📬 China Update — End of Week Newsletter

📬 China Update — End of Week Newsletter
Date: August 24, 2025
Your essential wrap-up on Chinese Political, Economic & Geostrategic developments

Let’s Jump In!

🔶 Top Story: The Overcapacity Crisis & Cement

Few commodities embody China’s growth story like cement — and few better illustrate its slowdown. Cement was the lifeblood of the country’s urbanisation miracle, poured into the foundations of entire new cities, vast transport networks, and sprawling apartment blocks. Now it is in retreat.

Cement production fell more than 5% year-on-year in July to 146 million tons, marking the weakest July since 2009. Extreme weather — both heatwaves and heavy storms — worsened the slump, but the deeper driver is structural: real estate investment is collapsing, infrastructure spending is sluggish, and new loans shrank for the first time in 20 years. Unlike steel, much of which feeds export industries, cement is almost entirely a domestic barometer. Its decline shows just how fragile the underlying economy has become.

The problem extends well beyond construction. From solar panels to autos, from batteries to shipbuilding, China’s industrial system is producing far more than the market can absorb. The Ministry of Industry and Information Technology has launched an “anti-involution” campaign to curb destructive competition, but success is uncertain. Chinese firms now churn out nearly double the world’s annual demand for solar panels. Auto production has hit new records, yet domestic sales are saturated, forcing exports to rise 25% in July.

Analysts stress that as long as Beijing maintains excessively high GDP targets, local officials will keep incentivizing new factories, perpetuating the cycle. As one economist observed: “We used to call this rebalancing, then dual circulation, now involution. The problem is the same — supply-led growth with weak demand. Changing the label doesn’t solve it.”

👉 Key takeaway: Cement’s collapse highlights the waning of China’s old growth engine. Overcapacity is no longer a sectoral problem but a systemic drag, pushing the economy toward stagnation.

🏙️ The Investment Riddle: Cities Show the Divide

A new Carnegie China report, The Chinese Investment Riddle: What Cities Reveal, highlights how China’s development model is diverging across regions. The findings underscore that despite central pledges of “high-quality growth,” many local governments remain trapped in old habits of brute investment.

Third- and fourth-tier cities recorded investment intensities averaging 58% of GDP in 2024, far above the national average of 40%. With real estate revenues drying up, they leaned heavily on industrial parks, infrastructure projects, and state-guided manufacturing investment — even when productivity returns were meagre.

The analysis shows a negative correlation between investment intensity and productivity (-0.21 with labor productivity, -0.62 with total factor productivity). More investment often means worse efficiency. Overlapping industrial projects create cutthroat competition and underutilised capacity, crowding out consumption and weakening household demand.

By contrast, Tier-1 hubs like Beijing, Shanghai, and Shenzhen — and advanced Tier-2 cities like Nanjing — are closer to a service-driven model, with more efficient use of capital and higher integration with global markets. These hubs remain attractive to multinationals for R&D and premium consumer offerings.

🕴️ Another Minister Purged

The reported detention of Liu Jianchao, head of the CCP’s International Department, has jolted China’s diplomatic corps. Liu, a veteran ambassador and former graft-buster, was seen as a possible candidate for foreign minister or even the Politburo. His abrupt disappearance — allegedly on national security grounds — removes him from that trajectory.

The lack of explanation recalls earlier purges of senior military and diplomatic figures. Liu’s fall reinforces a sense of instability within Beijing’s foreign policy apparatus. For now, it appears Wang Yi will continue as foreign minister well past the next Party Congress, ensuring continuity but also highlighting the risks of opaque elite politics.

💰 Beijing Targets Overseas Investors

Tax authorities are intensifying enforcement on overseas investment income. Notices in Shanghai, Zhejiang, and Shandong remind residents that offshore trading gains are subject to a 20% tax, aligned with global norms but rarely enforced until now.

The crackdown comes as fiscal pressures mount: shrinking land-sale revenue, costly baby subsidies, and measures to stimulate consumption. With OECD data-sharing frameworks now in place, Beijing can more easily track offshore accounts. Some investors have already been billed retroactively, with penalties added for delayed payments.

The campaign underscores Beijing’s determination to tap wealthy citizens’ offshore income to plug budgetary gaps — and signals that fiscal pressure is spilling over into private finance.

📉 Stock Market Malaise Persists

China’s stock market continues to underperform global peers, with the CSI 300 index still near levels of a decade ago despite intermittent rallies. For households, the failure of equities to generate wealth reinforces a culture of high savings, undermining Beijing’s efforts to boost consumption.

Regulators are pushing reforms — limiting IPOs, encouraging dividends, tightening oversight — but scandals and poor governance have left investors distrustful. As one veteran analyst put it: “China’s capital markets remain a paradise for issuers, a hell for retail investors.” Until returns improve consistently, households are likely to keep saving rather than spending.

🌏 Belt & Road at Gwadar Stalls

Pakistan has pressed China’s Gwadar Port operator to step up investment in the surrounding free zone, but progress is stalling. Only the southern section has been developed at a cost of $250 million, leaving most of the area untouched. Security, water, and power shortages continue to deter investors.

Geopolitical dynamics complicate the picture: Islamabad has moved to ease tensions with Washington, fuelling speculation that Gwadar could become a bargaining chip in its relations with Beijing. For now, analysts say the lack of a clear business case makes further Chinese investment unlikely, despite political rhetoric.

🧠 MERICS on Party in Daily Life

A new report from MERICS, Serving the People by Controlling Them, describes how the CCP is embedding itself deeper into daily life through digital surveillance, service delivery, and grassroots mobilization. From “grid management” to volunteer neighborhood monitors, the Party is tightening its control of communities while presenting it as public service.

The fusion of welfare and control strengthens resilience in an era of economic slowdown and rising geopolitical tension. The CCP is preparing society for “struggle,” with citizens expected not only to comply but to sacrifice when needed.

🌐 Wang Yi’s Diplomatic Circuit

Foreign Minister Wang Yi met India’s top leadership this week, including Modi and Jaishankar, signalling cautious improvement in ties. Agreements were reached on river data-sharing and reopening Himalayan border trade, while Beijing pledged to help with India’s needs for rare earths and fertilizers.

But frictions remain: India objected to a Chinese claim that New Delhi endorsed Beijing’s “One China” line. Wang has since moved on to Afghanistan, urging Kabul to join the Belt and Road, before heading to Pakistan. The balancing act underscores both new cooperation and persistent distrust.

💱 Yuan-Backed Stablecoins on the Table

Beijing is considering yuan-backed stablecoins as a way to boost the renminbi’s global role. A roadmap under review by the State Council could set targets for international use and integrate stablecoins with China’s digital yuan infrastructure.

Unlike decentralized cryptocurrencies, a Chinese stablecoin would likely be fully traceable, programmable, and tied to real-name IDs. Such a design could embed policy levers directly into money — from expiry dates to spending limits. Officials remain cautious, halting seminars to prevent speculative frenzy, but the move reflects Beijing’s recognition that dollar-backed stablecoins are reshaping global finance.

🏚️ Housing & Jobs Under Strain

China’s rental market is flooded, with listings in 55 cities hitting a three-year high in July while rents fell for the 11th straight month. Government-backed affordable housing is crowding out private landlords, pushing yields lower and feeding into the broader property price decline.

At the same time, youth unemployment surged to 17.8% in July — the highest in nearly a year — as 12.2 million graduates entered a weak job market. Beijing has rolled out counselling and training programs, but graduates report months of searching with little success. Analysts warn that weak household income growth will make it even harder to rebalance the economy toward consumption.

🌊 Pacific Islands Forum Pressure

China has demanded the Pacific Islands Forum revoke its 1992 recognition of Taiwan’s participation rights, calling it a violation of the One China principle. The unusually blunt demand, issued by Beijing’s embassy in Tonga, sets up a potential clash at next month’s summit in the Solomon Islands.

Pacific leaders now face the challenge of preserving regional unity on climate and development while navigating intensifying pressure from both Beijing and Taipei. The episode highlights how China is pushing to close even symbolic gaps in Taiwan’s global presence.

💻 Tech War: Nvidia & DeepSeek

U.S. Commerce Secretary Lutnick’s blunt comments that Nvidia’s H20 chips were meant to “get Chinese developers addicted” have backfired. Chinese regulators are now discouraging firms from buying the H20, accelerating adoption of domestic alternatives like Huawei’s Ascend. Reports suggest Nvidia has even paused H20 production as demand wanes.

Meanwhile, Hangzhou-based DeepSeek released V3.1 and teased a new FP8-capable domestic chip. If real, it would mark a breakthrough, since FP8 dramatically improves AI efficiency and is currently a key Nvidia advantage. Whether near-term reality or long-term aspiration, the signal is clear: China’s AI sector is doubling down on indigenous hardware.

🔚 Final Thought

This week’s stories tell a consistent tale: China’s old engines — cement, construction, property — are faltering, while overcapacity and “involution” spread across emerging industries. Beijing’s push for consolidation, innovation, and new tools like stablecoins reflects an urgent need to reset the growth model. But as protests, purges, and trade frictions remind us, the transition will not be smooth — and the costs will be high.

Until next week,
— Tony