Weekend reading links

1. Germany used to be the unquestioned global leader in chemicals, machinery, and automobiles. Now, thanks to the onslaught from China, it has fallen on bad times. Sample this on automobiles.

When German companies expand or build factories, it is often in places like Hungary, China or Mexico. The number of cars produced in Germany has fallen 28 percent since 2016, according to the VDA, the German automakers’ association, putting the country well behind China, the United States, Japan and India. Germany could soon also be overtaken by South Korea and Mexico... The German carmakers face an assault on two fronts. In China — the world’s largest car market — sales of foreign car brands are plummeting. And Chinese automakers are making big strides in Europe. In June, Chinese carmakers outsold Japanese carmakers in Western Europe for the first time, according to figures compiled by Schmidt Automotive Research.

China was once a lucrative market for the Germans, accounting for 37 percent of Volkswagen sales in 2019. But after Chinese automakers learned how to manufacture cars through joint ventures with foreign carmakers, the tables turned. BAIC Group, an automaker owned by the Chinese government, has become Mercedes’s largest shareholder, with a stake of almost 10 percent. Chinese companies like BYD and Geely Auto were quicker to develop electric vehicles that were heavily promoted by the Chinese government and are selling briskly in Europe. The Germans took too long to offer appealing electric vehicles. Volkswagen sold 26 percent fewer cars in China in the first six months of the year compared with a year earlier, while Mercedes reported a 28 percent decline and BMW a 20 percent slump.

2. The latest on AI's limitations on vertical use cases, explained with three illustrative use cases.

While A.I. can excel regularly at complex tasks, it can be unreliable when put in charge of an entire job. It can certainly add value to certain areas of the work force, but for now, A.I. still needs a human boss... In our experiment, we deployed A.I. “agents” to act as office workers and found that they were capable of performing some of the tasks we assigned, but not all of them. The agents, which can act autonomously and make decisions based on detailed instructions, excelled at problems they could solve by writing computer programs. But they struggled with understanding the nuances of human language and at navigating user interfaces like the Chrome web browser.

3. Important point about how wealth inequality has come to dominate income inequality as the reason for social discontent.

While wealth inequality has not changed much, the relative importance of wealth compared to income has. The median household’s disposable net worth (net property and financial wealth excluding pensions) in the UK, US, Germany and France has roughly doubled in real terms since the mid-1990s; incomes have grown by only around 30 per cent. The result is that where a generation ago it would have taken about 20 years of savings from the average salary to earn your way from the bottom quarter of the UK’s wealth distribution to the top quarter, it now takes 40. There are similar or even larger upward extensions to society’s economic ladder elsewhere.

This is all the more pernicious since the growing role of passive wealth gains (whether gifted by an asset price boom or one’s parents) relative to income in determining someone’s economic status is mirrored by their growing importance for wellbeing. In the 1990s income rank mattered more than wealth rank for life satisfaction or avoiding distress. Since then wealth has become steadily more influential and is now the larger driver. 

4. Ukraine has run out of Patriot air defence systems to shoot down incoming Russian ballistic missiles. 

5. Chrystia Freedland on Baumol's disease and public services.

Baumol’s assignment was to determine why in-person classical music performances seemed harder to fund. He found that the snag wasn’t that the musicians were getting worse — it was that the rest of the economy was getting better. It took four musicians one hour of work to perform a Schubert string quartet, exactly the same as it always had done. But four hours of human labour would produce roughly a hundred times as much wheat as it did in the pre-industrial era. For manufactured goods, the multiple is even greater. The same insight applies to taking a two-year-old on a walk in the park, or supporting a mother as she gives birth. As such, Baumol’s disease poses a knotty challenge for the state in liberal democracies because so much of what governments do is more like playing the violin than manufacturing a car.

6. Two points from John Burn-Murdoch's latest on the crisis of social isolation among youth. First, the share of those without any in-person contact during a typical day rose sharply during the pandemic and has not returned back to normalcy.

The least socially connected are increasing their disconnectedness. 

7. Rent controls are back as housing prices rise.

Rent controls, where a government sets price limits on rents or annual rent increases for certain types of housing, tend to be effective in their primary objective. A 2024 review of dozens of studies on the policy published globally between 1967 and 2023 found controls were effective in capping rents. The quid pro quo, say their critics, is that they increase rents on unregulated properties and reduce the overall supply and quality of housing in the long term... Of the 38 members of the OECD club of mostly richer nations, 23 already have some form of rent control. Ireland and Austria widened the scope of existing rules this year... In practice, rent regulation can encompass a wide range of measures. Outright freezes, such as in New York, tend to be temporary. More enduring limits can apply to existing or new tenancies, or both, and may apply nationwide or be focused on areas of high rental demand. There are often exemptions, such as for newly built properties, and a variety of yardsticks are used to determine the size of permitted increases... 

New Yorkers are the most burdened tenants in the US. Despite decades of regulation, new renters in the city spend an average of 40 per cent of their income on rent. Rent stabilisation — where annual increases are set by a city board based on its assessment of the market, inflation and other variables — is the main mechanism, applying to almost a million units. Households living in rent-stabilised apartments tend to have median incomes lower than overall renter households... In Berlin about 700,000 households, or a third of the total, spend more than 45 per cent of their income on rent, according to the Berlin Tenants’ Association. Like several hundred other high-demand areas in Germany, Berlin is subject to the Mietpreisbremse, or rental brake, a 2015 law that applies to new leases, and the Kappungsgrenze, introduced two years earlier, which limits rises on certain types of existing tenancies. Despite these guardrails, rents have risen almost 70 per cent over the past decade. 

Scotland has come up with new rent controls which have evoked interest globally.

The new controls are more precisely calibrated than before; they will apply only to specific areas, last for a maximum term of five years, and limit rent increases for both new and existing tenancies to consumer price inflation plus 1 per cent, up to a 6 per cent maximum. There are some exemptions, for instance properties that are coming to the rental market for the first time.

8. China's investment slump deepens in July.

Industrial output expanded 4.5 per cent in July on a year earlier, official statistics showed on Monday, short of the 4.8 per cent forecast by a Reuters analyst survey and growth of 5.3 per cent in June. Retail sales rose just 0.6 per cent last month, compared with analyst forecasts of 1.5 per cent growth and 1 per cent in June, as the waning effects of consumer goods trade-in subsidies weighed on household spending. Fixed asset investment declined 6.7 per cent for the first seven months of the year on the same period in 2025, deepening from a 5.7 per cent drop in the year to June. 

9. On RBI's exchange rate interventions.

Over the last 10 years, across spot and forward markets, the RBI’s net annual currency intervention has averaged about $60 billion, or 2 per cent of gross domestic product (GDP). During FY21 and FY22, when India’s balance of payments generated surpluses, the RBI net purchased $157 billion. That effectively put a floor on the exchange rate. In contrast, the RBI sold a significant $118 billion in FY25, helping restrict the rise in USD/INR from 83.50 to 85.50. Between April 2025 and February 2026, the RBI sold another $37 billion, even as USD/INR moved up to 91. Following the outbreak of the Iran war, the RBI sold a further $37 billion in March 2026 alone, with USD/INR eventually ending the month around 93.50... Such interventions were not necessarily incorrect. But when sustained at this scale and over such timeframes, it inevitably influences currency levels, not just volatility...

The RBI also intervenes in bond markets and modulates banking liquidity to facilitate monetary-policy transmission. During FY26, India’s net government debt across central and state government bonds and Treasury bills grew by ₹17.8 trillion. About ₹10.6 trillion was net purchased by banks, insurers, and pension and provident funds, which have regulatory obligations to buy such bonds. The RBI’s own holdings net increased by the remaining ₹7.2 trillion, thus accounting for a substantial 40 per cent of the incremental government debt... The RBI’s large bond purchases and liquidity operations helped keep rupee-denominated interest rates below levels that might otherwise have been required to attract discretionary savings.

10. Israeli national security minister Itamar Ben-Gvir, a hardline settler previously convicted of incitement to racism, advocates killing Gazans each night. 

“I think we should be doing 30 to 40 targeted assassinations per night,” Ben-Gvir said. “Not just those who pose an immediate threat. There are people there who don’t deserve to live . . . They are not even people.” Ben-Gvir also called for the re-establishment of Jewish settlements in the Palestinian territory, saying he envisaged “all Gaza” belonging to Israel and reiterating his previous calls for Palestinians to “emigrate”. “I imagine settlements not just in Gush Katif but throughout Gaza, and encouraging emigration, the more the better,” he said, referring to settlements that were dismantled by Israel in 2005. “And for the terrorists, there should be no emigration. We should just kill them one by one.”

11. Fear of AI is uniting American politics.

Almost three quarters of Americans do not trust businesses to use AI responsibly, according to Gallup. More than 70 per cent oppose having data centres built in their area because of fears about water and electricity inflation. Eighty per cent or more distrust AI for driving, medical advice and corporate hiring decisions. As The New York Times recently put it, fear of AI is the “most bipartisan issue since beer”. That feeling is as strong in the centre as it is on the Maga right and the democratic socialist left. That such fears are often conspiratorial should be no surprise. Paranoia is a natural response to the unknown. Maga’s Steve Bannon calls data centres “weapons labs”. Marjorie Taylor Greene, the former pro-Trump lawmaker, refers to Big Tech as “Skynet” after the self-aware computer system that triggers nuclear holocaust in the Terminator movies. Progressives talk of AI killing US democracy and ushering in a Blade Runner-style dystopia.

12. The big economics story of the recent months is the return of interest rates.

13. For long the World Bank and IFC have tried to get African countries to capture value by investing in the processing of their natural resources. Nigerian billionaire Aliko Dangote is doing exactly that by constructing the world's second-largest petroleum refinery, which has allowed Nigeria to export refined oil to Europe and elsewhere, while also ensuring that Africa's largest crude producer does not need to import refined oil. 

His new $20 billion oil refinery in Lagos, which has seen a spike in demand for petroleum products — both in Africa and elsewhere — since the war began in February. Despite having abundant crude oil, Africa still relies heavily on imported fuel... Jet fuel shipments from the Dangote Refinery reached the U.S. market for the first time ever this year, according to the company. The Dangote Refinery was “the world’s single largest exporter of jet fuel” in April and May, said Daniel Evans, a vice president of S&P Global Energy, a market-research firm. Last month, the refinery was Europe’s largest supplier of jet fuel and diesel, according to Devakumar Edwin, a vice president of Dangote Industries. On Tuesday, Dangote Refinery said it had secured $1 billion in financial backing from a Dubai-based investment group to go public on the Nigerian stock exchange. If the listing goes through, it will be Africa’s largest-ever public offering.

14. The rise and rise of America's public debt.

The US’s national debt has hit a record $40tn as borrowing rises at a historic pace... It has grown by $3tn over the past year, its fastest ever pace outside the pandemic era... America’s national debt has surged over the past two decades, rising from less than $6tn (about $12tn in 2026 dollar terms) at the turn of the century as vast public spending during the financial crisis and Covid pandemic exacerbated yawning budget deficits. In the past 10 years alone, the overall debt burden has doubled. Debt held by the public — a key metric monitored by markets that excludes intragovernmental holdings — now exceeds $32tn, roughly equal to the size of the US economy. The Congressional Budget Office, a non-partisan watchdog, expects the debt held by the public to exceed the high of 106 per cent of GDP reached in the aftermath of the Second World War by the end of the decade and hit 120 per cent by 2036.

15. The moderation of Meloni...

As prime minister, Meloni’s cautious pragmatism has dismayed hardline Maga purists such as Bannon, who told Italian media she was “a total globalist” who had betrayed her “fundamental beliefs”. Meloni has paired tough measures to curb irregular migration with higher quotas for legal migrants, helping Italian businesses cope with labour shortages. She has also softened her anti-EU rhetoric and forged effective working relations in Brussels.

... and fall out with Trump.

After Trump’s return to the White House in 2025, Meloni — the only EU leader to attend his inauguration — sought to cast herself as Europe’s bridge to Washington, hoping it would strengthen her hand in Brussels and at home. Instead, Meloni has been tarnished in the eyes of many Italian voters by her close association with an unpopular US president. Trump has imposed high tariffs on EU imports, pressed Nato allies to sharply increase defence spending and attacked Iran — policies deeply damaging to Italian interests. “Her proximity to Trump has failed to give her any appreciable results,” said Riccardo Alcaro, research director at Rome’s Institute of International Affairs, calling her erstwhile friendship an “electoral albatross” as Meloni gears up for a bruising re-election campaign... analysts say Meloni’s difficulties with the White House reflect not only Trump’s personality but a Maga world view that appears to expect near-total subservience from its allies... Maga’s deep-rooted antagonism towards the EU as a political project also made it hard for any leader with a pan-European outlook “to cosy up” to the administration for long.

16. One of the biggest innovations of the 20th century, container shipping.

Seventy years ago it would take at least 10 days for a ship at London Docklands to be emptied and reloaded by around 50 dockers. Pilfering was rife, accidents were commonplace and port business was vulnerable to labour strikes. Then came the shipping container, an 8ft x 20ft steel box that needed increasingly vast vessels to carry an ever-expanding volume of goods... it takes cranes roughly 40 hours to empty and reload a large container ship — around 20,000 steel boxes lifted by 146-metre-high computerised cranes that move two containers every three to four minutes. That efficiency and scale is testament to the unglamorous steel container, an invention that has driven down shipping costs to such a low fraction of total manufacturing value that it has enabled the rapid expansion of global trade over the past 70 years... The box’s dimensions were standardised from 1968 — a step that is “frequently overlooked”, says Brian Slack, a professor in geography and planning at Concordia University, Montreal. Without it, “containerisation would not have been as revolutionary as it turned out to be”...

More than 280mn journeys were made by containers between world markets last year. They bear around two-thirds of global seaborne cargo — about 60 per cent of total world trade, according to UN Trade and Development. More than 7,000 container ships are currently operating. The largest can carry cargo equivalent to a 44-mile-long freight train with, for example, around 120,000 bananas or 10,000 pairs of jeans per box. The average size of the ships has more than doubled since 2000, according to the WSC... To service the demand for goods, shipping lines have ordered larger and larger ships. The current record size for a container ship is the so-called ultra-large container vessel MSC Irina, which has a carrying capacity of 24,346 twenty-foot equivalent containers, or TEUs. The number of new container ships on order is equivalent to around 40 per cent of the current sailing fleet — a record high.

17. Circular trading in China's humanoid robots industry.

China’s humanoid robot makers are generating much of their revenue from selling machines to government-backed training centres — which then collect and sell training data back to the robot makers, raising concerns about actual demand in an industry Beijing is keen to promote.

18. Data centre job creation facts.

At the peak of construction, according to a November 2025 study by the University of Southern California, a data centre in the US needs between 0.7 and 2 workers per megawatt. To build India’s targeted capacity of 10 GW by 2030, that works out to a peak construction workforce of 26,000... In direct employment, a 100 MW data centre supports 120–150 jobs. Take the generous end of that range and India’s 10 GW target yields 15,000 full-time, sustainable jobs. And these aren’t, for the most part, gold-collar jobs. A handful of C-suite roles rake in Rs 1 crore a year. Design and engineering workers make Rs 30–40 lakh. The staff who actually keep the lights on—on-site security and hands-on hardware engineers—earn around Rs 10 lakh. A recent study from the US—the world leader in data centres with an installed capacity of 55 GW—examined the employment records of 770 server farms going back two decades and concluded that the industry overstated their job impact by a factor of three at least. Apply the cut to India’s job-creation estimate and the promise wilts before a single server is switched on.

And who will use it.

Of the 10 GW capacity India intends to build by 2030, only a sliver is meant for the country. The industry estimates that 90–95% will be leased by foreign firms such as AWS, Microsoft Azure, Google Cloud, Oracle, and Meta. Even now, of the roughly 2 GW already installed, barely 30% is used by Indian players.

Weekend reading links

1. While the US tariffs are undoubtedly reducing US imports from China, the imports are substituting towards other developing countries. See this about the trends with mobile phone imports.

And, this about imports of wooden furniture.

The moot point is how much of these imports are merely repackaging and re-routing of supply chains. 

2. Has Spain reached peak solar generation?

The country has become a solar champion thanks to abundant sunshine and the government’s pro-renewables policies. But a surge in power production has outpaced demand, depressing electricity prices and profits for generators. Some power producers are struggling to offload plants whose valuations have plunged as executives talk of solar “saturation”... Operational solar plants were valued at an average of €916,000 per megawatt in early 2024, but have now dropped to €648,000 per megawatt, according to nTeaser.

... the gloom is even greater over so-called ready-to-build projects, where land, permits and grid access have all been secured, but construction has not begun. A senior executive at an owner of Spanish solar plants said: “The market is flooded with ready-to-build projects that developers want to sell since they’re no longer good enough in the current market.” Some projects were up for sale for just €1, the executive said, reflecting developers’ desperation to avoid further spending, and potential government penalties for not executing agreed construction plans. The least attractive ready-to-build projects are often far from power grid nodes, requiring investment in expensive power lines.

... low prices are painful for producers. When they fall below zero, as they have for more than 500 hours in Spain this year, producers can end up having to choose between paying wholesale customers to take excess power off their hands or switching off. Many producers insulate themselves by selling electricity through long-term power purchase agreements (PPAs), which they sign at fixed prices with corporate clients for 10-20 years... Adding battery storage to solar plants helps to limit price plunges by enabling generators to store electricity when prices drop during the day, then sell it in the evening when demand and prices are higher.

3. John Burn-Murdoch points to a rising inflation in reported children with "special needs" in US and UK, with some distortions. 

38 per cent of undergraduates at Stanford this year are registered as having a disability, as are 21 per cent at Harvard — both up from 5 per cent in 2009... The bulk of the rise in special support for youngsters is cases of non-profound autism spectrum disorder (ASD), attention deficit hyperactivity disorder (ADHD) plus anxiety and mental health, all of which have flexible diagnostic criteria… we consistently see mild, not severe, cases driving the rise... As the number of more mild cases receiving support has climbed over the past decade, average funding per child (including the most severe cases) has fallen by a third in real terms… In 2010, 1 per cent of American young people from the poorest school districts were on plans that provide special support, and today that figure is unchanged. But among those in the richest areas, it has tripled from 2 to 6 per cent.

4. The Big 5 Indian IT firms have added just 17 net workers in the first three quarters of Fy26!

5. This is what industrialisation success looks like, the example of Hosur in Tamil Nadu, the leading EV and electronics manufacturing cluster in India.

6. India's industrial power prices are the highest.

7. Consumption's share of China's GDP is lowest among all major economies.

China’s decline in private final consumption expenditure is in sharp contrast to consumption-dependent economies like the United States (US) and India, with their share of private final consumption reaching 68.39 per cent (in 2022) and 61.38 per cent (in 2024) of their GDP, respectively. Among the top five economies of the world, China has the least share of private final consumption in its GDP. On the contrary, China has the highest share of fixed investment in its GDP – almost 10 percentage points higher than India’s share. Further, China has the largest share of net exports, after the EU.

8. The biggest trade promotion policy ever? The shipping container.

Nothing has done more to juice global trade than a simple receptacle—spanning about 40 feet on the long side and eight on the other two. It could be stuffed with cargo and hoisted onto lorries, trains, ships or planes with equal ease. That humble steel box—the standard shipping container—did “more than all trade agreements in the past 50 years put together” to boost globalisation

9. The US government has announced a $1.6 billion investment in USA Rare Earth, a listed Oklahoma-based miner that controls significant US deposits of heavy rare earths. 

One person said the government would get 16.1m shares in USA Rare Earth and warrants for another 17.6m, both at a price of $17.17. The government agreed to pay $277mn for the equity, giving it an implied gain of $490mn for the equity and warrants based on the current share price of $24.77. USA Rare Earth will also receive $1.3bn in senior secured debt financing at market rates from the government. The money will come from a finance facility created for the commerce department as part of the CHIPS and Science Act passed in 2022... A condition of the government investment in USA Rare Earth was that the company raise at least an additional $500mn from investors. It is on track to raise more than $1bn because of high demand for the financing deal, which uses a mechanism known as a private investment into a public equity, often called a “Pipe”...

USA Rare Earth, which has a market value of $3.7bn, is developing a huge mine in Sierra Blanca, Texas that it says contains 15 of the 17 rare earth elements underpinning production of cell phones, missiles and fighter jets. It also plans to open a magnet production facility in Stillwater, Oklahoma... Last year, the Trump administration invested in at least six minerals companies, including MP Materials, Trilogy Metals and Lithium Americas. Some of the investments overlapped with the financial interests of people associated with the administration. The government did a funding deal with Vulcan Elements, a rare earths start-up three months after the president’s son Donald Trump Jr’s venture capital group invested in the company... USA Rare Earth has separately tapped Cantor Fitzgerald, the Wall Street firm previously owned by commerce secretary Howard Lutnick and now run by his sons, to raise more than $1bn in fresh equity financing, the people said.

10. President Trump has announced his intention to cap credit card interest rates at 10% and has enlisted the services of an unlikely partner, Elizabeth Warren, to draft legislation in this regard. 

But a study by Liberty Street Economics found that spreads are high across all levels of credit ratings measured by so-called Fico scores and that default losses cannot explain the huge spreads above FFR... A recent Vanderbilt study concludes that at a 10 per cent cap, banks could continue profitably serving the vast majority of their customers... Americans pay about $160bn a year in credit card interest.

Sheila Bair, the former FDIC Chair, has this alternative proposal.

A better approach would be a permanent cap expressed as a spread over the FFR, say 10 per cent. This would be consistent with pre-crisis spreads. It would ensure that banks pass on the benefits when the Fed lowers rates but also allow them to raise rates when the FFR goes up. At the current FFR, it would bring credit card rates to just under 14 per cent.

11. Debashis Basu on the challenges with tripling exports by 2035, a CAGR of 13%. From history, South Korea increased its exports by a CAGR of around 18% between 1965-85, Taiwan by 16% in the 1965-80 period, Thailand by 14% in 1986-96, Malaysia by 14% in the 1987-2000 period, and Vietnam by 14% from 2005-24. 

History suggests that sustaining export growth of around 13 per cent for a decade requires these conditions: Cheap currency, strong central coordination and disciplined policy execution, a large surplus of labour at low wages, assured access to large and open markets, and a willingness to tolerate overcapacity and frequent failures. India currently possesses none of these in sufficient measure. Instead, it faces headwinds from rising protectionism, aggressive dumping by China, and reforms that are often procedural rather than outcome-oriented.

12. The non-profit only mandate for schools in India is among the biggest charades. 

India’s rules continue to insist that most private schools are “charities”. The result is a system that makes it hard to bring capital in openly or take returns out transparently. Founders instead resort to legal gymnastics. A single school is often split into three entities: a trust to hold recognition and collect fees; a land company to own the campus; and a services firm to run everything from transport to maintenance. Three entities mean three sets of books, audits, and compliance calendars. Even routine decisions, like paying salaries or upgrading infrastructure, require cross-entity coordination that adds weeks of delay. Hanging over all this is the lingering uncertainty of the government suddenly cracking down on the school or changing a rule about the trust... Every rupee that leaves the account must be defensible on paper. Salaries are routed as lease payments to a land-owning entity and as service fees to an operating company. Each transaction is vetted by his chartered accountant, ensuring no regulator can later accuse the school of making a profit—before it has even run payroll.

The arrangement is captured nicely here.

13. Tamal Bandopadhyay has an interesting article on the trends with central and state government borrowings.

In the current year, the central government’s gross borrowing is pegged at Rs 14.72 trillion, and net of redemptions, the net borrowings, at Rs 11.54 trillion... The gross SDL in the current year is Rs 11.83 trillion... Will there be demand for such a large borrowing programme? That’s the challenge before the RBI. In the current year, it has managed this by buying bonds from the market, popularly known as open market operations, or OMO. In FY26, a record Rs 6.45 trillion (till February 12) is being raised through this route, more than double of what the RBI had bought in FY25. The highest OMO before this was in FY21 – a little over Rs 3.13 trillion... 

Until the global financial crisis of 2008, the central government’s gross borrowing never crossed Rs 2 trillion. And SDLs were much lower – in thousands (for instance, Rs 20,825 crore in FY07). In FY09, the central government’s gross borrowing crossed Rs 2 trillion for the first time. The following year, it jumped to over Rs 4 trillion. The next big jump came in the Covid-hit FY21. From a little over Rs 7 trillion in the previous fiscal year, it rose to Rs 13.7 trillion that year. It crossed Rs 15 trillion in FY24, and is now set to cross Rs 16 trillion in FY27. Though the size of borrowing has increased over the years, as a percentage to GDP, it has remained largely in range... But SDL is becoming a burden. Before the global financial crisis, state loans were just 15-20 per cent of central borrowing every year. In FY27, these could be 75-80 per cent; and over the next few years, SDL may even exceed the centre’s annual borrowing. The oversupply of SDL has widened the spread between the yield of 10-year central government and state government papers to 85 basis points. Typically, it is about 40-50 basis points.

14. China is enhancing state capability by recruiting more tax officers to strengthen enforcement amid widening budget deficits. 

Central and local government tax departments plan to recruit 25,004 staff in 2026, accounting for two-thirds of the new bureaucrats to be appointed from among the millions taking part in fiercely competitive national exams, according to the state civil service administration. The plans mark a fourth successive year of heavy recruitment of tax officials, with the number of appointments set to marginally exceed a previous peak of 24,985 in 2023 to reach the highest level since at least 2012… Tax authorities have also announced moves to tighten tax enforcement and to scale back the use of corporate tax breaks by local governments… Authorities are also broadening the tax base by capturing more high-income earners, including those making capital gains on offshore equity investments… China’s tax revenues have fluctuated in recent years and fell 3.4 per cent year on year to Rmb17.5tn ($2.5tn) in 2024.

15. The rise and rise of Gold.

16. India mortgage housing market facts.

Housing accounts for 18 per cent of employment, making it the second-largest generator of jobs. It has deep linkages with more than 250 ancillary industries, creating powerful multiplier effects. Every investment in a housing unit generates 1.54 direct and indirect jobs and 4.05 induced jobs — much higher than employment multipliers in agriculture (0.8 and 1.2)... The average loan-to-value (LTV) ratio is a mere 65 per cent, compelling homebuyers to rely on other expensive borrowing sources for interiors and registration... less than 8 per cent of loan originations have an LTV greater than 80 per cent... even in a relatively safe asset class like mortgages, more than 75 per cent of lending is still to “prime” borrowers (bureau scores of 730 and above). The likelihood of a “near-prime” borrower (bureau score 650-700) getting a loan approval is just 40 per cent... housing finance to GDP ratio at 11-12 per cent is much lower than comparable economies.

17. What explains the weakness in East Asian currencies despite these countries running large surpluses, the general weakening of the US Dollar, and the smallest interest rate spread with the US in years?

Heavy buying of US assets, and concerns on how to fulfil the pledges from Japan, South Korea and Taiwan to invest $550bn, $350bn and $250bn in the US, and Sanae Takaichi's large spending plans are contributors. 

18. On the historic India-EU FTA deal.

Under the deal, Indian levies on EU cars will be gradually reduced from 110 per cent to 10 per cent, with a quota of 250,000 vehicles a year. Tariffs of up to 44 per cent on machinery, 22 per cent on chemicals and 11 per cent on pharmaceuticals will be mostly eliminated. Steel and iron levies of up to 22 per cent will also be phased out over a 10-year period... Tariffs of more than 36 per cent on EU food products will be reduced or removed, the bloc said, while those on wine will be slashed from 150 per cent to 75 per cent and eventually to levels as low as 20 per cent. Olive oil tariffs will also fall from 45 per cent to zero over five years. Those on processed agricultural products, such as bread and confectionery, of up to 50 per cent will be eliminated. In exchange, more than 99 per cent of Indian exports, worth about $75bn, will gain preferential entry status to the EU... The Indian dairy industry, a politically important constituency that New Delhi has sought to protect in the past, was excluded from the deal. Sensitive EU agricultural sectors, such as beef, chicken, rice, sugar and ethanol, were also carved out.

Weekend reading links

1. Heat impacts productivity and lot else. Therefore the need for airconditioning.

Once indoor temperatures rise above the low-twenties centigrade, or around 75 Fahrenheit, humans start to suffer. Sleep duration and quality fall rapidly when temperatures rise above 23C. Cognitive performance fares similarly, with scores in US high school tests dipping on hot days, and the affected students suffering a lasting impact on their prospects of graduation. The same is true of office workers’ productivity, which peaks at around 21C and rapidly deteriorates as the mercury rises. And that’s all before we get on to mortality, where death rates climb steeply once temperatures hit 30C.

2. Lessons for life from Roger Federer.

In tennis, a small, consistent edge over your opponent can translate into big margins in the long run. Nadal, for instance, also won exactly 54 percent of his points. And when Carlos Alcaraz defeated Jannik Sinner on Sunday in the French Open final — in one of the greatest matches since the 2008 Wimbledon final — Alcaraz, the champion, actually won one fewer point than Sinner. It’s an easy concept to apply to almost any field. In 2022, Ronald van Loon, a portfolio manager at BlackRock, authored a paper on the percentage of investment decisions that need to be correct to beat market benchmarks for returns. He researched markets, crunched the numbers and came up with a number: As low as 53 percent... Federer may have only won 54 percent of his points... but he always seemed to win the points that mattered most.

The three lessons offered by Federer - effortless is a myth; it's only a point; and life is bigger than the court. 

3. The US-Vietnam trade deal depends on how the Trump administration will define "transshipment" which attracts a 40% duty.

Experts say the Trump administration’s definition of transshipment could refer to a range of practices from simply repackaging Chinese goods with a counterfeit “made in Vietnam” label or to using Chinese raw materials in goods manufactured in Vietnam. “The impact may be more limited if these 40 per cent tariffs are enforced solely for the most egregious practices of plain diversion of trade to avoid US tariffs,” said MUFG analyst Michael Wan. “In contrast, if there is a stricter determination of transshipment defined as a certain threshold of foreign value added, the impact . . . may be pronounced.” Given the Trump administration’s interest in isolating China, businesses fear a wider definition. This would be extremely damaging for Vietnam, where many businesses rely on Chinese raw materials and components, and warned that removing them would be impossible.

4. As the use of electricity, especially from renewables, to replace natural gas and other fossil fuel sources increases, countries are finding that they are falling woefully short on the associated infrastructure. Sample this from Netherlands which has even started rationing power. 

The Netherlands already has some of the highest electricity costs in western Europe because of the grid bottlenecks... To cover the necessary investment, tariffs are expected to increase each year until 2034 by an average of between 4.3 and 4.7 per cent in real terms, a presentation from national grid operator Tennet said. To free up capacity, Tennet and regional grid operators have started to offer contracts to households that discount electricity used at non-peak times, such as between 11am and 3pm, and other flexible contracts that allow users to pay for electricity in time blocks. From April 1, operators could offer contracts where large industrial users are barred from using their connections at all during certain busy hours in exchange for lower tariffs. The Hague has also put out a “more conscious use of energy” advertising campaign across TV and social media that asks consumers to charge bikes and cars outside of the 4pm-to-9pm peak, when the grid comes under greatest strain...

“Everything is going electric and electricity infrastructure needs to grow massively everywhere,” said Jeroen Dijsselbloem, mayor of Eindhoven. The Brainport region around Eindhoven, covering 750,000 people in several municipalities in the southern Netherlands, had lost investment because it had to ration power supply, he said. Brainport is also home to a cluster of advanced technology companies led by ASML, the maker of the world’s most sophisticated chipmaking machines. No significant new grid capacity would be installed in the region until 2027, Tennet figures show. “We need more than 100 medium-size substations and 4,000 small substations,” Dijsselbloem said. Grid operators are also short of 28,000 technicians to install the necessary infrastructure, according to Netbeheer Nederland. Companies such as Thermo Fisher, a US medical business with a base in the Eindhoven area, have maintained their growth plans but invested in on-site battery storage and solar to counter the grid congestion issues.

5. Does the US suffer from Dutch disease?

The US has Dutch disease. Its export is the dollar... The dollar lost roughly 8 per cent of its value over the past six months, which has renewed the old discussion of whether holding the world’s reserve currency is an exorbitant privilege or an exorbitant burden... In 1999, Aaron Tornell, now at UCLA, and Philip Lane, now European Central Bank chief economist, offered a theoretical framework to explain (Dutch Disease). The commodity export changed the budgeting process, they argued. After a windfall, powerful groups will fight to get their hands on any new spending. If the country has strong institutions and social solidarity, this grab for spending will fail. With weak institutions, it will succeed: instead of going to things that increase productivity, such as roads and schools, new spending goes to powerful groups, as unproductive gifts. Tornell and Lane called this the “voracity effect”. 

They applied it to data from Nigeria, Venezuela and Mexico, but if we accept that the US is not magic, we can easily ask these questions of it, too. How voracious are its powerful groups? How strong are its institutions? The answers in order are: quite, and not as strong as we’d thought. The voracity effect does help explain the gobsmacking audacity of Donald Trump’s so-called “Big Beautiful” Bill, with a cost of $3.4tn over 10 years and the benefits going overwhelmingly to the wealthy. In the past, Republicans have attempted to present tax cuts for the rich as a policy to release productive investment. They’ve even attempted to model this idea as a process called “dynamic scoring”.

6. The balance sheet of six months of Trump tariffs.

Chinese exports to the US fell 9.9 per cent year on year in renminbi terms between January and June... Exports to countries in the Association of Southeast Asian Nations, which the US accuses of transshipment of Chinese exports, rose 14.3 per cent, while imports increased 2.3 per cent in the first half.

7. The Israeli economic miracle

In tech-driven Israel, GDP per head has nearly tripled since 2000 to more than $55,000, rising from 50 to 70 per cent of the level in the US... Its $550bn economy is now among the largest 30 in the world... Total factor productivity, which captures how well labour is using new machines, has grown four times faster in Israel than in other developed economies over the past 25 years... Perhaps the most telling sign of its dynamism is that Israel now spends more than 6 per cent of GDP on research and development — more than any other nation and over double the global average... Since the early 2000s, as most other developed governments have increased spending and debt, Israel has cut state spending from 50 to 40 per cent of GDP, and public debt from a high of 90 per cent to under 70 per cent of GDP. The government also made some smart investments, seeding the venture capital industry that helped to launch the nation’s vaunted tech sector... Spillovers from defence have made Israel a global leader in fields from air-traffic control to, above all, cyber security. With more start-ups per head than any other country, its business culture is closer to that of California than the Middle East. It has 73 start-ups in the hot field of generative artificial intelligence, the third largest in the world. Half of its exports are tech products.

8.  Akash Prakash on corporate India

One of the clear takeaways when speaking with senior people working with Apple is their disappointment at the lack of willingness among India Inc to step up and make the investments needed to bring the Apple ecosystem into India. While China is putting up obstacles, the profit focus of Indian entrepreneurs is also a stumbling block. Whether it is putting up the component supply chain or making large capital investments for display units, there is a lack of interest on the part of large Indian groups to commit capital. They cite the low margins on offer and the intense scrutiny that Apple demands on quality and scale. In effect, it would take years of sustained effort to earn a reasonable return on capital — if at all. Is it worth it? Many believe they would be derated by their shareholders, who would not accept the initial losses and question the ultimate return on capital. With a drop in margins will come pressure on valuations and market capitalisation — this is the common belief among Indian industrialists. Indian markets are hyper-focussed on profitability and return on capital.

9. FT long read on BYD, China's battery and EV champion. 

Until recently, the main advantage Chinese EV manufacturers had over Tesla was that their products were significantly cheaper. But in February, BYD’s founder Wang Chuanfu stood on stage in Shenzhen and unveiled “God’s Eye”, an advanced driver-assistance system that is a precursor to fully autonomous vehicles. A month later, Lian, who now heads BYD’s automotive engineering research institute, was on stage with Wang to announce a new battery charging system capable of adding a driving range of about 470km in five minutes — a fraction of the time it would take a Tesla to charge to that level. The startling technological advances made by BYD and others have sparked panic among legacy carmakers, who have responded by partnering with Chinese rivals to learn how to build vehicles faster and cheaper, and with better software.

10. Unless I'm missing something, the Chinese have definitively outsmarted Trump and the US by being able to link the relaxation of its export controls on rare earths with a similar US relaxation of restrictions on the export of advanced semiconductor chips. The latter has been in place since the Trump 1.0 and has progressively tightened. The Chinese export controls on rare earths were introduced in response to the Trump reciprocal and higher tariffs on China. The US ceded ground by both sharply reducing its steep tariffs (which would have been a significant blow to the Chinese economy) as well as making concessions on its export controls on advanced chips. 

Now that the linkage is established, the Chinese will use the rare earths instrument to combat both tariffs and export restrictions.

This is a good article about how Nvidia's Jensen Huang charmed Trump and convinced him to lift the ban on the export of its powerful H20 chips. One more example of how corporate America's commercial interests have trumped America's national interests. It also underlines the point that President Trump has no deep interest in containing China. 

11. As Donald Trump warms up to Ukraine, even suggesting that the US could supply missiles to Ukraine if it could target sites deep inside Russia, including Moscow, Janan Ganesh makes some very important points about Donald Trump.

Trump and Maga are no longer the same thing. His movement — the intellectuals, the donors, the more online of the grassroots — have intense beliefs. Besides a life-long conviction that running a current account deficit with another nation constitutes “losing”, he doesn’t. None of this is fatal to Trump himself. He papers over the differences with force of charisma, electoral success and the dutiful enactment of key Maga priorities. This will protect him from serious internal dissent... Still, we can now see what the future of the US right looks like. Unless the Republicans find another version of Trump — someone whose star power overwhelms all philosophical reservations about him or her — the next leader will have to be more in tune with the movement. That is, more Christianist, more nationalist, more paranoid. An extreme right-winger can put up with half a loaf under Trump because he provides so much else in dazzle and tribal leadership. You aren’t getting that with JD Vance. Ideological and even personal litmus tests, which have been waived for Trump, could return. In other words, we have to entertain the notion that Trump is a moderating influence on a movement that will become much more doctrinal once he is gone. He approaches the world through personal relations, which are malleable, not ideas, which aren’t. 

Consider Ukraine policy. In all likelihood, Trump has been soft on Putin because he appreciates the Russian’s well-aimed flattery and resents the cost to the US of protecting Europe from him. This is bad, but it isn’t dogmatic. Much of Maga, in contrast, backs Putin out of a belief that Russia is nothing less than Christendom’s frontline, whether against Islam or secular Chinese communism or the woke enemy within. Because it is practical, Trump’s position can be shaken, as seems to be happening now... There are worse things than a personality cult, such as an ideas cult. For a decade, conservatism has been whatever Trump says it is. He has made it possible to regard China as the threat of the century but admire Viktor Orbán, who is China’s biggest friend in Europe; to oppose vaccines but not the president who oversaw the Covid vaccine; to view Ukraine as another region’s problem but Iran as a core US interest. This is an intellectual farrago, but it might be preferable to hard, consistent doctrine... Trump doesn’t share the movement’s interest in the fate of “western civilisation” and other grandiose abstractions. He is not much of a China hawk: his concern is the bilateral trade data, not the grand strategy, much less the contest of values. As for religion, we can’t know another person’s inner life, but come on.

12. China is staring at zero interest rates.

The release of China’s second-quarter growth data this week... real economic expansion was strong and steady at 5.2 per cent but widespread falling prices meant nominal growth was much weaker, at 3.9 per cent... The central bank’s benchmark seven-day reverse repo rate, following a series of gradual cuts, now stands at 1.4 per cent... The yield on China’s 10-year government bond has been hovering around 1.7 per cent, near historic lows, suggesting investor expectations of persistent disinflation... The average interest margin at China’s top six state lenders fell to 1.48 per cent in the first quarter, its lowest level on record, compared with more than 2 per cent in 2021... At most Chinese banks, the interest rate on demand deposits is 0.05 per cent, while one-year term deposits yield less than 2 per cent.

13. Europe's rural depopulation

In the decade to 2024, the estimated number of people living in predominantly rural EU regions fell by nearly 8mn, an 8.3 per cent drop, while the urban population rose by over 10mn, or 6 per cent. Regions making up about 40 per cent of the EU’s land area and containing almost one-third of its population, are experiencing a sustained drop in residents. Dwindling numbers mean shops and bars are forced to close, buses run less frequently, doctors are harder to find, and classrooms become emptier. This fuels further departures, in what the OECD describes as a vicious cycle... Depopulation threatens Europe’s cultural heritage, local languages, cuisines, crafts, farmland, traditions and even national security... Attempts at reversing the trend range from selling houses for €1 to encourage new arrivals to restore them, to subsidising vital services and repurposing civic buildings so they can serve several different functions. Some areas are turning to tourism, encouraging second-home ownership even as some other areas turn against it... the EU’s rural population is forecast to shrink by 18 per cent by 2100, with some areas — including in Bulgaria, Croatia, Portugal and Lithuania — expected to lose one-third of their rural inhabitants or more.

 

14. China is snapping up mines across the world at record rates.

Chinese companies had become adept at snapping up mining assets from western rivals in recent years, often being willing to take a longer-term view on valuations and invest in riskier jurisdictions... The most active Chinese mining groups in overseas deals include CMOC, MMG and Zijin Mining. Chinese financial institutions have also issued billions in loans for minerals mining and processing projects in the developing world... Chinese companies were positioning themselves to benefit from resource nationalism in nations such as Mali. Some military governments in Africa have sought to take control of western mining assets and are demanding higher royalty payments. Chinese companies are often prepared to accept a less lucrative arrangement if they can take over the running of the asset.

15. As China grapples with overproduction and deflation, President Xi has warned against excessive production in EVs, computing power (data centres), and AI. 

“When it comes to projects, there are a few things — artificial intelligence, computing power and new energy vehicles. Do all provinces in the country have to develop industries in these directions?” Xi told the Central Urban Work Conference, a rarely held high-level Communist party meeting on urban development.

Since September 2022, Chinese producer prices have been in a deflationary trajectory.

In articles across state and party media, Chinese President Xi Jinping and other leading officials have attacked what they call neijuan, or “involution”, meaning excessive price competition... Beijing is growing increasingly wary that surging industrial output, coupled with weak consumer demand at home, is fuelling a race to the bottom in prices that is entrenching deflation and fuelling tensions with the country’s biggest trading partners. Official data is expected to show on Wednesday that factory gate price growth remained negative in June for a 33rd consecutive month, one of the country’s longest such falls in decades. Overcapacity is a sensitive issue for China, which has sought to dispel complaints that its industrial policy has flooded its partners’ markets with artificially low-cost goods.

16. Important decision by the University of California's $190 bn endowment fund to completely exit its hedge fund investments. 

UC Investments in a meeting on Tuesday approved a plan to reallocate its 10 per cent absolute return portfolio — or its investments in hedge funds — to public equities, finalising a wind-down that began five years ago. Jagdeep Singh Bachher, chief investment officer of UC Investments, one of the largest institutional investors in the US, sharply criticised the industry in a recent meeting for not delivering for clients... He added that UC Investment’s hedge fund positions had undermined its overall performance by introducing risks during market upheavals in 1999, 2008 and 2020. “In each of those three scenarios, hedge funds didn’t hedge us,” he said. “They exposed us to the opposite kind of risk, which actually meant they hurt us.” The move underscores concerns among asset allocators about hedge fund investments that come with unstable returns and high fees that have ballooned in recent years.

Weekend reading links

1. The Swiss Central Bank has lowered interest rates to zero in its sixth consecutive rate cut, after consumer prices fell 0.1% in May from a year earlier. Switzerland has had negative rates from 2015-22, with the lowest being minus 0.75%.

2. Hybrids are making a comeback.

In the first three months of this year, hybrids — including cars that can and cannot be plugged in — made up about 14 percent of all light vehicles sold in the United States, according to the Department of Energy. That was around twice the market share of fully electric vehicles in that period. Republican legislation working its way through Congress could further lift sales of hybrids. In May, the House passed a policy bill backed by President Trump that would eliminate a $7,500 tax credit available to people who bought or leased electric vehicles. That legislation would also impose an annual tax of $250 on electric cars and $100 on hybrids to finance road projects. The Senate version of the bill introduced this week would do away with the tax credit, too, but does not include the annual tax.

A few large automakers dominate the sale of hybrids. Nearly half the cars and trucks that Toyota and its luxury brand, Lexus, sold in the first five months of the year were hybrids — and sales of those vehicles were up about 40 percent from a year earlier. Ford Motor’s hybrid sales rose 31 percent in the same period. Honda is on track this year for its highest hybrid sales ever, and the hybrid versions of its Accord sedan and CR-V sport utility vehicle now outsell the gasoline-only models. Hybrids are typically powered by a small gasoline engine that is paired with an electric motor driven by a battery that is much smaller and, thus, less expensive than the batteries in fully electric vehicles. These batteries are charged primarily by regenerative brakes and gasoline engines. Plug-in hybrids, which account for a small share of hybrids, have bigger batteries than regular hybrids and can also be charged from power outlets at home or at charging stations. Some plug-ins can go around 50 miles on battery power alone before the gas engine kicks in.

3. The changing nature of business lines and revenues of Reliance Industries.

Rahul Malhotra, director at Bernstein, calculates that Reliance now generates more than half its annual earnings before interest, taxes, depreciation and amortisation from consumer-facing businesses, compared with less than 10 per cent a decade ago.

4. Smartphone assembly has been the PLI's standout success.

5. Trends with India's FDI.

Manufacturing's share of FDI has continued to decline.

6. Why Chinese consumers took to EVs?

XPeng's Mona Max, which has just gone on sale in China for around $20,000. For this price you get self-driving capability, voice activation, lie-flat beds, film and music streaming. Young Chinese graduates, we're told, see all these as standard features for a first car purchase... a huge amount of government spending goes towards making EVs financially attractive, according to the CSIS study. Members of the public receive subsidies for trading in their non-electric car for an EV as well as tax exemptions and subsidised rates at public charging stations. These perks drove Mr Lu to go electric two years ago. He used to pay 200 yuan ($27.84; £20.72) to fill up his car for 400km (248 miles) of driving. It now costs him a quarter of that. People in China also normally pay thousands for their vehicle registration plate - sometimes more than the cost of the car itself - as part of government efforts to limit congestion and pollution. Mr Lu now gets his green one for free... Another proud EV owner in Shanghai... says that rather than charge her vehicle at a station, she changes her car's battery at one of the city's many automated swapping stations provided by EV maker Nio. In under three minutes, machines replace her flat battery with a fully charged one. It's state of the art technology for less than the price of a tank of fuel.

7. Some statistics on government spending on public sector units.

The government’s total receipts from disinvestment and dividend from PSUs over this period of 10 years fell from 0.45 per cent to 0.25 per cent of GDP... In contrast, the government has been increasing its capital allocations for PSUs through equity and loans in the last 10 years, from about 0.54 per cent in 2014-15 to about 1.66 per cent of GDP in 2024-25... In 2014-15, total equity and loans to PSUs were estimated at ₹67,512 crore, accounting for just about 34 per cent of the Modi government’s total capex of ₹1.96 trillion. By the end of 2024-25, that share rose to 54 per cent, as PSU equity and loans were estimated at ₹5.48 trillion, out of a total capex of ₹10.2 trillion.

8. State capability, airline industry graphic of the day.

9. Brazilian Supreme Court rules that social media platforms can be held legally responsible for users' posts, forcing them to proactively demove material like hate speech, incitement to violence, etc., even without a prior judicial takedown order. This follows rising concerns in Brazil about harmful digital content, especially on children and youth. 

10. The balance sheet of AI spending and benefits is not looking good.

On the cost side, the effects of AI mania are all too apparent. The four tech companies leading the charge — Alphabet, Amazon, Meta and Microsoft — increased their capital spending by nearly two-thirds, or $95bn, in 2024. As this year got under way, they were planning to boost capex by another $75bn... Bank of America Securities predicts that for the tech industry as a whole, spending on data centres will jump from $333bn last year to about $1tn in 2030. By the end of the period, 83 per cent of the money will go into AI-related investments. 

On the revenue side of the equation, meanwhile, some of the AI leaders are starting to notch up big percentage increases in business — but the extra revenue is counted in the tens of billions rather than the hundreds. Early this year, Microsoft said its annualised revenue rate from AI had climbed 175 per cent to reach $13bn. That is still only about 5 per cent of the total revenue it is expected to produce this year. OpenAI’s revenue run-rate from subscriptions, its main source of income, just topped $10bn, doubling from the end of last year. The rates of increase are notable, but the absolute figures still pale in comparison to the capex.