new educational divide and territorial divide. This is where the left has been in difficulties. One thing that we observe today throughout western democracies is that you have this disconnection between the income cleavage and the education cleavage. For a given income, when you move up in education you actually get more left in terms of vote. And for a given education, when you go up in income you turn to the right. The two dimensions used to go together but they don’t anymore. The other big transformation is this territorial gap [inequality between regions] which has returned to levels we have not seen since the early 20th century.

He has some advice for the socialist side, 

I think they need to rethink, to have a new agenda for the future — more internationalist and also more egalitarian. This will have to come with a very strong compression of inequality and power and wealth distribution. I’m not saying it’s going to be easy, but the alternative is the nationalist side right now, because the pro-business, liberal side has been weakened by rising inequality and stagnating median income… The UK Labour Party has to move left in terms of economic and fiscal policies because the UK has so many parties on the right already. You cannot compete with the Conservative and Reform parties on the right.

Piketty has a striking factoid about inequality in France. 

In France, the top 500 wealth holders used to collectively own €200bn in 2010. Now they collectively own €1,200bn — it’s been multiplied almost by six. Of course, GDP per capita, average wage or even average wealth has not been multiplied by six over this period.

Piketty’s central point is that the mass base of the pro-business centre, the liberals, has shrunk so much as to make them unelectable on their own. They must ally with the nationalists or socialists to be able to fashion an electable coalition. 

This is a return to the old left-right paradigm. The centrist liberal agenda emerged as a synthesis of the duelling thesis of the right and anti-thesis of the left. The changes in the economic structure, nature of work, trends like globalisation, etc., have now weakened the centre and created the space for the return of the old right and left. While the right has mobilised its coalition to be back as an electoral force, the left is struggling to mobilise and respond electorally. The thesis in the form of the nationalist right has emerged and is awaiting the return of the anti-thesis in the form of the socialist left. 

Piketty makes an important point about how the success of the thesis will create the seeds for hastening the emergence of the anti-thesis.

Let’s see when the nationalists are in power how they are going to cut spending, because in practice, even if you cut everything you’re giving to migrants, that’s not that much. That’s not going to get you money for the health service and universities. This nationalist discourse will become a more right-wing, anti-public spending discourse. That will contribute to making the political system return to a left-right system, which to me is the most promising way to make social and economic progress. Not because the left is always right and the right is always wrong — both sides have different viewpoints and different economic experiences to bring to the democratic table.

Public funding of industrial innovation

A feature of China’s industrial policy has been its flexibility and innovativeness, even entrepreneurship. An example is the use of funds targeted to invest in identified sectors, targeting both industrial policy outcomes and financial returns. It also channels subsidies while neatly skirting around any WTO compliance concerns. 

In his excellent book, The Rise of China’s Industrial Policy (1978-2020), Barry Naughton has written about how China has channelled massive amounts of funds to targeted strategic sectors through several Technology Guidance Funds (or Government Guidance Funds, GGFs). These funds, established since 2014, aim to establish China’s dominance in technology sectors like semiconductor chips, AI, cloud computing, robotics, clean technologies, biotech, and advanced manufacturing. They are backed by the Ministry of Finance, state banks, policy banks and state-owned enterprises.

The central, provincial, and city governments establish these GGFs with direct budget support of 20-30% and the rest is mobilised from state-owned corporations, financial institutions, and local government entities. They sometimes invest directly in innovation ventures, or indirectly as LPs in partnerships with VC/PE funds (GPs, sometimes with state-linkage), or as Fund of Funds (FoF) in sub-funds managed by the VCs/PEs and with aligned sectoral mandates. 

Professional investment management firms, typically VCs, identify opportunities in the target sectors, undertake due diligence to screen and propose investments in private and public startups and firms. They also do all the portfolio management and exit planning. In all these funds, the government retains approval authority through representation in the investment committees of these funds. The investment is usually via minority equity stakes (often 5–20%) or through participation in private rounds/IPO allocations. 

This is a good article on the topic, with the linked paper here. The paper has a table that summarises China’s approach compared with those of others pursuing industrial policy.

It finds three defining characteristics of China’s GGFs.

First, only the Chinese state remains in the driving seat, ensuring an adaptive alignment with national priorities, steering profit motives towards strategic sectoral innovation priorities integrated into the planning mechanism and disciplining sub-funds with bans on non-core innovation activities and threats of central level FoF equity withdrawal for mandate non-fulfillment… Second, when doing VC investing, only Chinese GGFs mobilize state assets from SOEs, state-owned insurance companies or state asset management firms on top of the fiscal resources of executive branch actors at national level. In this way, only China converts “stale” state assets into patient finance for productivity-enhancing technological innovations, an option available but not exercised in both Europe and Korea, where the state still owns large parts of critical sectors like energy and insurance. 

Third, only GGFs have a strict geographical diversification mandate, fostering local innovation eco-systems while maintaining central oversight… the reverse investment ratio (RIR) is a mandate whereby the sub-funds invest locally at the value of between 100 to 200 percent of the equity commitment of central FoFs in the sub-funds… Another localizing requirement is “the FoF to sub-fund investment ratio,” stipulating that FoFs should contribute no more than 20 to 30 percent of the target capital for each sub-fund in which they are incorporated… The RIR increasing localization effects in both innovation and the formation of a GGF management technocracy appears to be a particularly innovative and distinctive feature of Chinese GGFs. This feature addresses regional disparities, enabling less developed areas to develop innovation hubs while fostering hypergrowth in already developed ones. 

An illustrative example is the National Manufacturing Industry Transformation and Upgrading Fund.

The Economist has an article which describes this remarkable world of public-private equity in China.

More than 1,000 government-guided funds have cropped up across China since 2015. By late 2020 they managed some 9.4trn yuan, according to China Venture, a research firm. A national fund focused on upgrading manufacturing technology held 147bn yuan at the last count. One specialising in microchips exceeded 200bn yuan in 2019. Almost every city of note across China operates its own fund. A municipal fund in Shenzhen says it has more than 400bn yuan in assets under management, making it the largest city-level manager of its kind. In the northern city of Tianjin, the Haihe River Industry Fund is putting to work 100bn yuan along with another 400bn yuan from other investors... Owing to a lack of in-house investment talent, most of them have acted as limited partners (LPs) in private-sector funds... As a result, PE in China is now flush with state financing. In 2015 private-sector money made up at least 70% of limited-partner funds pouring into the industry. By the end of 2019, state-backed funds accounted for at least that much. Their dominance has only increased since then; by some counts they hold more than 90% of the money in Chinese funds of funds (ie, those that invest in other funds).

While there are no official figures, an estimate of the amounts channelled into GGFs stands in the range of $0.9-1.1 trillion, with $95-100 billion going into semiconductors (Big Funds) alone.

Noughton and others have documented the enormous wastage and failings associated with China’s trillion-dollar innovation funding programs. It appears to be a choice that the Xi Jinping administration has made in its single-minded quest to dominate strategically important sectors through its Make in China 2025 campaign. 

In this context, T Surender in Livemint has a very good long read about the success of Maharashtra Defence and Aerospace Fund (MDAF). The MDAF is registered with SEBI as an AIF, and was launched in 2018 with an initial corpus of Rs 366 Cr pooled from Maharashtra Industrial Development Corporation (MIDC) (Rs 300 Cr), other government funds, and IDBI Capital (Rs 30 Cr). Its outcomes have been impressive.

Though the fund’s rollout was delayed by the pandemic, it began investing in late 2020. Over the next five years, it deployed more than ₹450 crore across 28 companies, thanks to recycling returns from early exits. By September 2025, 11 investments had been fully exited, three partially, and four firms had gone public. Together, those four companies commanded a market valuation of over ₹7,000 crore as of 22 September. An investee company executive, who did not wish to be named, said that IDBI Capital works on an internal rate of return (IRR), which represents the expected annual return on an investment, at 20-25% for its investments and offers the first right of refusal to promoters in case of an exit... What made the fund distinctive was not just where it invested, but how. IDBI Capital’s team, led by banker Amey Belorkar, knew conventional loans were a non-starter for SMEs already struggling with debt-to-equity ratios. So his team designed a quasi-equity instrument: optionally convertible preference shares (OCPS). These gave companies immediate access to cash without interest payments, while giving the fund the option to convert into equity later. Promoters could also buy back the shares at an agreed internal rate of return. The structure was flexible, patient, and crucially, non-predatory—a rarity in Indian finance... 

The fund would qualify as an AIF under Sebi laws, but only companies with confirmed defence orders and at least 80% of their revenue from defence could apply. Vetting was done by Belorkar’s team, while the final investment had to be ratified by a board headed by a state bureaucrat—a structure that offered legitimacy, but also a potential chokepoint if political priorities shifted... Unlike private venture funds that chase exponential returns, the Maharashtra fund was content with steady outcomes. Its mandate was not just financial but developmental: to broaden the state’s manufacturing footprint. For SME promoters, this mattered enormously. They no longer had to fear losing control of their companies to aggressive investors... The fund also played a role beyond money. As a state-backed entity, it had access to policymakers and institutional buyers. It introduced SMEs to potential customers, advised them on governance, and guided some toward IPO readiness.

The success of Maharashtra has found resonance elsewhere to replicate. 

In February, the union finance minister announced an outlay of ₹10,000 crore for startups to be funded through the Small Industries Development Bank of India (Sidbi). The money would go into a fund of funds floated by Sidbi, and would then be distributed to various venture capital funds. Sidbi Venture Capital, a fully owned arm of the bank, has a few funds that were sponsored by state governments but most focussed on social development goals such as employment and skills. Sidbi also had a fund in collaboration with the West Bengal government to invest in small enterprises but a report by the state government listed only four investments worth ₹25 crore made by the fund. In addition, the venture capital arm has startup funds for Assam and Tripura, but they are in the early stages of their investment cycles... What differed in the Maharashtra fund was that they were willing to cut large cheque sizes—up to ₹30 crore. That set apart the defence and aerospace fund… IDBI’s Belorkar says states such as Uttar Pradesh and Tamil Nadu regularly ask his team how to replicate the model. Whether they can do so without Maharashtra’s mix of timing, political backing, and institutional luck remains to be seen. Both states have already prioritized defence manufacturing, demarcating land corridors to establish new factories. 

The challenge with such successes is their replication

As the tenure of the Defence and Aerospace Fund comes to a close (in October 2025), IDBI Capital will continue to manage exits. But the state has already signalled its intent to go further. A new Emerging Technologies Trust, seeded with ₹300 crore, has been registered to support companies in areas such as artificial intelligence. Once a co-investor is identified, the trust, too, will be converted into an AIF... Shortly after the Defence Fund was created, the state announced another AIF—the Maharashtra Technology and Innovation Fund—in August 2022. This was supposed to be a ₹200 crore vehicle, with the Maharashtra State Innovation Society (MSIS) contributing ₹100 crore, IDBI Capital investing ₹10 crore, and other institutions putting in the rest. Two years on, the fund has not taken off, because MSIS never brought in its share, said people involved in the vehicle...

The challenge for Maharashtra, and other states rushing to emulate it, will be to prove this is not a one-off success dependent on a handful of visionary bureaucrats and unusually patient financiers. Indeed, the real test will come when the political leadership changes, when global capital cycles turn, and when the next batch of SMEs demand their chance at the table. Will the state still back them, or will these experiments fade into the long list of well-meaning but short-lived interventions?

China’s GGFs and Maharashtra’s MDAF have important lessons for India as it embarks on industrial policy funding of innovations and indigenisation in frontier technology sectors. 

I had blogged here with some suggestions on industrial policy to fund startup innovation. 

Traditionally, the Government of India (GoI), through its scientific ministries, has channelled funds into innovation and R&D primarily into public institutions. In recent years, this funding has expanded in scope to include startups, but mainly in partnerships with public research and academic institutions. Direct funding to startups has remained confined to strategic sectors like Defence and Space. The rapidly emerging technological landscape and changes in the geopolitical landscape have necessitated the expansion of industrial policy to funding startups and innovators in the technology frontier and strategically important sectors. 

Accordingly, the GoI has recently announced the Research, Development, and Innovation (RDI) Fund, with a Rs 1 trillion investment. It is designed as a FoF and invests through VCs and other fund managers into certain predefined sectors. 

While I have not seen its investment guidelines, I’m inclined to think that the RDI will face challenges in deploying capital. For a start, the domestic VCs and AIFs investing in these frontier and strategically important sectors are tiny. Besides the domestically registered startups engaging in these areas and at Technology Readiness Level (TRL) of 7-9 (which are close to commercial deployment) are also very few. Given its size, the RDI can, therefore, be a big opportunity to catalyse the emergence of firms engaged in these important sectors. 

In the early stages of this innovation funding journey, funds like RDI may have to be open to partnering with foreign funds and startups with foreign registration (for example, Indians in the US setting up companies but registering patents in the US), but all structured in a manner that maximises domestic appropriation of value and technology and knowledge spillovers. These are matters of detail. 

Then there’s the issue of investment guidance. Over-constraining the investment committees with restrictions on which startups would be eligible to access these funds is a recipe for failure. Similar restrictions on investment size, co-investors and exits too are likely to come in the way of the Fund taking off. 

The level of government involvement in these Committees should be dealt with caution. This is important not only on professional considerations (the public nominees are likely to skew the Committees away from risky investments) but also because many of these investments, especially in the early years, are likely to fail given the sparse domestic innovation landscape, thereby inviting post-facto scrutiny, especially if there’s close government involvement. 

In this context, while frontier innovation will remain challenging and risky, a prudent investment promotion opportunity is that of indigenous design and development of important components and products that are all currently imported. Efforts at indigenisation are an essential requirement to develop the industrial base and ecosystem to support frontier innovation. Such investments can be a good feed-in to the Production Linked Incentive (PLI) scheme (and its variants), which promotes indigenous manufacturing. 

State governments should proceed with caution on such funds. These funds require a strong institutional basis, and the political economy of state governments is not conducive to forming such foundations. Politically driven investments and corruption are never far away in such environments, thereby leaving them vulnerable to controversies and scandals.

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.