Majuqiao is located along Beijing’s southeastern Sixth Ring Road. Beijingers traditionally consider places that are upwind and upstream to be more desirable. But Beijing’s prevailing winds come from the northwest, and its few rivers generally flow from northwest to southeast. This leaves Majuqiao on the less favoured side of the city’s geography—and it has become Beijing’s largest casual labour market.

There is a popular saying in Beijing: “If you have money, you wouldn’t live in Tiantongyuan天通苑; if you fall on hard times, you head to Majuqiao.” The idea is that the rich would avoid living in an large community such as Tiantongyuan. But if you have run out of options, you can try your luck in Majuqiao, where short-term work may at least help you get by.

Cong Rui’an began conducting fieldwork among temporary workers in 2018. He has also worked a range of day-labour jobs himself. I think his firsthand experience offer rare insight into these workers’ living and working conditions.

Given how highly urbanised China has become, listening to this conversation sometimes felt like listening to a twenty-first-century counterpart to Mao Zedong’s Report on an Investigation of the Peasant Movement in Hunan. One of the points I found most interesting was how day labourers choose among the jobs available to them. Jobs at pharmaceutical factories tend to be the most “formal” and regulated. They provide the best meals and pay relatively well, around RMB 200 a day. Yet day labourers are often reluctant to take them because these factories exercise unbearable strict control over workers’ movements. The psychological toll also greater than in other workplaces.

The nature of casual labour also contributes to a dysfunctional relationship between workers and employers. Labour brokers and employers assume that casual workers are unreliable, so they resort to harsh methods to keep them under control. The workers, in turn, feel that they are being treated without dignity or respect, which gives them even less incentive to work hard. When employers see them slacking off, it reinforces their existing stereotype: These workers really are unreliable, so we need to control them even more strictly. The result is a vicious cycle of distrust, disrespect and increasingly coercive management.

Cong beleives that the key to improving the lives of casual workers is to improve working conditions and labour protections for long-term employees. This would reduce employers’ reliance on casual labour and, ultimately, give those who remain in the casual labour market greater bargaining power.

In some ways, the anxiety that day labourers experience in the face of an uncertain future is shared by many contemporary white-collar workers around the world. You can find work if you are willing to take it, but fewer and fewer jobs feel worth choosing.

Thanks Cong’s kind authorization, I can translate the podcast to English.

Below is the full transcript of the podcast:

MaJuQiao Day Labor, Dignity at Work, and the Career Choices of Young People

A Conversation Between Cong Rui’an and Liangzi Interviews

Speakers

• Cong Rui’an (丛瑞安): PhD candidate in Political Science at Tsinghua University

• Liangzi (凉子): Creator of the Bilibili channel Liangzi Interviews (凉子访谈录)

• Production Staff: Other people present during the recording

The Current State of Work in Majuqiao and Problems in the Labor Market

Cong Rui’an:

There is a saying that has circulated in Beijing for many years: “If you have money, don’t live in Tiantongyuan; if you’re down on your luck, head to Majuqiao” (有钱不住天通苑，落难必闯马驹桥).

Liangzi:

As the Chinese saying goes, “A person lives for dignity, just as a tree lives for its bark” (人活一口气，树活一张皮). Just because I need to earn one or two hundred yuan doesn’t mean I should have to let you treat me like a dog.

Cong Rui’an:

My name is Cong Rui’an. I am currently a PhD candidate in the Department of Political Science at Tsinghua University, and I have been conducting research and fieldwork related to Majuqiao.

Liangzi:

Can people really make money doing day labor?

Cong Rui’an:

Yes. But making money and actually saving money are two different things.

There are two seemingly contradictory descriptions of Majuqiao.

The first is that if you want to work in Majuqiao, you can find work every day.

The second is that Majuqiao is no longer what it used to be—that there is less and less work available.

These two descriptions may sound contradictory, but they are actually describing the same situation. There are still plenty of jobs in Majuqiao, but fewer and fewer of them are worth choosing. In other words, there are fewer jobs that immediately look attractive to workers.

Take parcel sorting, for example. These jobs recruit large numbers of workers every day, but labor brokers may shout by the roadside for hours without attracting anyone. Everyone knows the work is exhausting, so they do not want to take it.

By contrast, suppose someone arrives on an electric motorcycle or in a minivan, pulls over, and says, “I need a few people for some light moving or cleaning work. It pays 180 or 190 yuan. Who wants to go?” That would be considered a good job, and everyone would immediately crowd around.

But jobs like that have become less common, which is why people feel there is less and less work.

In theory, if someone hardens himself and is determined to work every day, he can find a job every day. But then the question becomes: if this is what I have to do every single day, what kind of life am I really living?

In Majuqiao, work is not a multiple-choice question. It is a series of true-or-false questions that appear one after another and require an immediate answer. You either check “yes” or mark “no.” If you say no, the next question immediately appears. The choices keep coming, and you cannot go back.

You might think, “It’s already late today, so there probably aren’t many good jobs left. Should I take this parcel-sorting job?”

But perhaps you still have a little money in your pocket, and you know how exhausting parcel sorting is. You may decide that you do not need to take it. Maybe a better job will appear tonight or tomorrow, so you turn this one down. That is a perfectly natural response.

Liangzi:

Could we put it this way? If you are sufficiently diligent and hardworking, then even if you do not yet have a long-term plan, you can still find relatively stable employment.

Some people may avoid long-term, stable jobs because they believe those jobs offer no future or do not pay enough. That may be why they come here.

But if someone is genuinely willing to look for a long-term job, chances are they can find one—as long as they are willing to endure hardship.

Cong Rui’an:

The problem is that “being willing to endure hardship” has to mean something. There has to be a standard.

Suppose we were discussing whether you should accept a job that paid only 1,000 yuan a month. No matter how hardworking you are or how much you can endure, many people would still refuse it.

If I refuse a job that pays 1,000 yuan and look instead for one that pays 2,000, 3,000, or 4,000 yuan, then the question is: how much money would make the hardship worthwhile? What kind of hardship should I be expected to endure?

More and more people have come to realize that they repeatedly hit walls at work. The jobs available to them are not what they want, but they cannot find anything better.

There is also severe information asymmetry (信息不对称) in our labor market, especially in the market for long-term employment.

Many people travel here from distant hometowns after being promised a good job. They may also be charged a large fee. But after working for only a couple of days, they discover that the job is nothing like what they were promised.

What can they do? If they leave, they may not receive any wages at all, and they will have lost their travel expenses as well.

Many people try to save only one or two thousand yuan so that they can afford to leave and search for a different job.

We all understand the logic: if a person finds a genuinely good job, they will usually stay. If the job is good, why would they quit?

As a result, the jobs that remain constantly available on the labor market tend to be the worst ones.

Liangzi:

But that raises another question. If a person can earn only around 150 yuan a day in Majuqiao, couldn’t they find that kind of work in a township or county?

At the very least, couldn’t they find it in their nearest prefecture-level city? Why do they have to come to Beijing? The cost of living in major cities such as Beijing, Shanghai, and Guangzhou is so high. Why come here at all?

Cong Rui’an:

First, major cities such as Beijing, Shanghai, and Guangzhou still provide an enormous number of jobs. The volume of labor demand is high. In smaller cities and counties, it may actually be harder to find work.

Second, living expenses in Majuqiao are not necessarily that high.

If you earn 150 yuan a day, a daily bed rental may cost around 20 yuan. After spending some more on food, you may still be able to save a little.

If you rent by the month, your living situation can also become more stable. The cheapest room I have personally seen cost only 200 yuan a month.

A PhD Student’s Experience as a Day Laborer and the Idea of the “City’s Image”

Cong Rui’an:

That room was underneath a staircase. Someone had put up a board to partition off the space. When you opened the door, there was only a bed and a bare incandescent bulb overhead. There was nothing else.

The light was off when I first walked past, so I thought it was a storage space. Then some light from outside fell into the room, and I realized that someone was actually sleeping inside.

I asked the labor broker about it, and he told me the rent was 200 yuan a month.

A worker could earn enough to cover an entire month’s rent for a room like that in a little more than one day. Of course, there may also have been slightly better rooms available for 200 yuan. I simply did not see them myself.

Liangzi:

But why would someone choose to live in a room like that? After working for one or two days, they could afford something at least slightly better.

Cong Rui’an:

On the one hand, a person may genuinely lack the means to improve their living conditions. On the other hand, they may simply not want to work the extra days required.

But they are supporting themselves through their own labor. They have not robbed anyone or harassed anyone. What gives us the right to condemn them? I think their choice is perfectly understandable.

Liangzi:

Yes, I think you are right.

Cong Rui’an:

At most, someone might say that they are “damaging the image of the city” (影响城市形象).

But this city also belongs to me. I am part of it. Why does my presence in the city damage its image, while your presence supposedly improves it?

Liangzi:

So this is really a form of elite arrogance.

Cong Rui’an:

The jobs I did most often were security jobs. I also worked as a waiter, in factories, in landscaping, in cold-storage facilities, and as a parcel sorter. Those were the main types of work I did.

Liangzi:

What was it like to do those jobs?

There is also another dimension to this. You were doing them as someone who had been a graduate student at Peking University and was now a PhD student at Tsinghua University. How did these experiences affect you?

Cong Rui’an:

The experience varies greatly from one job to another.

Security work is relatively easy. At some security jobs, you can sit there or stand around looking at your phone. Your main purpose is simply to be physically present and prevent a “broken windows” effect (破窗效应).

Factory work is different.

Some factories constantly scold and pressure you. They try to control you in every possible way, including methods that completely disregard your dignity.

They may shout, “Hurry up and work! You people can’t be slower than everyone else!”

Once, when I arrived at a workplace, several labor brokers were chatting happily. One of them proudly said, “I made two more workers cry yesterday.”

They were delighted to share stories like that. It was an extremely dehumanizing situation.

Of course, we could say that all work contains some element of dehumanization. But because these jobs demand extremely high output and intensity, the dehumanizing aspect becomes particularly obvious.

The employer wants you to sell your labor power and nothing else. As long as you are a person capable of providing labor, that is enough. Your other feelings, your dignity, and your needs are irrelevant to them.

Liangzi:

What was it like to spend an entire day doing that kind of work?

Cong Rui’an:

It was very painful.

You have no dignity. People are constantly scolding you, and both your body and mind gradually become numb.

Some might say, “Of course it was difficult for you. You are a doctoral student, a master’s student, or a graduate of an elite university. Naturally, you would not be accustomed to such work.”

But isn’t this exactly what many day laborers experience all the time?

That is precisely why they do not want to take these jobs.

I wrote about one example in my book.

A man on the street was mocking the people around him. He said, “Why don’t any of you go and sort parcels? You’re all useless. Look at me—I’m strong, I’m used to the work, and I can handle parcel sorting. Why can’t you?”

I teased him by asking, “Brother, why aren’t you doing it today, then?”

He froze and had nothing to say. Everyone around him burst out laughing, and the moment passed.

He knew perfectly well that it was a bad job. That was why he had not taken it himself.

Everyone understands how much pain such a job can cause. It may sometimes be worth choosing, but if I have the option not to choose it, I would rather not.

Liangzi:

Is it only because the pay is low and the work is physically demanding?

Cong Rui’an:

The pay is not necessarily that low. Some jobs pay 190 yuan a day. Of course, if they paid 300, 400, or 500 yuan, then, as the saying goes, “A generous reward will bring forth brave volunteers.”

To be honest, the pay at the pharmaceutical factory was quite good. You earned 200 yuan for working ten to twelve hours, and the food they provided was also delicious.

If you completely set aside the psychological pain and emotional damage, it was actually a very good and properly managed job.

It was the only job I ever did where I could leave early and still receive some wages. I worked for four hours, and they paid me for only three, but at least they paid me. In that respect, they handled things reasonably well.

Liangzi:

One can imagine how difficult it was. Even though you were a student—one of society’s so-called “favored children of heaven” (天之骄子)—the experience was still extremely painful.

Ordinary workers may not have prestigious degrees or extensive formal education, but they are still human beings. And every human being has dignity.

The Harshness of the Day-Labor Market

Cong Rui’an:

As the saying goes, “A person lives for dignity, just as a tree lives for its bark” (人活一口气，树活一张皮). That is more or less what it means.

Liangzi:

Exactly. Just because I need to earn one or two hundred yuan does not mean you have the right to treat me like a dog.

No human being can tolerate that kind of mistreatment indefinitely, even if they appear to have adapted to it.

Cong Rui’an:

These workers are no different from the rest of us.

Liangzi:

Any one of us could fall on hard times.

Cong Rui’an:

That is why people say, “If you have money, don’t live in Tiantongyuan; if you’re down on your luck, head to Majuqiao” (有钱不住天通苑，落难必闯马驹桥). It has circulated in Beijing for many years.

Liangzi:

Any one of us could experience one of those moments of misfortune.

That is why we should not stand on the moral high ground and accuse these workers of being lazy. We should not say, “Look, you can earn 200 yuan a day. What are you complaining about?”

Put yourself in that environment and try it. You might not last even half a day.

Cong Rui’an:

That said, a room renting for 200 yuan a month is an extreme case. Most people would not choose to live in a place like that.

Liangzi:

Even so, the environment is extremely harsh for these day laborers.

They have little dignity at work. They may be told that a shift lasts ten hours, but it becomes eleven or twelve. What can they do about it? They need the money.

Cong Rui’an:

The long-term labor market is a highly unequal market. The day-labor market, by contrast, is relatively equal in a certain sense.

You can scold me or push me around, but if you make me work too long, refuse to pay me, or humiliate me beyond what I can tolerate, I may genuinely fight back.

I have no support and very little to lose. As the Chinese saying goes, “The barefoot person is not afraid of the person wearing shoes” (光脚的不怕穿鞋的). In other words, someone with nothing to lose may be less afraid of conflict than someone with property or status to protect.

Liangzi:

At worst, I can give up the hundred or so yuan you owe me.

Cong Rui’an:

I can fight you, or I can simply walk away. Either way, I have very little to lose.

Such conflicts may be less common in northern China and more common in the south. Sometimes an argument escalates into serious violence.

A few days ago, I was talking with an older man who runs a barbecue restaurant near Majuqiao. He had recruited workers from Majuqiao several times, but the results were never satisfactory. He said that some workers had also pressured him into paying extra money.

According to him, some people would use every possible method to avoid work. The moment no one was watching them, they would hide in the bathroom.

If he realized that someone was incapable of doing the job and told them to leave, they would demand travel expenses.

We can set aside the question of whether that demand was reasonable. The point is that they would find different ways to prolong the confrontation. If he refused to pay, he would face a conflict.

He told me that he lacked the experience to handle these situations. When someone tried to intimidate him, he did not know what to do.

Some workers might even injure themselves deliberately and then demand compensation. When that happens, an inexperienced employer has few ways to respond.

In the end, he found two local friends and had them throw the troublemaker out. He had to resolve the situation by combining authority with intimidation—what Chinese people call “using both kindness and force” (恩威并施).

This helps explain why so many local labor brokers behave like jianghu bosses—“big brothers” or “big sisters” of the street world (江湖大哥、江湖大姐). Without that kind of commanding personality, it is difficult to survive for long in the labor-broker business.

Liangzi:

In other words, even if someone did not originally have that kind of personality, the job requires them to cultivate it so that they can keep the situation under control.

Cong Rui’an:

People are shaped and constrained by their occupations.

An occupation creates an identity for me, and I have to perform that identity.

I am normally very introverted. But when I enter an urban village (城中村), I become outgoing and actively talk to everyone.

In my ordinary life, I rarely haggle with people, and I certainly do not fight. But on the streets of an urban village, I will say, “Give me your real price. How much does this actually cost?”

That may be part of the way an environment shapes the social roles people perform.

Liangzi:

When people enter a particular environment, they gradually become what that environment needs and expects them to be.

So whether we are talking about day laborers or employers, neither side is particularly comfortable.

Why do employers use such aggressive and severe methods to control day laborers and force them to meet production targets? Partly because they believe that workers frequently take advantage of them.

They think, “You took my money, so you should at least produce approximately the amount of work expected of you.”

Even after imposing strict controls, they still believe that many workers are constantly looking for ways to avoid work.

The Vicious Cycle Between Workers and Employers

Cong Rui’an:

Labor brokers and employers think, “You Majuqiao workers are unreliable, so I have to behave aggressively to make you obey.”

The workers think, “You don’t respect me, so why should I work hard for you?” They respond by putting in even less effort.

The employer sees them avoiding work and thinks, “I was right—you’re unreliable. I need to control you even more severely.”

This creates a vicious cycle. Eventually, the two sides reach a kind of destructive equilibrium.

But no matter what happens, the workers must be paid the full amount they were promised. Refusing to pay them is completely unacceptable.

Liangzi:

So even if someone arrives later and is more conscientious and hardworking than the earlier workers, entering this environment will still make that person miserable.

Cong Rui’an:

On the other hand, working hard and performing well can also bring benefits.

If you demonstrate that you are diligent and willing to work, the employer may like you. The next time a similar job comes up, they may contact you directly instead of recruiting people on the street.

After a while, the employer may say, “Brother, I need another five or six workers. I don’t want to go to the street and recruit them myself. Find some people for me and act as the crew leader.”

The worker then temporarily becomes a crew leader or labor broker.

For example, the employer may give him 200 yuan per worker and tell him that he can decide how much to pay the workers themselves. If he pays each worker 150 yuan—or even 100 yuan—he keeps the difference.

Many people improve their circumstances by working hard and gradually entering an employer’s private network (私域关系). Jobs obtained through private relationships often pay more and have better conditions.

But this may also mean working harder, developing a deeper personal relationship with the employer, or becoming more skilled at dealing with people.

Liangzi:

When people spend a long time in Majuqiao, do they form their own social networks? Do they get to know one another?

Cong Rui’an:

Yes.

Liangzi:

Do they want to get to know one another?

Cong Rui’an:

It is very easy to meet people there.

Suppose I go somewhere to work and have a good conversation with another worker. I might say, “Brother, let’s add each other on WeChat.” We scan each other’s codes, and now we are connected.

Liangzi:

Then, if one of you hears about a job in the future, you can bring the other person along.

Cong Rui’an:

These relationships can be positive, but they are also fragile.

In many cases, they are still fundamentally economic relationships. Because everyone is in a difficult financial position, all kinds of disputes can easily emerge.

Some people get to know you because they eventually want to borrow money from you. Once they have the money, they may never repay it. They simply disappear into the crowd, and you never see them again.

At the same time, there are also very sincere and moving forms of mutual assistance.

I am willing to help you, and we are willing to support one another.

Part of this may be because everyone shares the same predicament and exists within the same relations of production (生产关系) and physical space. But part of it also comes from the simple fact of being human.

Liangzi:

The good within human nature is brought out by the circumstances.

Cong Rui’an:

There is an example in my book.

Once, I was working as a parcel sorter. I had already completed the work assigned to me, but the labor broker and the team leader insisted that I go to another work area.

They said, “Keep working on these parcels. You are not allowed to leave until you finish.”

There were only ten minutes left before the end of the shift. I thought, “There is no way I can finish all this in ten minutes.”

But I was relatively obedient at the time and did not dare to resist, so I kept working.

Suddenly, two other workers came up behind me and said, “Everyone else has already gathered to leave. Why are you still working here? Hurry up and go!”

I said, “They’re watching the front. I can’t get out.”

They replied, “Climb over from here.” They showed me where to climb and how to escape, and I got out that way.

Workers would also warn one another whenever the crew leader was approaching.

To put it somewhat negatively, they also taught one another when it was possible to slack off and where they could rest. But that was another gentle form of mutual assistance.

There was also something that happened outside work that I found very interesting.

A man had been drinking and got into a verbal argument with someone. The other person hit him with a brick, knocking him to the ground. The injured man was taken to hospital, and the attacker was taken away by the police.

Two things remained on the ground: a brick and a pool of blood.

A police officer came over and carefully kicked the brick to the side of the road so that it would not block the way or injure someone.

Then a dog suddenly ran over and tried to lick the blood. Everyone nearby immediately began shouting and drove the dog away.

No one wanted to see a dog licking the blood of a person who had just been taken to hospital.

I think that response arose naturally from somewhere deep within them.

Part of it came from the emotional connection created by sharing the same social space or field (场域). But it also came from something broader and simpler that people share merely by being human.

Why Cong Rui’an Began Studying Majuqiao Liangzi:

How did you first become interested in this subject?

Cong Rui’an:

It began in 2018 through a very accidental opportunity.

I had a friend from my undergraduate years whose friends had long been interested in temporary workers and related labor issues.

One day, he asked me, “We’re going to Majuqiao in a couple of days. Do you want to come?”

I thought, “Why not?” So I went. It happened very naturally and largely by chance.

Liangzi:

But why did you want to go?

Cong Rui’an:

This was how I thought about it.

First, I am a member of the CPC. Second, I study political science and have long studied issues related to Marxist-Leninist theory.

These theories require me to observe how people produce and live, and to understand how relations of production (生产关系) shape individuals.

That means I need to enter a place filled with real labor practices in order to understand and study them.

I therefore saw it as a natural mission—or perhaps a naturally developed academic interest. Eventually, Majuqiao became part of my life and produced concrete research outcomes.

At the time, I did not have many opportunities to conduct fieldwork elsewhere.

In other words, an opportunity to study Majuqiao appeared, and I took it.

The specific location was accidental. But even if I had not gone to the urban village in Majuqiao, I probably would have gone to another urban village or factory. I would eventually have selected—or accidentally encountered—one of these places.

Majuqiao happened to be the place I encountered.

Liangzi:

We have been discussing Majuqiao as a particular social field. What kinds of people are there? What are their ages, occupations, and backgrounds? Why do they come to Majuqiao?

Cong Rui’an:

The workers can be divided into several categories.

The first consists of long-term workers (长期工), mainly employed by factories in the surrounding area or slightly farther away.

The second consists of student workers (学生工), who mainly come during the winter and summer holidays.

Then there are gig and casual workers (零工).

Some of them have long-term jobs but also take temporary jobs on the side. They may work for one or two days during weekends, holidays, or other periods of free time to earn some extra money.

Another group relies primarily on daily-paid jobs (日结工), and their situations also vary.

Some people use Majuqiao as a temporary base. The cost of living is low, so they can maintain their lives cheaply while taking care of personal matters. Once those matters are resolved, they plan to leave.

Others become exhausted by long-term employment and come here to rest for a few days. They take an occasional temporary job, clear their heads, and change their routine while searching for another long-term position.

But these people can easily become another category: those who simply remain in Majuqiao.

They are not necessarily what outsiders imagine—people who came because they were determined to “pursue freedom,” or because they were simply lazy.

They may only have wanted to rest for a while. They had recently become exhausted and wanted to find somewhere to recover, do the occasional day job, or “lie flat” for a while (躺平).

But once they lie down, they may find that they cannot get back out.

Majuqiao has a powerful attraction. Life there is free and comfortable. Prices are low, and housing is cheap.

The jobs are paid daily. You can work for one day and then take several days off. Whether you work is entirely up to you.

People may discover that, at least in the short term, this life is more comfortable than working in a factory.

They think, “If that is the case, why shouldn’t I stay here and do day labor?”

Of course, they may know that this is not a long-term solution. But everyone is capable of telling themselves, “I’ll think about long-term plans later. Tomorrow’s problems can wait until tomorrow. For today, I’ll just enjoy myself.”

One day follows another, and eventually many people find themselves held in Majuqiao’s gravitational pull.

Liangzi:

What is the approximate age range of this group?

Cong Rui’an:

Among the people who gather on the street, the gender ratio is roughly three women to seven men. Men account for more than 70 percent.

Many of them look as though they are in their forties, but they may actually be only in their thirties. Work and the pressures of life can make people look much older.

I once met a man on the street who looked like he was in his sixties or seventies.

He reminded me of the elderly character in the Chinese comedy Goodbye Mr. Loser, from the famous exchange, “Ma what Mei? What Dongmei?” (马什么梅？什么冬梅？)

But when I looked at his identity card, I discovered that he was only around fifty. His entire face had aged dramatically.

There are also young people in Majuqiao. But younger workers may be more likely to stay in their rented rooms and find jobs on their phones rather than gathering on the street.

As for the exact proportion, it is extremely difficult to calculate.

The Career Choices of a New Generation

Liangzi:

Do these workers genuinely have no other options? Do they have to stand on the street looking for casual work?

Why don’t they deliver food, work as couriers, or drive for a ride-hailing platform?

Cong Rui’an:

Life is not a mathematical problem.

Human beings do not simply place several options side by side, compare their advantages and disadvantages, and then select the optimal one. That is how a machine calculates, not how a person chooses.

Human choices are often influenced by sudden events and by memories of past experiences. Different factors gradually push a person toward a particular option.

At a macro level, we can certainly offer structural explanations for people’s choices.

But ultimately, we need to return to the specific individual. How does this person understand the world around them? How do they understand their work? How do they understand their own choices?

Liangzi:

In that sense, they are no different from those of us who follow the standard path of going to school and then finding a job.

Whether someone is a white-collar or blue-collar worker, everyone is fundamentally the same.

Cong Rui’an:

We share many of the same ideas, and we live in the same world.

Liangzi:

I am curious about something.

People born after 1995 or 2000 grew up in the information age. They have seen a much larger world through the internet, including the lives of wealthy people.

Under these circumstances, would they still be willing to work as day laborers or security guards?

Cong Rui’an:

Then the question becomes: what should they do instead?

What do you think they should do?

Liangzi:

Perhaps they should find work that allows them to accumulate skills and continue improving themselves.

Cong Rui’an:

You mean learning a trade, for example, or joining a factory and gradually working their way up?

But there is a problem: is that genuinely feasible?

First, it is genuinely not feasible for some people.

A person may not be good at formal learning. Or they may lack the interpersonal skills required to move up. Such cases certainly exist.

Second, do they actually have access to the necessary opportunities?

You might say that there is no real barrier to learning a technical skill, or that anyone in a factory can rise step by step as long as they work hard.

But as we discussed earlier, different people understand these possibilities differently.

Someone may have attended a vocational training school and discovered that they could not master the material. Someone else may have spent money on training but still failed to find a job. A third person may have heard about someone who paid a large amount for training and still remained unemployed.

Or perhaps the individual is simply afraid of taking the risk.

All these factors can discourage someone from trying to acquire a technical skill.

The same applies to the idea of rising through the ranks at a factory. What happens after I start trying to move up? Can I genuinely advance?

How many people spend their entire lives working in factories and remain ordinary production-line workers?

If you argue that the new generation has seen a larger world and therefore should not choose jobs such as security work, I think the logic should be reversed.

It is precisely because they have seen more of the world that they may be more likely to choose this kind of work.

Today, even someone living in the most remote village can scroll through Douyin on a smartphone and see the glamour and excitement of the wider world—the “bright lights and lavish lifestyle” (灯红酒绿).

That person then begins to wonder: can I ever obtain that kind of life?

If I cannot, why should I work myself to death? Why shouldn’t I choose a job that makes my life easier and more comfortable?

The previous generation may have endured worse working conditions, but they were willing to work relentlessly because the future they hoped for seemed relatively concrete and attainable.

Where is that hope for the new generation?

I am not saying that young people have no hope at all. I am asking: even if I have those hopes, what difference does it make? Can I genuinely obtain the glamorous lifestyle that I desire? Can I become rich, famous, or highly accomplished?

It is extremely difficult.

Instead of exhausting myself in pursuit of something that is visible but unattainable (可望而不可即), perhaps I should first try to make my life more comfortable.

That is why we are seeing two apparently contradictory trends.

On the one hand, employment is becoming increasingly short-term and fragmented—a process we might call the “short-termization of work” (短工化). People’s jobs are becoming less stable.

On the other hand, more and more young people are pursuing stable jobs within the state or public-sector system (体制内).

One group chooses stability, while the other appears to choose instability. But both choices reflect the same underlying problem.

Faced with a highly uncertain and apparently unattainable future, people choose whatever makes them more comfortable and gives them a sense of certainty.

That certainty may still have been created externally. It may even be illusory. But illusory certainty is still a form of certainty.

This also helps explain why so many young people pursue what they consider spaces of freedom—for example, becoming “slash workers” with multiple professional identities (斜杠青年), or working while traveling.

People are trying to find spaces of freedom and autonomy within broader structural uncertainty. They want to do something that provides a stronger sense of achievement and personal agency.

If I work in a cubicle, I may face constant restrictions and criticism. If I open a small bubble-tea shop instead, I may feel that I have at least some control over my own life.

It may still be a form of alienation in the Marxist sense (异化), but it is a form of alienation that feels slightly more comfortable.

That is roughly how I understand the situation.

The Freedom of Food-Delivery Riders and the Broader Problem of Gig Work

Liangzi:

Even if the positive feedback is small, it is continuous. Every cup of bubble tea you sell can provide a small sense of achievement.

After observing and studying Majuqiao, what can we learn that might help us understand our own lives?

Cong Rui’an:

At the very least, Majuqiao can encourage us to reflect on our own lives.

How many times have we covered our own eyes and refused to see some of the realities within our lives?

Liangzi:

For example, does a person genuinely enjoy their work?

One person may quit after being scolded for a single day. Another may endure it for a year before leaving. Someone else may endure it for ten years.

But fundamentally, they may all be confronting the same question: the relationship between freedom and certainty.

Cong Rui’an:

A person may try to recover through food-delivery work some of the freedom they lost in a factory.

At the very least, choosing a delivery route may feel relatively free. Even if the route is not genuinely under the rider’s control, there is no supervisor standing directly behind them, watching constantly and suddenly shouting abuse.

When I ride through the streets at high speed, I can at least feel a degree of freedom. I can feel the wind blowing against me.

I can also decide what music I want to play. I might even attach a loudspeaker to the back of my bike and blast music through the streets—what people in China sometimes call “street blasting” (炸街).

These are small freedoms, but they belong to me.

Liangzi:

From an economic perspective, food delivery may also be the relatively optimal choice available to that person.

At least a food-delivery rider remains in contact with society instead of becoming completely disconnected from it.

Cong Rui’an:

Yes.

Personally, I believe that instead of treating the gig-work problem as a matter of “fixing” gig workers themselves, we should understand it from the perspective of society as a whole.

If we improve working conditions and labor rights for long-term workers, the number of gig workers will naturally decline.

Some existing gig workers will move into long-term employment, while fewer long-term workers will leave their jobs and enter the gig economy. Both changes will reduce the overall number of gig workers.

Once the supply of gig workers decreases, wouldn’t it be reasonable for those remaining in the market to earn higher incomes?

For this reason, I believe that improving and regulating the long-term labor market is extremely important.

The second issue is information asymmetry in the labor market.

We need to conduct serious, grounded fieldwork. We need to hear what temporary workers themselves are saying, respect their ideas, and treat them as individual human beings rather than as a “problem” that needs to be solved.

Every city—and the modern economy itself—needs temporary workers.

Temporary labor has existed throughout history. You cannot simply “govern Majuqiao out of existence” (把马驹桥治理掉) and assume that the problem has been solved. Temporary workers will always exist.

They are an essential part of society, and their labor helps keep society functioning.

We should not always approach them from a superior position and condescendingly “bend down” to listen to them (俯下身去听他们说话). We should genuinely sit down, remain with them, and listen to what they have to say.

They must have rights of their own. Workers must be able to speak in their own voices.

I hope that future systems of social governance will enable more workers to receive meaningful protection of their rights and to make their voices heard.

That includes long-term workers, white-collar employees sitting in office cubicles, and the day laborers of Majuqiao.

Only when people are able to speak for themselves can they gain a form of freedom and certainty that is at least somewhat genuine.

That is how I see it.

Liangzi:

Every worker deserves to live with dignity.

It does not matter whether someone is classified as a gig worker or a long-term employee. If they earn their living through labor—if the money comes from their own blood, sweat, and effort—then they deserve respect.

By the logic many people carry around, Beijing should be happy to look the other way. Observers tend to assume that the Chinese government welcomes content that deconstructs Western history. The latest Qiushi article seems overturned such assumption.

On September 1, Qiushi, the Party’s flagship theoretical journal, published an essay titled “Recognizing the Historical Nihilist Essence of ‘Pseudo-History Theory.’”认清“伪史论”的历史虚无主义本质 Two things are worth explaining for readers unfamiliar with Chinese political conventions. First, Qiushi is the Party’s leading theoretical journal; its articles typically represent formal, authoritative statements of official policy. Second, the piece is signed “Wen Ping” (文平). The last time (I can find) this byline appeared was in the second issue of Qiushi in 2022, on the topic of historical confidence. It is almost certainly a pen name, perhaps short for “cultural commentary” (wenhua pinglun 文化评论)?

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To my mind, what’s new in this article is not the attack on “historical nihilism” as such. It is that the range of such criticism has expanded—from nihilism that deconstructs Chinese history to nihilism that deconstructs Western history. In a sense, I believe this signals that China does not evaluate historical questions on a simple “pro-Western” versus “anti-Western” axis.

A little bit background, in the Chinese context, the term “historical nihilism” (lishi xuwuzhuyi 历史虚无主义) has usually referred to a specific category of content that disparages heroic episodes within Chinese history —in short, a sort of narratives that flatter the West and denigrates China.

“Western pseudo-history theory” (weishi lun 伪史论) is at the opposite end of that spectrum. It argues that the entire edifice of Western ancient history is a fabrication; the glories of ancient Greece, Egypt, and Rome were concocted by modern Europeans to construct a sense of civilizational superiority, while the true origin of human civilization lies in China.

Given China’s sheer population, believers in pseudo-history are far from few in the lower-tier internet market, and many of them like to style themselves as debunkers of “Western centrism.” Though, this posture acturally betrays a deeper insecurity. If all of Western history is fake, then the West managed—on the strength of just a few hundred years of development—to defeat an agrarian civilization with an industrial one in the Opium War of 1840. Doesn’t that prove the " superiority of Western civilization precisely” that the pseudo-historians so bitterly denounce?

I would not read the Qiushi article in isolation. Readers familiar with my earlier writing will remember the “Chigua Mengzhu” (吃瓜蒙主) affair late last year: a blogger shot to fame with the theory that Dream of the Red Chamber was secretly written to “mourn the Ming,” igniting a Han-nationalist historical controversy over the Ming-Qing transition. The authority that stepped in at the time was the Zhejiang Provincial Publicity Department, whose article “Beware the ‘1644 View of History’ Hijacking the Narrative” settled the matter officially, criticizing such narratives for “deconstructing the continuity of Chinese history.” Back then, it was just provincial publicity department.

But this time, the Qiushi article explicitly links the community spreading pseudo-history with believers in “the Yuan and Qing were not China” (元清非中国) and the “1644 view of history” (1644史观), charging that they “tacitly align and resonate with certain overseas narratives aimed at deconstructing the continuity of Chinese civilization.” 与境外某些旨在解构中华文明连续性的叙事形成暗合与共振。This actually places last year’s “mourning the Ming” episode and this year’s campaign against pseudo-history within a single governance framework.

Look closely at the choice of examples. When the article opens by cataloguing pseudohistory, it juxtaposes two kinds of claims: on one side, assertions that directly deny China’s documented history, such as “the Tang dynasty never existed” or “the Song dynasty lasted 800 years”; on the other, precisely the claims that “Mount Emei is the Alps” and “the Yongle Dadian gave birth to modern Western civilization.” By filing the signature claims of Western pseudohistory under the same “variant of historical nihilism” as “the Tang never existed,” the article completes its verdict.

And if that reading seems too subtle, the article also states directly that “extreme pseudohistory rhetoric proliferating online continues to spread overseas, and has already damaged our country’s academic discourse power and external cultural image.” That sentence can only point to Western pseudohistory. After all, a Chinese person who denies the Tang dynasty existed will simply be dismissed as a crank—but if someone claims “ancient Greece was forged,” there will be people ready to package the phenomenon into a straw man of “Chinese state propaganda directed abroad.” Moreover, the article’s final paragraph specifically states that “history must not be arbitrarily altered, and the ancient and splendid civilizations of all peoples must not be dissolved into nothingness” it clearly covers more than Chinese history.

The article then seals off the last avenue of defense: “Whatever the original intentions behind these claims, their actual consequence is often that national identity is deconstructed and cultural foundations are eroded.” This preemptively answers the most common self-justification offered by pseudo-history’s devotees that ”we are only deconstructing the West.”

The logic underneath is not hard to grasp. For Beijing, the “pluralistic unity of the Chinese nation” and the continuity of Chinese civilization are the bedrock of national identity. Both the ultra nationalism that would expel the Qing from “China” and Western pseudohistory erode that bedrock; just as the former carries the latent risk of ethnic separatism, the latter damages China’s cultural image abroad. Pseudohistory theory has never been the Chinese government’s friend. Many people simply mistook it for one.

Below is the Qiushi article I translated with the help of AI

Recognizing the Historical Nihilist Nature of “Pseudo-History Theory”

By Wen Ping

For some time now, a series of absurd arguments collectively known as “pseudo-history theory” (wěishǐlùn) have continued to ferment online, gradually entering the public eye. Among these are extreme assertions that directly deny the authentic recorded history of Chinese dynasties—such as claims that “the Tang Dynasty never existed at all” or that “the Song Dynasty reigned for 800 years”—as well as far-fetched and preposterous narratives like “Mount Emei is the Alps” or “the Yongle Encyclopedia gave rise to modern Western civilization.” When such bizarre and outlandish viewpoints are crowned as “historical truth” and run rampant, while rigorous archaeological findings are instead denounced as “falsified historical records,” what we face is no longer ordinary online rumor, but a new form of historical nihilism. It wields algorithms as a “new-style weapon” and spreads in a viral, fission-like manner among certain populations through “pan-entertainment” methods. The value orientation and dissemination logic hidden behind it merit our in-depth scrutiny.

Historical nihilism, as an erroneous social ideological trend, has philosophical idealism as its foundation. It often cloaks itself in the guise of “scholarship” or “art”—exquisitely packaged and highly seductive—while in reality harboring specific political intentions, posing a real threat to our nation’s cultural security and ideological security. Among these, the extreme manifestations that openly deny the Party’s history, vilify the Party’s leaders, and smear heroic figures are relatively easy for the public to see through, given their blatant stance and crude methods, and thus become universally reviled. However, historical nihilism has not perished as a result; rather, it constantly shifts strategies and changes its appearance. “Pseudo-history theory” is one variant of current historical nihilism marked by an especially strong anti-intellectualist character. Although it styles itself as “doubting antiquity” (yígǔ), it is fundamentally different from the scholarly practice of doubting and authenticating ancient texts based on rigorous evidence, and the two must never be conflated. History has never been a discipline immune to doubt; newly unearthed archaeological findings and newly discovered documents and classics can often correct previously entrenched historical understandings. Modern Chinese historiography was established precisely through the dual drive of empirical spirit and rational doubt. Its epistemological foundation lies in the principle that any historical judgment must withstand the test of evidence and the scrutiny of reason. “Pseudo-history theory,” by contrast, has completely abandoned the basic bottom line of empirical research. It does not exercise prudence where “historical materials are insufficient,” but rather deliberately turns a blind eye where “evidence is conclusive.” Its cognitive logic has slid from “having doubts” to “deliberate doubting,” and degenerated from “seeking truth” to “seeking difference.” Under the name of “doubting antiquity” while practicing “nihilism,” “pseudo-history theory” is not merely a disorder of historical cognition, but a concentrated projection of historical nihilism at the methodological level. While gravely distorting history, it also dissolves people’s capacity for critical thinking and public reason on a mass scale.

It is especially worth noting that, against the backdrop of the rapid evolution of information technology, historical nihilism exhibits new features—diversified carriers, fragmented discourse, and stratified dissemination through niche circles. In particular, it precisely targets adolescent groups whose values are still taking shape, employing facetious and playful modes of expression paired with emotionalized, immersive discursive strategies, giving it an extremely strong power to confuse and deceive. The traffic logic of platforms naturally chases conflict and favors extreme emotional content and sensationalist narratives, which precisely aligns with the cognitive characteristics of the post-truth era: emotion precedes fact, stance precedes evidence, and resonance precedes reality. The algorithmic mechanisms of short-video platforms further accelerate the spread of “pseudo-history theory.” The rigorous and weighty institutional and cultural history of the Tang Dynasty draws little attention, whereas a shocking headline like “the Tang Dynasty is a fabrication” can rapidly harvest traffic. Such “pseudo-history narratives” follow a well-developed dissemination formula: first, use astonishing conclusions that overturn common sense to grab eyeballs; then take fragmented information out of context and splice it together through misdirection, packaging it as so-called “evidence,” and forcing it upon naive audiences under the name of “innovative findings.” Serious historical writing is being re-encoded into consumable “emotional commodities.” Disseminators exploit the weaknesses of minors—their lack of historical training and limited life experience—to beautify anti-intellectualist absurd conjectures as “penetrating insights,” continually generating a cheap sense of superiority: “everyone else is drunk, and I alone am awake.” Meanwhile, some minors, having been long immersed in the information cocoons created by algorithmic recommendations, are continuously fed homogenized and extreme viewpoints, repeatedly reinforcing their existing cognitive biases. After a batch of self-media accounts that manufactured and spread extreme “pseudo-history theory” were dealt with in a concentrated crackdown in 2025, the related dissemination did not fall silent. Instead, it shifted toward decentralized, covert dissemination pathways: more extreme assertions were broken down into short phrases and inserted into short-video comment sections, live-stream danmu (bullet comments), and community message boards. Its deep-seated harm must not be underestimated.

It should be recognized that “pseudo-history theory” is not merely a battle of ideas confined to cyberspace; it also harbors multiple political and social risks, and its negative effects have already spread from the virtual space into real society. The extreme pseudo-history rhetoric flooding the internet continues to spread overseas, already damaging our nation’s academic discourse power and external cultural image. On a deeper level, some “pseudo-history theory” narratives carry an undertone of ethnic separatism, objectively becoming a theoretical accomplice in denying the pluralistic-yet-unified configuration of the Chinese nation. For example, some define the Tang Dynasty as a “barbarian regime” based solely on imperial bloodlines, and the groups that spread such claims often simultaneously subscribe to erroneous arguments such as “the Yuan and Qing were not China” and the so-called “1644 view of history,” forming a tacit alignment and resonance with certain overseas narratives aimed at deconstructing the continuity of Chinese civilization. Whatever the original intentions behind these arguments, their actual consequence is often to deconstruct national identity, erode cultural foundations, and shake the conviction in the continuity of the Chinese nation—placing the historical consensus of the Chinese national community at risk of being fragmented. Looking at the present, some overseas forces are harnessing artificial intelligence to mass-produce false information that alters history, and there is a real risk that large volumes of AI-generated fake historical materials could flood back into the domestic internet. Once such false content infiltrates foundational corpora, it will cause AI systems to continuously output biased historical narratives, thereby forming a vicious cycle of “algorithms amplifying bias—bias entrenching cognition—cognition reshaping algorithms,” constituting a long-term, hidden, and even irreversible erosion of the historical cognition of the Chinese people, especially adolescents.

As the ancients said: “To destroy a nation, one must first eliminate its history.” General Secretary Xi Jinping has repeatedly emphasized the need to “establish and uphold a correct view of history, of the nation, of the state, and of culture” and to “clearly oppose and resist historical nihilism.” In the face of the continued spread of “pseudo-history theory,” we must analyze it in depth, refute it forcefully, and respond in a coordinated manner across technological governance, educational guidance, and legal safeguards. We must fully implement the responsibility system for ideological work, tighten and firmly enforce the primary responsibility of online platforms, and drive mainstream value orientation deeply into algorithmic recommendation models—never allowing algorithms to become a mouthpiece for historical nihilism. Accounts that have long disseminated “pseudo-history theory” should be dealt with in accordance with the law and regulations, severing the chain by which pernicious ideas spread; extreme conduct that disrupts public order and crosses legal bottom lines must be seriously held to legal account according to law. At the same time, schools and families should work in concert to continuously enhance adolescents’ historical literacy and media literacy, striving to achieve a paradigm shift from “knowledge instillation” to “cognitive immunity,” helping minors improve their ability to distinguish true from false in historical rumors and hold their cognitive bottom line in an internet environment surrounded by algorithms. The popularization of authentic history must also learn to tell stories using new-media approaches, helping people establish a correct view of history.

History must not be arbitrarily altered, and the ancient and splendid civilizations of all ethnic groups must not be dissolved into nothingness. From the countless records preserved in the annals of the magnificent Tang Dynasty and the cultural relics and historic sites spread across the country, to the physical remains that generation after generation of archaeologists continue to unearth in confirmation of our civilization, authentic history is supported by a complete and solid chain of evidence and needs no self-justification. What truly needs to be carefully protected is the public reason that respects historical fact and holds evidence in awe. In the face of the various erroneous arguments of “pseudo-history theory,” we should take historical fact as our shield, the rule of law as our sword, and education as our foundation—speaking out proactively, daring to draw our blade, and resolutely resisting the erosion of historical nihilism. This is both the reverence and protection that our history of several thousand years deserves, and, even more, the weighty responsibility we must shoulder for the next generation and for the future!

The China–Kyrgyzstan–Uzbekistan railway is a critical piece of infrastructure for China’s efforts to develop its logistics network across Central Asia. The two sides also called for modernizing border crossings and strengthening “soft connectivity” by aligning institutions, standards, and rules. The project has two main practical implications: it will give China an additional westward transport route through Central Asia, while helping transform Kyrgyzstan from a peripheral endpoint into a regional transit hub. However, the railway remains under construction, and its commercial viability will ultimately depend on its costs, freight capacity, and operational efficiency.

2. China-Kyrgyzstan relations

China and Kyrgyzstan signed the Treaty of Permanent Good-Neighborliness, Friendship and Cooperation. Compared with the previous treaty between China and the five Central Asian states, the new bilateral treaty imposes more specific restrictions. It stipulates that neither party may join an alliance or grouping that harms the other’s sovereignty, security, or territorial integrity; conclude such a treaty with a third country; allow a third country to use its territory to harm the other party’s interests; or permit organizations or groups targeting the other party to be established or operate within its territory. These provisions are stricter than the 2025 treaty’s commitment not to participate in alliances or groupings directed against the other parties. Nevertheless, the new treaty does not create a military alliance or a collective-defense arrangement: an attack on one party would not automatically oblige the other to deploy forces or provide military assistance.

3. The SCO Is Expanding Its Economic Role

Xi’s speech brings artificial intelligence, green energy, the digital economy, mineral resources, transportation, and border-port cooperation into the Shanghai Cooperation Organization framework, indicating that China wants the SCO to move beyond its traditional focus on counterterrorism and security coordination. The most substantive commitments include implementing 100 science and technology cooperation projects over the next three years, establishing an international cooperation center for AI applications, advancing solar and wind power projects, creating a port-economy cooperation center, and supporting increased exports from member states to China. However, SCO members have widely differing interests, and the organization lacks both a unified market and strong supranational institutions comparable to those of the European Union. These initiatives are therefore more likely to be implemented through separate cooperation between China and individual member states than through an integrated SCO-wide economic system.

Below are Xi’s activities during SCO, including his remarks at the SCO Plus meeting, remarks at the 26th Meeting of the Council of SCO Heads, and Xi’s talk with Kyrgyz President Sadyr Japarov (I made with the help of AI):

Xi Jinping Holds Talks with Kyrgyz President Sadyr Japarov

August 31, 2026,

On the morning of August 31, 2026 local time, President of the Kyrgyz Republic Sadyr Japarov held talks with Chinese President Xi Jinping at the Yntymak Ordo presidential complex in Bishkek.

Bishkek was blessed with crisp autumn weather. When President Xi Jinping and his wife Peng Liyuan arrived by motorcade, they were warmly received by President Japarov and his wife Aigul Japarova.

President Japarov held a welcoming ceremony for President Xi. The two presidents stepped onto the reviewing stand as a military band played the national anthems of China and Kyrgyzstan. They reviewed the guard of honor. When President Xi reached the center of the formation, he greeted the guards in Kyrgyz, to which they responded, “Forward! Forward!” The two presidents then shook hands with members of each other’s delegations and watched the march-past. The two presidential couples entered the main hall and posed for photographs in front of the national flags of the two countries.

Following the welcoming ceremony, the two presidents held talks.

President Xi first extended, on behalf of the Chinese government and people, congratulations on Kyrgyzstan’s Independence Day.

President Xi noted that, under the joint guidance of the two presidents in recent years, China-Kyrgyzstan relations have achieved leapfrog development and cooperation has flourished across the board. This cooperation has supported the development of both countries, delivered tangible benefits to their peoples, and promoted regional peace, stability and prosperity.

This year marks the 105th anniversary of the founding of the Communist Party of China and the first year of China’s 15th Five-Year Plan. China is comprehensively advancing the building of a strong country and national rejuvenation through Chinese modernization. Kyrgyzstan is also working to implement its National Development Program through 2030. China is ready to work closely with Kyrgyzstan to better align their development strategies, deepen exchanges of experience in governance, produce more tangible outcomes from practical cooperation, and further advance the building of a China-Kyrgyzstan community with a shared future.

President Xi emphasized that high-level political mutual trust and firm mutual support are important guarantees for the steady and sustained development of China-Kyrgyzstan relations. China firmly supports Kyrgyzstan in safeguarding its national sovereignty, independence and territorial integrity, and supports the Kyrgyz people in pursuing a development path suited to their national conditions. China is ready to continue firmly supporting Kyrgyzstan on issues concerning each other’s core interests.

The signing of the China-Kyrgyzstan Treaty of Permanent Good-Neighborliness, Friendship and Cooperation will provide an important legal foundation for enduring friendship and firm mutual support between the two countries.

President Xi called on the two sides to deepen practical cooperation. They should fully implement the intergovernmental economic and trade cooperation plan, diversify traded goods, and develop new areas of growth such as digital trade and cross-border e-commerce.

The two sides should ensure the high-quality construction of the China-Kyrgyzstan-Uzbekistan railway, a major transport artery that carries the region’s aspirations for development. They should modernize border crossings and deepen “soft connectivity” in institutions, standards and rules.

The two countries should undertake more flagship projects in fields such as renewable energy and resource recycling, implement their green-minerals cooperation documents, and pursue cooperation across entire industrial chains. They should jointly develop the Belt and Road joint laboratory, strengthen cooperation in artificial intelligence and other fields, and use scientific and technological innovation to make bilateral cooperation more effective.

The two sides should also further facilitate travel between their countries and expand cooperation involving young people, the media, tourism, sports, healthcare and local governments, thereby continuing to strengthen the social and popular foundations of China-Kyrgyzstan friendship.

President Xi said that China and Kyrgyzstan should expand law-enforcement and security cooperation, jointly combat terrorism, separatism and extremism—the “three forces”—as well as drug trafficking and transnational crime, and work together to preserve regional peace and stability.

China supports Kyrgyzstan in playing a greater role in international and regional affairs and is ready to further strengthen coordination with Kyrgyzstan within the United Nations framework. The two sides should jointly implement the four global initiatives, oppose hegemonism and power politics, uphold genuine multilateralism, safeguard international fairness and justice, and promote a fairer and more equitable system of global governance.

As founding members of the Shanghai Cooperation Organization, China and Kyrgyzstan should advance the implementation of the outcomes of the Tianjin Summit, promote common regional development, and take the SCO’s development to a new level.

President Japarov said it was a great honor to receive President Xi during celebrations marking the 35th anniversary of Kyrgyzstan’s independence. The visit further demonstrated the deep friendship and high level of political mutual trust between Kyrgyzstan and China and represented an important milestone in the history of bilateral relations. The signing of the Treaty of Permanent Good-Neighborliness, Friendship and Cooperation would open broader prospects for the relationship.

Kyrgyzstan and China are close neighbors, and the ancient Silk Road has long connected the two countries. In recent years, with the rapid development of the Kyrgyzstan-China comprehensive strategic partnership for a new era, bilateral relations have entered a golden period and reached their highest level in history.

Kyrgyzstan appreciates China’s selfless support and assistance at every critical stage of the country’s development. The Kyrgyz side warmly congratulates China on the 105th anniversary of the founding of the Communist Party of China and the start of the implementation of its 15th Five-Year Plan. Kyrgyzstan admires China’s remarkable development achievements under President Xi’s leadership and is ready to learn from China’s experience in governance, particularly President Xi’s commitment expressed in the words, “I will work selflessly and live up to the people’s expectations.”

China has always been a priority in Kyrgyzstan’s foreign policy and is Kyrgyzstan’s closest friend and most reliable partner. Kyrgyzstan firmly adheres to the one-China principle and is ready to deepen good-neighborly and friendly relations with China on the basis of mutual respect, equality and mutual benefit.

Kyrgyzstan is ready to work more closely with China in trade and investment, connectivity, scientific and technological innovation, energy, minerals and the green economy. It also seeks closer exchanges in education, healthcare, culture and youth affairs. The two sides should jointly combat the “three forces” and safeguard regional security.

Kyrgyzstan is ready to actively advance construction of the China-Kyrgyzstan-Uzbekistan railway and develop it into a “steel Silk Road” of the new era and a new link of friendship between Kyrgyzstan and China.

President Xi’s four global initiatives will help countries jointly address common challenges and build a fairer and more stable international order. Kyrgyzstan is ready to coordinate closely with China through multilateral platforms including the United Nations, the Shanghai Cooperation Organization, the China-Central Asia mechanism and the World Artificial Intelligence Cooperation Organization, and to jointly safeguard global peace and stability.

On behalf of the Kyrgyz government and people, President Japarov expressed deep sympathy over the mudslide disaster in Gyirong, Xizang, China.

President Xi thanked him and said that the Communist Party of China and the Chinese government were making every effort to search for missing Chinese and foreign nationals, relocate and resettle affected residents, treat the injured, and prevent secondary disasters. China had also provided emergency assistance to Nepal. China has both the ability and confidence to overcome the disaster and rebuild the affected communities.

Following the talks, the two presidents jointly signed:

• the Joint Declaration of the People’s Republic of China and the Kyrgyz Republic on the High-Quality Development of the Comprehensive Strategic Partnership for a New Era; and

• the Treaty of Permanent Good-Neighborliness, Friendship and Cooperation between the People’s Republic of China and the Kyrgyz Republic.

They also witnessed the exchange of bilateral cooperation documents covering investment, transportation, customs and sister-city relations. During the visit, the two sides signed more than 20 additional cooperation documents in such fields as science and technology, education, culture and people-to-people exchanges, and the media.

At noon, President Japarov and his wife hosted a welcoming banquet for President Xi and Peng Liyuan at the Yntymak Ordo presidential complex.

Cai Qi, Wang Yi and others attended the events.

Advancing Higher-Quality Development of the Shanghai Cooperation Organization

Address at the 26th Meeting of the Council of Heads of State of the Shanghai Cooperation Organization

President Japarov,
Colleagues,

It is a great pleasure to meet with you in Bishkek. I thank President Japarov for the thoughtful arrangements made for this meeting. Since assuming the SCO chairmanship, Kyrgyzstan has organized a wide range of productive activities under the theme “Together Toward Sustainable Peace, Development and Prosperity.” China highly appreciates its work.

August 31 and September 1 mark the 35th anniversaries of the independence of Kyrgyzstan and Uzbekistan, respectively. On this occasion, I wish to extend my sincere congratulations to President Japarov and President Mirziyoyev, and to the friendly peoples of Kyrgyzstan and Uzbekistan.

This year marks the 25th anniversary of the Shanghai Cooperation Organization. Twenty-five years ago, against the backdrop of the profound lessons of the Cold War, the real threat posed by the “three forces” of terrorism, separatism and extremism, and the strong aspirations of the region’s peoples for peace and development, regional countries reached a broad consensus on working together to safeguard their sovereignty, security and development interests. It was under these circumstances that the SCO came into being, and it has since demonstrated growing vitality.

Over the past 25 years, the SCO has traveled an extraordinary journey. Its most significant achievement has been its gradual development into a new type of regional organization with the broadest geographical coverage, the largest population and enormous development potential. Its most valuable intellectual legacy has been the pioneering formulation of—and consistent commitment to—the Shanghai Spirit, which features mutual trust, mutual benefit, equality, consultation, respect for diverse civilizations and the pursuit of common development. Its most important experience has been finding the right way for countries to coexist through non-alliance, non-confrontation and not targeting any third party, thereby enabling regional countries to work together to build a common home.

Today, 25 years later, changes unseen in a century are accelerating. Dialogue and confrontation, win-win cooperation and zero-sum competition, and multilateralism and unilateralism are locked in intense contest, while the shadow of war has not disappeared. At this crossroads concerning humanity’s future, the SCO should shoulder its historical responsibilities and take the initiative in guiding the course of history.

First, we should prioritize development and create prospects for common prosperity.

We should promote universally beneficial and inclusive economic globalization, consolidate cooperation in traditional fields such as trade and investment, connectivity, energy and resources, and expand cooperation in emerging areas including artificial intelligence, the digital economy, green industries and green minerals. In this way, we can deepen regional cooperation and upgrade its quality.

China regards the SCO region as a priority for high-quality Belt and Road cooperation and for implementing the Global Development Initiative. In accordance with the region’s development needs, China will continue to organize events such as the SCO Digital Economy Forum and Agricultural Expo.

China will establish an international cooperation center for AI applications serving SCO countries. It will continue working with SCO countries to develop an additional 10 gigawatts of solar power and 10 gigawatts of wind power capacity. Over the next three years, China will jointly carry out 100 science and technology cooperation projects with SCO countries and continue providing China-SCO training for professionals in green industries.

China welcomes interested member states to participate actively in the “Shared Big Market—Export to China” initiative and seize the opportunities presented by China’s vast market.

To facilitate regional trade and ensure smooth logistics, China supports efforts to improve the quality and efficiency of the Trans-Caspian International Transport Route. China will also establish a China-SCO Port Economy Cooperation Center in Tianjin.

Second, we should make security a priority and create an environment of common security.

We should adopt a coordinated approach to traditional and nontraditional security threats. We should combat the “three forces” of terrorism, separatism and extremism, as well as transnational organized crime, drug trafficking and telecommunications fraud. We should strengthen cooperation in information security, biosecurity and outer-space security, and guard against external forces interfering in countries’ internal affairs, undermining political security or destabilizing the region.

China is ready to work with all parties to follow a vision of common, comprehensive, cooperative and sustainable security, and to develop the SCO into an important platform for implementing the Global Security Initiative.

China advocates a rational, coordinated and balanced approach to nuclear security and supports stronger multilateral partnerships in this field. China also supports putting the SCO’s “four security centers” into operation at an early date to strengthen member states’ capacity to address security threats and challenges.

Third, we should put people first and strengthen the foundations of friendship for generations to come.

Diverse civilizations and cultures are defining features of our region. We should take into full consideration the historical and cultural traditions, social systems and stages of development of different countries. We should build networks of cooperation among legislatures, political parties, schools, think tanks, businesses and media organizations, and promote people-to-people exchanges to inject new vitality into good-neighborliness and friendship among member states.

China is ready to work with all parties to implement the Global Civilization Initiative and supports a greater role for people-to-people friendship organizations, including the SCO Committee on Good-Neighborliness, Friendship and Cooperation. We should successfully organize the SCO Forum on Innovation and Sustainable Development, the SCO People’s Forum and the SCO Friendship Cities Forum.

China will establish a China-SCO Basic Education Cooperation Center. It is also prepared to continue building bridges for mutual learning and closer ties between peoples through programs such as Confucius Institutes and Luban Workshops.

Fourth, we should uphold dialogue and consultation and improve fair and orderly governance.

We should uphold the equality of all countries, large and small. Regional affairs should be discussed and decided through consultation. We should seek common ground while managing differences, properly address disagreements through dialogue and consultation, and respond to common challenges through multilateral cooperation.

President Mirziyoyev and President Tokayev have respectively proposed the Samarkand Solidarity Initiative and the Initiative for World Unity for Just Peace and Harmony. China appreciates and supports both initiatives.

China supports the SCO in carrying out exemplary cooperation to implement the Global Governance Initiative. The focus of this SCO Plus meeting on strengthening the role of the United Nations and building a multipolar world represents a successful example of such cooperation.

China proposes further improving the SCO’s operating mechanisms and enhancing the efficiency of its decision-making and implementation. We welcome more like-minded countries as SCO partners so that they can jointly participate in improving regional and global governance.

On international and regional hotspots such as Ukraine, the Middle East and Afghanistan, China is prepared to strengthen communication and coordination with all parties, address both symptoms and root causes, and promote political settlements.

Colleagues,

As long as we remain true to our original aspirations, no distance will deter us; as long as we remain steadfast in our commitment, no difficulty will prevent us from reaching our goal.

China is ready to work with all parties to continue upholding the Shanghai Spirit, implement the SCO’s development strategy for the next decade, pursue higher-quality development, and make greater contributions to building a community with a shared future for humanity.

Finally, I congratulate Prime Minister Shehbaz Sharif on assuming the chairmanship of the Council of Heads of State. China is ready to work with other member states to support Pakistan in carrying out its work as the SCO chair.

Thank you.

Jointly Advocating an Equal and Orderly Multipolar World and Making Global Governance More Just and Equitable

Your Excellency President Sadyr Zhaparov,

Colleagues,

It gives me great pleasure to join fellow members and partners of the SCO family in celebrating the 25th anniversary of our organization. I wish to thank President Zhaparov for his kind invitation and the thoughtful arrangements by the government of Kyrgyzstan.

The meeting today focuses on strengthening the role of the United Nations and building a multipolar world, and it demonstrates SCO’s commitment to reforming and improving global governance as required by our times.

Currently, major changes unseen in a century are accelerating across the globe. Hegemonism, unilateralism and protectionism are resurging against historical trends. Nevertheless, the overwhelming majority of the world do not condone power politics, conflict and confrontation, or isolation and backwardness. What they want instead is to hold a place on the world stage through national development and international cooperation. In recent years, the rise of the Global South is driving a profound shift in the international balance of power. The trend toward a multipolar world is irreversible.

What kind of multipolarity does the world need? How are countries going to take part in and promote it? The international community should build consensus and make the right choice that can stand the test of practice and history. As a responsible major country, China advocates for an equal and orderly multipolar world.

—Sovereign equality and mutual respect are fundamental principles. The history of the world is written by all nations. Multipolarity, independent choice of development paths, and greater democracy in international relations are the right way forward. We should ensure equal rights, equal opportunities and equal rules for all countries, regardless of their size, strength and wealth. As an important part of a multipolar world and a key driving force behind it, the Global South countries ought to have greater representation and voice in international affairs.

—Balance, order and the rule of law are inherent requirements. The purposes and principles of the U.N. Charter set the basic norms of international relations, and serve as the bedrock of the postwar international order. We should promote the common values of humanity, reject double standards, exceptionalism, foreign interference, bullying and the law of the jungle, and advance the rule of law in international relations. Major countries in particular should take the lead in observing international norms and honoring the rule of law, and work together to tackle global challenges.

—Multilateralism, dialogue and consultation are essential pathways. The domination of international affairs by a few is an injustice left over from history, and global governance dictated by one, a few or a bloc of countries is not true multilateralism. World affairs should be discussed by all, and international norms should be set by all. The authority and vitality of the U.N. need to be restored. Multilateral mechanisms, global and regional, should enhance their coordination and improve their efficiency.

—Mutual benefit, win-win, and inclusiveness are the way forward for development. Countries are not isolated islands, but partners with intertwined interests and a shared future. Protectionism, decoupling and supply-chain disruption will lead nowhere. We should focus on the development agenda, uphold openness and cooperation, and bridge the digital and AI divides, so that technological revolution and development achievements can benefit all nations.

Colleagues,

After a 25-year journey, the SCO has successfully set a stellar example in conducting relations among big countries, among neighbors, and among countries of different sizes. It has successfully brought together half of the world’s population and a quarter of the global economy, generating strong driving forces for development. A more united and vibrant SCO is fully capable of making greater contributions to an equal and orderly multipolar world.

First, we should advance common prosperity in the vast continent straddling Asia and Europe with the SCO Strength. Cooperation within the SCO has been fruitful in political, security, economic, trade, people-to-people and cultural domains, and our organization is now a key platform for Eurasian countries to jointly pursue development and tackle challenges. We should continue to leverage our strengths, unlock our potential, and connect the multiple growth poles across the continent through high-quality Belt and Road cooperation. We should empower each other, help each other succeed, and work together to create new opportunities and promote shared prosperity.

Second, we should promote the development and rise of the Global South through the SCO Wisdom. The organization takes root in the Global South, its heart beats with the Global South, and it is an important pillar of South-South cooperation. We should carry forward the Shanghai Spirit, strengthen and expand the SCO Plus partnerships, and jointly speak up for peace, foster synergy for development, build bridges for cooperation, and pave the way for win-win outcomes.

Third, we should guide the reform and improvement of global governance through the SCO Action. Our organization takes it as its mission and responsibility to make the global governance system more just and equitable. We should stay committed to building partnerships rather than alliances, and engaging in dialogue rather than confrontation. We should adhere to the principle of “planning together, building together and benefiting together” to encourage equal participation in global governance by all countries and ensure all will benefit from it.

Colleagues,

In global governance, stagnation is regression. It is important that SCO member states and partners ride the trend of history and shoulder the responsibility of our times. Let us take the people-centered and action-oriented approach, jointly advocate an equal and orderly multipolar world, make global governance more just and equitable, and build a community with a shared future for humanity.

Thank you.

Edit: My bad that I didn’t include the Xi-Putin meeting’s readout. already made an English ver, in case someone needs to check it:
https://sinocism.notion.site/Xi-Jinping-Meets-Russian-President-Putin-3cd84ece41d781c995a5d1be62cb9720

That is the assessment of Xu Shiling, Deputy Director of the International Humanitarian Law and Humanitarian Policy Program at the International Academy of the Red Cross, Soochow University, who said the conditions behind the disaster had been developing for years—even though the destructive flow unfolded in only a matter of minutes.

The debris flow traveled approximately 22 kilometers, descended nearly 4,000 meters and reached the affected border area in just six to seven minutes. These figures demonstrate the extraordinary speed and intensity of the event, Xu said.

A disaster years in the making

The geography of the Himalayan region was one of the fundamental factors behind the disaster.

Deep, narrow river valleys cut through enormous glacier-covered mountains. Over geological time, this landscape created the conditions in which ice and rock could accumulate immense potential energy. Once part of the glacier collapsed, the steep drop and confined valley allowed the material to accelerate rapidly and move downhill with enormous destructive force.

“The six to seven minutes were, in fact, a long time in the making,” Xu said, explaining that the drivers of the disaster had existed well before the glacier collapse itself.

In recent decades, the surfaces of the region’s mountains have become increasingly unstable. Xu identified climate change and global warming as important contributing factors. Rising temperatures can weaken glaciers while also destabilizing the rock, soil and loose material beneath and around them, increasing the possibility of fractures, slope failures and collapses.

Xu also pointed to the potential long-term effects of the powerful earthquake that struck Nepal in 2015. The earthquake affected glaciers, rock formations and soils across the region, leaving some mountain slopes more fractured and prone to failure.

In the August 26 event, part of a glacier tongue collapsed together with rock and other material. As the mass rushed downhill, it picked up additional loose debris and developed into an extremely fast-moving flow.

Similar events have occurred elsewhere in the Himalayas, Xu noted. What made this disaster especially destructive was not only the magnitude of the hazard but also the concentration of people and infrastructure along its route.

A major border port, surrounding communities and areas of intensive human activity lay in the path of the flow. The event therefore illustrates a central principle of disaster-risk analysis: a natural hazard becomes a human disaster when it intersects with exposed and vulnerable populations.

“The factors or drivers of disaster events may already be in place long before a particular event occurs,” Xu said. “The eventual losses depend not only on the magnitude of the hazard but also on what lies along its path.”

The precise timing and scale of an individual collapse may be a matter of probability. In this case, Xu said, an extreme but low-probability event occurred in a location where the consequences were severe.

Mountain environment complicates rescue operations

The same terrain that intensified the mudslide has made search-and-rescue operations extraordinarily difficult.

In mountainous areas, roads are commonly constructed along river valleys because this is often the most practical and economical option. However, rivers, floods and debris flows also follow these valleys. As a result, the infrastructure needed to reach remote communities is frequently located directly in the path of natural hazards.

“This is a universal problem in mountain regions,” Xu said. “The roads and the hazards often follow the same route.”

The mudslide destroyed or severely damaged regular access roads, preventing rescue teams from reaching the affected areas through conventional means. Responders have had to repair roads while simultaneously identifying alternative routes on foot or by air.

The remoteness of the disaster zone has created further logistical challenges. Rescue teams operating at the site need food, equipment, communications and places to rest, but both supplies and usable space are limited. Establishing and sustaining operational bases in such conditions is itself a major task.

Even after rescuers reach the affected area, the unstable environment continues to threaten their safety.

Threat of secondary disasters

Xu identified two major secondary hazards: the possible outburst of barrier lakes and the risk of another collapse from the same glacier or surrounding mountain slopes.

Landslides and debris flows can block rivers, forming temporary natural dams and creating barrier lakes. Because the valley surface remains loose and geologically active, new landslides may continue to occur. If a natural dam fails, the sudden release of impounded water could produce another destructive flood or debris flow.

A further glacier collapse could have similarly serious consequences. Either type of secondary event could strike rescue teams working in the disaster zone, as well as communities downstream.

Rescue personnel have reportedly had to withdraw temporarily from dangerous locations in response to safety alerts. Such withdrawals demonstrate the difficult balance between searching for victims and protecting responders from additional hazards.

Xu said continuous monitoring is therefore essential. Authorities on both sides of the border must closely observe glaciers, unstable slopes, rivers and barrier lakes while ensuring that rescue teams have clear warning and evacuation procedures.

The psychological burden on rescuers

Not all the challenges facing rescue workers are technical or immediately visible.

Xu emphasized the emotional and psychological pressure on those searching through the affected area. Some rescuers may know the missing or deceased personally—as friends, colleagues, acquaintances or members of the same community.

They are also likely to understand the survival prospects of people buried under mud and debris. This knowledge can intensify their grief while they continue carrying out physically demanding and dangerous work.

“The rescuers feel the same shock and grief as the rest of us,” Xu said. “Some are searching for people they knew, while being fully aware of the survival rates and the reality of what they may find.”

At the same time, rescuers are driven by a strong professional and personal sense of duty. Xu described this as an “inner mission” that compels them to continue despite exhaustion, danger and emotional distress.

The response should therefore address not only responders’ physical safety but also their mental health. Psychological assistance, adequate rest and long-term support may be needed for personnel exposed to traumatic scenes and personal loss.

Humanity should guide the cross-border response

Because the disaster crossed an international boundary and affected people of different nationalities, it also raises important questions concerning humanitarian law and policy.

According to Xu, the most immediately relevant principles concern the humane management of the dead and missing, the respectful treatment of their families and the proper handling of bodies, identities and personal information.

These responsibilities become particularly complex in a cross-border emergency. Victims may be citizens of Nepal, China or other countries, while their families may be waiting for information far from the disaster area.

Xu said humanity must remain the central value and fundamental principle of the response. All victims and their families should be treated with dignity, regardless of nationality or which side of the border they are on.

This means conducting searches and identification work carefully, handling human remains respectfully and sharing verified information with families through appropriate channels. Authorities must also avoid unnecessary delays in notifying relatives or transferring remains because of administrative and jurisdictional complications.

The humanitarian principle does not require either country to disregard sovereignty, national security, political interests or border-management responsibilities. Rather, Xu argued that both sides should preserve a neutral humanitarian space in which necessary discussions and negotiations can take place.

Such neutrality can prevent political considerations from obstructing urgent rescue and relief work. It can also support coordination between authorities while ensuring humane care for victims, missing persons and their families.

“Cooperation and coordination in rescue and relief should take priority over more conservative geopolitical considerations,” Xu said. “That does not mean disregarding sovereignty or security. It means maintaining the neutral space necessary for humanitarian discussion and action.”

China–Nepal coordination is a common interest

The physical route of the disaster makes bilateral coordination indispensable. It began with a glacier collapse in Nepal, struck China and then continued farther downstream into Nepal.

Both countries lost lives, both are conducting rescue operations, and both will have to address recovery and reconstruction. Cooperation is therefore not simply a diplomatic choice but a matter of common safety and shared interest, Xu said.

Ongoing coordination has included the exchange of data, satellite imagery and technical assessments. The two sides have also been monitoring upstream areas for signs of further glacier collapses, landslides, barrier-lake failures or floods.

Xu described the monitoring of secondary hazards as one of the most urgent priorities. Another major event would threaten not only rescue teams but also communities that have already suffered from the initial disaster.

Sharing information and alerts, however, is only part of the task. The more difficult challenge is to jointly develop contingency plans for possible secondary disasters.

Such plans should establish how rescue teams on both sides will respond to new warnings, where they will evacuate, which communication channels they will use and how authorities will alert downstream communities. They should also account for circumstances in which damaged infrastructure or interrupted communications prevent conventional warnings from reaching those at risk.

“The difficult part is not necessarily creating a mechanism for sharing monitoring information and alerts,” Xu said. “The challenge is jointly developing contingency plans for rescue teams and communities on both sides in the event of another disaster.”

China has also supported Nepal by providing technical expertise, relief supplies and financial assistance. Xu said such support is appropriate and relevant given the scale of the disaster’s impact on Nepal.

Bilateral cooperation will remain important after search-and-rescue operations end. The two countries will need to discuss infrastructure restoration, livelihood recovery, environmental monitoring and measures to reduce the risk of similar disasters.

International assistance should reflect needs and capacity

Beyond bilateral cooperation, the disaster has drawn wider international attention. Xu said the need for global support should be evaluated by considering two factors: the scale of the affected country’s needs and its capacity to meet those needs.

Some countries can manage a large disaster primarily through domestic resources, while others may require international assistance even during smaller emergencies. The appropriate level of support therefore depends on the specific context rather than the hazard’s magnitude alone.

Nepal is highly exposed to earthquakes, landslides, floods and other natural hazards. Over time, the country has developed considerable experience and capacity in search and rescue, emergency medical assistance and rehabilitation. Those capabilities have been evident in the response to the August 26 disaster, Xu said.

However, the severity and geographical extent of the event may place sustained pressure on Nepal’s available resources. Domestic capacity may be sufficient for some immediate tasks but struggle to meet all the needs associated with relief, rehabilitation and reconstruction.

International assistance should initially respond to the specific requests and priorities identified by Nepal’s government. Countries and humanitarian organizations should avoid sending unsuitable assistance that could burden local logistics or duplicate existing resources.

In the longer term, affected families will need help rebuilding homes, restoring livelihoods and recovering access to essential services. Roads and other infrastructure will have to be reconstructed, while communities may require continuing medical, psychological and financial assistance.

Xu said international support could become even more important during this extended recovery phase than during the initial emergency.

“Rebuilding people’s lives will involve a series of enormous tasks,” Xu said. “Global support is needed and may be needed even more in the longer term.”

Lessons for future Himalayan disasters

The Nepal August 26 Mudslide demonstrates that an extreme disaster cannot be understood simply as an isolated natural event.

The destructive flow lasted only minutes, but the underlying conditions developed over a much longer period. The region’s steep valleys and glacier-covered mountains created the physical setting, while climate-related warming and geological disturbance contributed to instability. The presence of communities, infrastructure and economic activity in the flow’s path then transformed an extreme natural hazard into a major human disaster.

The event also shows how risk in the Himalayas can cross administrative and national boundaries. A glacier collapse in one country can rapidly threaten communities, infrastructure and rescue personnel in another. Monitoring and emergency planning must therefore extend beyond individual jurisdictions.

Xu’s analysis points to several priorities: stronger monitoring of glaciers and unstable slopes, improved early-warning systems, safer mountain infrastructure, joint China–Nepal contingency planning and sustained support for affected communities.

The disaster also reinforces the importance of putting humanity at the center of the response. Respectful management of the dead and missing, timely assistance for families, protection of rescue personnel and cooperation across borders are not secondary concerns. They are essential parts of an effective humanitarian operation.

Ultimately, Xu said, future losses will depend not only on whether extreme natural events occur but also on how governments and communities prepare for them, where infrastructure is built and how quickly countries cooperate when hazards cross their borders.

Because I say so. OK, these four consecutive articles are important because the author is “Zhong Caiwen.”中才文. This is the pen name for the Office of the Central Financial and Economic Affairs Commission中央财经委员会办公室. It is the top-level economic decision-making and coordination body within China’s highest leadership, like the supreme command center for economic policy. A similar example is the more commonly seen “Ren Zhongping” (People’s Daily important commentary).

Ministries and commissions like to use pen names in their writing. I think there are two considerations: if they go through a ministry's or commission's formal document approval process, the internal review and approval procedures are often much more complicated. Using a designated collective pen name allows for a relatively faster response. On the other hand, if the article were published under an individual’s name, it would not fully represent the institutional stance, so the commission uses a collective pen name.

The last time the Central Financial and Economic Affairs Commission published a series of consecutive articles was during last year’s National Day holiday, which focused more on the 15th Five-Year Plan. My reading experience was that it was more like a supplement of incremental information to the content of the July Politburo meeting.

These four articles represent the Central Financial and Economic Affairs Commission Office’s assessment of the current economic situation, which is why I think they deserve attention.

What views do these four articles reflect?

These four articles follow a “3+1” structure. The first three articles explain the current state of China’s economy, while the fourth shapes policy expectations by laying out priorities for the next phase of work.

The first article discusses the resilience and vitality of China’s economy, focusing on its structure, namely the development of new growth drivers such as robotics, artificial intelligence, and high-end manufacturing. The second article focuses outward, explaining the positive impact of China’s economy on the world, including the spillover of clean energy technology and the outward layout of manufacturing, pushing back against the “China shock” narrative. The third article explains the recent 4.7% economic growth rate and why incremental policies were not introduced as many had expected.

The fourth article is especially important. It lists the priorities for the coming months, including one key judgment: goods consumption has already tended toward saturation, and services consumption is where the focus of expanding consumption should be going forward. (This confirms the view I expressed in my reading of the late-July Politburo meeting.)

From the text, the current policy focus remains on the supply side of the services sector.

In some areas of China, goods consumption has already tended toward saturation or entered a phased plateau. We need to adapt to the consumption needs of different groups, expand high-quality supply, and actively cultivate and strengthen emerging consumption. Services consumption is the key area for future consumption expansion. We need to innovate consumption scenarios, optimize the consumption environment, and tap the potential of services consumption.

Compared with previous years, this year’s policy documents and the way discussions are framed both show that the emphasis has shifted more toward services consumption. The characterization that “goods consumption in some areas of China has already tended toward saturation or entered a phased plateau” means that, in the short term, the policy side will no longer place special emphasis on stimulating physical goods consumption. Policy resources will shift toward expanding service consumption.

In addition, the article mentions “expanding imports and promoting balanced trade development.” In my view, this means that China’s approach to resolving the long-standing European complaints about the China-EU trade deficit is not to restrict exports, but to increase imports from Europe. Of course, whether this can be resolved still depends, in my view, on whether Europe can provide the goods China needs. This still depends on the outcome of subsequent negotiations between the two sides.

Other thoughts:

From the order in which the articles are arranged, the first of the four already focuses on industrial upgrading, still using the qualitative framework of “stability,” “resilience,” “newness,” and “quality.” Only the third article looks back and explains the 4.7% economic growth rate in the first half of the year, which reads more like a response to the growth rate falling short of the externally expected 5.0%. This shows that the assessment of the economic situation still centers on structural optimization rather than simply fixating on the growth rate itself. That said, considering that this year’s growth target has already been lowered from last year’s 5%, the government will hold the lower bound of growth, while whether it can reach the upper bound is more a matter of “doing what one can.”

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On incremental policy:

The pace of fixed investment deployment will be accelerated, but there will be no large-scale expansionary policies.

The fourth article mentions at the very beginning that in the first half of the year, the average daily balance of funds in the national treasury was relatively large. The purpose is to urge local governments to speed up spending. Money sitting idle in the treasury means the government needs to improve the efficiency of existing funds. The next step is to accelerate disbursement, speed up investment implementation, and put the money to use. Later in the article, it also mentions promoting investment to “stop declining and stabilize,”止跌回稳, urging local governments to spend the existing investment that has already been deployed but not yet disbursed.

If you look at it from the expectations-management perspective, this can also be seen as a way of showing the reserves of policy, demonstrating that available resources remain sufficient, and that even if large-scale stimulus is not introduced for the time being, there is still enough ammunition to respond to changing conditions.

But looking back at the third article, it also mentions that “the focus of China’s current investment policy is not simply to maintain a certain speed, but to better adapt to the requirements of high-quality development and pay more attention to investment quality and comprehensive efficiency.”(当前我国投资政策的着力点不是要简单维持一定速度，而是更加适应高质量发展要求，更加注重投资质量和综合效益。) This means there will be no “spending for the sake of maintaining investment growth.” Resources will still be concentrated on the “six networks” (water networks, new-type power grids, computing power networks, new-generation communications networks, urban underground pipeline networks, and logistics networks) and on people’s livelihoods.

Below is the full text of four essays that I translated using AI.

The Resilience and Vitality of China’s Economy（Aug.22）

Zhong Caiwen

Since the beginning of this year, under the strong leadership of the Communist Party of China Central Committee with Comrade Xi Jinping at its core, all regions and government departments have taken active steps and risen to challenges. They have effectively responded to various external shocks and domestic difficulties and made solid efforts to promote high-quality development. China’s economy has shown a trend of shifting toward new growth drivers and an improved structure, producing noteworthy results. In the first half of the year, the main macroeconomic indicators remained generally stable. Gross domestic product (GDP) grew by 4.7 percent, continuing to rank among the highest of the world’s major economies. Prices rose at a reasonable pace, employment remained generally stable, and the balance of international payments was broadly maintained. Meanwhile, the profits of industrial enterprises above the designated size increased by 18.7 percent, national general public budget revenue rose by 4.7 percent, and the economic performance of some market entities improved.

China’s economy is currently at a critical stage in which old and new growth drivers are shifting at a faster pace and the development model is undergoing transformation. In assessing China’s economy, one should not look only at the speed of growth, still less dwell on whether the figures for a particular quarter or month are high or low. Instead, greater attention should be paid to the quality of economic performance, with a focus on the substance of scientific and technological innovation, the level of industrial development, and the sustainability of economic growth, as well as on whether enterprises—the main entities engaged in business operations—possess vitality. In fact, viewed in terms of quality and efficiency and from a longer-term perspective, profound changes are taking place in China’s economic development, demonstrating powerful resilience and vitality.

China’s scientific and technological innovation is steadily being translated into industrial competitiveness. Since the beginning of this year, many striking achievements have been made in science and technology. For example, new breakthroughs have been achieved in key and core technologies such as integrated circuits; China has moved to the forefront of the world in the research and development of innovative drugs; and Chinese rockets have been successfully recovered both at sea and on land. The supporting and leading role of new growth drivers has strengthened. In the first half of the year, the value added of the equipment manufacturing and high-tech manufacturing industries grew by 9.3 percent and 13.3 percent, respectively, maintaining sound momentum. They are expected to open up new space for development through technological empowerment. The research, development, and application of robotics and artificial intelligence are gaining strong momentum. Industrial robots, surgical robots, cleaning robots, and bionic robots are becoming representative products of “intelligent manufacturing in China.” Artificial intelligence is driving the manufacturing sector’s orderly transition toward intelligent, digital, and green development, while the transformation and upgrading of traditional industries are accelerating.

China’s position as a hub in global industrial and supply chains continues to grow stronger. China has deployed innovation chains around industrial chains and used innovation chains to strengthen the latter. For a new energy vehicle, more than 10,000 parts and components can be assembled within four hours at an automaker in the Yangtze River Delta. For a humanoid robot, efficient collaboration among various enterprises in the Pearl River Delta can create a “one-hour industrial ecosystem.” China’s exports of intermediate goods have grown rapidly, supplying key parts and components to global industrial and supply chains and effectively ensuring their stable operation. China’s complete industrial and supply chains have not only improved production efficiency both within China and around the world, but also provided greater certainty for stable global economic growth.

Chinese enterprises are undergoing a remarkable digital and intelligent transformation as they restructure themselves. Some enterprises use big data to assess market demand and artificial intelligence algorithms to optimize production scheduling. Through flexible manufacturing and customized services, they can precisely meet market demand for small-batch and personalized products. Some enterprises use digital production systems to seamlessly connect production lines, logistics centers, and consumer orders, achieving integrated, end-to-end fulfillment with “zero contact.” This greatly shortens delivery times and ensures that products reach consumers in a “fresher” state. Some construction enterprises are applying industrialized standards, digital precision, and automated efficiency to turn the building of “good homes” from “construction on worksites” into “manufacturing in factories.” Changes of this kind have greatly expanded enterprises’ scope of operations, enabled them to break through geographical constraints, and demonstrated their strong vitality.

Risks and hidden dangers in China’s economic operation are being addressed and contained in an orderly manner. Since the beginning of this year, the property market has shown stronger signs of bottoming out and stabilizing. In some first- and second-tier cities, transactions involving previously owned homes have increased significantly and exceeded sales of new homes. Prices have stabilized, and inventory pressure has eased to some extent. Existing hidden debts of local governments are being replaced in an orderly manner, while the number of local government financing vehicles continues to fall. Reforms aimed at defusing risks among small and medium-sized financial institutions, reducing their number, and improving their quality are steadily advancing, and the number of high-risk local small and medium-sized financial institutions has declined. Overall, we have strictly controlled new risks, appropriately handled existing ones, and rigorously guarded against sudden defaults and other major risk events. In preventing and defusing major risks in the economic sphere, we have held the line against systemic risk.

The China Council for the Promotion of International Trade recently organized a delegation of business representatives to visit the United States, reflecting the aspirations and shared views of the business communities of both countries. During face-to-face exchanges, members of the U.S. business community spoke highly of China’s strengths in emerging fields such as advanced manufacturing, artificial intelligence, clean energy, quantum computing, and life sciences. They called for expanded pragmatic cooperation while maintaining necessary competition. At the same time, executives of a number of U.S. companies investing in China said that the Chinese government’s efforts to stimulate domestic demand, safeguard and improve people’s well-being, strengthen public services, and enhance local research and development capabilities would bring bright prospects for China’s economy. These efforts would also create new scenarios and new opportunities for multinational companies to deepen their presence in China. They said they would increase investment and expand their operations in China, casting a “vote of confidence” in the country through concrete action.

China’s economy is like a vast ocean, capable of withstanding winds and waves. It has the solid foundation accumulated through more than 40 years of reform and opening up, as well as a vast consumer market, a strong manufacturing base, well-developed infrastructure, a large pool of talent, and complete industrial and supply chains. The underlying conditions supporting China’s long-term economic growth and the fundamentals of its positive trajectory have not changed. In assessing China’s economy, only by fully understanding the country’s various strengths and enormous potential can one avoid “letting floating clouds obscure one’s view.” In the second half of the year, as major projects identified in the central and local 15th Five-Year Plans and national-level special plans successively begin construction, and as macroeconomic policies are applied in a timely and more effective manner, China’s economy will undoubtedly remain within an appropriate range and successfully accomplish the goals and tasks for the entire year.

China Is an Active Contributor to World Economic Growth and a Powerful Anchor of Stability(Aug. 23)

Zhong Caiwen

Since the beginning of this year, in the face of a grave and complex external environment marked by intertwined changes and turmoil, China’s economy has forged ahead under pressure and continued to move toward innovation and higher-quality development, demonstrating vigorous vitality and strong resilience. This has not only laid a solid foundation for a good start to the 15th Five-Year Plan period, but also injected powerful momentum and much-needed certainty into the world economy.

China is a primary engine of the world economy and has made important contributions to global development and prosperity. For many years, China has accounted for around 30 percent of global economic growth, making it indisputably the world’s “number one engine.” In the first half of this year, China’s economy grew by 4.7 percent, in line with the annual target and among the highest growth rates of the world’s major economies, continuing to stand out from the rest. Domestic demand played the leading role, contributing more than 80 percent of economic growth, with consumption alone accounting for nearly 50 percent. The recently released 15th Five-Year Plan for Expanding Consumption is China’s first national-level special plan in the field of consumption. In the coming years, the potential and scope of Chinese consumption will be further unleashed. In the first half of this year, China’s consumer price index rose by 1 percent year on year. This reasonable recovery in prices was consistent with the requirements of macroeconomic regulation and stood in sharp contrast to the situation in many countries, where rising global prices for energy, raw materials, and other goods have driven up inflation and eroded consumers’ purchasing power. China’s economy is characterized by solid foundations, numerous strengths, strong resilience, and enormous potential. The supporting conditions and underlying trend for its long-term growth remain unchanged. China will continue to be the most powerful, stable, and reliable source of momentum for global economic growth.

China is an anchor of stability for global industrial and supply chains, providing strong support for the smooth functioning of the world economy. Whether confronting the COVID-19 pandemic or the repercussions of geopolitical conflicts, China has consistently remained a staunch defender of the resilience and stability of global industrial and supply chains. Since late February this year, the conflict involving the United States, Israel, and Iran has disrupted passage through the Strait of Hormuz, creating tight supplies of international crude oil and key raw materials. Thanks to the accelerated green transformation of China’s economy and society in recent years, nearly four out of every 10 kilowatt-hours of electricity consumed across the country now come from green energy. The retail penetration rate of new energy vehicles in China has also continued to rise, reaching a cumulative 54.1 percent in the first half of the year. Drawing on its formidable strengths in new energy, China has actively responded by reducing crude oil imports, greatly easing the pressure driving up international oil prices. China’s industrial sector has maintained efficient and stable production, offsetting supply shortfalls caused by production stoppages and logistical disruptions in certain regions. The Wall Street Journal stated that China had supported the world economy by reducing its oil imports. France’s Le Figaro argued that China had saved the world economy for the second time since the 2008 international financial crisis. Through technological innovation and robust market competition, China has built the world’s largest and most complete new energy industrial and supply chain system. Over the past decade and more, it has helped reduce the average levelized cost of wind and photovoltaic power generation worldwide by more than 60 percent and 80 percent, respectively. China’s advanced and practical technologies in photovoltaics, wind power, and energy storage, together with its high-quality products such as electric vehicles and electric motorcycles, have turned the dream of an energy transition into reality for many developing countries. Distributed photovoltaic and microgrid projects undertaken by Chinese enterprises in sub-Saharan Africa have lit up the African night. Going forward, China will further guide the rational and orderly cross-border distribution of industrial and supply chains, align its efforts with the industrialization aspirations of Global South countries, and help more countries develop their economies, expand employment, and improve people’s well-being.

China is one of the world’s sources of scientific and technological innovation, injecting powerful innovation-driven momentum into global economic development. Innovation is an important endogenous driver of economic growth. Through its own philosophy of innovation-driven development and successful practices, China is becoming one of the world’s leading arenas for innovation on a massive scale. China’s innovative capabilities have increased significantly. According to a report by the World Intellectual Property Organization, China rose from 34th place in the Global Innovation Index in 2012 to 10th place in 2025, while the number of its science and technology clusters ranked among the world’s top 100 has been the highest globally for three consecutive years. Since the beginning of this year, China’s innovation achievements have continued to attract worldwide attention. The humanoid robot “Lightning” broke the human world record in a half-marathon in a single stroke; the semiconductor industry’s “Tao’s Law” emerged; China’s space program achieved a succession of major breakthroughs, including both maritime and land-based rocket recovery; and Kimi K3, the world’s first open-source large model with nearly three trillion parameters, was unveiled to great acclaim. China’s innovation achievements are reaching the world at an accelerating pace. In the first half of this year, eight out of every 10 humanoid and quadruped intelligent robots sold worldwide were made in China, while the total value of overseas licensing transactions involving Chinese innovative drugs reached approximately US$110 billion. A growing number of foreign-invested enterprises have said that China has developed into a “super training ground” for global technological innovation and a “hard-core gym” for competitiveness: developing in China enables companies to better exercise their innovation “muscles” and strengthen their competitive “physique.” China is increasingly becoming an enabler of global innovation. In July this year, the World Artificial Intelligence Cooperation Organization was formally established in Shanghai. This was a major initiative by China to respond to the calls of the Global South and unite the international community in actively promoting the development and governance of artificial intelligence. Foreign media have commented that the principles advocated by China—being people-centered and using AI for good—together with the open-source nature of Chinese AI technology, are more closely aligned with the trends of scientific and technological innovation and the needs of Global South countries. They will help bridge the global intelligence divide and ensure that all parties benefit on an equal footing.

China is a practitioner of mutual benefit and win-win cooperation, creating broad space for the cooperative development of countries around the world. Facts offer the best rebuttal to distortions and smears such as the “China Shock 2.0” and “China squeeze” narratives. Chinese manufacturing improves the well-being of people in countries around the world. As the world’s largest manufacturing country, China continues to provide the global market with high-quality, competitively priced, stable, and reliable products. During the recent heat wave that swept across Europe, Chinese air conditioners brought relief to European consumers and became so popular that they were difficult to find. Behind this “cool strength” lay Chinese companies’ keen insight into overseas market demand, the rapid response of their complete industrial chains, their leading energy-saving and environmentally friendly technologies, and the fast deliveries made possible by the China-Europe Railway Express. The benefits of Chinese manufacturing are shared by consumers and partners worldwide.

The Chinese market provides new opportunities for global development. In today’s world, the market is the scarcest resource. China imports goods worth more than 20 trillion yuan annually and is a major export destination for nearly 80 countries. While some countries are turning toward protectionism, China has consistently remained committed to expanding opening up. By lowering import tariffs, hosting the China International Import Expo, and launching the “Export to China” series of activities, it has provided vast market space for goods and services from around the world. Beginning on May 1 this year, China fully implemented zero-tariff treatment for all 53 African countries with which it has diplomatic relations, marking another milestone in China-Africa economic and trade cooperation. Facts have shown that the “shock” and “squeeze” narratives are false propositions that call a deer a horse and distort the truth. China’s high-quality economic development has brought the world new and even greater opportunities.

What Does Economic Growth of 4.7 Percent in the First Half of the Year Tell Us?

Zhong Caiwen

True strength reveals itself amid wind and rain, and confidence is forged through trials. In the first half of the year, China’s economy forged ahead under pressure, maintaining a generally stable trajectory while continuing to shift toward new growth drivers and higher-quality development. Gross domestic product (GDP) grew by 4.7 percent year on year. We responded forcefully to changes in the external environment, including geopolitical conflicts and economic and trade frictions, and effectively navigated a complex domestic situation marked by strong supply and weak demand as well as an overlap of longstanding and emerging problems. These hard-won achievements are all the more valuable.

Measured against the target, 4.7 percent is an economic growth rate that meets expectations. The Central Economic Work Conference and the annual sessions of the National People’s Congress and the Chinese People’s Political Consultative Conference set the expected economic growth target for the full year at 4.5–5 percent. The 4.7 percent growth recorded in the first half falls within this reasonable range. It accords with the Party Central Committee’s sound assessment of the economic situation and the requirements of its policy arrangements, laying a solid foundation for a good start to the 15th Five-Year Plan period. Major economic indicators remained stable, while employment and prices were broadly steady. The 4.7 percent growth rate was broadly consistent with current conditions in factor supply, technological progress, institutional innovation, and other areas. It is a realistic rate aligned with China’s potential economic growth rate. Major economic provinces generally grew faster than the national average, playing their role as pillars of the economy. At the same time, China’s financial risks continued to recede in the first half of the year, local government debt risks were defused in an orderly manner, and various constraints remained appropriately balanced, leaving room for responding to uncertainty and improving the quality of development.

Viewed in terms of its composition, 4.7 percent is a growth rate with real substance. Behind this figure lies an economy shifting toward new growth drivers and an improved structure, delivering a high-quality development report card underpinned by solid stability and sustained by forward momentum. Its technological content is higher. New quality productive forces have steadily gathered momentum. Innovative enterprises with core technologies that play leading roles in industrial chains, as well as specialized and sophisticated enterprises focused on particular market segments, are emerging and growing at a faster pace. In the first half of the year, new growth drivers directly contributed more than 40 percent of economic growth. Artificial intelligence is empowering industries across the board. A succession of new-generation open-source large models has recently been released, while China has systematically put forward its approach to building an AI ecosystem and establishing an order for AI governance. Innovative achievements continue to emerge, and the number of AI-related patents granted rose by 34.8 percent year on year.

The growth rate also has a stronger green component. The transition toward green and low-carbon energy has accelerated, with clean energy accounting for 36.2 percent of electricity generated by enterprises above the designated size in the first half of the year. New green growth drivers expanded rapidly: lithium battery output increased by 39.3 percent, the cumulative retail penetration rate of new energy vehicles reached 54.1 percent, and the development of zero-carbon industrial parks and zero-carbon transport corridors proceeded in an orderly manner.

Its contribution to people’s well-being is also more tangible. China implemented measures to stabilize employment, expand job opportunities, and improve job quality, while strengthening social security. Residents’ incomes increased steadily. In the first half of the year, China’s per capita disposable income grew by 5.2 percent year on year in nominal terms. The consumer market continued to expand, and new growth areas such as services consumption and experience-based consumption continued to develop. Retail sales of services rose by 5.3 percent in the first half, while consumption in lower-tier markets, including county-level areas, recorded the fastest growth. Holiday consumption and inbound consumption also remained robust.

Having forged ahead under pressure, the 4.7 percent growth rate demonstrates powerful resilience. As worsening external headwinds overlapped with domestic cyclical and structural pressures, China’s economy rode out the storm and delivered a satisfactory report card, demonstrating a strong capacity to withstand shocks and regulate itself.

Externally, geopolitical turbulence has persisted, and the conflict in the Middle East has disrupted global energy markets, leaving many countries facing energy shortages and soaring oil prices. China made early arrangements to develop a new energy system and a petroleum reserve system while implementing a market-diversification strategy. Its efforts to ensure energy supplies and stabilize prices have proved forceful and effective. No market shortages of petroleum products or similar problems have occurred over the past six months, and the foundations of China’s energy security have grown increasingly solid. Meanwhile, against a backdrop of rising global trade protectionism and increasing tariff and non-tariff barriers, Chinese products have won favor among consumers in a growing number of countries because of their strong value for money. China’s exports have remained robust. From electric vehicles, lithium batteries, and photovoltaic products to artificial intelligence, robots, and innovative medicines, Chinese products are reshaping the country’s foreign trade landscape through cutting-edge technologies and original innovation.

Domestically, addressing risks accumulated over many years in areas such as local government debt, the property market, and small and medium-sized financial institutions has objectively produced a certain contractionary effect on the economy and required some sacrifice in terms of economic growth. These short-term costs, however, have secured long-term stability and sustainable economic and social development. At the same time, judging from market fundamentals, the imbalance between strong supply and weak demand remains pronounced. In particular, China faces considerable pressure in halting the decline in investment and restoring stable growth. The rate of investment growth is closely related to a country’s stage of development. At present, the focus of China’s investment policy is not simply to maintain a particular growth rate, but to better meet the requirements of high-quality development and give greater attention to investment quality and overall returns. In the first half of the year, China concentrated its efforts on strengthening the coordinated development of the “six networks,” promoting the renewal and upgrading of manufacturing, and addressing weaknesses in water conservancy facilities and urban underground pipeline networks, directing more resources toward investment in the future and in people’s well-being.

Looking ahead, the 4.7 percent growth rate has substantial momentum behind it. China’s economic development enjoys ample room for maneuver, enormous market potential, and powerful resilience and vitality.

There is potential for growth. As research and development investment continues to increase, China’s capacity for original innovation is steadily strengthening, and scientific and technological innovation is becoming deeply integrated with industrial innovation. Innovation-driven development is emerging as a powerful engine of China’s economic growth. China has one of the world’s largest talent pools, and its human-capital advantage is steadily shifting from a demographic dividend based on quantity to one based on quality. New factors of production, including data and computing power, continue to empower traditional factors, jointly supporting high-quality economic development.

Reform will continue to generate dividends. We place emphasis on using reform to solve development problems, and the economy’s endogenous momentum is continuously strengthening. The development of a unified national market is advancing in depth. Prominent problems involving local governments’ noncompliant investment-promotion practices, barriers to market access, bidding and tendering, and other areas are being rectified. This will broaden and deepen China’s market and further unlock the potential of its enormous scale. Continued comprehensive measures to address “involution-style” competition will foster a healthier market environment, compelling enterprises to move beyond competition based solely on price and accelerate the transition from scale expansion and price competition to quality improvement and value-based competition.

There is also room for policy action. Unlike some economies that rely on high debt and large deficits to stimulate growth, China has not followed a path of excessive dependence on forceful policy stimulus. Its aggregate policies have remained proactive and effective, while structural policies have applied precisely targeted measures, thereby avoiding the creation of “policy dependence.” Overall, the supporting conditions and underlying trend for China’s long-term economic growth remain unchanged. China has an ample toolkit of macroeconomic policies and still has considerable room for countercyclical adjustment. It is well positioned to introduce pragmatic and effective incremental policies in response to changing circumstances and is capable of accomplishing its economic and social development goals and tasks for the full year.

Steadily Advancing High-Quality Development for the Long Term

Zhong Caiwen

The meeting of the Political Bureau of the Communist Party of China Central Committee held on July 30 made comprehensive arrangements for economic work in the second half of the year. It called for the economy to continue developing toward new growth drivers, higher quality, and better performance, and for efforts to secure a good start to the 15th Five-Year Plan period. To successfully carry out economic work in the second half of the year, we must thoroughly implement the decisions and plans of the Party Central Committee, intensify countercyclical adjustments, fully leverage the effectiveness of existing policies, and promptly plan and introduce pragmatic and effective incremental policies to strengthen the momentum of development and stimulate social vitality.

Macroeconomic policies must be more proactive, effective, and efficient. China should continue implementing a more proactive fiscal policy and a moderately accommodative monetary policy. In the first half of this year, the average daily balance of the national treasury was relatively high, indicating that substantial fiscal funds were available. The pace of fiscal spending and the use of bond proceeds should be accelerated so that tangible progress is achieved as quickly as possible. Fiscal operations must be closely monitored and treasury funds effectively allocated to ensure that primary-level governments have the resources needed to meet the basic needs of ensuring people’s livelihoods, paying salaries, and maintaining normal government operations. A range of monetary policy tools should be employed and adjusted as appropriate to maintain ample liquidity, improve the monetary policy transmission mechanism, and keep the cost of social financing at a low level. Structural monetary policy instruments should be properly implemented to provide stronger support for key areas such as expanding domestic demand, promoting scientific and technological innovation, and assisting small, medium-sized, and micro enterprises. Coordinated fiscal and financial policies to stimulate domestic demand should be optimized, creating a transmission chain in which fiscal policy provides guidance, financial instruments amplify its impact, and market-based operations deliver results. Assessments of consistency in macroeconomic policy orientation should be strengthened. Reasonable transition periods must be provided when major policies affecting enterprises’ production and operations are adjusted.

Domestic demand must be effectively expanded through sustained efforts. Consumption of goods in some sectors of China’s economy is already approaching saturation or has entered a temporary plateau. It is therefore necessary to respond to the consumption needs of different groups, expand the supply of high-quality goods and services, and actively cultivate and strengthen emerging forms of consumption. Service consumption will be a key area for future consumption growth. New consumption scenarios should be developed, the consumption environment improved, and the potential of service consumption unlocked. Fixed-asset investment declined by 5.7 percent in the first half of the year, making it necessary to halt the decline and restore stable investment growth. Projects and funding should be better coordinated, and the planning and development of the “six networks” should advance steadily. Stronger factor support must be provided, and the construction window offered by the peak season in the third quarter should be fully utilized to accelerate the approval and commencement of major projects already identified in the 15th Five-Year Plan. This year, 800 billion yuan has been allocated through new policy-based financial instruments, mainly to supplement the capital of major projects. These funds should be directed to specific projects as quickly as possible to leverage greater private investment.

Innovation must lead the way in accelerating the development of a modern industrial system. Basic research is the source of the entire scientific system and the foundation for solving all technological problems. Long-term and stable support for basic research should be increased, the capacity of the scientific and technological innovation system to make coordinated breakthroughs should be strengthened, and the deep integration of scientific and technological innovation with industrial innovation should be promoted. The “AI Plus” initiative should be implemented in depth to create new forms of the intelligent economy and enable artificial intelligence to empower industries across the board. At the same time, the AI governance system should be improved and the legislative process for foundational AI laws accelerated. Since the beginning of this year, demand for AI computing power has grown rapidly, driving faster development of the semiconductor industry. China must strengthen the supply of advanced computing power while avoiding indiscriminate or excessive expansion. Efforts should be made to achieve breakthroughs in frontier technologies, develop industries of the future, foster emerging pillar industries, and continuously advance the transformation and upgrading of traditional industries.

Contradictions must be confronted directly to foster a fair and orderly environment for market competition. Regulations on developing a unified national market should be formulated and implemented. Local investment-promotion practices and corporate competitive conduct should be regulated through both negative and positive lists. Comprehensive measures should continue to address “involution-style” competition, particularly disorderly low-price competition in certain sectors, and guide relevant industries back toward value-based and rational competition. In recent years, corporate accounts receivable have continued to grow rapidly, while average collection periods have lengthened and debt recovery has become increasingly difficult. This has become a deep-seated problem troubling businesses. Regular mechanisms should be established to resolve payment arrears owed to enterprises, and malicious defaults should be investigated and rectified. Governance mechanisms for platform enterprises should be improved to promote the regulated and healthy development of the platform economy. Pricing reforms for public utilities such as water, gas, and heating should be advanced gradually and steadily.

Domestic and international priorities must be coordinated to expand the scope for mutually beneficial international economic and trade cooperation. The more turbulent and complex the external environment becomes, the more firmly China must uphold opening up and promote win-win cooperation across multiple fields. Trade in intermediate goods, cross-border e-commerce, digital trade, and green trade should be actively expanded, while trade in services should be vigorously developed. Imports should be increased to promote more balanced trade, and the China International Import Expo should be successfully organized. The management system for outbound investment and the comprehensive overseas service system should be improved to make outbound investment more sound and secure and to strengthen the protection of China’s overseas interests. China should actively attract and utilize foreign investment, bolster foreign investors’ confidence in investing and developing in China, and support foreign-invested enterprises in maintaining a long-term presence in the Chinese market.

A solid foundation must be laid by maintaining an unwavering focus on agriculture, rural areas, and rural residents. Regular, targeted assistance should be carried out in depth to consolidate and expand the gains of poverty alleviation and ensure that no large-scale return to or descent into poverty occurs. Food security is a matter of fundamental national importance. China’s summer grain output exceeded 300 billion jin for the first time this year. Continued efforts must be made to ensure strong agricultural production and secure bumper harvests of autumn grain and grain for the full year. The production and prices of hogs and other agricultural and livestock products should be stabilized, and the high-quality development of the beef cattle and dairy cattle industries should be advanced. The development of high-standard farmland is an important vehicle for implementing the strategy of securing food supplies through the sustainable use of farmland and advances in agricultural technology. Sound mechanisms for its construction, operation, and maintenance must be established to ensure that every plot developed meets the required standard and delivers lasting benefits.

Multiple measures must be taken to strengthen public well-being effectively and substantially. Employment is the foundation of people’s livelihoods. The number of college graduates has reached a new high of 12.7 million this year, making it necessary to increase employment support for key groups. China currently has around 200 million people in flexible employment, including a large number engaged in new forms of employment, and measures to protect their rights and interests must keep pace. The impact of artificial intelligence on employment should be thoroughly assessed and effectively addressed, so that technological progress and inclusive employment can advance together. Expanding consumption requires strengthening residents’ capacity and willingness to spend. Pragmatic measures should be studied and introduced to increase the incomes of urban and rural residents through high-quality development. Inclusive, foundational, and safety-net programs for people’s well-being should be strengthened. Services and support for older people and children should be improved, and a tiered and categorized social assistance system should be established. The initiative for sustained improvement in air quality should be implemented in depth, the three landmark campaigns under the Three-North Shelterbelt Forest Program should be successfully carried out, and the goals of peaking carbon emissions and achieving carbon neutrality should be advanced actively and prudently.

The bottom line must be upheld and security safeguards firmly reinforced. As an ancient saying reminds us, “Those who are discerning prevent disasters before they arise; those who are wise prepare for future dangers.” We must adopt bottom-line thinking and effectively prevent and defuse all types of risks. The real estate market should be stabilized, and urban renewal should be advanced to a high standard. The package of measures for resolving debt risks should be properly implemented, and local government debt risks prudently defused. Financial risk prevention and control should be strengthened, while reforms to resolve risks, reduce the number, and improve the quality of local small and medium-sized financial institutions should advance steadily. Comprehensive reform of investment and financing in the capital market should be deepened, mechanisms for bringing medium- and long-term funds into the market further improved, and the resilience of and confidence in the capital market strengthened. All types of risks and hidden dangers should be thoroughly investigated and rectified, major and especially serious accidents resolutely prevented, and the safety of people’s lives and property, as well as overall social stability, effectively safeguarded.

China’s economic development enjoys ample room for maneuver, enormous market potential, and powerful resilience and vitality. We must remain confident, rise to challenges, and fully leverage all opportunities and advantages. With greater drive and an even more vigorous spirit, we must ensure that high-quality development advances steadily and delivers lasting progress.

Some background: Professor Zhang is an economist focusing on the labour economy. In a talk show, when asked what social security gig workers have, she said (to avoid ambiguity, I am quoting her original words here):

Let us explore this further. It is generally believed that those of us in formal employment tend to think that people in informal employment or gig work have no security. But from the perspective of labour economics, their flexibility is itself a form of welfare. They are flexible, unlike those of us working nine to five. You go to work every day, and your social security benefits are very good. You may have the state’s five insurances and one housing fund and so on, but you sacrificed your freedom in exchange for that social security. So when it comes to flexible employment, it is meant to be flexible. What they want is freedom; what they want is to maximise the part of their lives they manage themselves, but at the same time their social security will certainly be relatively weak. You manage yourself, so why should there be an employer to pay your social security, or why should the state or the government pay so much for you? On the other hand, regular workers have already handed over their time and freedom, so the government or the employer must guarantee certain benefits for them. So I think we should not imagine flexible employment as having nothing at all.

This kind of statement quickly stirred up an uproar on the Chinese internet. The well-known media figure Hu Xijin胡锡进 said her brain had “short-circuited.” Most other criticisms accused her of being out of touch and saying things like “ Let them eat cake.”I haven't seen much defended her point.

Frankely speaking, I do not want to criticise her too much. I’ve translated some of her pieces into English. Also, as a longtime reader of hers, I know that Professor Zhang has worked deeply in the field of labour economics for years; she conducted a lot of research on China’s gig economy, repeatedly calling for stronger labour protections for these flexible workers, and even proposing that the beneficiaries of AI and the government should jointly bear responsibility for the livelihoods of workers affected. She is certainly not among the “cold-hearted elites” that many people imagine her to be.

At the same time, however, I simply do not agree with her opinion this time. I believe social security and freedom should not be understood as an either-or choice.

In her remarks, regular workers trade their time, freedom, and organisational obedience for social security, healthcare, and pensions, while flexible workers gain greater autonomy and must therefore accept relatively weak social security. The problem, as she said later in the program, is that most simply don’t have sufficient alternatives at the very beginning.

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For different kinds of gig workers, flexibility can’t be understood as equal. For those at the top of the pyramid. They can compare different jobs and are therefore willing to trade some income and security for autonomy over their time. But for most gig workers, so-called flexible employment often means flexibility they are forced to accept. They lack stable job opportunities and can sustain their income only by taking orders and part-time work, becoming involuntary recipients of transferred risk.

I previously translated a podcast episode featuring Sun Zhongwei, Deputy Dean of the School of Politics and Public Administration at South China Normal University, who has long studied the transformation of Chinese manufacturing. Over the past decade, Chinese manufacturing has undergone large-scale automation upgrades, but automation did not immediately bring about mass layoffs. One reason is that many factories gradually reduced their workforce through natural attrition, halted new hiring, and reassigned workers internally. Another important factor is that many workers who left the factories didn't just leave the workforce; they moved into courier services, food delivery, ride-hailing, catering, and other service industries.

For many, this was essentially a shift from one kind of low-wage, high-intensity, highly repetitive manufacturing job to another kind of service job that is relatively free but equally insecure. Leaving the factory does not mean regaining autonomy. Platform dispatching, rating, and reward mechanisms assign more orders to riders who log on consistently. Ride-hailing platforms also frequently set completing a certain number of orders as the threshold for rewards. At best, this is nothing more than the freedom to arrange one’s time in a purely formal sense.

Another interesting finding in research by Sun Zhongwei and his collaborators is that migrant workers without local household registration, who have long been mobile, are often less worried about being replaced by automation than local workers. This is because they were already accustomed to high mobility and instability, and many of them did not have many existing benefits to lose in the first place. In their view, if one job disappears, the worst case is simply finding the next one. In a sense, this shows that not worrying about losing a job does not necessarily mean a person is freer. It may also mean that the person has long had little left to lose. I believe a healthy society should not describe forced flexibility as welfare, but should instead fill this protection gap and bring gig workers into the social security network. Only then is there a chance of achieving genuinely decent work.

Of course, if we step outside this debate, Professor Zhang’s remarks provoked such a strong reaction because of where Chinese society stands today.

In periods of sustained economic growth, flexible employment is more easily understood as opportunity. In 1998, Liu Huan wrote the song “Start Over from the Beginning.”从头再来 became popular under the social backdrop of the Asian financial crisis and state enterprises' layoffs. Many had lost their jobs, but everyone believed there were still plenty of opportunities, and even if you lost your job, you could start over. In that environment, expectations of growth easily obscured social security's inadequacy.

But many young people today face fiercer competition and increasingly uncertain career prospects, driven by AI. So when people hear that freedom and social security can only be an either-or choice, what many of them actually hear is this: the risk you bear is the result of your own personal choices. This also explains why so many workers react with such strong revulsion to statements like this.

On a higher level, I believe this is part of a Polanyi-style transformation that China is undergoing. What Polanyi called the “countermovement” refers to the phenomenon in which, as the market continuously expands and pulls ever more spheres of life into competition and exchange, society generates a force demanding its own protection, attempting to re-embed the economy within social relations. In China, however, this countermovement is led less by society itself than by the state: the protective force more often manifests as government-led macroeconomic regulation, industrial policy, antitrust measures, curbs on the disorderly expansion of capital, and the building of social security, all of which attempt to re-embed economic activity within society and political objectives.(no doubt that they need to pour more resources into areas like constructing social security for gig workers)

The past fourty-plus years of reform have essentially been a process of continuous market expansion. The market unleashed enormous efficiency and created unprecedented wealth and opportunities for social mobility. At the same time, however, it rapidly eroded part of the protective functions previously carried by state-owned enterprises and the work-unit system. The market wants workers to be more mobile and flexible, yet it tends to shift the risks that come with this flexibility onto individuals as much as possible.

After entering the 2010s, as China completed industrialisation and gradually bid farewell to the “economy of scarcity,” the mobility brought by marketisation began to replace the stability of the work-unit system, but no new form of protection matching it was provided in time. Workers are asked to bear nearly all the risk, yet in the course of their work they are subject to management and control resembling that of employees. They have lost the stability of the work-unit system, yet they have not truly gained the corresponding professional autonomy.

It is precisely in this sense that the series of social currents that gradually emerged after 2018, including growing attention to labour rights, reflection on 996（Working from 9 am to 9 pm, six days a week.） and excessive involution, young people attempting to withdraw from competition, and society’s pursuit of stable positions in state-owned enterprises and the civil service, can all be understood as expressions of a demand for social protection. Or, to put it in terms of my favourite first law of political science: where there is oppression, there is resistance.

These phenomena do not mean that market reforms should be rejected, or that we should return to the planned economy. Rather, they show that more and more people are beginning to refuse to bear alone all the risks the market creates. What they truly demand is not a choice between freedom and security, but a social security system that matches modern forms of labour while preserving mobility and room for choice. Workers should be able to switch platforms, switch careers, or even temporarily stop working, without losing healthcare, pensions, and basic livelihood protection because of a single spell of unemployment. This is not a backlash against marketisation, but more like countermovement in which society demands that the market accept public constraints, and Professor Zhang’s remarks unfortunately landed squarely on a raw nerve in Chinese society.

I believe this piece is invaluable for understanding China’s reforms of its state-owned banks in the 1990s, as well as how China gradually integrated itself into global financial markets.

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The author recalls the failure of CNOOC's first overseas IPO, which he led in 1999. The core reason for that failure was a difference in how China and the outside world perceived exclusive franchise rights. In China’s eyes, the monopoly that came with an exclusive franchise was a positive; but international markets saw it as a risk, reasoning that there was no legal guarantee the company would hold that monopoly forever. In a sense, this difference in perception (I’d rather not call it a “gap”) remains widespread even today.

Cao also looks back on how, two decades ago, he helped design the prototype of Hong Kong’s renminbi-reflux mechanism—the “clearing bank + offshore market” model—and how that model was later taken global in the wake of the 2008 financial crisis. He uses this experience to reflect on how to break through the traditional “impossible trinity” of currency policy, which holds that free capital flows, an independent national monetary policy, and a stable exchange rate cannot all be achieved at once. In his view, China’s approach to RMB internationalization was to first let the renminbi circulate offshore and then gradually loosen convertibility—in other words, rather than forcing a choice at one corner, it left room on all three fronts to find a middle-ground solution.

Below is the full English ver of the article I made with the help of AI; it hasn’t been reviewed by Cao Yuanzheng

Cao Yuanzheng: The Two Decades of China’s Financial System Reform That I Experienced

Cao Yuanzheng, Visiting Professor of Management Practice, School of Economics and Management, Tsinghua University

This year marks the twentieth anniversary of the founding of the China Finance 50 Forum. Twenty years ago, at the same time as I became a member of the 50 Forum, I left the State Commission for Restructuring the Economic System, where I had worked for more than a decade, due to the restructuring of Chinese government institutions, and was reassigned to the Bank of China. I was transformed from a researcher and formulator of economic reform policies into an implementer of them. Over these twenty years, I participated in the reform of China’s financial system, witnessed the opening up of Chinese finance to the outside world, and experienced the process by which Chinese finance grew from weak to strong, continuously deepening its capacity to serve China’s economic development and increasingly moving onto the world stage.

I. The Development of a National Investment Bank and the Reform of State-Owned Enterprises

Unlike commercial banks, which are dominated by asset-and-liability business and characterized by deposits and loans, investment banks do not have massive balance sheets; rather, they are non-bank financial institutions primarily engaged in underwriting stocks and bonds. Although investment banking has a long history, its true rise came only after World War II, and especially in the era of floating exchange rates, marked by the decoupling of the U.S. dollar from gold in 1973. To hedge against interest rate and exchange rate risks, capital markets—including financial derivatives—developed rapidly. The endless stream of financial instruments and their corresponding financial engineering theories and operational innovations gave birth to a large number of new financial institutions engaged in investment banking.

China began to understand investment banking after reform and opening-up, particularly after the 1990s. As the market economy developed, both township enterprises and enterprises owned by the whole people came to recognize the importance of establishing corporate governance mechanisms. Restructuring into joint-stock companies became a natural choice, and combined with the preliminary development of China’s capital markets, capital market business became a new hotspot in Chinese finance, and securities firms emerged accordingly. However, compared with the developed international capital markets, China’s capital market—despite its rapid development—remained small in capacity and insufficient in scale. Compared with the increasingly mature international investment banks, the investment banking business of China’s securities firms lagged enormously, both technically and managerially, and was still taking its first tottering steps. Under these circumstances, the pressing needs of institutional reform and financing forced enterprises to turn their eyes overseas. In 1993, with the successful H-share listing and issuance of Tsingtao Brewery, international investment banks began to become involved in the joint-stock restructuring and listing financing of Chinese enterprises. Capital market business became a focus of competition among domestic financial institutions, and, by comparison, strengthening the competitiveness of national investment banking business was put on the agenda.

In the mid-1990s, China Construction Bank and the Bank of China took the lead in this area. China Construction Bank established the China International Capital Corporation (CICC) as a joint venture with the internationally renowned investment bank Morgan Stanley, each holding a fifty percent stake, with its registered office in Beijing. The Bank of China took a different path, leveraging its advantage of long-term overseas operations to register BOC International Holdings (BOCI) in London, wholly owned by the Bank of China. One was a joint venture established domestically, and the other was wholly owned yet steeped in the international capital markets. Different paths, but the same purpose: to learn advanced international investment banking techniques and set a benchmark for the development of China’s capital markets. Zhou Xiaochuan, a member of the 50 Forum and then Vice President of the Bank of China, had advocated for the establishment of BOCI. Later, when he became President of China Construction Bank, he also personally served concurrently as Chairman of CICC.

In 1998, the State Commission for Restructuring the Economic System（国家经济体制改革委员会） was abolished, and I was reassigned to the Bank of China, tasked with participating in the restructuring of BOCI. At that time, Hong Kong had just returned; Chinese-funded institutions in Hong Kong no longer needed to adopt a strategy of decentralized operations, and the stability and prosperity of Hong Kong also became a duty-bound responsibility for Chinese-funded institutions. BOC International Holdings relocated its registration back to Hong Kong, and on the basis of the non-bank financial institutions affiliated with the Bank of China in Hong Kong, it was restructured and established as BOC International Holdings Limited, becoming an internationalized investment bank spanning the capital markets of London, Singapore, and Hong Kong.

When BOCI Holdings was established, the Asian financial crisis was raging. In Hong Kong, international speculative capital repeatedly moved back and forth, suppressing the stock and foreign exchange markets; the financial markets were filled with an air of desolation, and the linked exchange rate system hung in the balance. On the mainland, hit by the Asian financial crisis, enterprises found their operations even more difficult. A large number of state-owned enterprises became insolvent and went bankrupt, and layoffs and unemployment became a widespread phenomenon. Newly born, BOCI immediately faced a grim economic and financial situation. While being entrusted by the Hong Kong SAR government to help counter the speculative activities of international speculators, BOCI also shouldered the responsibility of assisting in the joint-stock restructuring and listing of state-owned enterprises.

In 1999, BOCI was appointed as one of the lead underwriters for the overseas listing of China National Offshore Oil, a project which I chaired. China National Offshore Oil had originally been an offshore oilfield development unit subordinate to the Ministry of Petroleum Industry石油工业部. In 1998, with the restructuring of the Chinese government, the Ministry of Petroleum Industry was abolished and split into three: apart from the north (China National Petroleum Corporation, CNPC) and the south (Sinopec), offshore oilfield development became a separate wholly state-owned enterprise. However, under the planned economy system, all profits were handed over to the fiscal authorities and all expenditures were allocated by the fiscal authorities. The three oil companies split off from the Ministry of Petroleum Industry all fell into the embarrassing situation of insufficient capital, high debt ratios, backward governance structures, outdated modes of operation, and inadequate momentum for development. Strengthening capital and improving governance structures through listing financing became an inevitable choice. An overseas listing would not only strengthen market discipline but also facilitate international cooperation.

After National Day in 1999, China National Offshore Oil formally launched its overseas listing roadshow. This was the first overseas listing of a large central state-owned Chinese enterprise. The roadshow route ran from Asia to Europe, with final pricing in New York. The Asian leg of the roadshow was highly successful, with enthusiastic subscription, but in Europe and America the atmosphere was cold and indifferent—especially as global oil prices declined, sales became increasingly difficult and the price kept sliding. In the end, the issuance had to be terminated, and we returned disappointed.

The failure of China National Offshore Oil’s first overseas listing and issuance was a bucket of cold water poured over BOCI, which had aspired to set a benchmark for national investment banking. For the first time, we felt to the bone the harsh mercilessness of the market; for the first time, we experienced with searing pain the powerlessness and helplessness of a small, weak Chinese investment bank in the international market. The Asian market understood China but not oil; the European and American markets understood oil but not China—leaving us caught in a dilemma.

But the market does not believe in tears. While we continuously wrote self-criticisms, we also seriously reflected on the gaps we faced. Beyond certain technical and capability issues, the biggest gap was our understanding of market mechanisms, especially in specialized markets. For example, China National Offshore Oil Corporation was the only company authorized by the state to conduct offshore oil extraction, and the parent company had injected this exclusive franchise right into the listed company. When we valued it, we assumed that being the only shop in town—an exclusive monopoly operation—was a favorable factor. But the international market did not interpret it that way; it regarded this as a risk, an unfavorable factor. The reasoning was: what law guaranteed that the Chinese government would forever grant this listed company the exclusive right to extract offshore oil? If there was none, a risk discount was needed. Frankly speaking, I had worked at the State Commission for Restructuring the Economic System and the Institute of Economic System Reform of China for fourteen years, and I thought I understood the market economy. But reality coldly handed me a failing grade.

The core technique of investment banking is enterprise valuation, and the departments and processes of an investment bank are almost entirely designed and built around valuation. It is a three-dimensional reproduction of the market economy mechanism at the micro level. Inside an investment bank there is a “Chinese Wall,” with different departments set up on either side of the wall—one end connected to the issuer, that is, the company intending to list, and the other end connected to the investors, that is, the market. The departments at the two ends are strictly forbidden from crossing the wall: not only must document information be kept confidential and not cross the wall, but there must also be physical separation, and personnel are not allowed to interact. In an economic sense, these two ends are in fact reproductions of the supply and demand curves, and the “Chinese Wall” is the point at which supply and demand intersect. The department at the end of the wall connected to the issuer, driven by interest, will work to prove how excellent the quality of the company intending to list is; while the department at the other end of the wall connected to investors, equally driven by interest, will repeatedly emphasize how picky the market is. When the company intending to list approaches the Chinese Wall from both ends through a series of processes, the significance of the market is expressed to the fullest. Under the repeated fault-finding of the department at the end of the wall representing the interests of market investors, the department at the end of the wall representing the interests of the issuer must continuously dig out the investable highlights of the company intending to list; the value of the enterprise is thereby discovered, and valuation is thus formed. But this is not the end of the process. A simulated market, after all, is not the real market. An investment bank’s valuation of an enterprise is only a price range; the final pricing must still be determined through the roadshow. The roadshow involves one-on-one negotiations with investors, especially institutional investors represented by mutual funds, collecting the bids—including quantity and price—of different investors for the same target enterprise. By continuously narrowing the price range, the accumulated final result is the public offering quantity and the offering price.

Under the investment banking organizational structure that simulates the market, the most important responsibility of the end of the wall connected to the issuer—aside from marketing to clients—is to research the enterprise in order to value it. In theory, to do valuation well, one must understand the client even better than the client understands itself. Apart from finance, law, and other requisite financial capabilities, one must also have the ability to understand the physical production processes of the enterprise. In a sense, only by understanding the physical production processes of the enterprise can one grasp its financial processes. Therefore, investment banks all have industry groups, whose members mostly have backgrounds in that industry or are professionals in that field. The number of industry groups depends on the business direction and scale of the investment bank. At the same time, an investment bank also needs professional economic and market research teams, including in macroeconomics, to provide support.

In an economic sense, the market economy selects the superior and eliminates the inferior. In the capital market, the enterprise with the highest market valuation in its industry is also the enterprise with the best business model—the benchmark enterprise. In investment bank valuation, apart from the general construction of valuation models, the customary method is the comparable company method. One searches the international capital markets for comparable benchmark enterprises to serve as reference points, uses the benchmark enterprise as a model to adjust the business model—including the corporate governance structure—that is, to restructure, and thereby obtains the optimal market pricing.

From the above, an optimized organizational structure, excellent industry research capability, and skilled valuation techniques together constitute the core competitiveness of an investment bank. After the failure of the CNOOC issuance, BOCI, on the basis of reflection, began to build its own capabilities in this way. On the one hand, it relied on its own efforts to build a talent pipeline, conducting large-scale, one-time recruitment of graduate students from key domestic universities to form industry groups, and sending them to overseas institutions for training. On this basis, it made campus recruitment an ongoing effort, replenishing fresh blood year after year, and thereby maintaining internal competitive pressure that selected the superior and eliminated the inferior. On the other hand, in accordance with the needs of China’s economic reform and development, it sought breakthroughs in key industries to build competitiveness. In 2000, the Shenzhen municipal government decided to carry out reform in the field of public utilities, and BOCI was entrusted to serve as an advisor. Seizing this opportunity, BOCI organized young rising talents, divided them into several groups, and extensively researched domestic and international restructuring cases in public utility fields such as water supply, gas, and public transportation, repeatedly pondering their physical characteristics and related financial arrangements. On the basis of a thorough understanding of asset specificity, they formed practical and effective restructuring plans, successfully introduced overseas strategic investors, and won widespread acclaim.

It was precisely by virtue of its unique understanding of “whole-process, whole-network” and “whole-process, not whole-network” that BOCI established a competitive advantage in this field, extending its business to infrastructure fields including public utilities in various localities, successively serving as financing advisor for the Beijing-Shanghai High-Speed Railway, the West-to-East Gas Transmission project, the State Grid, the Beijing Subway, the Beijing Olympic venues, and more. More importantly, a single flower does not make spring. As a national investment bank, we had a responsibility to elevate our experience into theory to be shared by society. While summarizing the Shenzhen experience and publishing a monograph, I discussed with 50 Forum members Zhang Shuguang, Sheng Hong, and Mao Yushi and together established the Unirule Public Utilities Research Center. The Center brought together the various industry associations of China’s public utilities, established a board of directors, and I served as chairman. The Center’s mission was to provide decision-making references for the government, solutions for enterprises, and high-quality academic resources for society in the field of public utilities. The Center successively released the Green Paper on China’s Public Utilities, published a variety of monographs and translated works, organized theoretical and case discussion seminars, promoted the exchange of experience among peers, and powerfully advanced the application of PPP techniques and institutional arrangements in China’s infrastructure field.

Twenty years have passed, and China’s national investment banks have completely changed their former appearance of being “poor and blank.” Not only are institutions numerous, but their competitiveness is also improving. The scale of China’s capital markets now ranks among the world’s foremost. At the same time, Chinese enterprises, whether state-owned or private, all believe that restructuring and listing is an important method for strengthening capital and accelerating development, as well as an important avenue for improving governance and raising competitiveness. The two reinforce each other. At present, in the restructuring of Chinese enterprises and in listings both at home and abroad, one can see the figure of Chinese-funded investment banks competing on the same stage as foreign banks. Although we still have a considerable distance to go compared with the international majors, the facts of the past twenty years demonstrate that only by opening up to the outside world and “swimming in the open sea” can one develop the ability to weather storms. We believe that China’s national enterprises and national investment banking industry will grow increasingly in the course of opening up.

II. The Commercialization Reform of China’s Banking Industry and the Development of Chinese Finance

In January 1984, marked by the separation of the Industrial and Commercial Bank of China from the People’s Bank of China, China for the first time began to possess a financial architecture with a central bank and commercial banks independent of the fiscal authorities. But at this time, not only was the financial market still in its infancy, but the banks were still government-led specialized banks, still linked to and even dependent on the fiscal authorities by countless ties. Entering the 1990s, although the financial market had developed considerably and various types of non-bank financial institutions had sprung up, as far as the specialized banks were concerned, they still bore the responsibility of helping to reform state-owned enterprises and fully supporting economic development. There was neither the condition nor the will to build the systems and mechanisms for their own autonomous operation, self-assumption of risk, responsibility for their own profits and losses, and self-restraint—that was still a work in progress.

In December 1993, the State Council promulgated the “Decision on the Reform of the Financial System.” In this decision, the reform goal of “turning the state specialized banks into genuine commercial banks” was clearly put forward for the first time. This opened the process of the commercialization reform of state-owned banks. Because of my work at the State Commission for Restructuring the Economic System, I participated in the relevant work of drafting this decision. Thereafter, I became involved in the actual process of pushing forward this reform, which also constituted one of the reasons why I was reassigned to the Bank of China after the Commission for Restructuring was abolished.

The first task I undertook upon joining the Bank of China in 1998 was to draft a restructuring plan for the Bank of China’s Hong Kong business.

The Bank of China is China’s earliest national bank, and its predecessor can be traced back to the Da-Qing Board of Revenue Bank in 1905. After the founding of New China, with the establishment of the planned economy system, the market foundation for financial development disappeared, all domestic financial institutions were merged into the People’s Bank of China, and the Bank of China, which had existed for decades, thus became the Foreign Business Bureau of the People’s Bank of China. However, overseas, and especially in Hong Kong, New China’s international financial activities were still conducted in the name of the Bank of China. Hong Kong at that time was still a British colony, and constrained by objective conditions, the Bank of China implemented a policy of decentralized operations. In addition to the Bank of China itself, there were thirteen banks including Po Sang, Nanyang Commercial, Chiyu, Yien Yieh, Sin Hua, and the Kwangtung Provincial Bank, four of which were registered domestically and the rest registered in Hong Kong. Together they constituted the Bank of China Group in Hong Kong. In 1997, with Hong Kong’s return to the motherland, the necessity for decentralized operations disappeared, and the drawbacks of overly small capital, complex structure, and low efficiency began to be exposed; restructuring was truly important. The basic idea of the restructuring was to use Po Sang Bank as the main body, inject the businesses of the other banks into Po Sang, and—except for retaining the Bank of China Hong Kong Branch, Nanyang Commercial Bank, and Chiyu Bank—successively deregister the other banks. On this basis, Po Sang Bank would list and be renamed Bank of China (Hong Kong). In December 1999, this restructuring and listing plan was approved by the State Council and began to be implemented. In 2002, Bank of China (Hong Kong) listed overseas in a red-chip form; the restructuring and listing ultimately achieved great success, accumulating useful experience for the commercialization reform of China’s banking industry.

Since the beginning of this century, following China’s accession to the WTO and its commitment to open up the financial services industry, the commercialization reform of state-owned banks was urgently placed on the agenda. This urgency can be glimpsed from the asset-and-liability situation of China’s banking industry at the time. In 2002, the capital adequacy ratio of China’s state-owned banks averaged only about four percent, while the level of bad debts was as high as about twenty percent—the level of bad debts was almost five times that of capital. Judged by the Basel Accord’s eight percent capital adequacy standard for the banking industry, they had already gone bankrupt five times over. China’s banking industry had almost entirely fallen into a state of technical bankruptcy of insolvency.

In fact, as early as the mid-to-late 1990s, people had already noticed the problem of making bank balance sheets healthy. To this end, in 1998, four major asset management companies (AMCs) were simultaneously established, each corresponding to one of the four major state-owned banks to separate out bad debts. At the turn of the century, Zhou Xiaochuan, a member of the 50 Forum and then President of China Construction Bank, wrote a special article proposing the use of a “good bank, bad bank” mechanism to accelerate the reform of state-owned banks, which caused a great stir. With the development of China’s economy, and especially the improvement in the operating conditions of state-owned enterprises, the conditions for the reform of state-owned banks also began to be in place. As the conditions for reform grew increasingly ripe and the urgency of reform grew increasingly prominent, the two reinforced each other. On January 1, 2004, the curtain finally lifted on the Bank of China’s commercialization reform through the joint-stock system.

Compared with previous reforms, this reform started from adjusting the property rights structure of financial institutions, reshaping their governance mechanisms, transforming their internal processes, and establishing a commercialized foundation for sustainable operations, so that financial institutions could truly become market entities. This series of reform projects consisted of three relatively independent yet interrelated parts:

First, taking the cleanup of the balance sheet as an opportunity, reshape the relationship between the state and financial institutions. Its core was to establish a limited-liability mechanism. The state exercised the rights of the contributor of capital through Central Huijin Investment Ltd. (hereinafter “Central Huijin”) and assumed limited liability up to the amount of its contribution, thereby severing the “father-son relationship” between the state and enterprises. Financial institutions would assume their own risks, operate autonomously, and be responsible for their own profits and losses.

Second, taking joint-stock restructuring as the breakthrough point, establish a sound corporate governance structure. Through strategic investors introduced under the guidance of the banking regulatory authority, establish a shareholders’ meeting and a board of directors, with the board hiring the management and the management hiring the employees, forming a modern enterprise system. In order to make this mechanism stable and sustainable over the long term, the measure of public listing of commercial banks in overseas capital markets was adopted, so as to strengthen the constraints of market discipline.

Third, taking the establishment of the China Banking Regulatory Commission as the lever, establish a third regulatory system independent of the government, implement the separation of administrative power from regulation, and strengthen professional regulation.

Based on the experience of the successful restructuring and listing of BOC Hong Kong two years earlier, the Bank of China was selected as one of the first two pilot banks. And since I had participated from beginning to end in the restructuring and listing of BOC (Hong Kong), it was only natural that I also participated in the design and operation of the overall listing plan for the Bank of China. The Bank of China was a century-old establishment with numerous legacy problems, and it operated globally. Subject to the supervision of the regulatory authorities of different countries, with varying regulatory standards, just for the restructuring alone there were several tons of various documents and materials, and the personnel directly participating in the restructuring business numbered in the thousands. One can imagine the difficulty and the enormous workload involved. From this one can also imagine what a vast and arduous reform project the joint-stock reform, restructuring, and listing of all the state-owned banks was.

This reform project was also an innovation project. In this process, the theorists and practitioners of Chinese economics and finance, grounded in China’s actual conditions, creatively used various financial instruments and successfully completed the reform tasks. One important innovation was the creation of Central Huijin Investment Ltd. Central Huijin was initially a company of the central bank; it borrowed the central bank’s balance sheet, used foreign exchange as capital to inject into the banks, shored up the banks’ capital adequacy ratios, and rescued the banks from the brink of technical bankruptcy. On this basis, through the four major asset management companies stripping out bad debts, the fiscal authorities reducing profits, writing off bad debts, and other comprehensive measures, the banks’ balance sheets were made healthy, laying a financial foundation for sustainable operations. It should be explained that such a process of making the balance sheet healthy was also a process of corporatization reform amounting to a complete rebirth. The original state-owned banks had, in the balance-sheet sense, already ceased to exist; in their place, newly established companies took over the licenses, trade names, and clients of the original banks and reopened for business—this bank was no longer that bank. For example, the current Bank of China is a limited liability company first wholly established by Huijin, which then underwent joint-stock reform to form a joint-stock limited company; it took over the license and clients of the original Bank of China and began its new operations. It also meant that although the original Bank of China Limited remained under absolute state controlling ownership, the state now assumed limited liability up to the amount of its capital contribution, thereby severing the traditional father-son relationship of soft budget constraints between the government and state-owned enterprises.

In order to consolidate the fruits of this reform and enable the banks to operate sustainably on a commercialized track, the banks’ corporate governance structures needed to be reshaped and their business and management processes needed to be re-engineered. On the one hand, each bank established a shareholders’ meeting and a board of directors, with the board hiring the management; at the same time, in order to strengthen the constraints of market discipline, the banks went public, and since international market discipline is stronger than domestic, the banks listed not only domestically but also overseas. On the other hand, each bank repositioned itself in accordance with its own business characteristics and re-engineered its various processes in a market-oriented manner, with the market-oriented re-engineering of human resources processes being the focal point. For example, I myself had been a bureau-director-level cadre of the State Commission for Restructuring the Economic System, but in the re-engineering of human resources processes, I not only lost my cadre status but also had to sign a labor contract with the Bank of China—if my performance was poor, the Bank of China could terminate the labor contract. Clearly, such a constraint is a strong constraint, and the process re-engineering thereby bid farewell to the traditional mode of operation.

This round of reform aimed at becoming genuine commercial banks took the establishment of Central Huijin on December 31, 2003, as its starting point. It was first launched by the Bank of China and China Construction Bank, then spread to various types of state-owned financial institutions—including both commercial banks and non-bank financial institutions—and came to a close with the public listing of China Everbright Bank in 2012, lasting eight years. This round of reform gave Chinese financial institutions a new look, and their operating philosophies, modes of operation, capital adequacy ratios, risk management capabilities, and technological levels all rose to a new level. In hindsight, this round of reform came at exactly the right time and was accurately implemented, thereby constituting the foundation for the Chinese financial system’s successful defense against the global financial crisis of 2008.

In this round of reform, the 50 Forum devoted great effort, and many of its members contributed greatly. They were: Zhou Xiaochuan, then Governor of the People’s Bank of China; Lou Jiwei, then Vice Minister of Finance and later Chairman of China Investment Corporation; Guo Shuqing, then Director of the State Administration of Foreign Exchange and later Chairman of Huijin; Xie Ping, then Director-General of the Financial Stability Bureau of the central bank and later General Manager of Huijin; and Li Bo, then Deputy Director-General of the Legal Affairs Department of the central bank. The achievements of China’s banking industry today embody their sweat.

III. The Internationalization of the Renminbi and Chinese Finance Moving onto the World Stage

In 2015, the International Monetary Fund announced that the renminbi would be included in the SDR, formally taking effect on October 1, 2016. This was the fifth reserve currency after the U.S. dollar, the euro, the pound sterling, and the Japanese yen, marking the entry of renminbi internationalization into a new stage.

Because of my work at the Bank of China’s Hong Kong institution, I was among the earliest to become involved in the arrangements for the cross-border use of the renminbi. As early as twenty years ago, hit by the Asian financial crisis, Hong Kong’s financial markets were in turmoil and all trades were depressed. Hong Kong’s stability and prosperity concerned not only the welfare of Hong Kong residents but also the success or failure of “one country, two systems.” After the Asian financial crisis, a series of policies favorable to Hong Kong’s stability and prosperity began to be implemented, the most important of which was CEPA, that is, the Closer Economic Partnership Arrangement between the mainland and Hong Kong under the WTO framework. One important measure of this was implementing zero tariffs on products originating in Hong Kong exported to the mainland. By that time, however, since most of Hong Kong’s manufacturing had already relocated, there were few products originating in Hong Kong. Although the CEPA arrangement was beneficial, it was a drop in the bucket. Hong Kong’s recovery from the Asian financial shock was to a large extent thanks to the free travel of mainland residents to Hong Kong. Large numbers of mainland residents traveled to Hong Kong for tourism—eating, staying, traveling, and shopping—which drove Hong Kong’s consumer industry and supported the income growth of Hong Kong’s grassroots classes. But a problem also became prominent: because the renminbi was still a non-convertible currency, although mainland residents had purchasing power, they had no means of expressing that purchasing power. How to give mainland residents a means of expressing their purchasing power became key. Under the circumstances that the renminbi was still not convertible, one feasible arrangement was for Hong Kong to allow the direct use of the renminbi locally. The cross-border use of the renminbi was thereby placed on the agenda.

However, once the use of the renminbi in Hong Kong was raised, a series of policy and technical difficulties came rushing in, the core of which was the opening of the capital account of China’s balance of international payments. From Hong Kong’s perspective, under the circumstances that the renminbi was non-convertible, the renminbi used in Hong Kong needed to be fully recovered by the mainland—that is, the renminbi needed to flow back. From the mainland’s perspective, if the renminbi could not flow back through the current account (imports), then it would need to be arranged to flow back through the capital account, and this would not only bring pressure on the mainland, which at the time was extremely thirsty for foreign exchange to balance its international payments, but also—with the Asian financial crisis as a cautionary precedent—it was still hard to predict what opening the capital account would mean. Thus, the focal point of the contradiction became whether a closed renminbi reflux loop could be formed so as to effectively control the risks of opening the capital account.

In 2003, I began to participate in the design of this reflux loop. After repeated deliberation and continuous argumentation, a special arrangement was formed that leveraged the specific advantages of Bank of China (Hong Kong): at the consumption venues frequently visited by mainland residents traveling to Hong Kong, designated merchants could accept the renminbi, and the renminbi revenue of these designated merchants would be promptly converted into Hong Kong dollars by Bank of China (Hong Kong); Bank of China (Hong Kong) signed an agreement with the Shenzhen Branch of the People’s Bank of China to transport the renminbi positions (mainly cash) it obtained from the designated merchants back to the mainland. Thus, the renminbi flowed out of the mainland through the current account via multiple channels (carried by individuals), but flowed back into the mainland through the capital account via a single, special, closed conduit (the special arrangement between BOC Hong Kong and the Shenzhen Branch of the People’s Bank of China).

It should be pointed out that under such a special arrangement, Bank of China (Hong Kong) was in effect performing the function of central bank clearing. Its essential significance was: under the circumstances that the renminbi was non-convertible—that is, under the circumstances that there was no foreign exchange market settlement—the clearing of the market could only rely on the central bank’s clearing. And since the central bank, by virtue of its sovereign nature, found it difficult to conduct cross-border clearing, it entrusted a financial institution that it could trust and that was within its jurisdiction to seek agency clearing business.

With the implementation of the above special arrangement, mainland residents could pay directly with renminbi when consuming in Hong Kong. Not only was consumption convenient, but the scale of renminbi use also greatly increased. While promoting the stability and prosperity of Hong Kong’s economy, it also made the original cash-based clearing conduit between BOC Hong Kong and the Shenzhen People’s Bank appear too narrow, unable to fully meet the need for renminbi reflux. So, outside the conduit, a “pump” was set up—that is, through special arrangements, certain mainland institutions were designated to issue renminbi bonds in Hong Kong to channel renminbi funds back to the mainland. At first these were the major banks, and later this was extended to the Ministry of Finance as well. This measure both eased the congestion of the original clearing conduit and, by opening a new channel for reflux through bonds, expanded the reflux of the domestic currency through the capital account, laying the foundation for Hong Kong’s offshore renminbi financial market. At this point, the basic framework of renminbi internationalization—the genetic makeup of “clearing bank + offshore market”—began to be laid.

The international financial crisis of 2008, which originated in the United States, brought a severe shortage of international dollar liquidity; the “dollar shortage” caused normal international economic and trade exchanges to grind to a halt for lack of means of payment. Employing a new international currency for international payments, so as to ease the severe shortage of international liquidity, became a pressing task. And since China’s GDP already ranked among the world’s foremost, and even more because China had become one of the largest international trading entities, the renminbi became the first choice for a newly emerging international currency, and the renminbi was thereby internationalized, no longer merely confined to Hong Kong outside the mainland’s borders. Clearly, the international demand for the renminbi presented the challenge of opening the capital account and achieving convertibility for a developing country even more acutely before China.

With the support of the Boyuan Foundation, Wu Xiaoling, a member of the Academic Committee of the 50 Forum, took the lead in organizing large-scale research activities on renminbi internationalization. One of the difficulties of the research was the question of the relationship between the international use of the renminbi and the opening of the capital account. In this regard, Hong Kong’s experience needed to be seriously explored and summarized, so as to elevate it from a passive, temporary, expedient arrangement into an active, long-term, stable strategy of internationalization. I undertook this research and produced the special research report “The Position and Role of Hong Kong in the Internationalization of the Renminbi.” The conclusion of the research was: on the basis of the financial authorities of both sides reaching a consensus and cooperating closely, a mechanism could be formed for the renminbi to flow back to China and operate in a closed manner under the condition that the capital account was non-convertible. The best arrangement was to designate an international bank that the Chinese financial authorities could manage to act as the clearing bank. This would not only not harm the objectives of China’s foreign exchange controls, but would on the contrary be conducive to the accumulation overseas of renminbi flowing out through the current account. Once the overseas financial authorities gave permission, the renminbi accumulated overseas could form an offshore renminbi financial market, and flow back to China through already-formed or newly created domestic-currency capital-account reflux channels—for example, renminbi raised in the offshore market entering in the form of direct investment. It is worth noting that this research supported by the Boyuan Foundation was not content merely with writing a research report, but aimed to form an operable policy system and implementation measures. The research team continuously communicated with the financial authorities of both Hong Kong and the mainland, and while providing intellectual support, also solicited the opinions of financial institutions in both places and provided advisory opinions, making the operation more meticulous. The most obvious result was jointly promoting the formation of the Hong Kong Monetary Authority’s Circular No. 2 of 2010. The circular determined that: first, the flow of renminbi into and out of Hong Kong was the right of the People’s Bank of China, and Hong Kong would not interfere; and on this basis, the renminbi would be treated the same as other freely convertible currencies and could be used for transactions in Hong Kong’s financial markets. At this point, the model of “clearing bank + Hong Kong offshore market” was formalized and standardized. Using Hong Kong as a blueprint, offshore renminbi markets in Taiwan, London, Frankfurt, Paris, Singapore, Bangkok, Seoul, and North America were successively opened, and the internationalization of the renminbi made its formal entry onto the global stage.

Since cross-border trade settlement in renminbi began on July 2, 2009, only nine years have passed. Over these nine years, the internationalization of the renminbi—though its urgency was within expectations—unfolded beyond expectations. Its speed was so rapid and its scale so enormous that those of us who participated in its design in those days had never anticipated it. On July 2, 2009, the pilot for cross-border renminbi settlement of goods trade began with only 365 enterprises in the five cities of Shanghai, Shenzhen, Guangzhou, Zhuhai, and Dongguan. By 2010 it had expanded to twenty provinces, and by 2011 all enterprises in all provinces nationwide could use the renminbi for trade settlement—not only for goods trade but also for services trade. More importantly, it could be used for cross-border direct investment. At present, the renminbi has become the world’s seventh-largest international payment currency and second-largest trade financing currency; its scope of use extends across the globe, and it has thereby entered the SDR to become one of the reserve currencies of various countries.

More importantly, the internationalization of the renminbi created fresh experience for resolving the contradiction between the opening of the capital account and convertibility for developing economies. Due to the needs of my work, over the past nine years, I have visited the central banks and major financial institutions of almost all of Eurasia and half of the Americas to explain renminbi internationalization. To put it accurately, this was not merely proactive promotion, but more often exchanging views and discussions with foreign counterparts at their invitation, from which I deeply appreciated the uniqueness of this fresh experience—which at the same time strictly conformed to the general logic of economics.

The traditional view holds that if the capital account is opened, it necessarily means the convertibility of the domestic currency with foreign currencies, and once convertibility exists, the inflows and outflows of international capital—especially short-term capital—will disturb macroeconomic stability. The Asian financial crisis of twenty years ago and today’s financial turmoil in Argentina and Turkey are the examples commonly cited by the traditional view. The necessity of opening the capital account and the risks of opening it present a difficult choice. But the successful practice of renminbi internationalization shows that the domestic-currency side of the capital account can be opened first, and then the convertibility of domestic and foreign currencies on the capital account can be achieved—that is, first realize the flow of renminbi through the capital account, and then create the conditions to realize the convertibility of domestic and foreign currencies. This step-by-step approach helps reduce difficulty, ease contradictions, and gradually approach the goal.

Theoretically speaking, the core of this fresh experience is that it created a non-corner solution to Mundell’s impossible trinity. Traditional theory holds that among the three—monetary policy independence, a fixed exchange rate, and free capital flow—only two can hold at a time, that is, the corner solution of 1+1+0=2. But the experience of renminbi internationalization shows that, under the condition of satisfying an aggregate solution of 2, non-corner solutions such as 1+1/2+1/2 and 2/3+2/3+2/3 can also hold. In other words, relax monetary policy independence a little, let the exchange rate float in a managed way a little, and open the capital account a little—all can satisfy the basic condition of an aggregate solution of 2. The emergence of non-corner solutions means that the corner solution of Mundell’s impossible trinity is not the only solution; it has multiple solutions, thereby opening up in practice multiple paths and related arrangements for opening the capital account. This both enriches, in theory, the connotation of Mundell’s impossible trinity, while at the same time, through its diversity, tenaciously proving the theoretical soundness of the Mundell trinity, thereby foreshadowing the direction of convergence for opening the capital account and its related arrangements.

The practice of renminbi internationalization enriches economic theory and also propels the deepening of China’s financial reform and opening-up. With the development of renminbi internationalization, the marketization of exchange rates, and further the marketization of interest rates, has become a new key area and important link of reform, and behind this in turn is the opening of the financial markets and the financial services industry. This in turn demands the reform and innovation of the financial regulatory system. With such a ratchet effect—interlocking, rolling forward—Chinese finance presents a pattern of a great power with great finance. The development of Chinese finance has entered a new stage, and it finally needs to face the problems of the world.

In the process of renminbi internationalization, the 50 Forum also made major contributions. Not only did it, during the international financial crisis of 2008, repeatedly organize discussions on related issues and form a series of ideas and results, but more importantly, many of its members personally participated in advancing this process. They were Zhou Xiaochuan, Wu Xiaoling, Yi Gang, Li Yang, Yu Yongding, Li Bo, Guan Tao, Huang Yiping, and others. I thank them and the teams they led—especially the central bank team—who, when the tsunami of the international financial crisis struck, not only faced the danger without fear but on the contrary seized it as an opportunity, opening up a new chapter in the internationalization of the renminbi at the opportune moment.

A Mission That “Did Not Make Sense”

In early 1971, Jiang Zemin was a forty-four-year-old engineer who had recently left the Wuhan Institute of Thermal Machinery and joined the First Ministry of Machine Building as deputy director of its Foreign Affairs Office. He had worked in the automobile and electrical industries, studied factory production in the Soviet Union, and traveled with technical delegations to France and Japan. This combination of engineering and foreign experience made him a natural candidate when the ministry needed a leader for an industrial survey mission to Romania.

The assignment was unusual. Besides Albania, China had never provided a systematic aid program to a Warsaw Pact country (Albania quit the Warsaw Pact in 1968). However, in 1971, China had agreed to help Romania build facilities for automobile molds, bare copper wire, hydraulic and pneumatic components, electrical equipment, and measuring instruments. To launch the investigation and aid program, the Ministry gathered fifty-one specialists from factories and design institutes across China. Thus, Jiang was selected as the leader of this specialist group. Before departure, Jiang required each group to investigate comparable plants at home, collect technical materials, and prepare a preliminary design.

Jiang arrived in Bucharest on July 28, 1971, with the six members of the automobile-mold group. Other teams followed in August and September. For most of the specialists, this was their first trip abroad. What they saw immediately put the purpose of the mission into question.

During the early 1970s, China’s economy was stagnating. Food and consumer goods remained scarce. However, in the eyes of Jiang’s team, Romania appeared much wealthier. The visitors saw new apartment buildings; many Romanians had private automobiles, televisions, and refrigerators. Its factories were also more modern than they had expected. Many operated machinery imported from West Germany, Italy, Britain, and the United States.

Some team members began to describe the mission as “the poor helping the rich” and “the technologically backward helping the advanced.” Their concern came directly from the factories and streets around them. If Romania already possessed Western machinery that China could not manufacture, what exactly was a Chinese aid team doing there?

Jiang understood that the team could hardly continue its work until this question had a convincing answer. After doing observation and analysis, he told team members that China was passing through an extraordinary diplomatic period. He said, “After years of isolation, the country needed an opening in Europe. Romania occupied a valuable position inside the Warsaw Pact: it resisted Soviet control, maintained relations with Western countries, and had begun to build an economy less dependent on Moscow. Cooperation with Romania could therefore serve a purpose far beyond the factories under negotiation.”

For a mid-level official in the machine-building bureaucracy, Jiang’s reasoning was remarkable because it rested on observation rather than privileged information. He had no access to the secret exchanges taking place among senior Chinese, Romanian, and American leaders. He could only work from the contradiction before him: China was sending industrial assistance to a country that appeared more prosperous and technologically advanced. Rather than conclude that the mission was misguided, Jiang treated this contradiction as a clue. If the assignment made little sense as conventional foreign aid, Beijing must have valued cooperation with Romania for a broader strategic purpose.

Events at the diplomatic level confirmed his inference. China was seeking a way out of its international isolation, while Romania was quietly helping Beijing and Washington explore the possibility of improved relations. Jiang had therefore discerned a larger diplomatic shift from the limited evidence available to him. More importantly, he turned that insight into an effective response to the team’s doubts. By explaining how their assignment could contribute to China’s wider opening, he gave the specialists a reason to view Romania’s relative prosperity as an opportunity rather than a reason to question the mission. Complaints about “the poor helping the rich” subsided, allowing the team to concentrate on its work. The episode demonstrated not only Jiang’s ability to recognize the broader significance of an unfamiliar assignment, but also his capacity to restore confidence and unite a team around a shared purpose.

Challenge the Existing Aid Model

The next problem arose from Romania’s understanding of aid. Since Chinese construction aid was usually sent to countries that had little industrial capacity, Chinese teams were accustomed to designing and equipping a complete factory or production line. Romania instead asked China to provide only the workshop, production line, or individual machine that suited a particular project. It would combine that contribution with its own factories, products, drawings, and industrial equipment. Chinese participants called this “ordering from the menu” (点菜). The ministry history describes it as a new form of Chinese aid, and it was the first time the delegation had to turn such a selective request into a workable plan.

The electrical measuring-instrument project at Timișoara offers a clear example. Romania planned a new plant that would combine precision meters, multimeters, and switchboard frequency meters in the Chinese-supported part with older Romanian products transferred from a Bucharest factory. Some equipment would be made in Romania, some had already been imported by Romania, and some would come through Chinese aid. The Chinese contribution was therefore one part of a production system Romania was assembling for itself.

This arrangement differed sharply from the complete factory the Chinese team had expected to design. Romania changed the product list and output targets, and several items were to be made from Romanian drawings, including products Chinese factories had not previously manufactured. The team had to determine whether Chinese processes and equipment could produce each item and what machinery, tooling, and technical responsibility China could safely undertake. It could no longer begin with a Chinese factory design and reproduce it abroad.

Jiang asked the team to evaluate each request according to China’s actual industrial capacity. He reported the departures from the original agreement to the Ministry and the Ministry of Foreign Economic Relations and sought instructions. The direction he then conveyed did not force Romania back to a complete Chinese package. Where Romania supplied drawings, the team would first examine whether Chinese processes and equipment could make the product. If they could, China could undertake the process design and provide the equipment and tooling within its capacity. If they could not, the product would not enter China’s commitment.

The flexibility that Jiang proposed seems normal nowadays. However, it took some courage in the 1970s. The great influence of the ultra-left ideology and the “Gang of Four” hindered any change in work procedure. Jiang’s new proposal, which indicated that Chinese design and implementation of aid programs needed to compromise with Western technology, was a great violation of ultra-left ideology. The idea initially met with considerable skepticism. Jiang nevertheless persuaded Fang Yi, the minister responsible for China’s foreign economic relations, to approve this new approach. Fang later recalled that Jiang had faced considerable difficulty in convincing him because China had long followed a fixed procedure in foreign-aid construction. Jiang succeeded because his proposal rested on thorough investigation and a clear sense of responsibility. Jiang’s innovative idea demonstrated that he was willing to challenge current practices according to new situations.

Learning Western Technology Through Romania

Jiang did not limit his scope to finishing the aid program. Rather, he treated Romania as a unique example to learn about technology importation, which was a taboo during Mao’s era. Romania was a socialist economy with extensive access to Western machinery in the 1970s. Romanian factories often combined locally made equipment with machines imported from several capitalist countries. Chinese engineers could see the imported technology operating inside complete production lines, compare it with equipment used in China, and discuss its strengths with Romanian specialists. Direct access of this kind remained rare in the early 1970s.

Jiang asked his team to approach Romanian engineers with humility and to treat the projects as mutually beneficial technical cooperation. The attitude produced practical results. Romanian specialists allowed Chinese visitors to inspect machinery closely, brought out equipment drawings for them to examine, and provided samples and technical formulas. In the bare copper wire project, these materials helped Chinese factories think about a new series of wire-drawing machines rather than merely copying an entire foreign production line.

The most important follow-up came from a West German high-speed rolling mill at a Romanian wire factory. It operated at forty-five meters per second. China’s only comparable mill, imported from Hungary in the 1950s, reached fifteen to twenty-one meters per second and frequently caused production accidents. Jiang proposed adding the Romanian equipment to the two countries’ scientific and technical cooperation program. In July 1972, a Chinese group returned to study its production process. Jiang also encouraged the group to remain in Bucharest for an international mining-machinery exhibition so that it could examine other recent technologies. After the group returned, the Ministry of Metallurgy and the First Ministry of Machine Building began considering a domestically designed high-speed mill with an annual capacity of about 300,000 tons.

For Jiang, Romania’s technology-import model offered a practical reference. Unlike other Chinese people who considered foreign technology an ideological threat, foreign machinery provided a benchmark and a source of technical knowledge in Jiang’s mind. Organized study could then lead to domestic design and production. Importing technology strengthened self-reliance when Chinese industry treated the equipment as material to be understood and absorbed. The Romanian mission allowed Jiang to apply this idea several years before China began importing Western technology on a much larger scale.

A Window Before China Opened

Jiang’s experience in Romania is worth mentioning, because it showed an approach to leadership that would become increasingly important as China moved towards opening to the world. Faced with an assignment that appeared inconsistent with China’s circumstances, he did not simply defend existing policy or follow established procedures. He examined the situation, identified the larger diplomatic change behind the mission, and adjusted China’s aid practices to conditions that policymakers in Beijing had not anticipated. At the same time, he recognized that engagement with a more technologically advanced country could serve China’s own development. These judgments shared a common premise: established policy should be tested against reality, and foreign relations should ultimately expand China’s capacity to develop itself. These were precisely the abilities required of a leader guiding China through deeper reform and greater engagement with the international economy: reading changes beyond China’s borders, overcoming resistance within the bureaucracy, and turning foreign contact into domestic development.

As Chinese enterprises expand worldwide, they have brought abroad an entire body of development experience, such as infrastructure first, close government-business coordination, and long-term patience. But the author observes that when this experience travels, it runs into a Western-dominated framework of development discourse within which Chinese practices must constantly explain themselves. Through three cases, namely Piraeus, Colombo Port City, and South Africa’s Musina-Makhado SEZ, the author traces how experience gets dismantled into fragments that can be integrated into corresponding Western standards, disciplined by compliance, and stripped of the institutional conditions that once sustained it.

Many concepts Chinese enterprises take for granted actually have a whole system behind them, which is usually invisible. In the Chinese context, an “industrial park” 工业园区 means a zone where infrastructure is already completed. Even by the most basic 1990s standard, san tong yi ping 三通一平, “three connections and one leveling” (water, electricity, roads, and a levelled site), and today qi tong yi ping 七通一平, adding drainage, telecommunications, gas, and heating. The quiet presupposition behind this checklist is the presence of a local government providing basic public services, from guaranteeing power supply to negotiating with locals.

The trouble, as the author’s cases make painfully clear, is that many regions lack even this baseline governance capacity. Where the state cannot mediate between enterprise and local society, a company that wants to produce has no choice but to shoulder responsibilities that ought to belong to government, from negotiating land acquisition directly with communities to building infrastructure from scratch. From the outside, this looks like a Chinese company “overreaching.” In structural terms, it is a company forced to perform state functions without state capacity—and then judged, within the prevailing discourse, for doing precisely that.

This is why the author’s reframing of “translation” deserves emphasis. The concept of Translation here is not the same as simple public relations. I would like to understand it as a form of governance capacity: recognizing that one’s own vocabulary encodes institutional conditions that cannot be assumed elsewhere, and learning how different societies define “good development” on their own terms. I present this article because I think it captures well the dilemma Chinese enterprises are facing worldwide.

Thanks to the kind authorisation of the Author Li Haoyue and editor Zheng from , I can publish the English ver here. Below is the translation I made with the help of AI.

Translational Dilemmas and Practical Knowledge in China’s “Going Out” Era

Over the more than four decades since Reform and Opening-up, the overseas footprint of Chinese enterprises has evolved from tentative positioning to systematic, deep engagement. As of 2023, China’s outward foreign direct investment stock had exceeded USD 2.7 trillion, with Chinese enterprises operating in more than 190 countries and regions worldwide. Accompanying this export of capital and engineering capacity is an entire body of practical experience that gradually took shape over the course of China’s own development: an investment logic that leads with infrastructure, a path that drives regional growth through industrial clusters, a relatively close coordinating relationship between government and enterprises, and a developmental orientation that emphasizes long-term investment and strategic patience. When these enterprises go out into the world, what they confront is a Western-dominated framework of knowledge and system of discourse within the global development arena—one that has been long in the making and is relatively stable. This framework often presupposes an entirely different developmental logic: that the market is superior to government, that short-term returns outweigh long-term strategy, that individual rights take precedence over collective goals, and so on. In their overseas practice, Chinese enterprises are frequently required to explain their own conduct within this framework, with the result that certain institutional arrangements that were originally nested within one another become broken down into more widely current terms such as “efficiency,” “compliance,” and “commercial decision,” while the parts behind them—those involving state coordination, temporal arrangement, and social objectives—find it far harder to obtain an equivalent degree of expressive space. Thus, the more Chinese enterprises try to prove abroad that they are responsible, compliant, and transparent, the more they are forced to abandon precisely those institutional characteristics that genuinely constitute their competitive advantage. And when they attempt to preserve these characteristics, they are often misread as opaque, as exporters of authoritarianism, or as instruments of geopolitics.

As the Belt and Road Initiative shifted from vision to large-scale practice, similar frictions have continually emerged. The labor disputes at Greece’s Port of Piraeus, the compliance restructuring of Sri Lanka’s Colombo Port City, and the stagnation of South Africa’s Musina-Makhado Special Economic Zone occurred under different political and legal environments, yet they exhibit a similar structure of problems: the projects were not weak at the level of engineering and financing, yet they repeatedly encountered resistance at the level of explanation and negotiation. This predicament directly affects the actual operation of the projects—from financing structures to labor management, from environmental assessment to community relations—as Chinese enterprises continually face the challenge of “translation.”

The Price of “Being Understood”: The Dismantling of Experience and the Power of Interpretation

When Chinese experience enters the international arena, what it first encounters is often not direct political confrontation, but rather a problem concerning “intelligibility.” Certain practices can be fairly naturally subsumed under categories such as “reform,” “efficiency improvement,” or “market-oriented adjustment,” while others require constant justification of their reasonableness. The difference does not derive entirely from the practices themselves, but is related to the way the existing framework of knowledge classifies them. The experience of Greece’s Port of Piraeus offers a concrete case.

The 2008 global financial crisis dealt a heavy blow to the Greek economy, triggering a severe sovereign debt crisis. As a condition for receiving bailouts from the European Union, the European Central Bank, and the International Monetary Fund, the Greek government was required to implement large-scale privatization and fiscal austerity policies. The Port of Piraeus, as Greece’s largest and one of Europe’s important container ports, was placed on the priority privatization list. Against this backdrop, China Ocean Shipping Company (COSCO) obtained a 35-year concession for Piers 2 and 3 of the port in 2008. In 2016 it further acquired a 67% stake in the Piraeus Port Authority, for a total transaction value of EUR 368.5 million, and committed to more than EUR 350 million in mandatory investment in the future. This transaction itself took place within a Western-dominated framework of austerity policy, yet this institutional background did not become a focus of discussion in subsequent international reporting. On the contrary, the impact of Chinese capital on European labor standards swiftly dominated the media after the strike protests of 2016. After COSCO took over, it carried out modernization of the port; in the corporate narrative, these measures—introducing automated equipment, optimizing loading and unloading processes, and implementing new labor management systems—were described as necessary steps to enhance competitiveness and achieve internationalized management. However, in the experience of Greek workers, these words triggered an entirely different set of historical memories. In the context of Greek society, terms such as “flexible employment” and “performance management” had appeared repeatedly during the privatization wave of the preceding decade or more, each time accompanied by layoffs, outsourcing, and cuts to benefits. Consequently, these seemingly neutral management terms had already become highly politicized in the local context. In August 2016, some port workers held a protest beneath the newly installed automated cranes, with banners reading in Greek and English: “We are not China’s cheap labor!” and “COSCO = Neo-colonialism!” The protest rapidly escalated into a strike, at one point bringing the port’s operations to a standstill.

The international media quickly seized upon this story, with mainstream outlets such as the Financial Times and the BBC framing it as an erosion of European labor standards by Chinese capital.[1] In these narratives, Piraeus became yet another example demonstrating that Chinese state-owned enterprises were replicating their domestic “authoritarian” labor management abroad, undermining Europe’s hard-won system of social protection. However, before COSCO’s entry, the port had already undergone multiple rounds of institutional change; outsourcing and temporary contract systems did not begin with the Chinese takeover. What is worth noting here is not a defense of any particular mode of management, but rather an observation of the different interpretations that similar practices receive under the names of different actors. The modes of conduct are similar, yet the moral evaluations are not symmetrical. When the Greek government and Western capital pushed for labor flexibilization, it was mostly regarded as a necessary adjustment under economic crisis, and the media naturalized it as “necessary reform and the growing pains of transition”; whereas when Chinese enterprises adopted similar practices, they were labeled “exploitation,” becoming “authoritarian export,” “neo-colonialism,” and “the expansion of the China model.”

Of course, this does not mean that Chinese enterprises should not face criticism. Labor rights issues are in themselves real and legitimate. But the experience of Piraeus suggests that international understanding often depends on established language and historical memory. Whoever is closer to this language is more readily regarded as “the norm.” This double standard reveals a fundamental problem: the modern world is not a cognitively neutral space. Within this space, understanding does not occur naturally, but is continually shaped through institutions, standards, and professional language. More critically, whose experience can be naturalized as “universal” and whose practice must be constantly explained is itself a relation of power.

When union members shouted “We are not China’s cheap labor,” a deeper question was obscured: why is “China’s labor” naturally equated with “cheap” and “exploited”? Yet within the context of Chinese enterprises, these same port workers are the industrial working class, are employees of state-owned enterprises, possessing collective dormitories, staff canteens, and political study groups. The answer perhaps lies in the fact that the operational logic of Chinese port enterprises is deeply embedded within a complete institutional ecology—including the dual role of trade unions and Party organizations, the social responsibility positioning of state-owned enterprises, and the government’s active coordinating mechanisms in labor-capital relations. These elements together constitute the particularity of China’s labor system. When COSCO attempted to operate in Greece, this institutional ecology could not be transplanted in its entirety. It was forced to enter the Greek legal framework, EU labor standards, and the neoliberal management paradigm, with the result that those mechanisms that maintain labor-capital balance within Chinese society were stripped away, leaving only the most superficial logic of “cutting costs and raising efficiency.”

The Piraeus case reveals the first predicament that Chinese experience encounters when “going out”: experience is often dismantled during cross-institutional transfer and incorporated into existing systems of classification. When institutional arrangements that originally supported one another must be broken down into several identifiable parts within the existing Western-dominated conceptual system in order to “be understood,” those institutional linkages that cannot be clearly named—which genuinely constitute their distinctiveness—often cannot be expressed. “Being understood” here is not a bridge toward communication, but rather a screening mechanism—it determines which experiences can be named and which logics must remain silent. It is precisely in such a context that Chinese experience is often forced to appear in the form of “market behavior” or “commercial decision,” while the state role, long-term temporal outlook, and complex governance practices behind it are regarded as untranslatable, undiscussable, and even lacking legitimacy. It must be pointed out that although this screening mechanism at the cognitive level constitutes a structural constraint on Chinese experience “being understood,” it does not necessarily lead to conflict. The formation of the port dispute was also related to the early-stage judgment of social risk in the project. Had the sensitivity of local labor politics been more fully assessed at the launch stage, and had earlier consultation mechanisms been established, some of the tensions might have been eased. The experience of Piraeus both presents the differences among interpretive frameworks and reminds enterprises of the need for more careful social risk identification during the process of institutional transfer.

The Price of Compliance: Experience Domesticated by Standards

If Piraeus presents the structural predicament of “being understood,” then Sri Lanka’s Port City presents another, more complex and more concealed situation: when Chinese experience attempts to proactively integrate into the existing system of discourse and strives to prove its own “progressiveness” and “compliance,” it is instead drawn ever more deeply into the discipline of established standards. The threshold of understanding is no longer manifested as exclusion, but appears in the form of acceptance.

The Colombo Port City project was formally launched in September 2014, with China Communications Construction Company and its subsidiary China Harbour Engineering Company investing USD 1.4 billion to build a new urban district of 269 hectares through land reclamation. The project was positioned as the flagship project of the Belt and Road Initiative in South Asia, promising to make Colombo the “new Dubai of South Asia.” However, from its very inception the project faced multi-sided opposition from fishing communities, environmental organizations, religious leaders, and some civil society groups. The controversies centered on environmental impact, the livelihood problems of fishermen, and the mode of land use. Critics worried that land reclamation would alter marine ecology and affect traditional fishing activities, and questioned whether the project would exacerbate spatial division within the city.

After the Sri Lankan presidential election of January 2015, the new government announced a suspension of the project, demanding a re-examination of the agreement and the environmental impact assessment, and Port City construction thus entered a stagnation period lasting fifteen months. In March 2016, against the dual backdrop of debt pressure and the need for economic development, the Sri Lankan government decided to restart the project, but required comprehensive compliance adjustments. The Chinese enterprises were well aware of the international public-opinion pressure this project faced, and in their publicity placed special emphasis on the project’s sustainability, inclusiveness, and modernity. In terms of environmental compliance, the environmental impact assessment report ran to several thousand pages, and an internationally renowned green building certification body was engaged to apply for LEED Gold certification.[2] In terms of governance structure, the Port City was positioned as the Colombo International Financial City, introducing an English common-law system and an independent arbitration mechanism, emphasizing alignment with global capital markets. In terms of community participation, agreements were reached with the fishing community, promising to move dredging vessels further offshore, providing 500 million Sri Lankan rupees to a fishermen’s income-support program, and organizing multiple rounds of public information sessions. On the surface, this was a process of gradually integrating into the international standards system. But the problem lies precisely in this: while Chinese experience strove so hard to prove its own conformity with international standards, these standards themselves never became an object of discussion.

As the enterprise’s compliance measures accumulated, the developmental logic of the project also quietly changed. The core objective of the Port City gradually crystallized as the construction of an international financial center, benchmarked against existing models such as Singapore and Dubai. This path is already quite mature within the landscape of global urban competition, and the associated social consequences—spatial segregation, class stratification, institutional arbitrage—have long been amply discussed. However, in the compliance narrative of the Port City, these problems were systematically suspended, replaced by repeated emphasis on “international viability,” “investor confidence,” and “rating recognition.” For local residents, the compliance adjustments did not significantly change the social orientation of the project. The high-end residences, financial services, and enclosed governance structure in the Port City plan kept it at a distance from the surrounding low-income communities from the very start. The large number of jobs the project promised were mainly concentrated in low-skill service sectors, while high-value-added financial and professional positions were more likely to be occupied by foreign talent. Surveys show that residents of low-income communities near the Port City were full of ambivalence about the project: on the one hand, they hoped it could bring prosperity to Colombo; on the other hand, they feared they would be further marginalized. A woman living in a neighboring community emphasized in an interview that this future city being built did not belong to them, that at most they would work there as cleaners.[3] The Port City therefore did not alleviate Colombo’s existing social inequality, but instead spatialized and legitimized it through institutional design.

Ironically, when Sri Lankan scholars and activists criticized the Port City, the very language they used was likewise the critical discourse of Western development studies—such as “neoliberal urbanization,” “exclusionary development,” and “spatial segregation.” The enterprise side, for its part, had no choice but to respond by demonstrating higher-standard compliance certifications and more detailed social responsibility assessments. Here both criticism and response fell into the same linguistic system, circulating continuously, yet rarely touching upon whether the developmental path itself could have different choices. No one asked whether there exists a path of urban development that does not rely on the “international financial center” model. Was it possible to build a new city that was both modern and inclusive, rather than replicating Singapore or Dubai? China itself, during the construction of special economic zones in the early period of Reform and Opening-up, had once explored ideas such as “letting some get rich first to bring along the rest” and “coordinated regional development,” but these alternative experiences were not seriously considered in the Port City project. The reason is not complicated: in international capital markets, a “Colombo version of Shenzhen” holds no appeal; only a “Colombo version of Singapore” can secure financing. Investors, rating agencies, and international banks all use the same set of standards to assess a project’s “viability”—and this set of standards is itself the dominant framework that took shape over the long course of neoliberal globalization; if the project wished to obtain financing and rating support, it had to operate within the existing framework.

This process reveals the second predicament that Chinese experience encounters when “going out”: when “proving oneself” becomes the primary task, the imagination of alternative development is dissolved in advance. So-called compliance leaves little room for different developmental imaginations; through the mainstream system of “standards,” it gradually draws the project closer to existing models. The alternative vision of modernization contained in China’s development path—one that emphasizes state coordination, long-term planning, and the priority of social objectives—is difficult to express in international projects. This is not because these experiences are unimportant, but because they cannot be incorporated into the knowledge framework that dominates global capital flows and project assessment. The Colombo Port City project was permitted to exist, but it had to reorganize itself within the mainstream standards system; in this process, the experience acquired legitimacy while at the same time losing its original space of alternative imagination. Therefore, the problem with Colombo Port City lies not in whether it is sufficiently green, smart, or compliant, but in the fact that this entire compliance mechanism itself has already presupposed what counts as “good development.” When Chinese enterprises accept this presupposition, they inevitably relinquish the contest over the power to define development. Compliance here is no longer a bridge toward dialogue, but an absorptive mechanism—it converts potential alternative paths into extensions of the existing order. The Colombo Port City case demonstrates that the price Chinese experience may pay in the international arena can appear not only in the form of exclusion, but also in a particular form of acceptance. The experience is not that it goes unUnderstood or is misunderstood, but that it is understood in a way that has already been written in advance.

In 2017, Shenzhen Hoimor Investment Co., Ltd. proposed building a large industrial complex in South Africa’s Limpopo Province, which was expected to become an important Belt and Road investment project in Africa. Limpopo is one of South Africa’s poorest provinces, with an unemployment rate that has long remained above 30%, bordering Zimbabwe and Botswana. This project, named the Musina-Makhado Special Economic Zone Energy-Metallurgical Complex (MMSEZ), was planned to transform this impoverished region into a modern heavy-industry base. The scale of the project plan was enormous, with total investment ranging from USD 10 billion to USD 40 billion. Core facilities included a steel plant with an annual capacity of 5.1 million tons, supporting coking and ferroalloy plants, a cement plant with an annual output of 6 million tons, and copper and iron smelting plants, among other heavy-industry facilities. To support these energy-intensive industries, the project also planned to construct a coal-fired power plant with an installed capacity of 4,600 megawatts. The entire project covered an area of more than 80 square kilometers, was planned to be built in phases, and was expected to create more than 20,000 direct jobs. In theory, this project perfectly embodied the classic logic of China’s “infrastructure first, industrial agglomeration, regional development”—that is, through large-scale infrastructure investment, introducing leading enterprises, forming industrial clusters, driving the development of surrounding areas, and ultimately achieving employment growth and improvement in local finances. The then President of South Africa, Zuma, publicly expressed support, and the Limpopo provincial government designated it as the province’s number-one project, hoping to change the province’s economic outlook through it.

However, after the project was launched, the constraints of basic conditions quickly became apparent. The first was the energy problem. The planned 4,600-megawatt coal-fired power plant is not uncommon in China. For industrial projects of a similar scale, power supply is usually uniformly guaranteed by the state grid, and enterprises need not bear responsibility for systemic power security. But in South Africa, the national electricity company Eskom has long been mired in a supply crisis, and industrial parks must solve their own power-source problems. In 2023, South Africa experienced the most severe power shortage in its history, with more than 300 days of load-shedding nationwide. Against this backdrop, for an energy-intensive heavy-industry park to rely on itself to secure stable power supply was a nearly impossible task. The water-resource problem likewise constituted a structural obstacle. The project plan required 249 million cubic meters of industrial water annually, equivalent to five times the total existing water consumption of the locality. Although the plan proposed the idea of cross-border water diversion, this would mean negotiating water-rights arrangements with Zimbabwe and Botswana, constructing cross-border water-transfer pipelines, and coordinating the environmental regulations and water-use priorities of the three countries. Such cross-regional resource allocation, in China, belongs to the category of national strategic engineering, uniformly coordinated by the central government—for example, major projects such as the South-to-North Water Diversion and the West-to-East Gas Transmission. But the Musina-Makhado SEZ is an enterprise-led investment project, which clearly does not possess the capacity to advance such transnational infrastructure cooperation. As of 2024, the relevant water-diversion plan still had no substantive progress. The third fundamental problem lay in the market. The project planned a steel capacity of 5.1 million tons per year, while South Africa’s domestic annual steel consumption was only about 4 million tons. At the same time, the country’s largest steel enterprise was shutting down production lines and cutting staff due to overcapacity. Under conditions where the supply-demand structure was already imbalanced, adding large-scale new capacity lacked realistic market support.

On the surface, these are three concrete difficulties: energy, water, and market. But at a deeper level, the problem lies in the absence of institutional structure. In Chinese experience, an industrial park of such scale is never an isolated commercial investment, but is usually embedded within national industrial-transfer policies, regional development strategies, and even poverty-alleviation plans. Chinese governments at all levels provide systematic support to enterprises through land allocation, tax incentives, infrastructure provisioning, and industrial coordination mechanisms, and, when necessary, even guarantee the formation of industrial chains and the sales channels for products through administrative means. The industrial park is part of China’s governance system, not a standalone capital project. However, when this model was transplanted to South Africa, the institutional architecture that supports its operation did not exist. Although the South African government expressed support, it lacked both the capacity to provide large-scale fiscal subsidies and the administrative mechanism for nationwide industrial coordination, and it lacked all the more a national mobilization system for concentrating resources to advance strategic engineering. As a result, the project replicated the external form of “building an industrial park,” yet could not replicate the overall institutional coordination behind it. What the Musina-Makhado SEZ presents is precisely a state of institutional disembedding: it has the form of a park, but lacks the foundation of governance. By 2024, facing environmental-assessment controversies, financing difficulties, and continuous legal disputes—especially against a backdrop of markedly weakened support after the change of government—the Musina-Makhado SEZ project had entered a state of de facto freeze.

The problems exposed by this case do not remain merely at the operational level; they touch upon two core dimensions that Chinese experience loses when “going out.” First, the flexibility, ambiguity, and pluralistic strategies within Chinese experience are essentially a recognition and absorption of the complexity of reality. However, within an international system that demands clear classification and definite boundaries, such complexity often has no place to reside. Much of the wisdom of Chinese practice is embodied precisely in its ways of dealing with uncertainty and gray zones. Behind expressions such as “crossing the river by feeling the stones,” “let the bullets fly for a while,” and “analyze specific problems specifically” lies a capacity to adjust strategy within a dynamic process, an art of governance that seeks balance in complex environments. But in the international system of discourse, this ambiguity is often re-coded as “opacity” or “ulterior motives.” When complexity is compressed into a single narrative, when polysemy is required to be converted into standardized formulations, those informal, gray, and multi-layered dimensions that carry real life and local wisdom gradually vanish from view. For example, the local informal economy may manifest as institutional disorder, yet it is also the economic foundation upon which large numbers of people depend for their survival, an indispensable component of the overall system. However, within an imagination of modernization that takes normalization and standardization as its goal, these gray spaces are often regarded as objects to be cleaned up and regularized. As a result, those important factors that originally constituted the institutional advantages of the China model become, under the framework of neoliberal discourse, the hidden parts that are difficult to express openly.

Second, there is the absence of state coordinating capacity. The distinctiveness of China’s development model derives, to a large extent, from a state with powerful coordinating capacity. This state is able not only to mobilize resources, integrate interests, and bear risks, but also to regulate and balance between short-term goals and long-term strategy. However, when Chinese enterprises “go out,” they often, in the capacity of private investors, attempt to advance developmental strategies that originally required the support of state capacity. This role dislocation recurs repeatedly across many Belt and Road projects. Chinese enterprises in fact lack the state-level capacity for resource mobilization and the institutional coordination mechanisms, yet they are expected by the outside world—or to some extent expect of themselves—to shoulder state-like developmental functions. At the same time, Chinese enterprises also face the discursive hegemony of a neoliberal globalization that is difficult to challenge; in this context, “state-led” itself often carries negative connotations, and is easily accused of “market distortion,” “inefficiency,” or “rent-seeking and corruption.” When China introduces its own development experience to the world, it often, whether intentionally or unintentionally, plays down the state role, turning instead to formulations that emphasize marketization, commercialization, and enterprise as the principal actor. Yet it is precisely this strategic playing-down that hollows out the institutional core of Chinese experience. The advantages formed through reliance on state coordinating capacity are compressed into a purely commercial logic, and the development model loses its original institutional support. In a complex new environment, it can neither fully present its own structural advantages nor establish equivalent institutional conditions. The result is that the form can be replicated, while the overall mechanism that sustains the operation of that form cannot be reproduced.

Discussion and Conclusion: “Translation” Is Not Rhetoric, but Governance Capacity

Taking together the three cases spanning Europe, Asia, and Africa, we can see that Chinese experience, in the process of “going out,” does not simply encounter failure or external resistance; rather, it is reinterpreted and reclassified within different institutional contexts, and in this process undergoes unavoidable distortion. The recurring fundamental problem does not lie only in whether the project is profitable or whether the technology is feasible, but in how Chinese experience is understood, and under what framework it is permitted to exist. When experience is simplified and disciplined, when state capacity is obscured and regarded as risk, the true loss of Chinese experience “going out” gradually becomes apparent—just as these projects present not merely setbacks at the commercial level, but a retreat of interpretive capacity and imaginative space.

At the Port of Piraeus, the controversy centered on the labor system and management practices. The conflict did not stem purely from a clash of interests; it was also related to historical memory and the meanings of language. The enterprise was well-prepared at the financial and legal levels, yet underestimated the sensitivity of local labor politics. In Greece, port workers have long occupied a key position within state-society relations, and privatization reform had already become highly politicized, so management reform could very easily be incorporated into a narrative of the continuation of austerity policy. Had a more systematic social-risk assessment been introduced at the early stage of the project—identifying which issues carry symbolic significance, which vocabulary might trigger collective anxiety—and had earlier channels of communication been established, some of the conflict might have been avoided. At Colombo Port City, the problem lay not in exclusion, but in the mode of acceptance. The project obtained legitimacy through a large number of compliance measures, yet in the process of standardization it gradually drew closer to the existing international-financial-center model. The enterprise invested substantial resources in responding to international public opinion and the rating system; environmental assessments and social responsibility reports were continually expanded, and public communication documents advanced layer upon layer. At the same time, the space for discussion about the developmental path itself was relatively limited; criticism and response revolved around the same set of standards, and the project rarely stepped outside this framework to consider whether other directions of urban development might exist. The key here is not merely compliance, but how compliance shapes the developmental imagination. At the Musina-Makhado SEZ, the difference in institutional conditions was even more evident. The project plan followed the developmental logic of Chinese industrial parks, yet lacked the corresponding state coordinating mechanisms and fiscal support system. The problems of energy, water resources, and market were not single technical difficulties, but involved cross-departmental and transnational cooperation. When an enterprise advances abroad, in the capacity of a commercial actor, a strategic vision that is highly dependent on state capacity, institutional dislocation will appear—and this dislocation will not automatically be repaired through market mechanisms. These three cases point respectively to different levels of the mechanism of transformation: experience is dismantled into identifiable elements, the standards system shapes the mode of expression, and institutional conditions are difficult to migrate in step. These mechanisms are not abstract existences, but are embedded throughout the entire process of project decision-making, execution, and adjustment.

It must be pointed out that Chinese experience does indeed occupy a relatively disadvantaged position within the existing system of international rules. The international rating system, the global financial order, and academic discourse have long been dominated by developed economies, and the criteria for evaluating development paths were likewise formed against this historical backdrop. A single project cannot shake this overall structure, nor can it easily change existing rules in the short term. However, structural disadvantage does not mean there is no space at the level of practice. Whether a project can be stably advanced depends to a large extent on the enterprise’s capacity for “translation” within a concrete context; whether experience can obtain expressive space within diverse institutional environments likewise depends on this capacity. From a longer time scale, “going out” is itself a process of continuous negotiation amid differences and constant adjustment amid frictions. Therefore, the success or failure of a project should not be measured solely by throughput, GDP contribution, or the number of international certifications. For the workers of Piraeus, stable employment and labor dignity carry real significance; for the fishermen of Colombo, livelihood security and community continuity are equally important; for the community residents of Limpopo, ecological safety and the right to autonomous development are the core concerns. If these dimensions are ignored, then even if the financial statements perform well, a project will find it difficult to gain long-term social support. These cases remind us that when Chinese enterprises that “go out” are able to proceed from the perspective of the local society, understanding how their own actions are embedded within existing historical and political contexts, “translation” is no longer merely a passive response to risk, but may become a creative institutional practice. Truly effective “translation” is not only about letting the local society understand China’s developmental logic, but even more about letting Chinese enterprises understand how different societies define “the good life” and “good development.”

In the course of implementing the Belt and Road Initiative, China has put forward the important cooperative concept of “consultation, joint construction, and shared benefits.” How this concept is translated into concrete practice ultimately depends on whether the enterprises that “go out” understand the differences in how different societies define “development,” and adjust their own practical paths accordingly. Therefore, “translation” is not merely linguistic conversion, but a governance practice of maintaining flexibility and the capacity for negotiation within complex environments. As uncertainty and conflict in the international political and economic environment intensify, the overseas development of Chinese enterprises will inevitably face more disagreements and disputes. Against such a realistic backdrop, whether enterprises can identify risks within different institutional environments, establish consultation mechanisms, and safeguard their own core logic—while at the same time avoiding the excessive simplification of their experience—will become the key factor determining the sustainability of Chinese enterprises “going out.”

Sources:
[1] See related reports: “Greek Port Workers Protest Against Chinese-Run Piraeus,” BBC News, August 15, 2016; “Piraeus Port Workers Strike Over Chinese Owner’s Plans,” Financial Times, September 26, 2016; “Greek Port Workers Take on China’s Cosco,” Financial Times, October 6, 2016.

[2] LEED (Leadership in Energy and Environmental Design) is a green building certification system developed by the U.S. Green Building Council, and is regarded worldwide as the gold standard for building sustainability.

[3] A. Radicati, “The Unstable Coastline: Navigating Dispossession and Belonging in Colombo,” Antipode, Vol. 52, 2020, pp. 542–561.

1. Tightening export controls on drones, their key components, and related technology to the United States, subjecting them to strict case-by-case review.

2. Launching a 12-month national security investigation into foreign trade regarding imported printing and copying office equipment installed with foreign system software.

3. Placing Compliance Testing LLC—which assisted the FCC in restricting Chinese companies—on the countermeasures list, pursuant to the Anti-Foreign Sanctions Law

4. Placing 6 US entities, which assisted US “forced labor” sanctions related to Xinjiang, on the countermeasures list, prohibiting organizations and individuals within China from engaging in transactions or cooperation with them.

   covers the companies in detail, and I highly recommend it.
   

In addition, the Certification and Accreditation Administration of China (CNCA) issued a notice suspending the practice whereby CCC-designated certification bodies commission US-based certification agencies to carry out post-certification factory follow-up inspections in the United States.

CCC certification, short for China Compulsory Certification, is the mandatory safety certification that specific products sold in China (electrical appliances, toys, wires and cables, etc.) must pass. It’s similar to the US UL certification, but functions as a mandatory market-access system. If US-based factories producing CCC-catalog products such as power supplies, motors, and household appliances want to enter the Chinese market, they need this certification. Previously, domestic CCC-issuing bodies would commission local US agencies to conduct on-site annual inspections nearby, avoiding the need to send Chinese inspectors all the way to the US. Now that this channel has been closed, in theory Chinese certification bodies can still send their own inspectors directly to the US, but the process for imported products has become more cumbersome. Overall, this can be understood as a kind of “half closed door” countermeasure.

The tone of the Commerce Ministry’s response was similarly measured, emphasizing that:

China’s countermeasures are on the whole restrained. China values the hard-won stability of China-US economic and trade relations. We hope the US side can meet China halfway.

Overall, I think this resembles the pattern seen before last year’s phone call between the two leaders: the US finds some pretext to expand sanctions on China, and China responds at key moments with a relatively restrained but precise countermeasure. The two sides then escalate against each other in different areas, before things are eventually resolved through several rounds of in-person negotiations and a meeting between the leaders. Last year, the focal points of escalation between the two sides were TikTok and rare earths. This year, so far, what can be observed (Thanks to the brilliant Reuters reporting) is that the US has focused its restrictions on core components of the chip industry, such as optical modules.

Chinese media outlet The Paper (澎湃新闻), citing industry insiders, analyzed that at this stage, the build-out of US AI infrastructure cannot do without Chinese optical modules. Among the world’s top ten optical module manufacturers, seven are Chinese companies, accounting for as much as 70% of global shipments, while US domestic manufacturers lag behind in both production capacity and technological sophistication. If they cannot obtain Chinese products, the AI infrastructure buildout of major US cloud providers — currently in an acceleration phase — would be severely affected. So the probability of the US rolling out a strict ban is considered low.

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Besides, those restrictive policies lack coordination with its domestic industrial promotion policies. Manufacturers like Coherent do have ambitions for “Made-in-USA,” but they cannot achieve domestic manufacturing on their own. This has already been demonstrated in the case of the Biosecure Act. Moreover, China seems to have taken a liking to restricting critical raw materials as a way of countering US countermeasures.

If this pattern holds, I would expect several rounds of phone calls between the two countries’ commerce secretaries or trade representatives, followed by in-person consultations, and finally a meeting between the two leaders to reach a new consensus on a temporary truce.

Below is the full text of the Chinese countermeasures I made with the help of AI:

MOFCOM Announcement No. 33 of 2026: Announcement on the Initiation of a National Security Investigation into Foreign Trade Regarding Imported Printing and Copying Office Equipment

[Issuing Unit] Bureau of Trade Remedy and Investigation
[Document No.] MOFCOM Announcement No. 33 of 2026
[Date] August 5, 2026

Pursuant to Article 41 of the Foreign Trade Law of the People’s Republic of China, in order to safeguard order in foreign trade, the Ministry of Commerce may, on its own or jointly with other relevant departments of the State Council, conduct investigations into matters concerning national security interests in foreign trade.

Preliminary information indicates that imported printing and copying office equipment installed with foreign system software may affect national security interests in foreign trade, meeting the circumstances specified under Article 41 of the Foreign Trade Law of the People’s Republic of China.

Pursuant to Articles 41 and 42 of the Foreign Trade Law of the People’s Republic of China, the Ministry of Commerce has decided to launch an investigation, effective August 5, 2026, into matters concerning national security interests in foreign trade. The relevant matters are hereby announced as follows:

I. Subject and Scope of Investigation

(1) Subject of Investigation

The subject of this investigation is imported office equipment with printing and copying functions that is installed with foreign system software.

Foreign system software refers to driver software and embedded software developed, tested, or maintained by foreign individuals or entities.

(2) Scope of Investigation

To assess the impact of goods, technology, and services in foreign trade on China’s national security interests, the investigating authority may investigate the following matters:

(1) The import situation of the subject products;
(2) The impact of the imported products, technology, or services on national security interests;
(3) Domestic demand in relevant fields and dependence on foreign goods, technology, or services;
(4) The current state of development of relevant domestic industries in China and the impact of imports thereon;
(5) The capacity and level of relevant domestic industries in China to meet domestic demand and national security interests;
(6) The impact of relevant foreign government policies and measures on China’s national security interests;
(7) Other matters affecting national security interests in foreign trade.

II. Investigation Procedures

Pursuant to Article 42 of the Foreign Trade Law of the People’s Republic of China, the investigation may be conducted by means of written questionnaires, hearings, on-site investigations, commissioned investigations, etc. Based on the investigation results, the Ministry of Commerce will produce an investigation report or make a disposition ruling, and issue an announcement.

III. Investigation Period

This investigation shall be concluded within 12 months from the date of the announcement of the decision to initiate the case, which may be extended under special circumstances.

IV. Access to Public Information

During the investigation, interested parties may access public information on the case via the sub-website of the Bureau of Trade Remedy and Investigation on the MOFCOM website, or visit the MOFCOM Trade Remedy Public Information Reading Room (Tel: 0086-10-65197878) to search for, read, transcribe, and photocopy public information on the case.

V. Submission of Comments

Interested parties may submit written comments regarding the initiation and investigation procedures to the Bureau of Trade Remedy and Investigation of the Ministry of Commerce within 30 days from the date of publication of this announcement.

VI. Submission and Handling of Information

Interested parties submitting comments, questionnaire responses, etc. during the investigation shall submit electronic versions via the “Trade Remedy Investigation Information Platform” (

https://etrb.mofcom.gov.cn

), and shall also submit written versions as required by the Ministry of Commerce. The content of the electronic and written versions shall be identical, and the format shall be consistent.

If an interested party believes that the disclosure of information it provides would cause serious adverse effects, it may apply to the Ministry of Commerce for the information to be treated as confidential, stating the reasons. If the Ministry of Commerce approves the request, the interested party applying for confidentiality shall simultaneously provide a non-confidential summary of the confidential information. The non-confidential summary shall contain sufficient, meaningful information to allow other interested parties a reasonable understanding of the confidential information. If a non-confidential summary cannot be provided, reasons shall be given. If an interested party submits information without indicating that confidentiality is required, the Ministry of Commerce will treat the information as public.

VII. Contact Information

Address: No. 2 Dongchang’an Street, Beijing
Postal Code: 100731
Bureau of Trade Remedy and Investigation, Ministry of Commerce
Tel: 0086-10-65198474, 65198194
Fax: 0086-10-65198172
Website:

https://trb.mofcom.gov.cn

Ministry of Commerce of the People’s Republic of China
August 5, 2026

Order No. 2 of 2026 of the Ministry of Commerce of the People’s Republic of China: Decision on Countermeasures Against 6 U.S. Entities Including Applied DNA Sciences, Inc.

[Issuing Unit] Bureau of Security and Control
[Document No.] MOFCOM Order No. 2 of 2026
[Date] August 5, 2026

Order of the Ministry of Commerce of the People’s Republic of China

No. 2 of 2026

With the approval of the National Coordination Mechanism for Countering Foreign Sanctions Work, the “Decision on Countermeasures Against 6 U.S. Entities Including Applied DNA Sciences, Inc.” is hereby promulgated and shall take effect on August 5, 2026.

Minister: Wang Wentao
August 5, 2026

Decision on Countermeasures Against 6 U.S. Entities Including Applied DNA Sciences, Inc.

Recently, the United States has sanctioned Chinese enterprises under the pretext of so-called “forced labor,” which seriously violates international law and the basic norms governing international relations, and seriously infringes upon China’s sovereignty, security, and development interests. Applied DNA Sciences, Inc. and 5 other U.S. entities have assisted and supported illegal U.S. sanctions related to Xinjiang, and the nature of their conduct is egregious.

Pursuant to Articles 3, 4, 6, 9, 10, and 15 of the Anti-Foreign Sanctions Law of the People’s Republic of China, and Articles 3, 5, 8, and 10 of the Provisions on Implementing the Anti-Foreign Sanctions Law of the People’s Republic of China, China has decided to place 6 U.S. entities, including Applied DNA Sciences, Inc., on the countermeasures list, and to adopt the following countermeasures: prohibiting organizations and individuals within the territory of China from engaging in relevant transactions, cooperation, and other activities with them.

Attachment: Countermeasures List (August 5, 2026)

Attachment

Countermeasures List
(August 5, 2026)

1. Applied DNA Sciences, Inc.
   Address: 50 Health Sciences Drive, Stony Brook, NY 11790, USA
   Postal Code: 11790
   Common Name: Applied DNA Sciences

2. Stratum Reservoir, LLC.
   Address: 5200 North Sam Houston Pkwy W #500, Houston, TX 77086, USA
   Postal Code: 77086
   Common Name: Stratum Reservoir

3. Altana Technologies, Inc.
   Address: 25 Kent Ave Ste 501, Brooklyn, NY 11249, USA
   Postal Code: 11249
   Common Name: Altana Technologies, Altana

4. Responsible Business Alliance
   Address: 1725 Duke Street Suite 300, Alexandria, VA 22314, USA
   Postal Code: 22314
   Common Name: RBA

5. Verite Group, Inc.
   Address: Business Ct, Suite 200, Sterling, VA 20166, USA
   Postal Code: 20166
   Common Name: Verite Group, Verite

6. Human Rights in China
   Address: 85 Broad Street, FL 17, NY 10004, USA
   Postal Code: 10004
   Common Name: HRIC

Order No. 3 of 2026 of the Ministry of Commerce of the People’s Republic of China: Decision on Countermeasures Against Compliance Testing LLC (USA)

[Issuing Unit] Bureau of Security and Control
[Document No.] MOFCOM Order No. 3 of 2026
[Date] August 5, 2026

Order of the Ministry of Commerce of the People’s Republic of China

No. 3 of 2026

With the approval of the National Coordination Mechanism for Countering Foreign Sanctions Work, the “Decision on Countermeasures Against Compliance Testing LLC (USA)” is hereby promulgated and shall take effect on August 5, 2026.

Minister: Wang Wentao
August 5, 2026

Decision on Countermeasures Against Compliance Testing LLC (USA)

Recently, the U.S. Federal Communications Commission (FCC) has intensively rolled out negative measures targeting China, seriously infringing upon the legitimate and lawful rights and interests of Chinese enterprises. Compliance Testing LLC has assisted and supported the FCC in adopting such measures, endangering China’s sovereignty, security, and development interests.

Pursuant to Articles 3, 4, 6, 9, 10, and 15 of the Anti-Foreign Sanctions Law of the People’s Republic of China, and Articles 3, 5, 8, and 10 of the Provisions on Implementing the Anti-Foreign Sanctions Law of the People’s Republic of China, China has decided to place Compliance Testing LLC (USA) on the countermeasures list, and to adopt the following countermeasures: prohibiting organizations and individuals within the territory of China from engaging in relevant transactions, cooperation, and other activities with it.

Attachment: Countermeasures List (August 5, 2026)

Attachment

Countermeasures List
(August 5, 2026)

Compliance Testing LLC
Address: 1724 S Nevada Way, Mesa, Arizona, 85204, USA
Postal Code: 85204
Common Name: Compliance Testing, CT

MOFCOM Announcement No. 34 of 2026: Announcement on Strengthening Export Controls on Drone-Related Dual-Use Items to the United States

[Issuing Unit] Bureau of Security and Control
[Document No.] MOFCOM Announcement No. 34 of 2026
[Date] August 5, 2026

In accordance with the Export Control Law of the People’s Republic of China, the Regulations on the Export Control of Dual-Use Items of the People’s Republic of China, and other relevant laws and regulations, and in order to safeguard national security and interests and fulfill international obligations such as non-proliferation, it has been decided to strengthen export controls on drone-related dual-use items to the United States. The relevant matters are hereby announced as follows:

For exports to the United States of drones and their key components, as well as related technology listed in the Export Control List of Dual-Use Items of the People’s Republic of China, case-by-case strict review shall be applied, and licensing facilitation measures shall not apply.

This announcement shall take effect from the date of publication.

Ministry of Commerce
August 5, 2026

Xinhua News Agency: China’s Designated Compulsory Product Certification Bodies Suspend Commissioning of U.S. Certification Agencies to Conduct Factory Follow-Up Inspections

The Certification and Accreditation Administration of China (CNCA) has decided that, effective immediately, China’s designated Compulsory Product Certification (CCC) bodies will suspend the practice of commissioning U.S.-based certification agencies to carry out post-certification factory follow-up inspections.

Xinhua News Agency: MOFCOM Spokesperson Answers Reporters’ Questions on Countermeasures Against a Series of Negative China-Related Measures by the U.S. Federal Communications Commission and the U.S. Department of Homeland Security

Q: Today, the Ministry of Commerce and other relevant departments announced countermeasures against a series of negative China-related measures by the U.S. Federal Communications Commission and the U.S. Department of Homeland Security. What are the considerations behind this?

A: Since the Busan summit between the Chinese and U.S. heads of state, the U.S. Federal Communications Commission has, in disregard of China’s strong opposition and the strong calls from industries in both countries, continued to broaden the concept of national security and has repeatedly rolled out restrictive measures targeting China, covering multiple fields such as telecommunications operations, testing laboratories, drones, consumer-grade routers, and submarine optical cables, and has recently adopted import restrictions on advanced robotics equipment and power inverters.

In particular, disregarding China’s repeated representations, the U.S. side, following the video call between the China-U.S. economic and trade leads on July 30, went on to place more than 40 Chinese entities on the so-called “Uyghur Forced Labor Prevention Act Entity List” on July 31. China is strongly dissatisfied with and firmly opposed to this.

The relevant measures by the U.S. Federal Communications Commission and the U.S. Department of Homeland Security’s action of placing relevant entities on the so-called “Uyghur Forced Labor Prevention Act Entity List” seriously violate the important consensus reached by the two heads of state, and seriously undermine China’s legitimate rights and interests. China has no choice but to take necessary countermeasures in response, including: strengthening export controls on drones and their key components and technology to the United States; suspending factory follow-up inspections commissioned by China’s designated Compulsory Product Certification bodies to U.S. certification agencies; placing Compliance Testing LLC (USA) on the countermeasures list; launching a national security investigation into foreign trade regarding imported printing and copying office equipment; and placing 6 U.S. entities on the countermeasures list, among other measures.

I would like to emphasize that China’s countermeasures are on the whole restrained. China values the hard-won stability of China-U.S. economic and trade relations. We hope the U.S. side can meet China halfway. China demands that the U.S. side immediately revoke the relevant measures, stop its erroneous practices, return to the correct path of resolving differences through friendly consultation and cooperation, and work together to safeguard a constructive and strategically stable China-U.S. relationship. If the U.S. side insists on introducing new restrictive measures against China, China will take further countermeasures.

Zhou is a professor of applied economics at Peking University’s Guanghua School of Management, where he also directs the Faculty of Economics and Management. He’s best known for his work on local government competition and the “promotion tournament” system (晋升锦标赛) among officials; it’s a theory that explains how the incentives facing local officials have shaped China’s economic growth and regional development. Zhou argued that China should not be seen as a simple, uniform single economy. Instead, competition and industrial shifts between provinces are key to understanding how China’s growth model actually works.

In this latest article, The Impossible Trinity of Governance, Zhou lays out what he calls the “impossible trinity” in Chinese governance, including rigid targets, rigid rule enforcement, and limited resources.

He argues these three things can’t all exist together without causing problems; the way they were combined explains a lot about how Chinese local governance actually functions.

When targets are fixed and resources are limited, enforcement inevitably becomes flexible. This is why informal rules and “gray zones” are common in China’s grassroots governance.

When rules are strict but resources fall short, the process would drift away from the original goal. Following procedure becomes more important than getting real results.

When both targets and rules are rigid, officials are pushed to find workarounds, including expanding budgets on their own, adding hidden spending, or shifting risk elsewhere.

And when all three pressures hit at once, organizations tend to break down in predictable ways, including fake data, local officials start to avoid responsibility while over-mobilizing resources, and risks spill over into other areas. So Zhou believes the real question in governance isn’t how to have everything at once. It’s how to balance trade-offs between these three forces.

Zhou also offers a fresh way to think about two trends often criticized in China: local government financing platforms and the expansion of state-owned enterprises. He believes those problems emerge because local governments and SOEs face heavy tasks but lack the formal resources to meet their goals. So they’re pushed to pull resources from markets and society outside their normal scope. This is how financing platforms and SOE expansion happen. He believes the fix isn’t to strip away all discretion, nor is it full marketization. It’s about fine-tuning the balance and adjusting dynamically, rather than swinging hard in either direction. Zhou argues that understanding this balancing act is the key to understanding the logic behind every governance reform happening in China today.

At the end of the article, Zhou adds a comparison between Chinese and Western governance. He says the real difference between the two systems isn’t about how centralized or decentralized power is. It’s about how each system handles this same “impossible trinity.” Western systems tend to divide power through clear institutional boundaries, spreading the “impossible” tension across different sectors so no single part bears it all. China, by contrast, relies on a continuous chain of hierarchical authority to keep a closed loop of responsibility. Tension gets managed by constantly pushing responsibility down the chain, layer by layer, to control uncertainty at each level.

Below is the full article I made with the help of AI; First published in the Chinese Journal of Sociology(2026 Ep.3). The English version is not authorized or reviewed by Professor Zhou.

Zhou Li’an: The Impossible Trinity of Governance

Abstract: Building on the study of administrative subcontracting (行政发包制), this research enriches and develops the middle-range theory of the “impossible trinity of governance.” It argues that within any hierarchical principal-agent structure, three conditions—rigid governance targets, rigid budget allocation, and rigid rule constraints—cannot all hold simultaneously. Organizations must make structural trade-offs among the three. Based on this, the paper reconstructs the comparative logic of three typical governance forms: administrative subcontracting, Weberian rational bureaucracy, and modern corporate governance. It proposes a set of testable propositions to explain the endogenous mechanisms behind numerous governance phenomena, including the expansion of informal institutions, selective enforcement, campaign-style governance, ambiguous subcontracting, and organizational distortion. The paper further analyzes the implicit conditions under which the “impossible trinity” holds (technology, organizational absorptive capacity, agent behavior, risk externalization, and legitimacy resources) and possible pathways to break through these constraints (technological progress, extraordinary mobilization, and organizational restructuring). From the perspective of ex ante versus ex post uncertainty management, it reveals the fundamental difference between administrative subcontracting and Weberian rational bureaucracy. It concludes that under structural conditions of rigid targets, resource constraints, dispersed information, and risk spillover, China’s state governance has formed a hybrid institutional structure—bureaucracy as the institutional “chassis,” subcontracting as the governance “engine,” and external “contractors” as supplements—thereby maintaining the feasibility and continuity of governance under seemingly impossible conditions.

Introduction

Organizational governance research has long confronted a recurring but never fully resolved theoretical puzzle: governance principles widely regarded as “desirable” in practice—rigid and challenging performance targets, uniform and strict rule constraints, and disciplined budget and resource control—often cannot hold together at the same time. When organizations try to simultaneously strengthen target accountability, rule compliance, and resource discipline, the outcome is rarely greater efficiency or better order. Instead, it often produces formalism, strategic compliance, the expansion of informal institutions, and even systemic failure.

This phenomenon appears across many types of organizations. In the public sector, pushing for compliance reform alongside performance evaluation and fiscal discipline often triggers overload and hidden implementation at the grassroots level. For example, in recent years, as governance responsibilities have shifted downward, higher-level governments have simultaneously tightened both target accountability and oversight of lower-level governments, causing grassroots overload (Lü Dewen, 2022). In large corporations, when compliance regulation and performance pressure intensify without corresponding resource investment, data manipulation and metric gaming tend to follow (Roychowdhury, 2006; Kedia and Philippon, 2009). Historically, bureaucratic states facing limited resources while maintaining high-intensity governance targets have generally relied on informal rules and flexible operations. Many studies of local government in the Qing dynasty found that when the imperial court set rigid quotas for grain and tax remittance under extremely limited budgets, local officials had no choice but to rely on “hidden rules” and gray or even illegal income sources such as surcharge fees to keep the government running (Ch’ü T’ung-tsu, 2003; Zelin, 2005; Wei Guangqi, 2010). These are not occasional deviations in specific contexts, but structural patterns that recur across organizations and institutional environments.

Existing social science theories offer many explanations. New institutional economics emphasizes that institutional arrangements are second-best solutions formed under transaction costs, incomplete information, and incomplete contracts, rather than optimal outcomes (Williamson, 1975, 1985). Principal-agent theory systematically analyzes how incentives and monitoring can mitigate moral hazard and adverse selection under information asymmetry (Akerlof, 1970; Jensen and Meckling, 1976; Holmstrom, 1979; Milgrom and Roberts, 1992; Laffont and Tirole, 1993). Organizational sociology further points out that a “decoupling” often exists between formal structure and actual operation, with organizations using ritualized compliance to respond to external institutional pressure (Meyer and Rowan, 1977; DiMaggio and Powell, 1983). Each of these studies reveals one facet of governance failure, but none answers a more fundamental question: why do governance principles that logically support one another end up in systematic conflict when implemented together? In other words, why do these “good governance principles” become infeasible when pursued simultaneously?

This paper argues that governance dilemmas are not mainly caused by poor incentive design, weak rule enforcement, or flawed organizational culture, but are rooted in a more basic structural constraint. Specifically, in any hierarchical principal-agent relationship, organizational governance is simultaneously constrained by three core factors: target constraints on outcomes, resource constraints on inputs, and rule constraints on behavior. The core claim of this study is that these three constraints cannot all be made rigid at the same time. When two of them are tightly locked in, the third must remain flexible—otherwise, governance becomes structurally infeasible.

Based on this judgment, this paper seeks to further enrich and develop the middle-range theory of the “impossible trinity of governance” (Zhou Li’an, 2024), systematically mapping the feasibility boundaries of organizational governance, deriving the theoretical propositions behind it, exploring the organizational conditions on which the “impossible trinity” depends and its potential implications for organizational innovation, and on this basis, re-examining the core differences between administrative subcontracting and Weberian rational bureaucracy.

The theory of the “impossible trinity of governance” does not attempt to answer which governance model is superior. Instead, it focuses on a more realistic question: under different combinations of constraints, which governance arrangements are feasible, and which will inevitably trigger strategic responses and governance distortion? Under this framework, the paper offers a new interpretation of several classic governance forms. Administrative subcontracting, Weberian rational bureaucracy, and modern corporate governance are not simply different historical stages or better-or-worse institutional choices, but stable responses to different combinations of constraints within the “impossible trinity”: administrative subcontracting relaxes rule constraints to maintain rigid targets and resource constraints, thereby ensuring deliverable outcomes under conditions of resource scarcity; Weberian rational bureaucracy trades target flexibility for rule and budget discipline, relying on procedural legitimacy; modern corporate governance allows flexible resource investment so that strict rules and high-intensity targets can coexist. In this way, the “impossible trinity” brings governance models scattered across different disciplines and empirical fields into a unified analytical framework.

Building on this theoretical framework, the paper further proposes a set of testable propositions and reveals the underlying mechanisms behind several important empirical phenomena. First, when rigid targets and resource constraints combine, rule enforcement inevitably becomes flexible—explaining the widespread expansion of informal institutions, selective enforcement, and “gray zones” in grassroots governance. Second, when rigid rules and resource constraints combine, governance targets tend to weaken or be redefined, manifesting as organizational behavior where “procedure replaces performance.” Third, when rigid targets and rigid rules coexist, resource flexibility inevitably rises, showing up as budget expansion, hidden investment, and risk transfer. Fourth, when all three constraints are forced to be rigid simultaneously, organizations exhibit systematic “abnormal responses” such as data distortion, responsibility avoidance, over-mobilization, and risk spillover. Through these propositions, the paper redefines governance phenomena long viewed as “deviations” or “exceptions” as rational equilibrium outcomes under structural constraints.

Building on this, the paper further extends the explanatory boundaries of the theory. On one hand, by introducing the concept of “low-tension equilibrium,” it shows that governance systems can also form stable equilibria in low-risk domains by simultaneously lowering the intensity of targets, resources, and rules—thus breaking away from the single-path assumption of “high-intensity governance.” Phenomena widely found in Chinese state governance—such as administrative outsourcing (e.g., gentry contracting for local public goods) and “ambiguous subcontracting” in contemporary social governance—can be reinterpreted within the category of “low-tension equilibrium” (Huang Xiaochun, 2015; Zhou Li’an, 2016, 2022). On the other hand, the paper systematically analyzes the implicit conditions under which the “impossible trinity” holds—including technological constraints, organizational absorptive capacity, boundaries of agent behavior, risk feedback mechanisms, and legitimacy resource structures—and proposes three possible “breakthrough paths”: technological progress, extraordinary mobilization, and organizational restructuring. This analysis shows that the “impossible trinity” is not a static constraint, but a dynamic one that continuously reconfigures as institutional conditions and technological environments evolve.

The paper reinterprets administrative subcontracting and Weberian rational bureaucracy from the perspective of “ex ante versus ex post uncertainty management.” The former absorbs uncertainty at the outcome stage through responsibility binding and incentive mechanisms; the latter compresses uncertainty through the ex ante allocation of rules and resources. The two are not simply stages in a historical progression, but two governance technologies pointing in opposite directions, both equally modern. This perspective shows that the deeper root of the “impossible trinity” lies in the inherent tension between different uncertainty management technologies.

Finally, the paper argues that under structural conditions of rigid targets, resource constraints, dispersed information, and risk spillover, China’s state governance has formed a hybrid institutional structure with its own internal logic: bureaucracy serves as the institutional “chassis,” the subcontracting mechanism as the governance “engine,” and external actors outside government—platform companies, state-owned enterprises, social organizations, and special status groups—serve as external “contractors” absorbing pressures from outside the formal system. This structure is by no means transitional or temporary, but a stable institutional equilibrium formed under the constraints of the “impossible trinity,” explaining China’s governance system’s capacity for sustained operation under the coexistence of long-term resource constraints and high target pressure.

The empirical significance of this study lies in providing a unified explanatory framework for understanding a range of complex phenomena that have long troubled governance practice. For example, the administrative subcontracting mechanisms, extra-budgetary resource mobilization (such as land finance, financing platforms, and the expansion of off-payroll staff), and informal institutional operations widely found in Chinese organizational governance can be understood as stable equilibria under the combination of “rigid targets—resource constraints.” The widely discussed phenomenon of campaign-style governance (Feng Shizheng, 2011; Zhou Xueguang, 2012) is an institutional response that compresses rules to achieve short-term targets when target rigidity increases and resources are hard to expand. Similarly, in modern corporations, when organizations simultaneously strengthen performance targets and compliance rules, resource expansion and rising costs often become necessary conditions for maintaining equilibrium. As Ren Zhengfei summarized Huawei’s strategic success, in order to “breach a section of the city wall,” one must launch a “saturation attack” (discussed in detail later). But if the conditions for resource expansion are not met, this may instead evolve into distorted organizational behaviors such as data falsification, performance manipulation, and formalistic compliance.

More importantly, the theoretical insight of this paper is that it redefines “governance failure” from a normative deviation into a structural outcome, thereby offering a more realistic analytical framework for institutional design. Rather than pursuing high targets, strict rules, and tight budgets simultaneously within a single institution, it is better to clarify the combinations of constraints and trade-off logics appropriate to different governance contexts, and to improve overall governance capacity through layered configuration and structural reorganization. Thus, the governance question is no longer about how to achieve all three at once, but about which feasible combination to choose under which conditions.

The theoretical contributions of this paper are threefold. First, it elevates resource constraints to a core governance variable as important as incentives and rules. Political science, sociology, and economics increasingly emphasize the concept of “state capacity,” viewing a state’s resource extraction and fiscal capacity as key drivers of economic development and modernization (Tilly, 1975; Mann, 1986; Besley and Persson, 2011). But principal-agent theory, the theory of the firm, and transaction cost theory in economics have long overlooked the critical role of budget constraints in organizational design (such as property rights systems and firm boundaries) (Jensen and Meckling, 1976; Williamson, 1985; Hart, 1995). This study emphasizes that resource and budget constraints are a crucial component of the structural tension governance faces. Second, this paper provides a middle-range analytical framework that spans public governance, corporate management, and historical institutional analysis. This framework not only provides a unified analytical foundation and comparative dimension for organizational models across different social science fields (such as administrative subcontracting, Weberian rational bureaucracy, and modern corporate governance), but also connects many seemingly scattered and independent governance phenomena (such as campaign-style governance, ambiguous subcontracting, administrative outsourcing to society, expansion of off-payroll staff, and informal operations), treating them as different “members” of the same “family” under the “impossible trinity of governance,” and revealing their shared “family background.” Third, it redefines informal institutions and various governance “distortions” from normative deviations into structural equilibrium outcomes, offering a new theoretical perspective for understanding how complex organizations maintain operation under “infeasible conditions.” For a long time, Weberian rational bureaucracy has served as the ideal benchmark in domestic academic circles for analyzing state governance issues, used to identify and define various “gaps” and “deviations” in Chinese governance practice (such as campaign-style governance, informal operations, and extra-budgetary systems), and to judge them from a normative standpoint. This study seeks to emphasize that these so-called governance “deviations,” just like Weberian rational bureaucracy, are all institutional responses to the same triangular structural tension, each with its own conditions and logic of choice, with no inherent superiority or inferiority between them.

The remainder of this paper is structured as follows: Part Two defines the core concept of the “impossible trinity of governance” and its theoretical foundations, then analyzes how three typical governance forms respond to this structural constraint; Part Three proposes and elaborates a set of testable propositions; Part Four discusses the implicit conditions and breakthrough mechanisms of this framework; Part Five deepens the theoretical content from the perspective of uncertainty management; Part Six explains the deep reasons why China’s state governance leans closer to the administrative subcontracting corner of the “impossible trinity”; Part Seven is the conclusion.

The Impossible Trinity of Governance: A General Proposition in Organizational Governance

Studies of grassroots governance in the Qing dynasty repeatedly reveal a governance phenomenon that appears empirical yet is highly universal: on one hand, the imperial court imposed extremely rigid governance targets on local officials—fixed quotas for grain and tax remittance, and unlimited responsibility for local security and public affairs. On the other hand, the formal governance resources allocated by the court to local governments were extremely limited—neither the fiscal budget nor staffing was sufficient to meet the governance demands implied by these targets. At the same time, the court continuously issued large numbers of laws, regulations, and institutional texts, attempting to constrain local officials’ behavior with detailed rules. This governance model produced a long-standing and highly stable institutional phenomenon: formal rules became “dead letters” in many key matters, on-budget and off-budget operations ran in parallel, formal and informal institutions coexisted, and local governance relied heavily on gray practices, hidden rules, and flexible operations (Ch’ü T’ung-tsu, 2003; Wei Guangqi, 2009; Bradly Reed, 2021; Zhou Li’an, 2024). A similar phenomenon can be widely observed in contemporary grassroots governance in China: on one hand, rigid targets and tasks are handed down from higher levels; on the other hand, grassroots governments face severe shortfalls in their on-budget funds. To complete their tasks, grassroots officials must raise funds through extra-budgetary channels and are forced to adopt informal methods or “selectively” implement higher-level policies (Zhou Xueguang, 2005; Ouyang Jing, 2011).

These empirical facts are highly relevant to the phenomena of state governance that administrative subcontracting seeks to explain (Zhou Li’an, 2014, 2016, 2017). This raises a fundamental question: is there a more general structural tension among governance targets, governance resources, and rule constraints? Is the “flexibility” or even “failure” of rules seen under administrative subcontracting the result of institutional backwardness, moral hazard, or implementation deviation—or does it stem from a deeper governance logic that holds universally across organizations?

It is with this question in mind that Zhou Li’an (2024) sought to distill and extend, from the analysis of administrative subcontracting, a more general theoretical proposition—the “impossible trinity of governance.” This proposition states that within any hierarchical principal-agent structure, rigid governance targets, rigid budget allocation, and rigid rule constraints (see Figure 1) cannot all hold at once. This is not an empirical generalization or a “tendency,” but a structural constraint with organizational necessity. Its core logic can be stated as follows: a principal cannot simultaneously require an agent to strictly follow pre-established rules and procedures, accept a fixed and non-negotiable amount of governance resources (such as budget funds and staffing), and complete a challenging governance target under high political or performance pressure.

Put simply, the principal can demand “both this and that,” but not “this, that, and the other.” In actual operation, only two of the three rigid requirements can hold simultaneously; the third must remain open and flexible. From this, we can see that the “impossible trinity of governance” is not a value judgment, but a fundamental constraint on how hierarchical organizations avoid systemic failure. Under this framework, differences among governance forms lie not in whether one is “more advanced,” but in which two rigid requirements they choose, and which third requirement they leave flexible.

Administrative subcontracting corresponds to the combination of “rigid governance targets + rigid (limited) budget resources + flexible rule constraints.” Under this model, the principal (central government) hands down clear and non-negotiable governance targets to the agent (local officials)—as seen in the “pressure-type system” (Rong Jingben et al., 1998) and “target responsibility system” (Wang Hansheng and Wang Yiming, 2009)—while strictly limiting budget and staffing. Under these conditions, if rules remained absolutely rigid, the agent would be structurally unable to complete the task. Therefore, rules must “leave room”: formal rules are selectively enforced, and informal institutions, hidden rules, and gray operating space become necessary supplements for maintaining governance (Wang Hansheng et al., 1997). From this perspective, the failure of rules under administrative subcontracting is not governance failure, but an institutional response to the “impossible trinity.”

Weberian rational bureaucracy corresponds to the combination of “rigid rule constraints + rigid budget resources + flexible governance targets.” In this governance model, the core of the organization lies not in achieving a specific challenging performance target, but in acting according to established rules, procedures, and legal-rational principles. Budget and staffing are clearly defined in advance and rarely adjusted afterward, but the agent’s discretion is tightly compressed. Governance legitimacy comes mainly from procedural correctness rather than the quality of outcomes—phrases like “spend only as much as the budget allows” and “due diligence exempts liability” reflect this principle in practice. Precisely for this reason, in a purely Weberian rational bureaucracy, principals tend to avoid imposing overly rigid performance targets on agents, because forcibly introducing target pressure easily triggers rule distortion, responsibility avoidance, or formalism.

Modern corporate governance corresponds to the combination of “rigid governance targets + rigid rule constraints + flexible governance resources.” In corporate governance, the principal (shareholders or the board) often sets clear and binding performance targets for the agent (management), while also requiring strict compliance with rules and audit requirements. Under these conditions, the budget cannot be rigid: resource allocation must remain highly flexible, adjusted according to the business environment, project risk, and progress toward targets. If a company maintains a rigid budget cap while also enforcing strict rules and high performance targets, the result is usually not greater efficiency, but target distortion or risk transfer.

The transformation of the Qing dynasty’s customs administration offers a highly persuasive historical experiment for the “impossible trinity of governance” (Wright, 1993; Zhou Li’an, 2024). Before the Englishman Robert Hart became Inspector General of Customs in 1863, the Qing customs administration was a typical example of administrative subcontracting: tax farming and lump-sum budgeting operated between superior and subordinate levels, with local customs offices remitting fixed quotas to the court; formal fiscal appropriations were minimal, and officials and staff survived on commissions; although the court issued regulations, they were largely unenforced. The key to Hart’s reform was not “anti-corruption” or “introducing modern management techniques,” but a fundamental rearrangement of the “impossible trinity”: completely abolishing tax farming and implementing full collection of duties owed; establishing a comprehensive budgeting and accounting system to eliminate off-budget income and spending; and requiring the court to give up its remittance targets for customs revenue while significantly increasing budget appropriations. The Office of Foreign Affairs ultimately agreed to Hart’s request to remove remittance targets and provide generous budget funding, and as a result, Qing customs shifted from administrative subcontracting toward something close to a Weberian rational bureaucracy. Rules could be genuinely enforced after the transformation not because officials became more moral or more aware, but because the “impossible trinity” had been reconfigured.

The “impossible trinity of governance” offers a new analytical perspective for understanding how organizational forms shift under different conditions. Take a company as an example: as it develops from a startup into an industry giant, it often goes through several changes in management style. In the early startup stage, companies usually focus on challenging business targets, but due to financing difficulties, budgets and staffing are extremely limited, so there is less attention to building and following internal rules and procedures, and performance evaluation tends to favor “results over process.” At this stage, organizational governance more closely resembles administrative subcontracting. As the company grows and its financial strength increases, the importance of enforcing internal rules and procedures rises, and the coordination between setting business targets and determining budget size also strengthens. When a company reaches a dominant, monopoly-like position in its industry, internal rules and procedures take center stage, and the relative importance of setting business targets declines—its governance model may then approach the rational bureaucracy typical of government. This example also shows that administrative subcontracting and Weberian rational bureaucracy as governance models are not necessarily tied to government or public organizations, but can also be organizational forms adopted in corporate governance.

Thus, the theory of the “impossible trinity of governance” aims to move beyond treating administrative subcontracting or Weberian rational bureaucracy as single ideal types, situating them instead within a more general governance theory framework. The reason administrative subcontracting recurs throughout Chinese history and present-day reality is precisely that it represents a stable combination that satisfies the “impossible trinity” under specific constraints (discussed in detail later). The “impossible trinity of governance” offers a unified perspective spanning public governance, corporate governance, and historical institutional analysis: it does not judge which governance model is “more advanced,” but reveals what institutional trade-offs different organizational forms must make under different constraint conditions. In this sense, administrative subcontracting is no longer just a Chinese experience, but becomes a key entry point for understanding how complex organizations achieve “feasible operation” under seemingly impossible conditions.

Testable Propositions and Empirical Corollaries

The core value of the “impossible trinity of governance” lies not in offering conceptual comparisons or institutional classifications, but in providing a series of theoretical corollaries that can be tested through empirical research. These corollaries do not presuppose which governance form is superior; instead, they point out that when an organization strengthens two of the three governance constraints, the third will necessarily undergo systematic adjustment. This structural relationship can be translated into a series of observable, comparable empirical propositions.

Proposition 1: The combination of rigid targets and rigid budgets leads to increased rule flexibility

When governance targets are highly rigid and budget and staffing are strictly constrained, the flexibility of rule enforcement within the organization inevitably rises, manifesting as the expansion of informal institutions, increased selective enforcement, and the instrumental use of procedural rules. Its empirical implication is: when performance indicators are clearly quantified and accountability pressure rises significantly, while budgets and staffing cannot expand correspondingly, we can observe the following: formal regulations being “flexibly interpreted” in key matters; frequent temporary arrangements, verbal directives, and gray operations; increased administrative outsourcing across organizational boundaries, project-based operations, and off-payroll staffing; and a widening gap between compliance documentation and actual implementation. This proposition can be used to examine phenomena such as administrative subcontracting, campaign-style governance, and the failure of grassroots burden-reduction efforts.

For a long time, campaign-style governance has often been understood as an abnormal tool used after the failure of routine governance, or attributed to normative deviations such as a tradition of political mobilization or insufficient governance modernization (Feng Shizheng, 2011; Zhou Xueguang, 2012). However, this understanding overlooks a more structural fact: in real governance contexts, governments often face simultaneous pressures from highly rigid targets, limited governance resources, and continuously strengthening institutionalized procedures—three forces that are structurally difficult to maximize at once. This study proposes that placing campaign-style governance within the analytical framework of the “impossible trinity of governance” helps reinterpret it as an institutional response endogenous to modern governance structures, rather than an accidental result of governance disorder.

Under conditions where governance targets cannot be relaxed and resource allocation cannot expand in the short term, procedural constraints often become the only dimension with room for adjustment. It is precisely within this constraint structure that campaign-style governance—through extraordinary mobilization, cross-departmental integration, and the concentrated release of accountability pressure—strategically compresses existing procedures, boundaries, and routine rules to achieve targets within a short period. This process does not represent a wholesale rejection of institutions and rules, but rather a temporary substitute for procedural governance mechanisms: when routine institutions cannot bear target pressure within a given time and resource constraints, campaign-style governance, as a “time-compressing governance mechanism,” temporarily takes over governance functions to maintain the overall operability of the governance system.

Through this analysis of governance types, this study frees administrative subcontracting and campaign-style governance from the binary opposition of “normal versus abnormal,” instead understanding them as different institutional equilibria formed by the governance system under the constraint of the “impossible trinity,” thereby providing a unified analytical framework for comparing the conditions, operating logic, and mutual transformation of different governance mechanisms. From this perspective, campaign-style governance is not simply the opposite of administrative rationality or the rule of law, but a short-term equilibrium formed by the governance system under the constraint of the “impossible trinity.” It shares an internal consistency with mechanisms such as administrative subcontracting, local government financing platforms, the expansion of off-payroll staff (Ye Jing, 2016), and “administrative outsourcing to society” (Huang Xiaochun and Zhou Li’an, 2017)—all reflecting a shared logic in which, as target rigidity rises while institutional supply and resource expansion are constrained, governance pressure shifts toward unconventional tools and beyond institutional boundaries. Therefore, campaign-style governance is no longer merely an “exceptional state,” but a key entry point for understanding the structural tensions and adjustment paths of contemporary governance.

Proposition 2: The combination of rigid rules and rigid budgets leads to increased target flexibility

When rules and procedural constraints are highly rigid and budget and staffing face hard limits, the organization’s governance targets tend to become vague or adjustable, manifesting as the weakening, delay, or replacement of performance targets by procedural legitimacy. Its empirical implication is: in organizational environments emphasizing rule of law, compliance audits, and process control, if the budget cannot be flexibly adjusted, we often see the following: performance targets redefined as “completed according to procedure” (for example, Hart’s principle of “full collection” in customs); target deadlines extended or broken into staged compliance tasks; decision-making becoming more conservative, with increased risk-avoidance behavior; and outcome evaluation weakening while process evaluation strengthens. This proposition applies to analyzing efficiency losses, delayed responses, and formalism within Weberian rational bureaucracy, as well as “responsibility-avoidance” behavior where “procedure replaces performance.”

Within the “impossible trinity,” Weberian rational bureaucracy clearly prioritizes the predictability of process. Its budget is typically allocated in advance and, once approved, is difficult to adjust—hence its strong rigidity. In Western countries, government budgets must be approved by the legislature, and in principle, no additional funds are granted after approval. Since democratic government budgets are comprehensive—meaning government departments have no extra-budgetary sources of income beyond legislature-approved appropriations—the budget approval process must, as much as possible, determine in advance the budget amount that matches each department’s function. Of course, this process is also heavily influenced by the state’s fiscal extraction capacity and overall government revenue and expenditure conditions.

However, the cost of this institutional arrangement is that when an organization faces highly complex, multi-objective, and rapidly changing tasks, achieving challenging targets or ensuring the deliverability of final outcomes is often not prioritized institutionally. When formal rules cannot cover every real-world situation and there is little room for discretion or incentive mechanisms, organizations are more likely to prioritize compliance over efficiency, resulting in a situation with complete procedures but insufficient performance. Moreover, because Weberian rational bureaucracy follows a “limited liability” logic of accountability, it often exhibits the practical characteristic of “spending only as much as the budget allows.” Once a major external shock occurs or budget allocation proves insufficient, performance must be sacrificed, because strict rule constraints represent a bottom line that cannot be breached. Therefore, Weberian rational bureaucracy essentially trades the deliverability of outcomes for the stability of process execution and the predictability of agent behavior.

Proposition 3: The combination of rigid targets and rigid rules leads to increased budget flexibility

When governance targets and rule constraints remain highly rigid at the same time, the organization must maintain feasibility by increasing resource flexibility, manifesting as budget expansion, additional resources, external financing, or a systematic rise in hidden investment. Its empirical implication is: when an organization requires both the completion of clear, high-intensity performance targets and strict compliance with rules and audit requirements, if the task can still be completed, it is usually accompanied by: additional budget allocations, special appropriations, or capital injections; overtime, overwork, and hidden labor input; risk transfer through insurance, outsourcing, or financial instruments; and rising costs while both rules and performance are maintained. This proposition is especially applicable to modern corporate governance, large-scale project campaigns, and certain high-intensity public policies.

Unlike state governance, a key feature of corporate governance is that governance targets are highly singular and quantifiable (profit, shareholder value), and resources are mainly raised in advance through market mechanisms (such as capital markets and debt financing). This allows corporate governance to adopt highly results-oriented incentive mechanisms (such as performance pay, stock options, and profit-sharing) under relatively predictable resource conditions, thereby achieving high-intensity targets. Within the “impossible trinity,” corporate governance prioritizes the deliverability of outcomes (i.e., achieving set targets). If a company simultaneously insists on strict internal and external compliance requirements and emphasizes the binding force of internal rules, it must ensure sufficient and predictable resources.

This is exactly what Ren Zhengfei often describes as Huawei’s strategic characteristic—launching a “saturation attack” toward a single breach point in the wall. This phrase contains three layers of meaning: first, breaching the “wall” is a non-negotiable strategic target; second, Huawei strictly enforces a set of internal rules and process management, and this requirement is equally non-negotiable; third, in order to “breach the wall,” the company can invest resources without restraint, investing as much as needed to carry out the “saturation attack.” This shows that corporate governance is an institutional form that uses market-based resource supply to “pay for” the combination of “strong incentives—strict rules—strong results orientation.”

In fact, major Chinese projects carried out through the “whole-nation system” and “concentrating resources to accomplish major tasks” (such as the “Two Bombs, One Satellite” program) share similar features: first, the target must be achieved; second, project implementation must follow internal financial, project, and technical rules and systems; third, to achieve the target, comprehensive resource mobilization and extraordinary support can be deployed to guarantee investment.

Proposition 4: “Parallel occupation of all three vertices of the trinity” leads to systemic failure

All else being equal, when an organization simultaneously imposes rigid requirements on governance targets, governance resources, and rule constraints, systemic failure becomes unavoidable. Its manifestation is not a single deviation, but a set of predictable “abnormal responses.”

The core meaning of the “impossible trinity of governance” is that any governance system can only form a relatively stable institutional equilibrium inside the trinity or near one vertex—it cannot occupy all three vertices at once. In public governance, when a principal tries to force “parallel occupation of the trinity”—that is, simultaneously demanding rigid targets, rigid budgets, and rigid rules—the organization will inevitably exhibit a series of “abnormal responses.” For example, regarding governance targets, we may see data falsification, window-dressing (Fang et al., 2023), multi-target distortion (sacrificing other targets), or outright abandonment (such as “lying flat” and giving up); regarding governance resources, we may see staff overworking themselves to exhaustion, the recruitment of large numbers of off-payroll personnel, and large-scale diversion of funds from other purposes (”robbing Peter to pay Paul”); regarding rule constraints, we may see formalism, bureaucratism, and passive responsibility-avoidance replacing proactive action (Tian Xianhong and Zhou Zhan, 2024). In addition, governance risks may spill over toward the organization’s periphery or externally, such as accelerated administrative outsourcing, project-based operations, and shadow operations (Huang Xiaochun and Zhou Li’an, 2017); in the long run, organizational trust and capacity may erode. This proposition provides a structural explanation for why certain governance reforms, despite being correctly directed, produce distorted results.

The above analysis shows that public governance has general, foundational organizational logic and “iron laws.” Violating these logics and laws produces the series of “abnormal responses” described above, leading to organizational friction, behavioral disorder, and resource waste—the severity of which depends on how forcefully “parallel trinity occupation” is imposed.

It should be noted that the “impossible trinity of governance” does not mean that governance targets, resource constraints, and procedural constraints cannot coexist at all—rather, it emphasizes that they are difficult to maximize simultaneously within the same organizational form. This framework, therefore, is not limited to explaining modern governance dilemmas characterized by highly rigid targets and concentrated governance pressure; it can equally explain stable governance forms where targets, resources, and rules are all configured at low intensity. In certain low-risk governance domains—especially in the provision of local public goods and routine affairs—governance systems do not attempt to strictly quantify or fully cover targets, nor do they rely on highly centralized fiscal and organizational resources, nor do they emphasize formalized, procedural governance rules. Instead, by simultaneously “de-rigidifying” all three elements, they form a low-conflict, sustainable institutional equilibrium. For example, in Chinese history, the court’s practice of subcontracting local public goods to local gentry shared common features: governance targets (such as road building, public security, disaster relief, and moral education) were defined loosely and flexibly; resource supply was typically non-fiscal and non-budgetary, relying mainly on local self-financing and social mobilization; and rule constraints could not take the form of bureaucratic procedures, relying instead on social custom, moral norms, and status order for soft regulation (Zhou Li’an, 2024).

“Low-tension equilibrium” governance typically appears in domains with lower governance risk, limited accountability pressure, and targets that are hard to quantify precisely. In this context, governance targets are intentionally kept loose and vague; the state does not try to achieve governance outcomes through strict evaluation or comprehensive coverage, but instead delegates responsibility for specific public affairs to local actors. Resource allocation does not center on fiscal budgets and formal staffing, but relies on local self-financing, social mobilization, and reputational incentives. Rule constraints appear more as customs, status order, and moral responsibility rather than formalized procedures. This governance combination systematically avoids the structural tension revealed by the “impossible trinity” by simultaneously lowering the intensity of constraints on targets, resources, and rules. This organizational form can be understood as an institutional equilibrium formed inside the trinity rather than at its boundary. Compared with governance paths that seek to comprehensively strengthen targets, budget control, and procedural constraints all at once, this “moderate on all three fronts” configuration is actually more conducive to maintaining long-term governance stability in low-risk, low-accountability-pressure contexts.

Proposition 5: The simultaneous downscaling of governance targets, budget constraints, and rule constraints forms a low-tension equilibrium

Table 1 constructs a typology of administrative subcontracting based on the “impossible trinity of governance,” used to compare the combinations of targets, budget control, and procedural constraints across different governance contexts and their corresponding institutional forms. These types do not represent a ranking of governance models by efficiency or modernity—they simply reflect the institutional equilibria each achieves under specific constraint conditions. When the rigidity of governance targets, budget constraints, and procedural requirements cannot all be maximized at once, governance systems tend to select and switch between different institutional tools by configuring the three elements differently. Among these, “low-tension equilibrium” governance systematically avoids the structural tension revealed by the “impossible trinity” by simultaneously lowering the institutional intensity of targets, resources, and rules; its stability comes from social embeddedness rather than administrative mobilization. “Steady-state subcontracting” governance centers on the administrative lump-sum system, easing resource and information constraints through responsibility decomposition and layered subcontracting while maintaining certain procedures and boundaries. “High-pressure acceleration” governance, under conditions of highly rigid targets and limited deadlines, forms short-term governance capacity by compressing procedures and concentrating resources—this corresponds to the campaign-style governance discussed earlier. Based on this discussion, we can derive the following proposition: the simultaneous downscaling of governance targets, budget constraints, and rule constraints forms a low-tension equilibrium.

Proposition 5 provides a theoretical basis for understanding why the state actively maintains low-pressure administrative outsourcing models in certain governance domains. As noted earlier, during the Ming and Qing dynasties, the imperial court delegated part of local public goods provision to local gentry, and this arrangement operated as follows: task targets were vague, accountability was weak, and incentives relied mainly on intrinsic motivation (centered on moral norms and status identity) rather than material rewards and punishments. This mechanism avoided the potential governance risks caused by behavioral distortion from strong incentives. Huang Xiaochun (2015), in his study of the relationship between contemporary Chinese government and social organizations, identified a similar mechanism, calling it “ambiguous subcontracting.” Its basic logic is as follows: higher-level authorities set relatively vague targets for the development of social organizations, and inspection and approval procedures remain low-intensity. Against this backdrop, grassroots governments face both high innovation risk (because it is hard to accurately grasp higher-level intentions) and a lack of predictable fiscal or promotion incentives, leading them to adopt conservative response strategies. In Huang Xiaochun’s (2015) framework, the core features of ambiguous subcontracting include imprecise task boundaries, hard-to-quantify responsibility standards, and flexible room for performance evaluation—creating strategic ambiguity between superior and subordinate levels. This offers a key organizational mechanism for understanding “low-tension equilibrium” governance.

Table 1 clearly shows that under the structural constraints of the “impossible trinity of governance,” administrative subcontracting mechanisms do not appear as isolated, disconnected institutional types, but form a continuous spectrum. From ambiguous subcontracting to steady-state subcontracting to high-pressure subcontracting, the change is not a shift in fundamental institutional nature, but the result of gradually increasing task clarity, resource concentration, and accountability intensity, driven by rising governance tension. Ambiguous subcontracting sits at the low end of the tension spectrum, characterized by flexible task boundaries and wide room for interpreting responsibility. Steady-state subcontracting occupies the middle range, maintaining relatively stable accountability relationships through project-based operations and layered evaluation. High-pressure subcontracting sits at the high end of the tension spectrum, characterized by rigid targets and compressed procedures, serving the need for short-term, concentrated mobilization. The continuous distribution of subcontracting mechanisms shows that administrative subcontracting is not a single institutional form, but a structural organizational technology that adjusts as governance pressure, resource allocation, and procedural constraints combine differently. This analysis helps break through the linear narrative that understands modern governance as a single evolutionary path, offering a unified analytical perspective for comparing the institutional logic and evolutionary conditions of different governance models.

Implicit Conditions and Breakthrough Mechanisms of the “Impossible Trinity of Governance”

What the “impossible trinity of governance” reveals is a structural tension that emerges under specific institutional frameworks and technological conditions—it does not represent an absolute impossibility of institutional evolution. Its core proposition can be summarized as follows: under routine governance conditions, target rigidity, rule density, and resource constraints cannot maintain a strong, parallel state for long. However, the validity of this proposition depends on several implicit institutional premises. Only when these premises hold does the “impossible trinity” appear as a stable structural constraint; once the relevant conditions undergo structural change, the trinity’s tension may be compressed, reshaped, or even transformed into a source of institutional innovation.

Implicit Conditions of the “Impossible Trinity of Governance”

1. The assumption of stable technological conditions

The trinity structure implicitly assumes that information collection, behavioral monitoring, and organizational coordination technologies have not undergone fundamental leaps. In institutional environments with high information and monitoring costs, increasing target rigidity and rule density often brings significant implementation burdens, creating inherent tension with resource constraints. But when digital governance, data platforms, and algorithm-assisted decision-making significantly lower information processing and monitoring costs, some of this tension may be absorbed by technology. For example, platform systems based on real-time data feedback and performance monitoring can strengthen institutional enforcement without significantly increasing staffing. This shows that the “geometry” of the trinity is not fixed, but partly depends on the evolution of the technological foundation. While technological change cannot fully dissolve the tension, it may drive structural adjustments in how it is distributed.

2. The assumption of relatively stable organizational form

The second implicit premise of the trinity is that an organization’s structure of authority and responsibility, hierarchical system, coordination mechanisms, and information communication remain relatively stable. Internal tension only becomes apparent when target rigidity continues to strengthen while the organizational structure and operating mechanisms remain largely stable, preventing organizational absorptive capacity from keeping pace. If the organizational model undergoes major innovation (such as platform-based structures, network organizations, or cross-departmental coordination mechanisms), the boundaries of absorptive capacity may be redefined. In other words, the trinity theory assumes the organizational model is in a relatively stable state.

3. The assumption of normal agent behavior

The trinity theory also includes a basic assumption about agent behavior: under routine incentive structures, individuals have a limit to their willingness to invest effort and take on risk (i.e., agents are generally averse to work and risk). Under this premise, strengthening governance targets and rule compliance inevitably requires increasing incentive intensity or compressing institutional flexibility. However, it should be noted that under specific historical circumstances—such as wartime mobilization, major disaster response, or large-scale social construction—agents may display strong mission-driven behavior and exceptional dedication, significantly compressing institutional tension in the short term. This kind of “extraordinary mobilization” is not caused by a fundamental change in institutional structure, but reflects ethical guidance and political mobilization temporarily substituting for resource investment. Therefore, the trinity’s tension is essentially a proposition about long-term equilibrium, not an absolute description of an instantaneous state.

4. The assumption that risk cannot be externalized indefinitely

The trinity theory also implicitly assumes that risk will eventually flow back to the organizational core. If governance risk can be externalized for a long time through debt expansion, extra-budgetary arrangements, or institutional outsourcing, the emergence of tension may be temporarily obscured. However, within a closed-loop responsibility structure—where the risks caused by organizational behavior must ultimately be borne by the organization’s principal—risk externalized in the short term will flow back to the core system, forcing it to bear the consequences of organizational disorder.

5. The assumption of limited legitimacy resources

Finally, the “impossible trinity” theory implicitly assumes that reserves of social legitimacy are limited. Here, “legitimacy resources” do not refer to an abstract notion of “public sentiment,” but to a set of political capital that can be mobilized, consumed, and replenished, used to make society accept a certain “forced parallel” combination within the “impossible trinity” (such as high targets, strong rules, and low resources). It includes at least three sources (which can be thought of as three “legitimacy accounts”): first, performance legitimacy—whether results can be delivered (growth, public security, public services, crisis response, etc.); second, procedural/legal legitimacy—whether rules are predictable, perceived as fair, and allow for appeal and correction; third, social identity/value legitimacy—shared community narratives, mission-driven mobilization, national symbols, and identity. These accounts can substitute for one another at different stages: strong performance can “offset” imperfect procedures; strong procedures can tolerate short-term performance fluctuations; strong identity mobilization can temporarily compress resources and welfare. But this substitution faces diminishing marginal returns (for example, the “appeal” of mobilization slogans declines with repeated use) and the problem of cross-period overdraft. When legitimacy resources are abundant, society may tolerate high-intensity targets and dense rules, but having legitimacy resources does not mean an unlimited supply. When society’s tolerance threshold drops, tension will become visible more quickly.

Breakthrough Mechanisms of the “Impossible Trinity”

The “impossible trinity of governance” may be reconfigured when the following conditions change. Its breakthrough mechanisms mainly take three forms:

First, technological breakthrough. Using digital, intelligent, and platform-based governance tools to significantly reduce information asymmetry and monitoring costs can allow high rule density and high target rigidity to coexist even when resources grow only slowly. The essence of this breakthrough path is substituting technological elements for some organizational resources, but its sustainability depends on the maintenance cost of the technological system and how well technology fits with the institution.

Second, extraordinary mobilization. Temporarily expanding the boundaries of agent behavior through political mobilization, value appeals, and mission-driven leadership can allow high-intensity targets and rules to coexist temporarily even under resource shortages. This path tends to be stage-specific and context-dependent. If the gains from mobilization are not converted into institutional arrangements in time, once the mobilization fades, it may trigger implementation fatigue or the buildup of hidden risks.

Third, organizational restructuring. Innovating organizational forms—such as platform-based coordination mechanisms, cross-departmental integration, and redesigned responsibility structures—can improve institutional absorptive capacity, rebalancing the trinity’s tension within a more flexible and diverse institutional framework. Compared with the first two paths, breakthroughs through organizational restructuring have greater sustainability, and their success depends on whether the closed-loop responsibility system and risk distribution mechanism can be effectively reconstructed.

It is worth emphasizing that the “impossible trinity of governance” is not only a constraint on institutional operation, but can also become a source of pressure for institutional innovation. When the trinity’s pattern is forcibly maintained in parallel, the institutional system generally faces two possible outcomes: institutional shock caused by risk accumulation and re-concentration of responsibility, or institutional innovation at the technological and organizational level. Therefore, the trinity’s tension has a “dual consequence”: it can lead to institutional imbalance, but it can also serve as an important catalyst for institutional upgrading. However, it must be made clear that so-called “breakthrough” does not mean the complete elimination of tension, but a systematic shift in how tension is configured. The “impossible trinity of governance” cannot be fundamentally dissolved, but it can be continuously reshaped through technological integration, organizational restructuring, and mobilization mechanisms.

Therefore, the “impossible trinity of governance” should not be simply understood as a static proposition of institutional impossibility, but should be seen as an analytical framework reflecting long-term structural constraints that hold under specific implicit conditions. As the technological foundation, organizational form, behavioral ethics, and legitimacy resources evolve, the trinity’s tension will be compressed, delayed, or transformed. This perspective gives the trinity theory multiple functions—explanatory, generative, and predictive: it can explain why forced parallelism often leads to organizational disorder, risk feedback, and institutional shock, and it can also explain why, at certain historical junctures, institutional pressure instead gives rise to governance innovation and structural breakthroughs.

Ex Ante or Ex Post Uncertainty: Revisiting the Difference Between Administrative Subcontracting and Weberian Rational Bureaucracy

The previous section compared the differences between administrative subcontracting and Weberian rational bureaucracy in terms of governance mechanisms and basic features. Next, we shift perspective to examine the management technologies of ex ante versus ex post uncertainty, revealing a deeper and more fundamental difference between the two. We will argue that administrative subcontracting mainly emphasizes the capacity and flexibility to respond to ex post uncertainty, while Weberian rational bureaucracy tends to pursue ex ante certainty and controllability. However, there is a tension between maximizing the capacity to respond to ex post uncertainty and maximizing ex ante certainty—the two are difficult to achieve simultaneously. It is precisely this tension that forms the endogenous basis of the “impossible trinity of governance.”

From traditional to contemporary China, we can glimpse a fundamental operating logic embedded in “great unity” state governance: governance is not supported by an ample and sufficient supply of resources, but is instead driven by state power itself. Its core lies not in pre-allocating abundant and stable fiscal and organizational resources, but in using state power as a lever—centered on governance tasks and outcomes, with regime stability as the highest goal—to mobilize governance resources across multiple levels, actors, and types, thereby achieving effective integration of a vast territory and complex society.

Specifically, this governance logic manifests in at least three nested institutional mechanisms. First, governance responsibility is set through state power and decomposed and subcontracted in a hierarchical manner. The central government does not directly handle specific governance affairs, but converts governance targets into divisible responsibility packages, pushing them down the administrative hierarchy level by level, with each “contractor” responsible for concrete implementation. Second, state power is used to leverage broadly defined fiscal resources, diversifying and socializing resource mobilization. Unlike the modern budgetary state, which is premised on “giving money in advance,” a defining feature of administrative subcontracting is precisely “no money given, only policy.” Higher-level governments transfer financing responsibility and resource mobilization responsibility to “contractors” by granting or tacitly allowing a certain amount of policy space. Local governments and other contracting entities can thus raise resources outside the formal budget—through land transfers, fees, commercial activities, social mobilization, and even administrative outsourcing—to complete assigned governance tasks. The dual-budget system, extra-institutional finance, and administrative outsourcing are institutional forms generated under this logic. Third, state power grants “contractors” multiple and highly flexible incentive mechanisms. These incentives are not limited to monetary compensation, but comprehensively use administrative decentralization, performance evaluation, political promotion, revenue-sharing, and policy preferences to tightly bind governance performance to the contractor’s political future, organizational status, and economic gains.

This underlying logic exists not only within the central-local relationship inside the administrative system, but also extends, with varying intensity and form, to the relationship between the state and society. Whether it is administrative in-house subcontracting to local governments, or administrative outsourcing to gentry, merchants, and other social actors, the core is the same: using power authorization and responsibility transfer to externalize, disperse, and socialize governance costs that would otherwise fall directly on the central government (Zhou Li’an, 2016, 2022).

In sum, administrative subcontracting does not pursue high predictability in the grassroots governance process; instead, it concentrates certainty on the highest governing target itself—for example, regime stability, tax and grain remittance, or the completion of key governance indicators. As long as the final result is guaranteed, the sources of resources, methods of execution, and even institutional boundaries during the process can remain highly flexible. In sharp contrast, the governance logic of Weberian rational bureaucracy is built on an entirely different institutional premise: it centers on legal-rational principles, rules, and procedures, ensuring certainty and predictability in organizational behavior by limiting the agent’s discretion. To achieve this, bureaucracy must rely on relatively stable and ex ante predictable budgets and resource allocation, allowing organizational members to fulfill their duties under clear rules and guaranteed resources. This institutional arrangement aligns closely with the economic structure of industrial capitalism: whether it is large-scale fixed-asset investment or long-term production planning, both must be built on predictable returns and a stable institutional environment (Weber, 2010).

This is precisely where the two systems diverge fundamentally in their governance rationality: Weberian rational bureaucracy eliminates uncertainty through the ex ante allocation of rules and resources, while administrative subcontracting absorbs uncertainty through the ex post binding of power, responsibility, and incentives. From a more abstract institutional perspective, administrative subcontracting and Weberian rational bureaucracy are not successive forms of the same governance logic across different historical stages, but two “uncertainty management technologies” that point in opposite directions while being equally modern. Their fundamental difference does not lie in whether they pursue efficiency or rationality, but in where uncertainty is placed within the governance process—before or after the fact.

Weberian rational bureaucracy is a typical mechanism for absorbing ex ante uncertainty, with its institutional design aimed at eliminating or compressing uncertainty as much as possible before governance action takes place. This goal is achieved through a coordinated set of institutional arrangements: clear legal authorization, stable organizational boundaries, standardized procedural rules, clearly defined responsibilities, and matching ex ante budget allocation. By institutionalizing behavior patterns, decision-making authority, and resource use in advance, bureaucracy attempts to convert organizational members’ room for judgment into predictable rule-following, ensuring continuity over time and replicability across space in governance behavior. However, this technology for managing ex ante uncertainty relies heavily on two preconditions: the governance task itself has relatively stable targets and clear boundaries, and the organization can obtain relatively sufficient and predictable resource support before taking action. Once these two conditions become difficult to meet, bureaucracy easily falls into the dilemma of “sufficient rules but weak action”—showing up as complete procedures but poor performance, and even evolving into formalism.

In sharp contrast to Weberian rational bureaucracy, administrative subcontracting is a typical mechanism for absorbing ex post uncertainty. It does not attempt to exhaust all possible contingencies before action, nor does it try to eliminate information asymmetry through detailed rules. Instead, it consciously leaves uncertainty within the governance process, absorbing it at the outcome stage through accountability, performance evaluation, and incentive constraints. Under this institutional arrangement, the governance target itself is set as highly certain, while the path to achieving it, the sources of resources, and specific methods remain highly flexible. It is in this sense that administrative subcontracting, as an operating mechanism that leverages power logic to drive governance, is characterized by keeping as much certainty as possible with the subcontracting party—for example, setting challenging task targets, guaranteeing fiscal remittance and the subcontracting party’s share of tax revenue, and using personalized accountability to compel completion—while “pushing down” and transferring uncertainty to the “contracting party”: the “contractor” must not only bear execution responsibility, but also independently cope with risks such as insufficient information, resource scarcity, and environmental change. State power does not rely entirely on ex ante rules to control behavior, but disciplines choices more through ex post accountability, political evaluation, and the fulfillment of incentives. Governance order thus no longer depends mainly on the consistency of rules, but on the deliverability of results.

Placing the two side by side, we can see a clear structural symmetry: Weberian rational bureaucracy mainly absorbs uncertainty through the ex ante allocation of rules and resources, while administrative subcontracting mainly absorbs uncertainty through the ex post binding of responsibility and incentives. The former pursues predictability of process, trying to eliminate discretion; the latter pursues the achievability of results, maximizing the use of discretion. This difference also means that the two uncertainty management technologies each have clear boundaries of applicability. Ex ante technology has clear advantages under conditions of a stable governance environment, sufficient fiscal capacity, and solid rule-of-law foundations; in contexts where governance tasks are highly complex, information is highly dispersed, resource constraints are significant, and target priorities are clear, ex post technology tends to be more adaptive and better at mobilization. In this sense, administrative subcontracting is not a “low-end version” of Weberian rational bureaucracy, but an alternative governance technology formed by rearranging uncertainty under specific constraint conditions.

From the perspective of the “impossible trinity of governance,” we can gain a deeper understanding of the essential difference and inherent tension between Weberian rational bureaucracy and administrative subcontracting. We can imagine that, within the same organizational level, if one tries to maximize ex ante certainty—for example, through a complete rule system or strictly locked-in budget size—this will inevitably compress the agent’s discretion, thereby weakening its capacity to absorb ex post uncertainty. Conversely, if one tries to maximize ex post responsibility binding—for example, by imposing high-intensity accountability pressure or rigid performance targets—the “contracting party” must be given ample discretion and flexible response space, which comes at the cost of process predictability. This shows that the same organizational level cannot simultaneously minimize and maximize discretion. In other words, we cannot pursue maximum ex ante certainty while also expecting the organization to have full flexibility to cope with ex post uncertainty—the two are like fish and bear’s paw, impossible to have both. By distinguishing between ex ante and ex post uncertainty, we can reveal, from a new perspective, the deeper structural tension hidden behind the “impossible trinity of governance.”

The “impossible trinity of governance” discussed earlier treats the modern corporation as one possible institutional equilibrium under structural governance tension. This naturally raises an interesting question: how does the modern corporation, as one corner of the trinity, handle ex ante and ex post uncertainty? And how does this relate to the “impossible trinity of governance”?

Unlike Weberian rational bureaucracy and administrative subcontracting, the modern corporation shows a distinctive hybrid characteristic in its governance logic: on one hand, it sets and pursues challenging organizational targets, transferring ex post uncertainty to internal agents through “pressure” mechanisms; on the other hand, it emphasizes compliance systems and rule-based procedures, striving to lock in uncertainty in advance. This practice—seemingly pursuing both maximum ex ante certainty and maximum capacity to respond to ex post uncertainty at the same time—appears to break the constraint of the “impossible trinity of governance.” However, just as Ren Zhengfei’s “saturation attack” suggests, reconciling the two does not rely on a clever balance of institutional design, but on sufficient and predictable resource investment. Conversely, if budget resource supply is insufficient, the company must either downgrade performance targets (reducing the transfer and pushing-down of ex post uncertainty) or breach compliance and procedural constraints (weakening the locking-in of ex ante certainty)—and may even need to do both to keep functioning.

Viewed this way, budget and fiscal supply capacity form the key variable determining an organization’s ability to cope with both ex ante and ex post uncertainty. It is precisely on this dimension that the modern corporation and government organizations under Weberian rational bureaucracy show a fundamental difference. Modern corporations, especially large ones, can raise substantial funds from financial institutions and capital markets based on their profit prospects, giving their budget supply capacity significant flexibility (this is also the theoretical basis for why “traditional theory of the firm” and principal-agent models in economics generally assume firms do not face budget constraints). Government organization budgets, by contrast, generally require approval from the legislature or higher-level departments before taking effect, and once set, are difficult to adjust flexibly, leaving little room for elastic response. Moreover, the sufficiency of government budgets depends on the state’s resource extraction capacity, which is tied to complex factors such as public expenditure and tax systems, tax collection technology, and public willingness to pay taxes—in most cases, funds cannot be “allocated on demand,” and tight budgets are the norm.

Therefore, from a governance perspective, differences in budget constraint flexibility split modern corporations and bureaucratic governments into two distinct governance institutional forms. As an ideal type, Weberian rational bureaucracy groups modern bureaucratic departments and modern corporations together under the category of rational, matter-of-fact organizational forms without strict distinction (Weber, 2010). But this study, based on the “impossible trinity of governance” theory, reveals a structural divergence between the two in terms of resource constraints and uncertainty management mechanisms, offering an important supplement and correction to the Weberian paradigm.

From this perspective, the relationship between administrative subcontracting and Weberian rational bureaucracy cannot simply be understood as a linear substitution—it is instead an institutional division of labor and coexisting tension centered on how uncertainty is placed. Understanding this has important theoretical significance for further discussing the institutional combinations, structural conflicts, and inherent limits of different governance models.

Why Does China’s State Governance Naturally Lean Closer to Administrative Subcontracting?

The reason China’s state governance structurally “naturally” leans closer to the administrative subcontracting pole of the trinity is not simply due to historical inertia or a cultural preference for a particular governance style, but because a set of structural constraints continually push the governance pattern toward an equilibrium point characterized by “prioritizing the deliverability of results, yielding on process predictability, and institutionally tolerating resource uncertainty.” In other words, Chinese local governance is forced to choose its position within the “impossible trinity”: under the pressure of multiple targets and resource constraints, it tends to absorb uncertainty through ex post mechanisms rather than eliminating it through an ex ante system of rules.

First, the high rigidity of governance targets. Chinese state governance has long relied on performance legitimacy to sustain its operation (Yang Hongxing and Zhao Dingxin, 2013). In the imperial era, “national peace and social stability” (maintaining regime stability and social order) was placed at the highest priority, reflected in top-down, tier-by-tier targets for tax and grain remittance and social security. After 1949, catching up economically, industrialization, and modernization became the state’s priority governance targets. Politically transmitted targets, cascading down through the hierarchy, carry rigid constraints, giving overwhelming weight to “delivering results.” In contemporary Chinese local governance, there exists a category of strongly binding “bottom-line targets” and “key performance targets,” covering matters such as stability, security, the implementation of major tasks, higher-level evaluation indicators, and staged campaigns. Such targets usually have two features: first, they must be completed—failure is not allowed, and the political cost of failure is far greater than the institutional cost of procedural deviation; second, they are time-sensitive, often accompanied by deadlines, windows of opportunity, and a campaign-style rhythm. When governance targets show “rigid priority,” institutional rationality naturally tends to concentrate certainty on “whether it gets done,” rather than “whether it was done according to standard procedure.” Thus, an administrative subcontracting model—centered on results, allowing flexible paths, and relying on ex post accountability—becomes a more feasible organizational solution.

Second, the structural tension between fiscal capacity and administrative responsibility. As a super-large country, China has always faced urgent pressure to raise fiscal resources. The usual response strategy is to prioritize securing central government fiscal revenue, while the budget resources of local governments at all levels—especially grassroots governments—remain highly uncertain, with formal budget allocations generally tight and insufficient. The coexistence of expanding tasks and resource constraints forces local governments to internalize “resource-raising” as an organic part of their governance mechanism. Since the reform and opening-up period, local governments have long shouldered heavy responsibilities for public services, infrastructure, industrial development, and risk management, while on-budget revenue and formal borrowing capacity have struggled to keep pace. In recent years in particular, budget constraints have tightened, debt regulation has strengthened, and land and real estate cycles have fluctuated more sharply—meaning local governments’ governance challenge is often not “how to spend according to procedure,” but “where the money will come from.” This situation directly pushes governance toward the logic of administrative subcontracting: higher levels hand down targets mainly in the form of policies, indicators, and tasks, while local governments, operating within the authorized and tacitly allowed space of “no money given, only policy,” self-finance through financing platforms, state-owned enterprises, project funds, and social mobilization. Resource uncertainty is institutionally “pushed down” to the “contracting party.” Thus, administrative subcontracting is not a substitute for bureaucracy, but an institutional response to the structural contradiction between “resource gaps” and “rigid tasks.”

Third, the high degree of dispersion in the information structure. For a country as vast in territory and population as China, the high localization of governance information makes it difficult for ex ante rules to exhaust the heterogeneity and variability across regions, forcing reliance on ex post outcomes to offset information asymmetry. China’s vast territory and significant regional differences mean that governance objects and contexts show high heterogeneity and dynamic change, making it difficult for the central government to cover local governments’ specific situations with uniform rules. Even when rules are formulated, they often fall into the dilemma of being overly detailed yet disconnected from reality. Under this structure, trying to eliminate uncertainty through ex ante means faces a dilemma: the more detailed the rules, the more likely they are to become distorted; the coarser the rules, the weaker their binding force. The advantage of administrative subcontracting lies precisely in acknowledging that information rests with local governments, allowing them to use discretion to adapt to circumstances, with higher-level governments correcting deviations afterward through evaluation, inspection, and accountability mechanisms. In short, the more dispersed the information, the harder it is to regulate in advance, and the more governance must rely on ex post evaluation and adjustment. In a multi-level local government system, information asymmetry and strategic interaction between levels make this logic even more complex.

Fourth, the spillover nature of risk governance and bailout expectations. In areas such as stability, security, finance, public health, and the handling of extreme events, the spillover effects of governance failure are extremely strong. Facing high-risk issues, higher-level authorities often care more about “whether the conflict is resolved locally” than “whether standard procedures were strictly followed.” This reinforces two institutional tendencies: for local governments, it is better for the process to be “unconventional” as long as the outcome is “accident-free”; for higher-level authorities, control is strengthened after the fact through supervision, accountability, and special inspections. This shows that “ex post technology” more easily becomes the default choice—the existence of major risks makes “results-oriented plus ex post correction” a safer political strategy.

In sum, the reason China’s state governance structurally “naturally” leans closer to administrative subcontracting is that it has long operated under a specific set of structural constraints: target rigidity driven by performance legitimacy (must be completed), resource constraints faced by governing a large country (tight budgets), dispersed information (hard to regulate in advance), and risk spillover (reliance on ex post control). Under this set of conditions, the most feasible equilibrium is not to “eliminate uncertainty in advance,” but to “retain uncertainty within the process” and then absorb it at the outcome stage through responsibility, incentives, and accountability—this is precisely the position administrative subcontracting occupies within the “impossible trinity of governance.”

From an overall institutional perspective, China’s state governance is not dominated by a single governance model, but takes the form of a stable, internally logical hybrid institutional structure: bureaucracy as the institutional “chassis,” the subcontracting-contracting mechanism as the governance “engine,” and numerous non-government organizational forms as the external “contractors” and buffer zones outside the formal institution. This institutional combination is by no means a stopgap measure or a transitional form of reform, but a structural equilibrium formed under the constraint of the “impossible trinity.”

First, as the “chassis,” bureaucracy provides governance with a minimum level of institutional stability and legitimacy boundaries. The formal organizational system of local government, budget procedures, staffing management, audit oversight, and legal responsibility together form an institutional framework indispensable to governance operation. The function of the bureaucratic “chassis” is not to solve all governance problems, but to maintain basic organizational order and the legitimacy of authority, define acceptable and unacceptable institutional boundaries, and provide institutional interfaces for accountability, oversight, and re-centralization. In other words, the core responsibility of bureaucracy is not to complete every task, but to ensure the system does not spiral out of control.

Second, as the “engine,” the subcontracting-contracting mechanism provides local governance with continuous mobilization capacity and a results orientation. In contexts where targets are highly rigid, tasks are dense and overlapping, and resources cannot be fully allocated in advance, relying solely on the ex ante logic of bureaucracy is insufficient to sustain governance operation. Administrative subcontracting thus becomes the key driving mechanism pushing governance forward: higher levels transmit governance pressure down through task decomposition, indicator-setting, and responsibility enforcement; local governments gain the motivation to “must complete” tasks through performance evaluation, political incentives, and responsibility binding; uncertainty is consciously retained at the implementation level and absorbed through ex post mechanisms. In this structure, administrative subcontracting does not replace bureaucracy, but embeds itself within it, functionally compensating for the boundaries of its capacity.

Finally, as external “contractors,” quasi-governmental organizations and social organizations outside the government absorb governance pressure that the bureaucratic system cannot accommodate. When budget constraints tighten, borrowing channels are restricted, and procedural oversight intensifies, the resources, flexibility, and risk tolerance local governments need to complete governance tasks often exceed the institutional capacity of the formal administrative system. The platform companies, state-owned enterprises, and other quasi-public organizations that emerged after the tax-sharing reform play the role of external institutional “contractors” in this context: organizationally, they operate between government and market, controlled by local governments while possessing market-based financing and operating capabilities; functionally, they take on high-investment, high-risk, high-uncertainty tasks such as infrastructure construction, industrial investment, and public services; institutionally, they become a key vehicle through which administrative subcontracting extends beyond the organization. As a result, governance costs and risks that should originally fall directly on the government are systematically transferred, dispersed, and outsourced.

Placing the three together within a single analytical framework, we can identify a clear division of labor: the bureaucratic “chassis” is responsible for rules, legitimacy, and minimum order; the subcontracting “engine” is responsible for mobilization, pressure transmission, and delivering results; and the external “contractor” is responsible for resource mobilization, risk absorption, and institutional flexibility. It is precisely through this combination that Chinese local governance is able to keep operating under conditions of high uncertainty, significant resource constraints, and rigid target requirements.

This also explains a commonly misunderstood phenomenon: the financialization of local government platforms, the expansion of state-owned enterprises, and the involvement of public institutions in commercial activities are not simply “government overreach” or “market distortion,” but the institutional result of administrative subcontracting spilling over from the budgetary state and bureaucratic governance boundaries to the outside of the organization. Therefore, the core problem of Chinese local governance is not “whether to return to pure bureaucracy” or “whether to fully marketize,” but how to recalibrate the internal boundaries of this institutional combination—in which areas the bureaucratic “chassis” should be strengthened, in which tasks the subcontracting “engine” should be allowed to run, and under which conditions the external “contractor” needs to be functionally scaled back and risk-isolated. This question is precisely the core thread for understanding the logic behind contemporary Chinese governance reform.

Conclusion

Every civilization must answer a fundamental question: how to maintain the continuity of order under conditions of limited resources, irremovable risk, and continuously expanding targets? What the “impossible trinity of governance” reveals is precisely the structural expression of this question: under routine institutional and technological conditions, target rigidity, rule density, and resource constraints cannot be forced into parallel alignment for long. This means that the governance logic of any civilization can only allocate resources between constraints and expectations—it cannot achieve cost-free, comprehensive expansion.

This paper develops and refines the theory of the “impossible trinity of governance,” providing a unified analytical language and explanatory framework for several seemingly scattered and independent governance forms and phenomena. Different governance organizations—such as administrative subcontracting, Weberian rational bureaucracy, and modern corporate governance—are institutional equilibria that emerge under different structural pressures within the target-budget-rule combination. This helps us move beyond the constraints of “Western-centrism.” As our analysis shows, administrative subcontracting and Weberian rational bureaucracy are not different stages within a single evolutionary sequence, nor is there a normative superiority of one over the other—rather, they are stable responses to different combinations of constraints within the “impossible trinity,” reflecting different trade-offs in uncertainty management technology.

This study reveals a deeper and more general organizational logic of public governance that existing literature has not noticed. An important insight of the “impossible trinity of governance” theory is that, just as we must respect the laws of nature and economics, organizational designers and leaders must also respect the inherent “laws” of organizational governance. Public governance, too, has general, foundational organizational logic and “iron laws”—if these logics are violated through sheer willfulness, a series of “abnormal responses” will result, leading to organizational friction, behavioral disorder, and resource waste. At the same time, facing the “impossible trinity of governance,” an important strategic judgment and choice for organizational leaders is to assess the situation according to the specific stage of organizational development, decide which two corners to hold firm and which one to leave open, and adjust accordingly over time.

From the perspective of this study, administrative subcontracting is far more than an institutional arrangement—it constitutes a civilizational-level choice of governance pathway. Relying on the continuity of hierarchical power, it redistributes uncertainty along the organizational chain through boundary embedding and responsibility pushing-down, so that power is neither fully centralized nor fully devolved. The so-called “third realm” between state and society (Huang Zongzhi, 2003) is not an institutional gap between state and society, but a responsibility buffer structure formed by civilization under long-term resource constraints: it both relieves governance pressure and maintains the continuity of power; it both generates risk and reserves a channel for risk to flow back. The “impossible trinity of governance” thus transcends the level of institutional technique and becomes an expression of how a civilizational form responds to structural tension. At certain historical moments, technological innovation, organizational restructuring, or high-intensity mobilization may temporarily compress this tension, making targets, rules, and resources appear to run in parallel. However, this “forced parallelism” either transforms into a new institutional structure, or falls into crisis or is readjusted as risk flows back. The way civilizations endure lies not in eliminating tension, but in repeatedly reconstructing it.

If the “impossible trinity of governance” reveals a structural constraint that every complex society must face, then the differences among civilizations lie not in whether this tension exists, but in how it is organized, distributed, and reconstructed. In other words, the divergence in civilizational governance rationality is reflected in how institutions respond to the contradiction between limited resources and expanding targets.

The formation of modern Western governance order is built on the logic of boundary separation: state, market, and society are institutionally distinguished, with different domains bearing different risks and responsibilities. Government does not set binding targets; target expansion is mainly absorbed through market mechanisms and social self-governance; rule density is constrained through the rule of law and contract systems; and resource constraints are balanced through fiscal institutions and representative politics. Western governments emphasize “limited liability”—so under federalism, local governments that become insolvent can file for bankruptcy reorganization, and companies and individuals whose businesses fail can also file for bankruptcy. By clearly defining the boundaries of rights and obligations for all parties, the “social contract” between government and market, state and citizens, and the contracts between private actors clearly allocate and separate risk and responsibility. Under this logic, “outsourcing,” “cooperation,” and “network governance” are often interpreted as the decentralization and multi-centering of state capacity, an institutional optimization of bureaucracy’s resource constraints. This approach handles the trinity’s tension by dispersing pressure across multiple structural units through institutionalized decentralization, limited liability, and domain separation.

By contrast, Chinese governance rationality has long formed under a different set of structural conditions: the continuity of hierarchical power is highly stable, and there is a lack of clear organizational boundaries between government and market, state and society (Zhou Li’an, 2016). In this structure, target rigidity often takes priority over boundary separation, and the state must maintain order stability under conditions of limited resources. Therefore, governance pressure is not cut apart through institutional decentralization, but embedded, spilled over, and returned through administrative subcontracting at organizational boundaries. The so-called “third realm” is not the institutional recognition of an independent domain, but a product of the extension of the responsibility chain; compared with administrative in-house subcontracting, administrative outsourcing does not mean the retreat of state power, but merely a shift in the form of control.

Therefore, the core difference between the two civilizations’ governance rationalities does not lie in the degree of “centralization” versus “decentralization,” but in how each configures the trinity’s tension. Western governance principles tend to absorb tension through institutional separation, dispersing impossibility across multiple domains; Chinese governance rationality maintains a closed loop of responsibility through the continuity of hierarchical power, cyclically regulating tension through boundary embedding. The former emphasizes clarity of institutional boundaries, trying to reduce governance uncertainty through rule certainty; the latter emphasizes the continuity of the power chain, relying on pushing responsibility downward and risk feedback to manage uncertainty. However, neither governance logic can escape the constraint of the “impossible trinity of governance.” Technological leaps, organizational innovation, or political mobilization may temporarily compress tension, but in the long run, the contradiction between resource constraints and target expansion always persists. The stability of different civilizations lies not in whether they can eliminate this contradiction, but in whether they have formed a sustainable mechanism for reconstructing tension.

Therefore, what administrative subcontracting and the “impossible trinity of governance” offer is not a special explanation for any single country, but a comparative framework of universal significance: it allows us to understand, within the same structural coordinate system, how different civilizations organize power, distribute responsibility, and manage risk. The difference among civilizations lies not in whether they face impossibility, but in how they institutionally bear and reconstruct it.

1. A subtle change in tone. This time the readout says, “we must attach great importance to the difficulties and challenges in economic operations” (同时，要高度重视经济运行中的困难挑战). That single word “great importance” (高度) is doing a lot of work. It suggest that the leadership now clearly perceives the problems building up in the economy.

2. firmer counter-cyclical stance. The meeting called to “intensify countercyclical adjustment” (加大逆周期调节力度) and, notably, to “promptly plan and roll out pragmatic and effective incremental policies” (及时谋划出台务实管用的增量政策). This lines up with the counter-cyclical direction Premier Li stressed at the July symposium. Currently, we are at the stage of researching (planning) potential incremental policies, putting them in effect takes more time.

3. The fiscal-monetary frame keeps the same tone, just spend the money faster. The overall framework is unchanged, yet the emphasis has clearly moved toward accelerating fiscal outlays. In April the language was “make full and good use of macro policy” and “keep optimizing the structure of fiscal spending” (用好用足宏观政策、持续优化财政支出结构). By July that had been upgraded to “macroeconomic policies must be more forceful and effective, accelerating the pace of fiscal expenditure and the use of bond funds” (宏观政策要发力提效、加快财政支出和债券资金使用进度). July reads as more action-oriented and more urgent, and it names bond funds directly. It’s basically a prod to local governments to actually get the money out the door. That fits the first-half backdrop I flagged in the outlook: expenditure under government-managed funds down 16.4% year-on-year, and local investment visibly contracting.

4. On the export, the call to “expand the space for mutually beneficial international economic and trade cooperation, vigorously develop trade in services, and promote balanced trade development” (拓展国际经贸互利合作空间、大力发展服务贸易、促进贸易平衡发展) reads, to me, partly as a response to Europe’s recent complaints about its trade deficit with China. The wording suggests there’s still room to negotiate at this stage.

5. In terms of the general focus, it’s still on domestic demand, it’s worth noticing that services consumption gets its own billing. The readout says, “expand the supply of high-quality goods to meet the consumption needs of different groups, and tap the potential of service consumption” (适应不同群体消费需求扩大优质供给、挖掘服务消费潜力). As I expected inthe outlook, the pro-consumption push leans more toward services.

6. There are some new language on the private sector and market order. Compared with April, July adds “optimize the development environment for the private economy, and promote the standardized and healthy development of the platform economy” (优化民营经济发展环境、推动平台经济规范健康发展). It also elevates the “national unified market” into an actual regulation， “formulate and implement regulations on building a unified national market”It’s positioning the rulebook as the instrument for reining in local involution-style competition.

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below is the transcript I made with the help of AI:

Political Bureau of the CPC Central Committee Holds Meeting, Decides to Convene Fifth Plenary Session of the 20th CPC Central Committee, Analyzes and Studies Current Economic Situation and Economic Work; Xi Jinping, General Secretary of the CPC Central Committee, Presides Over the Meeting

Beijing, July 30 (Xinhua) — The Political Bureau of the Communist Party of China (CPC) Central Committee held a meeting on July 30, deciding to convene the Fifth Plenary Session of the 20th CPC Central Committee in Beijing in October this year. The main items on the agenda are for the Political Bureau of the CPC Central Committee to report its work to the Central Committee, and to study a number of major issues concerning the persistent advancement of full and rigorous Party self-governance. The meeting analyzed and studied the current economic situation and made arrangements for economic work in the second half of the year. Xi Jinping, General Secretary of the CPC Central Committee, presided over the meeting.

The meeting pointed out that since the 18th CPC National Congress, great achievements have been made in exercising full and rigorous Party self-governance, opening up new frontiers in the self-reform of a century-old major party, driving historic accomplishments and historic transformations in the cause of the Party and the country, and enabling the Party and the people to seize the historic initiative in strengthening the Party and the nation. At the same time, as profound changes have taken place in global, national, and Party conditions, full and rigorous Party self-governance also faces many new circumstances and new problems. The whole Party must, from the strategic height of consolidating the Party’s governing position and fulfilling the Party’s mission and tasks, gain a profound understanding of the great significance of persistently advancing full and rigorous Party self-governance. We must firm up our confidence, maintain our resolve, and with higher standards and more practical measures, uphold and apply well the valuable experience of full and rigorous Party self-governance in the new era, effectively rectify and resolve the prominent problems facing Party building, and consolidate and develop well the sound political situation formed in Party management and governance.

The meeting emphasized that persistently advancing full and rigorous Party self-governance requires upholding Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, and the Scientific Outlook on Development, comprehensively implementing Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, thoroughly studying and applying Xi Jinping’s thought on Party building, and implementing the general requirements for Party building in the new era. It requires taking the Party Constitution as the fundamental basis, upholding and strengthening the centralized and unified leadership of the CPC Central Committee, and focusing on enhancing the Party’s capacity for long-term governance, maintaining the Party’s advanced nature and integrity, and preserving the close ties between the Party and the people. It requires unwaveringly adhering to a strict tone, improving the system for full and rigorous Party self-governance, taking the Party’s political building as the overarching principle, comprehensively advancing all aspects of Party building, fully stimulating the enthusiasm, initiative, and creativity of the whole Party, and continuously achieving the Party’s self-purification, self-improvement, self-renewal, and self-elevation. This will ensure that the Party always remains a Marxist governing party that stands at the forefront of the times, enjoys the wholehearted support of the people, can withstand all kinds of storms and tests, and is full of vigor and vitality, and that it always remains the strong leadership core of the cause of socialism with Chinese characteristics.

The meeting held that since the beginning of this year, the CPC Central Committee with Comrade Xi Jinping at its core has united and led the whole Party and the people of all ethnic groups across the country in forging ahead with determination and striving courageously. By coordinating the two overall situations of domestic and international affairs, coordinating development and security, and effectively responding to various external shocks and internal difficulties, China’s economy has shown a development trend of shifting toward new drivers and optimizing its structure. At the same time, we must attach great importance to the difficulties and challenges in economic operations, firm up our confidence, rise to the challenges, make good use of various opportunities and advantages, and promote the steady and sustained progress of high-quality development.

The meeting emphasized that to do a good job in economic work in the second half of the year, we must uphold Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era as the guide, adhere to the general principle of pursuing progress while ensuring stability, fully, accurately, and comprehensively implement the new development philosophy, accelerate the building of a new development pattern, and better coordinate the two overall situations of domestic and international affairs as well as development and security. We must continue to deepen reform and opening up, accelerate the transition between old and new growth drivers, effectively implement a more proactive fiscal policy and an appropriately accommodative monetary policy, give full play to the effectiveness of all existing policies, promptly plan and roll out pragmatic and effective incremental policies, intensify countercyclical adjustment, step up efforts to expand domestic demand and optimize supply, earnestly safeguard and improve people’s livelihoods, enhance the momentum of development and stimulate social vitality, promote the sustained development of the economy toward new drivers, better structures, and improved performance, and strive to achieve a good start to the 15th Five-Year Plan period.

The meeting pointed out that macroeconomic policies must be more forceful and effective, accelerating the pace of fiscal expenditure and the use of bond funds, and vigorously advancing the “two major” initiatives (major national strategies and security capacity building) and the “two new” work (large-scale equipment renewal and consumer goods trade-in programs). The “three guarantees” baseline at the grassroots level—ensuring basic living needs, salary payments, and normal government operations—must be firmly secured. Monetary policy tools should be used comprehensively and adjusted in a timely manner, and the coordinated implementation of fiscal and financial policies to boost domestic demand should be optimized.

The meeting emphasized the need to effectively expand domestic demand, expand the supply of high-quality goods to meet the consumption needs of different groups, and tap the potential of service consumption. Solid progress should be made in the planning and construction of the “six networks.” We must accelerate the building of a modern industrial system, strengthen long-term and stable support for basic research, deeply implement the “Artificial Intelligence Plus” initiative, develop new forms of the intelligent economy, and improve the AI governance system. We should actively promote breakthroughs in frontier technologies and the development of future industries, work hard to build emerging pillar industries, and continue to promote the transformation and upgrading of traditional industries.

The meeting emphasized the need to foster a fair and orderly market competition environment, formulate and implement regulations on building a unified national market, continue to comprehensively address “involution-style” competition, and resolve the problem of overdue corporate payments on a regular basis. We must deepen reform of state-owned assets and state-owned enterprises, optimize the development environment for the private economy, and promote the standardized and healthy development of the platform economy.

The meeting pointed out the need to expand the space for mutually beneficial international economic and trade cooperation, vigorously develop trade in services, and promote balanced trade development. We should improve the outbound investment management system and the comprehensive overseas service system, and actively attract and utilize foreign investment.

The meeting emphasized the need to do a good job in work related to agriculture, rural areas, and farmers without any slackening, continue to consolidate and expand the achievements of poverty alleviation, establish and improve mechanisms for building, operating, and maintaining high-standard farmland, stabilize the production and prices of hogs and other agricultural and livestock products, and promote steady growth in farmers’ incomes. We must ensure the supply and price stability of agricultural inputs, do a good job in agricultural production, and secure a bumper harvest of autumn grain and grain for the whole year.

The meeting pointed out the need to strengthen livelihood protection through multiple measures, increase employment support for key groups, and do a good job in protecting the rights and interests of flexible workers and those in new forms of employment. We should ensure services and support for “the elderly and the young,” and improve a tiered and categorized social assistance system. We must strengthen ecological and environmental protection, wage the tough battle of the “Three-North” Shelterbelt Program, and actively and prudently advance carbon peaking and carbon neutrality.

The meeting emphasized the need to earnestly build a solid security barrier. We must stabilize the real estate market, effectively implement a package of debt-resolution plans, and steadily advance the reform and risk mitigation of local small and medium-sized financial institutions, reducing their quantity while improving their quality. We should deepen comprehensive reform of investment and financing in the capital market and enhance the market’s resilience and confidence. We must thoroughly investigate and address various risks and hidden dangers, and resolutely curb the occurrence of major and serious accidents. We should strengthen the investigation and management of hidden dangers in dilapidated and dangerous reservoirs, river embankments, areas prone to flash floods and geological disasters, and low-lying and flood-prone urban areas. We must do solid work in flood prevention, emergency rescue, and disaster relief, and make every effort to protect the safety of people’s lives and property.

The meeting pointed out the need to consolidate and expand the achievements of the education campaign on establishing and practicing a correct view of political performance, and to encourage leading officials at all levels to create new achievements in high-quality development with a more uplifting and positive spirit.

The meeting also studied other matters.

The backdrop for this statement is, in my view, the recent intensification of EU accusations against China. As the EU’s trade deficit with China widens, anxiety within the bloc over the issue has continued to grow: on May 28, five European countries signed a joint document calling on the EU to take more assertive restrictive action against Chinese products. EU Commission officials have argued that China currently accounts for 30% of global production but only 13% of global consumption, a suggestion being that weak domestic demand is driving overcapacity. This is also the argument the paper sets out to rebut.

Basically, the core of the position paper is about four pairs of relationships: the relationship between industrial subsidies and overcapacity, between trade surpluses and overcapacity, between economic imbalances and overcapacity, and between market competition and overcapacity.

First, on industrial subsidies and overcapacity. MOFCOM argues there is no inevitable link between the two, noting that every country has its own industrial policy: the U.S. Inflation Reduction Act plans to provide $750 billion in subsidies, and the European Commission will provide more than €1.44 trillion in subsidies between 2021 and 2030, subject to “EU origin” requirements—whereas China’s consumer subsidies, it contends, apply equally to domestic and foreign firms.

Second, on trade surpluses and overcapacity. MOFCOM argues that high exports and large surpluses do not equate to overcapacity. It points out that throughout the history of global economic development, major manufacturing powers such as the United Kingdom, the United States, Japan, and Germany all maintained surpluses for extended periods, and it was not uncommon for Germany’s and Japan’s current-account surpluses to exceed 6% of GDP. The paper reiterates that China has never deliberately pursued a trade surplus, and that a surplus does not necessarily mean the other side’s interests are harmed—in 2025, foreign-invested firms accounted for 27% of China’s exports and 16% of its surplus. Looking at the overall balance of payments, while China runs a sizable surplus in goods trade, it runs deficits in services trade and investment income, so that overall its current-account surplus stands at about 3.7% of GDP, within the internationally recognized reasonable range.

Third, on economic imbalances and overcapacity. The paper contends that global economic imbalances are a historical norm with complex roots. Notably, it turns the tables by citing the views of institutions such as the IMF: the United States has accumulated massive debt-related imbalances and needs to improve its fiscal position, Europe suffers from underinvestment and needs to raise productivity, and China needs to expand domestic demand. This is meant to show that imbalance is a systemic problem shared by many parties, rather than something to be laid solely at China’s door.

Fourth, on market competition and overcapacity. The paper argues that competition itself is the mechanism that prevents the disorderly expansion of capacity. Every industrial revolution has raised production capacity and generated surplus output, and it is only through competition that loss-making, inefficient firms are weeded out. The role of government, accordingly, should be to safeguard competitive order and a level playing field, allowing backward capacity to exit naturally.

In addition, the paper touches on China’s support for developing countries in growing their own manufacturing sectors, noting that between 2010 and 2025, China’s imports of labor-intensive products from developing countries and least-developed countries grew 3.5-fold and 16-fold respectively. I think this can also be read as a response to recent “pulling up the ladder” criticisms.

below is the full transcript published by Xinhua, I believe it’s worth a reading no matter you agree with it or not:

Material for the press conference of the State Council Information Office

China’s Position on the So-called Excess Capacity Issue

(July 2026)

The Ministry of Commerce of the People’s Republic of China

Contents

Foreword……………………………………………………(1)

I. Global capacity and the so-called excess capacity should be viewed in a rounded and objective manner……………(3)

A. The evolving global capacity landscape is the result of international industrial labor division and cooperation...…(3)

B. The phenomenon of excess capacity in global economic development should be viewed objectively.………………(4)

C. The measurement of excess capacity in different economies and industries should take into account their respective development stages and levels…………………(6)

II. Perspectives and positions on four relationships concerning excess capacity………………………………….(8)

A. Relationship between industrial subsidies and excess capacity……………………………………………………(8)

B. Relationship between trade surplus and excess capacity...(11)

C. Relationship between economic imbalance and excess capacity.………………………………………………….(14)

D. Relationship between market competition and excess capacity.…………………………………………………(17)

III. China’s commitment to building a modern industrial system through opening-up and cooperation……………(21)

A. The rapid growth of China’s modern industries is driven by innovation……………………………………………(21)

B. China’s steady, healthy industrial performance relies on continued, deep-going reform……………………………(23)

C. China’s industrial modernization is “China opportunity 2.0” to the world, not “China shock 2.0”………………(25)

IV. We should jointly pursue open and inclusive cooperation on global industrial and supply chains……………………(30)

A. Promoting mutually beneficial and win-win cooperation for common development.………………………………(30)

B. Respecting the law of the market and advancing economic globalization.……………………………………………(31)

C. Strengthening coordination of industrial policies and maintaining a sound cooperation environment.…………(32)

D. Expanding market openness and jointly creating cooperation opportunities.………………………………(33)

E. Upholding multilateralism and building a more just and equitable international economic order.…………………(35)

Conclusion…………………………………………………(37)

Foreword

Providing strong dynamism for world economic growth, economic globalization is an unstoppable and overwhelming historical trend that promotes the flow of goods and capital, progress of science and technology and civilization, and exchanges among nations. As an important dimension to economic globalization, industrial cooperation is a key pathway to continuous global economic recovery and common development shared by all.

In recent years, international economic and trade landscape has gone through profound shifts with major-country rivalry intensifying and global industrial and supply chains reshaping quickly. With growing concerns about their industrial competitiveness and market positions, some countries and economies have politicized economic and trade issues. Hyping the so-called excess capacity of China, they accuse the country of flooding the world market with Chinese capacity and have used this as an excuse to ramp up restrictions on China, stoking up protectionism.

It has been China’s belief all along that the capacity issue requires a rounded, objective and just approach that combines historical perspective with dialectics to address contradictions and differences together in the spirit of openness, cooperation, mutual benefit and win-win outcome. Invoking protectionism will only serve to disrupt global economic and trade order and undermine the security and stability of global industrial and supply chains and the sound and orderly development of industrial cooperation, which spell long-term risks for world economic growth.

To clarify related facts, this document is hereby published to lay out China’s policy position on issues related to the so-called excess capacity.

I.
Global capacity and the so-called excess capacity should be viewed in a rounded and objective manner

A. The evolving global capacity landscape is the result of international industrial labor division and cooperation.

History of the evolving global capacity landscape. Since the first industrial revolution, continuously improving productivity and deepening economic globalization have accelerated the flow of various factors of production worldwide. As global centers of production and demand shift among countries and regions, industrial capacity also moves from country to country and region to region, which changes the shares of major economies in global industrial output. In 1880, the UK’s share in global industrial output peaked at 22.9%. Around the First World War, the U.S. succeeded the UK as the world’s industrial center, accounting for as much as 44.7% of the global industrial output in 1953.

Gradual shift in the global industrial landscape after the Second World War from a single center to multiple centers. As economic globalization gathers pace, international division of labor keeps deepening with several waves of global industrial transfer first from the U.S. to Europe, then from the U.S. and Europe to Japan, and on to East Asia and China, as well as the current movement of some industries from China to Southeast Asia and other regions, which has formed three regional manufacturing centers in North America, Europe and East Asia with their manufacturing value-added respectively accounting for 17%, 17% and 38% of the global total. It is by actively integrating into economic globalization and taking part in international labor division that China has become “the workshop of the world” and a key component of the global manufacturing network.

B. The phenomenon of excess capacity in global economic development should be viewed objectively.

Excess capacity is a dynamic phenomenon in the market economy. Capacity supply and demand in the world economy goes through the dynamic cycle of “balance—imbalance—rebalance”, without lasting capacity balance. Whether there is surplus capacity depends on supply and demand with dynamic adjustments in the life cycle of the industry. Supply-demand balance is relative, while imbalance is universal. In the age of globalization, changes in international capacity are interlinked with shifts in global supply and demand. In the course of technological revolution, emerging capacity creates new supply while old capacity becomes redundant, which leads to temporary and structural supply-demand imbalance. With adjustments of the market mechanism, supply and demand will converge towards a new equilibrium.

Given varying perspectives on the concept of excess capacity, a global consensus has yet to be reached. Excess capacity remains a subject of debate across various sectors in the absence of an official definition by major international organizations. There is no definition of excess capacity or provisions on excess capacity in the World Trade Organization (WTO) agreements. According to the International Monetary Fund (IMF), excess capacity is a complex concept which should be approached from the perspective of macroeconomic scenarios. Economists mostly explain excess capacity from both macro and micro perspectives. At the macro level, excess capacity is a phenomenon where the production capacity of the whole industry substantially surpasses the total effective market demand. At the micro level, excess capacity refers to a situation where firms’ actual output falls short of the optimal level due to monopolistic competition. In reality, economies are no strangers to the state of excess capacity over effective demand driven by fluctuations in economic cycles. The criteria and angles for determining whether excess capacity exists vary greatly across countries and sectors. Some economies attempt to impose on others various criteria they have invented for defining the so-called excess capacity in a simplistic, mechanical or blanket fashion to serve their specific geopolitical and protectionist ends. These so-called concepts and criteria do not hold water, as they are inconsistent with the laws of development and the actual conditions of countries.

C. The measurement of excess capacity in different economies and industries should take into account their respective development stages and levels.

Capacity utilization rate, an indicator often used to measure excess capacity, should be viewed differently in light of each country’s actual conditions. In economics, capacity utilization rate is the ratio of actual output to potential output. There are no globally accepted criteria for determining the reasonable range of capacity utilization, as it differs across economies. Data of relevant institutions indicate that the median capacity utilization rate for advanced and fast-growing economies mostly falls in the 75-80% range, whereas that for less developed countries usually stands between 50% and 64%. It is the constraints of infrastructure, capital and other factors that prevent less developed countries from bringing their capacity into full play.

Capacity utilization rate varies substantially across sectors. According to the latest available data on capacity utilization rates published by the 27 EU member states, 169 out of its 725 industries reported rates below 70%. Capacity utilization in some traditional industries is significantly below the average. For example, in some countries, capacity utilization in beverages and furniture stands at around 65%, while in sectors like rubber, chemicals, and plastics, it is only 40% to 50%. The latest Federal Reserve data show a 75.7% capacity utilization rate for U.S. manufacturing, but with considerable variation across sectors. The capacity utilization rate ranges from 83.2% in computer and peripheral equipment to below 70% in textiles, leather, automobiles and parts, primary metal products, furniture and related products, and communications equipment. Economic practices of various countries have shown that capacity utilization rate, although a reasonably objective indicator of the use of production capacity, is not a one-size-fits-all measure for determining whether excess capacity exists in different economies or sectors.

II. Perspectives and positions on four relationships concerning excess capacity

A. Relationship between industrial subsidies and excess capacity.

There is no necessary connection between industrial subsidies and excess capacity. Sound industrial subsidy policies help correct market failures, advance technology innovation, protect environment, reduce poverty, and promote balanced development, rather than cause the so-called excess capacity. Many countries introduce tailored industrial policies in light of their national conditions and development needs. For example, R&D subsidies for emerging industries and risk management subsidies for the agricultural sector are legitimate industrial and trade policy tools for WTO members. Several UNCTAD reports point to the rapid increase in industrial policies worldwide over the past five years. Providing R&D subsidies, tax incentives and low-interest loans for emerging industries has become a widely accepted international practice.

WTO members generally pursue subsidies that are fair, universal and transparent. Major countries should set an example in ensuring their subsidies conform to WTO rules. Subsidies per se are not a problem, but they should be applied in a rational way in accordance with the WTO principles of openness, fairness and compliance. Given the significant spillover and demonstration effects of their industrial policies, major countries, as pacesetters of global industrial development, should take the lead in opposing the abuse of subsidies and discriminatory subsidy polices. The U.S. Inflation Reduction Act, which plans to provide a total of USD750 billion in various subsidies from 2022 to 2031, requires that electric vehicles eligible for these subsidies shall be produced and sold in the U.S. or North America, effectively excluding other WTO members. The U.S. provides far more industrial subsidies for artificial intelligence (AI) than any other country. According to available statistics, the European Commission is set to provide EUR1.44 trillion in various subsidies between 2021 and 2030. The EU Industrial Accelerator Act links local content to fiscal support through the EU origin requirement. It is imperative that all countries make the pie of global development bigger and introduce subsidies and other industrial policies in a rational and compliant manner, rather than use them as a tool to constrain the development of others. China stands ready to engage in discussions on the subsidy policy with all sides under the WTO framework to jointly bring relevant practices into compliance.

China always strictly observes WTO rules and strives to build and improve a system of subsidies in accordance with international practice. For years, China has constantly regulated and improved relevant policies to ensure that its subsidies are compliant, science-based and transparent. It has also reviewed and standardized some unsound local practices and established a unified administration system for local government subsidies based on negative lists. The government of China has earnestly and comprehensively fulfilled its commitments on transparency in a timely manner. The latest notification submitted in June 2025 by the government of China on central and sub-central policies on subsidies from 2023 to 2024 covered the entire country. China’s subsidies apply equally to all types of market entities and mainly go to scientific R&D, initiatives on industrial application of technology, and market consumption, among other areas. China uses market-based and indirect guidance more often, such as public services, technical standards and skills training, to support priority areas like technological R&D and innovation, development of SMEs, and green and energy-efficient development. For example, the consumer goods trade-in program treats domestic and foreign-invested companies equally. Both the trade-in policies for automobiles and household appliances and the subsidies for buying new digital and smart products provide equal treatment. Foreign-invested companies actively participating in them have benefited equally.

B. Relationship between trade surplus and excess capacity.

Large exports or trade surpluses are not synonymous with excess capacity. Surplus mainly reflects the difference between total national savings and investment, including surpluses in both goods trade and services trade. The global history of economic development suggests that manufacturing powerhouses like the UK, the U.S., Japan and Germany all recorded trade surpluses for a long time. It is also quite common for Germany and Japan to have a current account surplus of over 6% of their GDP. The exports of emerging markets also grow fast, making Indonesia and Mexico countries with surpluses, and enabling Brazil and Vietnam to run trade surpluses for ten years in a row. Industry- and product-wise, 80% of American chips are for export, and about two-thirds of commercial planes delivered by Boeing were sold to clients beyond North America. The EU’s automobile, pharmaceutical and cosmetics sectors had surpluses of USD92.2 billion, USD214.6 billion and USD11.6 billion in 2025 respectively. By the logic that a large surplus is an inevitable outcome of excess capacity, should these sectors and products with large exports and surpluses be viewed as having an excess capacity issue as well? As a result of the global division of labor and supply and demand pattern, trade surplus does not mean excess capacity.

It has never been China’s intention to seek a trade surplus. China’s export growth is due to enhanced economies of scale and innovation capacity and the needs of countries for green transition and industrial development. For example, the growth of China’s exports to Europe is mainly contributed by photovoltaic (PV) devices, new energy vehicles (NEVs), lithium-ion batteries and chemical products, which reflects more than anything else how green transition has fueled the demand for energy products and the energy crisis has driven up production costs of chemicals and other industries in Europe. Besides, China never seeks to raise the share of labor-intensive products in its exports; rather, the share of relevant products decreased from 20.7% in 2012 to 15.1% in 2025. Regarding the distribution of trade benefits, the surplus is registered by China, but the benefits are shared by all. In 2025, foreign-invested companies accounted for 27% of China’s exports and 16% of its surplus, reporting higher growth in both surplus and profit than China’s domestic businesses. In terms of the balance of payments in general, despite a relatively large surplus in trade in goods, China has deficits in both trade in services and return on investment. Overall, China’s current account surplus is about 3.7% of its GDP, which is within an internationally recognized appropriate range.

China actively promotes the balanced development of import and export. As the primary export destination for nearly 80 countries, China’s scale of import has ranked the second in the world for 17 years in a row. China has extended zero-tariff treatment to 63 countries, and is also the first major economy to give zero-tariff treatment for 100% tariff lines to all the African countries and LDCs having diplomatic ties with China. China is also the only country hosting an international import expo, reaching intended deals worth over USD580 billion in total during the eight successful editions that have been held so far. China is also carrying out the “Export to China” series of events, stepping up efforts to “buy global” and help more quality products and services around the world enter the Chinese market. During the 14th Five-Year Plan period, China’s total imports exceeded RMB90 trillion, ample proof that China is not only “the world’s workshop”, but also “the world’s market”.

As unilateralism and protectionism are on the rise, trade protectionist measures of all types have suppressed global economic growth, disrupted regular trade exchanges and order, and undermined rational global capacity flows and distribution. This requires all parties, major trading nations in particular, to work in the same direction, safeguard free trade, make more efforts to keep trade easy and smooth, refrain from building walls and barriers, promote balanced and sustainable development of global trade, and keep global industrial and supply chains stable and unimpeded.

C. Relationship between economic imbalance and excess capacity.

Global economic imbalance is a historical norm with complex root causes. Under the international division of labor and economic and financial order formed after the Second World War, the global economy would move in a cycle about every ten years, in which the risks of imbalance accumulated and materialized, sometimes even causing global economic and financial crises. When analyzing the causes of global economic imbalance, the focus of discussion by the international community keeps shifting, ranging from market factors such as savings and investment and division of labor along industrial and supply chains, to institutional factors including the international financial system and macroeconomic policy interactions. In recent years, global imbalance has taken on new features. The IMF and other institutions believe that the macroeconomic policies of countries, fiscal policies in particular, are the dominant driver of global imbalance. The U.S. has accumulated a huge debt imbalance and needs to improve its finances; Europe has insufficient investment and needs to raise its productivity; China needs to expand its domestic demand. These views have shown that global imbalance is systemic and complex. Some views that link global imbalance with excess capacity and attribute one to the other in an oversimplified manner deliberately confuse different concepts, contain logical fallacy, and even have a hidden agenda.

The argument that “China’s inadequate domestic demand gives rise to excess capacity” runs counter to facts. China is not only a manufacturing powerhouse, but also a major consumer, with domestic demand serving as a main engine of the economy. From 2013 to 2024, domestic demand on average contributed 93% of the country’s economic growth. In breakdown, consumption and investment contributed 55% and 38%, respectively. Between 2013 and 2025, China’s total retail sales of consumer goods doubled from RMB23.8 trillion to RMB50.1 trillion. Measured by the World Bank’s purchasing power parity conversion factor, China’s total retail sales of consumer goods in 2025 was 1.7 times that of the U.S., making China the de facto largest consumer market in the world. China also tops the world in terms of consumption of physical products, with the annual per capita consumption of some industrial products approaching the levels of developed countries. In recent years, the growth of China’s total retail sales of consumer goods has slowed. This aligns with the country’s economic transition from high-speed growth to a phase of high-quality development. It also mirrors an ongoing structural upgrade in China’s consumption: the consumption of goods remains steady, while the consumption of services registers robust growth. Over the past five years, per capita expenditure on services posted an average annual increase of 8.5%. It is both unobjective and biased to view China’s slowdown in retail sales growth as a sign of inadequate domestic demand. The argument that “China’s inadequate domestic demand gives rise to excess capacity” simply distorts concepts and misapplies a micro-level perspective on market phenomena to the macro, structural level.

China is committed to a higher-level supply and demand equilibrium by continuously expanding domestic demand. A strong domestic market provides strategic support for Chinese modernization. Domestic demand includes demand for investment and demand for consumption. China’s 15th Five-Year Plan has a dedicated section on bolstering domestic demand, underscoring the need to adhere to the strategy of expanding domestic demand, complete with measures for expanding effective investment, advancing special initiatives to boost consumption, expanding and upgrading goods consumption, unleashing the potential of services consumption, strengthening the foundation for resident consumption, and continuously improving the consumption environment, so that new demand drives new supply, new supply helps create fresh demand, and positive interactions are fostered between consumption and investment and between supply and demand. Over the coming decade, China’s middle-income population will exceed 800 million, and per capita GDP is expected to reach the level of moderately developed countries. With huge space, abundant potential and strong vitality, consumption will continue to serve as a primary engine for China’s economic development, while delivering strong impetus to world economic growth.

D. Relationship between market competition and excess capacity.

Competition provides important guarantee for capacity optimization and adjustment and sound industrial development. Every industrial and technological revolution has been accompanied by increased or even “excess” capacity, alongside technological upgrading and industrial iteration fueled by market competition. To capture higher profits and larger market shares, companies make investment to expand production. Under the regulating forces of the market, companies are encouraged to cut costs and lift efficiency, which in turn spurs technological advances and overall efficiency gains. Market competition in itself constitutes the most effective mechanism to curb disorderly capacity expansion. Otherwise, firms will face unsold inventories, incur losses and ultimately be driven out of the market. The role of the government lies in ensuring orderly competition, preserving a level playing field, and allowing the market to fully function, so that outdated capacity is phased out naturally through competition.

All parties should uphold fair competition, and reduce undue interference with the global division of labor and cooperation in production capacity. The WTO’s principle of fair competition and related rules are the world’s most widely accepted code of conduct. In recent years, some economies have prioritized their national interests over international rules, violating the fair competition principle. They have even cloaked protectionist agendas under the guise of fair competition and resorted to the heavy use of unfair practices. The United States has seriously undermined fair competition through illegal tariff measures, targeted investment restrictions, and abusing export controls and sanctions. The European Union has introduced a series of trade and economic legislation and measures. Its Industrial Accelerator Act, for example, imposes restrictive requirements on foreign investment across four emerging strategic sectors: batteries, electric vehicles, photovoltaics, and critical raw materials, erecting significant barriers to investment. Accusing China of “unfair competition” and “non-market policies and practices” is a typical case of “double standards” and genuine unfairness. China resolutely upholds the basic principles of the WTO, and firmly promotes fair competition and mutually-beneficial and win-win outcomes. China has already announced that it will not seek new special and differential treatment in current and future WTO negotiations. As WTO Director-General Ngozi Okonjo-Iweala observed, this decision reflects China’s commitment to a more balanced and equitable global trading system.

China is working actively to foster a first-class business environment underpinned by fair competition. The country boasts the world’s largest pool of market entities, whose total count has surpassed 200 million. This massive base of market participants creates a fully competitive environment, compelling companies to take on challenges, compete on strength, and keep improving their products and services in competition. McKinsey once described China as “the world’s toughest gym” that trains hyper-competitive companies, noting that one cannot find “another China” in the world. China’s 15th Five-Year Plan specified that the country will further advance the development of a unified national market, remove barriers related to production factor access, qualification accreditation, public bidding, and government procurement, fully implement national treatment for foreign-invested enterprises, and address rat race competition through holistic measures. China will work actively to foster a first-class business environment that is market-oriented, law-based and internationalized, and uphold fair market competition. According to the US-China Business Council Member Survey 2026, 92% of American companies surveyed report profitability in China in 2025. The European Chamber of Commerce in China released its Business Confidence Survey 2026, which shows that 75% of the respondents categorize their China production as more efficient than their production in the rest of the world.

III. China’s commitment to building a modern industrial system through opening-up and cooperation

A. The rapid growth of China’s modern industries is driven by innovation.

China stays committed to an innovation-driven development strategy, and has blazed a successful path whereby sci-tech innovation spearheads industrial innovation and industrial upgrade propels sci-tech revolution. As a major national strategy, pursing development through innovation is the key to the sustained and sound long-term growth of China’s economy. During the 14th Five-Year Plan period, the total R&D expenditure nationwide grew by an average of 10% annually, making China the world’s second-largest R&D spender. In 2025, basic research accounted for more than 7% of total R&D expenditure, setting a new historical record for China. Numerous industries have achieved technological breakthroughs and secured leading positions through arduous, long-cycle and capital-intensive R&D. These efforts, not government subsidies, underpin the competitiveness of Chinese products. The vigorous growth of China’s new energy and intelligent connected vehicle industries, for example, has been enabled by sci-tech breakthroughs in new materials, power batteries and communication technology. Domestic new energy vehicle manufacturers have carried out consistent investment in R&D and industrial layout for over two decades, cultivating unique technological edge. Since 2018, energy density of power battery has risen by more than 50%, while production costs have fallen by over 60%. A Morgan Stanley report suggests that the focus of China’s NEV sector has shifted from price wars to technology battles, with AI applications such as intelligent driving systems further consolidating its industrial advantages.

China stays focused on empowerment through innovation, contributing to significantly greener and smarter traditional industries. China supports enterprises in adopting digital and smart technologies to drive industrial optimization and upgrading and promoting higher-end, smarter and greener industries. In recent years, industries in China have grown increasingly eco-friendly. Over 8,000 national green factories and more than 600 green industrial parks have been built, and the 246 national green data centers are 50% powered by green electricity. Of all industrial enterprises above the designated size, 89.6% have launched digital transformation and 57.7% have installed digital equipment. China has 109 lighthouse factories, nearly half of the global total.

China enhances the application of innovation, building massive “training grounds” for new industries and new arenas. China has a complete industrial system. A promising sci-tech outcome, backed by China’s manufacturing strength, can be rapidly turned into real-world products. China has the one-hour electronic information technology innovation circle in the Yangtze River Delta, and the 30-minute support circle in Shenzhen’s Robot Valley. Its highly advanced new energy industrial circles enable electronic vehicle manufacturers to source all their components within a four-hour drive. China has a super-sized market of more than 1.4 billion people, in which constantly emerging new business types, models and scenarios create the finest testing grounds for verifying “zero-to-one” breakthroughs and “one-to-N” upscaling. The rise of sectors such as the new export trio (NEVs, lithium-ion batteries, and PV products) and the new IT consumption trio (smart and connected NEVs, smartphones and computers, and smart robots) is closely related to the massive application scenarios.

B. China’s steady, healthy industrial performance relies on continued, deep-going reform.

China presses ahead with supply-side reform, with the utilization rate of industrial production capacity kept within a reasonable range. In recent years, during the supply-side reform, China has taken such measures as phasing out outdated production capacity to improve industrial capacity utilization, achieving a generally balanced and stable performance in terms of the total supply and demand. In 2025, the capacity utilization rate of industrial enterprises above the designated size was 74.4%, and higher capacity utilization was observed in high-tech manufacturing, high-end equipment manufacturing and strategic emerging industries. By sector, the average capacity utilization rates over the last three years were 78.9% for general equipment manufacturing, 74.8% for electric machinery and apparatus manufacturing, 73.3% for automobile manufacturing and 76.9% for manufacturing of computer, communication equipment and other equipment. The temporary low capacity utilization rates in certain traditional raw-material sectors mainly stem from adaptive adjustments brought by structural changes and green transition, which are normal during the high-quality upgrading of industries.

China keeps refining the institutions and mechanisms for market-based allocation of production factors to foster an enabling industrial ecosystem. In recent years, China has been increasing support in resources and factors of production, putting in place a diversified investment system with enterprises leading the way, government providing guidance and society participating, building a group of major sci-tech research facilities and infrastructure, and training some seven million university graduates in science, engineering, agriculture and medicine every year. In deepening reforms of systems and institutions, China has introduced a series of new policies and measures in areas including intellectual property rights protection, risk sharing and innovation incentives. On improving the institutions and mechanisms for ensuring the supply of production factors for new business types and areas, China has sped up the development of new infrastructure such as new-type power grids, computing power networks and new-generation telecommunication networks, so as to effectively remove barriers to better resource allocation, further enhance total factor productivity, speed up the transformation of growth drivers and promote the sound and sustainable development of industries.

C. China’s industrial modernization is “China opportunity 2.0” to the world, not “China shock 2.0”.

The U.S. and other western countries have come up with the so-called “China shock 2.0”, falsely accusing China’s industrial development of posing threats to western countries’ monopoly and squeezing the development space of the Global South. This is not supported by facts and totally untenable. For more than a decade, China has contributed around 30% of the global growth, making it a critical engine driving the world economy. In the past, China’s big market and low-cost production factors provided the world with “market dividends”. Today, while continuing to provide even greater “market dividends”, China is also offering “development dividends” as an anchor of stability and hub for global industrial cooperation through its industrial development; moreover, it is also offering more and more “innovation dividends” with its technological progress. What these combined dividends generate for the world are greater opportunities and potential of development, also known as the “China opportunity 2.0” more frequently mentioned by the international community, as reflected in the following four aspects specifically:

Pushing forward innovation cooperation and scientific progress on a global scale. China is committed to an open approach to innovation. Many of its innovations, such as large AI models, are open-source, enabling more countries, particularly developing ones, to access affordable new technologies to enhance their development capacity. China’s large open-source AI models have been downloaded over 10 billion times globally in cumulative terms, and large-scale scientific facilities in controlled nuclear fusion, quantum technology and other areas are open to the world. Fast-growing innovative Chinese companies generate several, even dozens of, times of returns for global investors. Here in China, enterprises from various countries can quickly find whole-process partners from R&D to prototyping, and to mass production, making innovation more efficient. This not only helps companies succeed in the Chinese market, but also boosts their global competitiveness. These are proof enough that what China’s technology and products in emerging areas bring to the world are not shocks, but opportunities; not threats, but empowerment.

Accelerating global green and low-carbon transition. With climate change as a global challenge, achieving green and low-carbon transition is the common aspiration and development need of all countries. China’s quality new energy products enrich global supply, promote green and low-carbon development and contribute to achieving the targets set in the Paris Agreement. According to a report from the International Renewable Energy Agency (IRENA), over the past decade, the average cost per kilowatt-hour of global wind projects has decreased by more than 60%, and PV power projects by more than 80%. The reductions are largely attributable to China’s innovation, manufacturing and production capacity. The U.S. journal Science crowned the global renewable energy surge led by China among its Top 10 Breakthroughs of 2025. With the global energy crunch, and rising electricity demand driven by AI, green transition is becoming an important area of international cooperation. The IEA projects that global electricity consumption of data centers will reach approximately 1 trillion kWh by 2030, and 40% of the growth in power demand will be met by renewables. China boasts significant advantages in scale and technology in solar, energy storage and electrification, enabling it to provide green energy equipment and solutions.

Improving wellbeing for people of all countries. In recent years, the global economy has been suffering sluggish growth and high inflation. High-quality, high-performance and cost-effective Chinese products have enriched global supply, lowered costs of living, and eased global inflation pressure. China’s textiles and home furnishings, daily consumables, smart devices, home appliances and medical supplies are exported to over 200 countries and regions, offering stable, reliable and diversified choices to global consumers. According to Australian media, the Chinese products that are helping keep inflation under control have expanded from daily necessities to high-tech equipment, such as solar panels, significantly benefiting U.S. and European consumers. A report published by the European Central Bank estimated that a 10% increase in EU imports from China would lower overall import prices by 1.6%. According to Brazilian media, amid continuously rising costs across the world, China maintains relatively moderate inflation with the advantage from its manufacturing system and helps emerging markets, including Brazil, lower inflationary pressure.

Contributing to industrialization in developing countries. China’s exports of high-quality, cost-effective manufacturing equipment and components, including sewing machines, textile machinery and industrial machine tools, have made manufacturing more accessible for developing countries. From 2012 to 2024, the value of China’s exports of textile machinery to developing countries exceeded USD 30 billion, helping countries like Vietnam, Pakistan and Bangladesh become major textile manufacturers and exporters. China’s imports have also created export opportunities for developing counties. From 2010 to 2025, China’s imports of labor-intensive products from developing and least-developed countries grew by 3.5 times and 16 times respectively. China’s investment has enhanced developing countries’ industrial production capabilities. More than 50,000 Chinese businesses have been established overseas, and China’s outbound investment has exceeded USD 3 trillion, with nearly 90% in developing economies. They have driven the implementation of a large number of projects in light industry, textiles, home appliances and other industries, promoted the development of new areas, such as digital and green sectors, and helped many developing countries in Southeast Asia, the Middle East and Africa move from the margins of supply chains to serve as key nodes in the global manufacturing network.

IV. We should jointly pursue open and inclusive cooperation on global industrial and supply chains

A. Promoting mutually beneficial and win-win cooperation for common development.

Against the backdrop of globalization, economies are intertwined and industries are integrated. Mutually beneficial and pragmatic cooperation on industrial and supply chains that makes the pie of global development bigger meets the common interest of all countries.

Creating new demands through the iteration of industries. All parties should jointly seize the opportunities brought by the new round of industrial revolution and technological transformation, enhance international cooperation on green and low-carbon sectors, AI and biomanufacturing, fully leverage the rapid growth, huge potential and other strengths of frontier and emerging industries, and address growth bottlenecks by sharing scientific dividends, so as to inject new impetus and vitality into sustained global economic recovery.

Facilitating balanced development to expand new space. All parties need to place greater emphasis on the “real imbalance” between developed and developing economies, enhance industrial, trade and investment cooperation and engage more developing countries and regions in the global division of labor to accelerate their industrialization and modernization, boost their economic growth and expand their markets, so as to create “new blue oceans” for global industrial cooperation. When the pie of the world economy gets bigger, conflicts over distribution of interests get smaller.

B. Respecting the law of the market and advancing economic globalization.

Global industrial and supply chains are the result of the combined effects of the law of the market, business development and technological advancements. They are not formed overnight, and artificial intervention by force will only backfire.

Facilitating the flow of factors through openness and integration. All parties should foster a virtuous global cycle of industrial and supply chains, promote trade and investment facilitation and liberalization, make the allocation of production factors and resources more efficient, and prevent bottlenecks in industrial and supply chains caused by market fragmentation, investment restrictions and increased barriers. All parties should draw on one another’s strengths based on equality for mutual benefits, jointly build and safeguard an open global innovation ecosystem, so that international industrial cooperation will generate more benefits.

Opposing politicizing and overstretching the concept of security over economic issues. Enhancing the influence and resilience of domestic industries through competition and cooperation between countries is a legitimate demand that should not be subject to artificial political interference which distorts the market’s underlying logic for reasonable flow of global resources and production factors. Overstretching and politicizing concepts such as “diversification” and “de-risking” will only lead to missed development opportunities. All parties should respect the investment decisions and autonomy of market entities in business planning, and build a fair, stable and predictable business environment, so that the nature of the market will be reaffirmed for businesses to act in accordance with economic laws.

C. Strengthening coordination of industrial policies and maintaining a sound cooperation environment.

Major economies are deeply involved in and have a significant impact on global cooperation along industrial and supply chains. Considering the spill-over effects of their industrial policies, they should, therefore, strengthen communication and coordination, enhance mutual trust, and set a good example.

Working together to keep global industrial and supply chains stable and unimpeded. Major economies should commit to equal-footed consultation, manage differences properly, reject unilateralism and protectionism, oppose discriminatory and exclusive practices, and avoid self-isolation, restrictive measures and the race to the bottom, which would create more barriers and instabilities to global industrial cooperation. Economic and trade restrictions imposed by Europe and the U.S. on China not only are detrimental to mutual trust and cooperation, but also undermine their own interests, with an adverse impact on global economic development and industrial cooperation.

Strengthening multilateral and bilateral dialogue on industrial policies. Based on multilateral and bilateral platforms, all parties should improve mechanisms for regular exchange on industrial policies, uphold openness and transparency, clarify policy objectives, and clear up misunderstandings and respond to concerns through constructive dialogues. All parties should strengthen communication on subsidy transparency under the WTO framework, resolve differences properly through equal-footed consultation, and submit notifications on subsidies on time and proactively respond to members’ concerns, so as to jointly create a stable and predictable institutional environment.

D. Expanding market openness and jointly creating cooperation opportunities.

Openness brings progress, while isolation leads to backwardness. All parties should break down barriers, open up further, and continuously tap into market potential to create broader space for industrial cooperation.

Reducing trade barriers. The larger the scale of trade, the harder it is to avoid differences and frictions. Focusing on “building walls” will only intensify contradictions and do no good to resolving issues. All parties should, in the spirit of openness and cooperation, facilitate cross-border flow of domestic and international factors of production, promote full competition in the market, boost business vitality, and continuously enrich new supply and create new demand. Self-isolation will only deprive the market of growth engines, which will further hold back innovative development.

Reducing barriers to investment cooperation. As an important channel to make the pie bigger, tighten bonds and enhance mutual benefits, investment cooperation not only meets local needs but also boosts development of the host country. All parties should ease access restrictions in investment sector, streamline procedures and remove barriers to provide a fair, transparent and predictable environment for foreign investors, and better protect the legitimate and lawful rights and interests of investors. We oppose saying welcome as a lip service while cherrypicking in practice, as well as conducting discriminatory investigations into and imposing mandatory requirements on companies by using foreign investment screening regulation and foreign subsidies regulation as weapons.

E. Upholding multilateralism and building a more just and equitable international economic order.

Multilateralism, a valuable lesson humanity has learned from the two painful world wars, should be all the more cherished by the international community.

Upholding fundamental principles and rules of the WTO. The WTO rules system underpinned by principles such as fairness, transparency, non-discrimination and openness has served as a cornerstone for the stable development of global economy and trade for years. The idea of multilateral trade is well entrenched, and no one wants to go back to the jungle era where the strong bully the weak. All parties should advance WTO reform in a manner that keeps pace with the times, restore the WTO’s authority, promote the upgrading of WTO rules, rebuild trust among WTO members, adhere to the most-favored-nation (MFN) principle, and work together to anchor global trade within the multilateral framework and in the rules that are acceptable to all, to protect the legitimate rights and interests of different economies in global trade and economic exchanges to the greatest extent possible.

Making the global governance system more just and equitable. All parties should stay committed to equality and mutual benefit in trade and economic exchanges, respect the development stages and national conditions of each other, and jointly reject the big and strong bullying the small and weak and in particular making peace with major powers at the expense of third countries’ interests. All parties should uphold genuine fair competition and make efforts to run faster in stead of tripping others, avoid inconsistency between words and actions, and refrain from prohibiting others from doing what they allow themselves to do. Multilateral and regional cooperation mechanisms such as G20, BRICS, and APEC should be better leveraged to jointly defend fairness and justice and improve the system for global economic governance.

Conclusion

The issue of capacity is a natural outgrowth of industrial iteration, market volatility and evolving division of labor amid global economic development. All countries should view the so-called capacity “controversy” objectively and dialectically on the basis of economic laws with a market-oriented and global perspective, focus more on exploring cooperation rather than creating confrontation, work together to remove bottlenecks in global supply and demand, optimize global resource allocation, and promote the sound and sustainable development of global industries.

Economies make progress through exchange and inter-connectivity and fall behind because of seclusion and closeness. China cannot develop in isolation from the rest of the world, nor can the world as a whole maintain prosperity without China. China stands ready to work with all parties to safeguard the global free trade system, the stability and smooth functioning of global industrial and supply chains, and an open and cooperative global environment, so as to make the global economy more sustainable and universally beneficial, promote common prosperity for the world, and ensure that development outcomes benefit all peoples.

Chinese AI founders are often different from American ones. They tend to stay away from the media and put all their energy into building models. They seldom get the chance to fully share their vision for the industry. So this talk, which lasted nearly four hours, gives us a rare look into his thinking.

I don’t usually like ideas that are too abstract, but Liang’s understanding of AI is almost like Daoist philosophy. He does not see AI simply as a tool to build a monopoly. Instead, he sees it as a huge wave that is changing human history, a tide that no single company can ever own. That is why he believes the best attitude is to hold back and be kind: you should set limits on your own gain, earn only a fair profit, and share openly to reduce pushback. In his heart, the real goal is to reach AGI. All other business wins are just side products, natural results as the technology moves forward, not the main goal. One interesting point: he thinks the biggest key to reaching AGI is not finding the very best people, but keeping the team stable.

Liang believes that the lead among top American models, such as OpenAI, Anthropic, and Google, is cyclical and will not last. He says Anthropic’s early edge in coding agents will soon fade. When talking about the gap between China and the US, he says America’s lead comes only from having more computing power. He thinks talent is spread around the world by chance, and China has no real shortage of it. In his eyes, American models keep getting bigger because they have plenty of resources, and their basic business idea is to lock up the market with closed models and high profits. But this pursuit of very high profits is weak in terms of strategy, because it will surely be beaten by those who are happy to earn only a fair profit.

He believes China has built-in advantages in cost and user experience, since American companies have no strong reason to push costs to the very limit. He pictures a future where competition looks like that in other manufacturing fields: China will play the role of offering cheaper services in a systematic way. At the same time, he thinks Nvidia’s CUDA ecosystem wall is being broken down by new technology, and that building a new ecosystem for Chinese chips is a historic chance. Once the limit on how many chips can be made is overcome, the gap in basic computing power between China and the US will go away.

In his view, the future AI world will never be a pyramid controlled by one or a few giants. It will be a system based on holding back, one where everyone gains and lives together. First, the number of companies working on base models will shrink; in the end, only three or four need to compete fully, and any that try to make very high profits will be pushed out. Second, he insists that open source is the base of the ecosystem. He believes a pricing plan that earns only a small profit, such as getting back the hardware costs in ten months, can let open source and business work together without conflict. This will push more partners to build apps on top of open source models. Finally, DeepSeek itself will focus strongly on the main road to AGI: mainly language models, chains of thought, agents, and continual learning. It will actively leave aside areas like video generation and world models, giving those business opportunities to the whole ecosystem and to society. By making only the most important tech advances, the company hopes to help the whole ecosystem grow, with an attitude of not fighting or competing.

For other highlights, I would recommend ’s post The DeepSeek Doctrine

Below is the transcript I made with the help of AI translation:

Liang Wenfeng Investor Exchange Meeting · Audio Transcript

Audio “deepseek 0520.m4a”, total length approximately 3 hours 44 minutes. This transcript was auto-transcribed from speech recognition and organized by AI, without distinguishing speakers; the content in brackets indicates the audio timestamp position; individual proper nouns and numbers may contain recognition errors, please refer to the original recording as authoritative.

[00:00:01]

...as well as our company’s other colleagues, when we first started this company, our original intention was not that I ultimately wanted to make a certain amount of money, to go to the capital markets, to IPO, or anything like that. So we didn’t have that original intention.

The first few dozen people didn’t think this way at all. If someone thought that way, they wouldn’t have come. So overall, we’re doing this with tremendous goodwill toward the world, and then we feel this is useful for humanity—this is something beyond money.

Of course, later on, after discovering that the benefits of this thing are enormous, there were other temptations—that’s a separate matter. But our original intention when we set out, our vision, and the vision we’ve maintained until now, was not done in a way that maximizes commercial interest. I think this point is quite crucial.

About twenty years ago, the person I admired most in management was Jack Welch, the former CEO of GE. Looking back now, most of what he said may already be wrong, but he got one most important point right: the most important thing about a company is its vision.

Managing a large company relies not on your rules and regulations, but on vision. What is vision? Vision is not a slogan hanging on the wall—vision is how you do things, not how you talk, that is, how you actually operate. Anyway, I forget Jack Welch’s exact words, but that’s roughly the meaning.

So how do we manage so many people, how are we organized? Actually, we have no organization—it’s vision-driven, organized by a vision. We have no organization.

This has advantages and disadvantages. In the future we’ll figure out how to build on strengths and avoid weaknesses, but this is our characteristic. We don’t operate in a way of “I need to achieve some KPI, no assessments”—only vision.

This vision isn’t even written down, it’s not written out, nothing has ever been written down. This vision exists in our methods of doing things, in our attitude toward the world. Perhaps everyone in our company understands this vision differently, perhaps each person’s vision is somewhat different, but on a broad direction we are aligned.

I think it’s still about having tremendous goodwill toward the world, and then wanting to accomplish something. This is what we use to organize ourselves.

Next I’ll speak first, and after I finish everyone can ask questions. I’ll probably talk about the subsequent matters revolving around this vision. This vision is real, not made up—we truly think this way, truly do it this way. Otherwise you can’t explain many of our actions.

Why do we insist so much on open source because of this vision? Because this vision itself requires open source. Without this vision, you can’t organize people.

For example, Zhipu also open-sources, but Zhipu’s open source is different from ours. Zhipu’s open source has a forced feeling—they feel it’s not their true intention, but for us, this is our true intention.

Then on the matter of open source, we thought it through very clearly from the start. First, the first reason is vision; second, we believe that to succeed commercially with AI, open source has benefits.

This sounds a bit contradictory, a bit counterintuitive, because historically, open source and commercialization have been in conflict. But I think AI is different from before. Because historically, a software company’s market might be just a few billion dollars a year, and once open-sourced, it’s gone—maybe only tens of millions or a few hundred million left.

But AI is big enough—ultimately it might occupy, say, ten percent of human society’s GDP. That’s actually a very large number. One person monopolizing this thing—you can’t monopolize this thing, you must share with others, otherwise you definitely can’t survive.

This is different from previously open-sourcing a piece of software, because that software’s market wasn’t that big. But AI is simply too big. If we want to monopolize this benefit, then we’re bound to be abandoned by history. I think the main point is that this is an objective law, this is a view of history.

It’s not that if I don’t open-source, I can monopolize this market—that theoretically doesn’t conform to objective reality. You’ll definitely encounter many obstacles, there will definitely be other methods to stop you from achieving this goal.

In this situation, I think you don’t necessarily have to follow traditional business thinking. You need a mechanism to ensure that the benefits you yourself can obtain are limited—only then do you have a chance of succeeding. Restraint is needed, I think restraint is needed.

If we want to succeed at AI in our hands, first of all, I think restraint is needed. You can’t think that some percent of humanity’s GDP all belongs to me, or that some percent of China’s GDP all belongs to me. The more you think this way, the less you’ll succeed.

So from the beginning we felt restraint is needed. The more restrained you are, the more likely you are to succeed at this thing. This is a commercial consideration, though it’s a macro-level consideration.

I think this conforms to intuition, at least it conforms to my intuition, or at least I truly think this way. We don’t have many other advantages, we have no special skills, we’re not richer than others, nor are our personnel better than other companies—we really aren’t.

Think about it, when we founded this company two years ago, we didn’t have much money, we didn’t have many cards [GPUs], we had no fame, no influence—we were just a group of very ordinary people.

[00:11:49]

We really are just a group of ordinary people. If there’s a narrative I like, it’s a group of ordinary people accomplishing extraordinary things, rather than a group of geniuses accomplishing extraordinary things. This is closely related to our restraint—it’s of one piece with our restraint and our vision.

So, will open source and commercialization conflict? I think on this matter of AI, if you’re not restrained, you won’t rise. Open source is part of restraint, and our restraint is manifested not only in open source but in many other aspects too. But overall, we don’t need to worry about open source, don’t need to worry about restraint.

The more restrained you are, the easier it may be to succeed, or at least so far it’s been borne out, so far it can be explained. Otherwise there’s no way to explain why we could succeed: we had no weapons, our starting point was very low, our resources were very few, and our people are actually just a random group of ordinary people. I myself am just a university graduate, and not from the most top-tier school either.

This restraint is also part of our vision. AI is too big, the benefits too large. We are very restrained—as long as we can succeed, ultimately the benefits will be enormous. However you divide up even a little, the benefits are enormous, so right now there’s simply no need to consider which portion of these benefits to take, or how to take it—I think there’s simply no need to consider this, because the benefit is already big enough.

You only need to take a tiny bit and it’s already more than enough. So as we said before, we only take a reasonable profit—it depends on your willingness, not the size of profit—this is different. This isn’t our API pricing. Our API pricing considers a reasonable profit—roughly, we go to the market and buy a batch of equipment, and recover the cost in ten months. I think this is a reasonable profit.

Under current circumstances, considering you have risk, plus upfront investment and so on—if a server, we financially amortize over three or five years, but commercially, we feel roughly ten months to recover cost, we feel that’s enough, OK, we feel it’s enough. So this is the logic of our current API pricing. Our V3.2 Flash and the others all recover equipment cost in ten months.

This is our standard. It’s actually not profit-maximizing—if it were profit-maximizing, we should set prices higher. Because in this price range, user demand is inelastic, meaning if I cut the price in half, or if I raise the price by double, the token consumption doesn’t differ much.

If I make the price twice as expensive, my total revenue would be close to double. Wait a moment, let me check. Ah, great.

Let me tell you a story—it’s about our DDCP, one of our models. At first we worried demand would be too high, so we set the price relatively high at first, and people on the team weren’t very happy. Later I brought the price back down, down to a quarter, and everyone was happy.

I think this is our true thinking. It’s the vision I mentioned earlier—we still want this thing to be useful to people, rather than us making the most money—rather it’s that under the condition of being able to make a reasonable profit, everyone can afford it. I think our company’s other people’s thinking too—when we cut prices, many people in the company group cheered, everyone felt very happy.

Because this is the purpose for which we spent so much effort, so much care making this model well. The purpose is to be very cheap, very effective, letting everyone fully use it. We just feel this is happy, this is our motivation, this is our vision, this is the consensus that allows our company to come together to do this thing—this is our company’s internal consensus.

This point should be relatively special, because price cuts like this are certainly not a good thing for our competitors—they definitely don’t cheer. Because your revenue, your ARR—if you cut in half, ARR drops by half. Right, this is a place where we’re different.

We feel this is enough. From our company’s internal perspective, I recover cost in ten months—commercially I’m already very satisfied. For the company’s external perspective, we also feel this price is one everyone is happier and more willing to see—it’s win-win for everyone, win-win for the company, society, and everyone.

I think, OK, someone just left a message on screen saying ten-month payback is too high a profit. Indeed there’s still room for price cuts, indeed still room. There’s also room for optimization in the models, so overall there’s quite a lot of room for price cuts.

But this cost, ten-month payback, we ourselves can achieve—other companies can’t. Like maybe Alibaba or Tencent—they don’t have our optimization, their cost should be several times higher than this. There’s still a lot of optimization work here.

I just said why we don’t keep cutting prices—it’s because it’s inelastic. That is, if I cut prices further, demand won’t increase more, or if I cut prices further, demand increases very little. Because at this price everyone can already afford it, everyone feels this price is satisfactory, and won’t stop using it because the price is expensive.

So cutting prices—first, the company won’t have more revenue; for society there’s no more value either, because everyone is already satisfied with this price. Even if you lower the price further, it won’t increase society’s sense of happiness much. Right, OK, but on this issue just now, on this matter of pricing, we’re definitely not...

[00:25:32]

...taking company revenue highest or profit highest as our starting point. This is part of our restraint, because short-term, if your price is a bit higher, you might have a bit more revenue; but long-term, it’s really hard to say. Because I think restraint is a strategy.

For me, restraint is a strategy. It lies in the fact that sometimes you can give up some things to exchange for more of other things. The matter of not open-sourcing is actually the same—it can be seen as our pressure, or as our concession of benefits.

First, this concession—for our company internally, we’re very happy, everyone is happy, employees feel a sense of accomplishment, and we’ll have cohesion because of it. And this concession is good for society, society is also happy, other peers or ordinary people will be happy. So this restraint, my understanding is, this restraint from a long-term perspective can increase our probability of achieving AGI.

When considering a matter, I have no doubt that AGI will have enormous commercial value. So on this basis, my priority consideration is not how I add a bit more share, how I take a bit more share—my priority consideration is how I increase my probability of succeeding.

This restraint is perhaps reflected in many other aspects too. For example, last Spring Festival we suddenly had many users, but we didn’t pursue retaining these users, or monetizing these users, or grabbing these commercial benefits, cashing in on the users.

We didn’t grab users, didn’t make money, but we worked very hard to figure out how to serve users well. We wouldn’t have the thought of “I want to become the next super app, and then I want to compete with someone, I want to become the next ByteDance, become the next Tencent”—we have no such thoughts at all.

We could do it this way, but we didn’t. My understanding is, this is also part of restraint. You shouldn’t think you have to profit from everything—it seems like once you have users, it seems you could become the next ByteDance, and then you just gobble that up.

I think this is workable commercially, it’s possible. If last year we had used a large sum of money to grab users from ByteDance, that would also be a way to play. But we chose a very restrained approach—that is, I won’t compete with you over this thing, because there are still watermelons behind, and what’s in front is maybe just sesame seeds.

I shouldn’t grab all the sesame seeds. Of course, maybe these sesame seeds are relatively large, but I think the AI behind might make what’s in front seem small. Looking at it now, our not pushing hard on the C-end last year was probably correct. Because you can see that behind there really are bigger watermelons, and what’s in front really is just some small sesame seeds.

If last year I had a lot of money and made this thing very big, what would be the benefit? You wouldn’t have gained anything. These are my true thoughts, because I think the AGI opportunity behind should be very large, the AGI opportunity behind is always very large.

I don’t even need to consider whether I’ll occupy a position in it at that time, or what my business model in it will be—we simply don’t need to consider it. As long as there’s such a big commercial opportunity, you’ll definitely have a way. So for the sesame seeds in front, we’ll also pick some up, but we just pick up a bit casually—we won’t stop, or treat it as an important matter.

So last year’s C-end DAU and such—I think it’s probably a small matter. But we picked it up too, we maintained user usage at a relatively low cost, because it might be useful later. Although right now we don’t know what use these users have, right now it’s a pure cost expenditure, but it might be useful later.

Since it can be obtained casually, we’ll pick it up along the way. Including this year, it’s very likely that our ARR revenue from API or AI also has an opportunity. That is, if this demand can continue to expand—if it keeps expanding, and we can buy more GPUs—then ARR reaching several hundred million dollars is very possible.

If AI can reach a billion dollars, then basically my company’s cash flow could turn positive, could cover my R&D expenses, could cover all my expenses. So this is also possible, but we haven’t made it a priority.

This we’ll do, but I think this is an important matter. It’s not our first priority consideration, or not what we truly care about today. The bigger opportunities should still be behind—the opportunities in front, including last year’s C-end and this year’s B-end—I think this needs to be done, needs to be done well, but this is not our goal.

Or rather, most people in our company don’t think this is a very important matter, don’t think this is a matter equally important compared to AGI.

The open source part I can say more about, because many previous questions were about open source. First, I think we will open-source, and then even our strongest model will probably be open-sourced too. Because I don’t see the benefits of closed source, I don’t see the inevitable benefits. ByteDance’s model is closed source—what benefit does it have? I don’t see any benefit.

Even if a model is open-sourced, even if you tell others everything, the threshold is still very high. For others to actually use it, the threshold is very high. For them to use it, it’s very hard; secondly, for them to use it and get the cost very low too, is also very very hard, not that easy.

It’s not that once I open-source, they can easily achieve the same deployment cost as me. There’s still a lot of work to be done here. Although the principles of this work are all understood, not every company is willing to, or has the willingness and ability to organize manpower to reach this goal.

I’m quite used to this point too. It may just not be good at doing this thing, because the resistance is too great. Controlling this cost is very hard—it has many management and physical constraints. This is also the advantage of startups, because if a startup is too small, you don’t have the strength to do this thing; if you’re a big company, you find it hard to organize.

[00:38:36]

This matter has difficulties everywhere, so this belongs to the sweet spot of a company of our scale, the sweet point. Then if we were bigger, we might have other problems; if smaller, our friends’ strength would be insufficient.

So, as for open source, I think we should set pricing. Currently we should recognize, we won’t force people. Because for the pricing model, I won’t charge a very high fee—I’ll probably charge based on ten-month payback. At ten-month payback, it’s already enough to keep competitors...

At my ten-month payback, I can make independent third-party deployment unprofitable. The third party can’t do it, can’t achieve this cost—they definitely can’t.

So open source won’t affect my revenue. Of course, if I wanted to earn a hundredfold profit, then open source is...

“I can hear you, but the video seems to have dropped, boss.”

“Just now maybe a phone call came in.”

So open source, I think has no impact whatsoever on our business model. The premise is that we only earn sixfold profit—ten months to recover cost roughly corresponds to sixfold profit. Under the condition that we only earn sixfold profit, open source won’t have any impact.

But if you wanted to earn a hundredfold profit, then open source would indeed affect your earning a hundredfold profit, because third parties would deploy—they might be at twentyfold cost, which would be lower than yours.

Is this model sustainable long-term? I think it is. Under our vision, I think open source is sustainable long-term, or we intend to do it this way. You can consider it as having restraint, which is also giving you longer-term benefit.

This strategy can give us more opportunities technically at the front, and our probability of achieving AGI is also greater. We’re more at ease.

Think about it, we don’t even need to work overtime, because it’s just not that hard. But for other companies, it might be very hard, because you’re thinking about too much.

It’s actually not hard, simply not hard. At first it’s a... From the outside it might look like we chose a very hard model—we do research, we do the hardest things, seemingly a hard mode. But actually we gave up a lot in other areas, which lets us still be very strong, still doing it very easily.

So on this matter of open source, actually my judgment is that it’s sustainable. There’s no conflict between open source and commercial paid services—the premise is that under sixfold profit there’s no conflict.

Sixfold profit looks high, but actually it’s not high. Because now with AI efficiency this high, right now a reasonable profit might just be this much. In the future it might drop to, say, fourfold, threefold—I think that’s already... any lower and it couldn’t drop further. But it will still have very large profit.

Just looking at selling API alone—but I don’t think selling API is that attractive. But on this matter, you can explain, no, I don’t see any conflict.

Then I’m also not worried about others deploying our models and then competing with us—not worried at all. We even hope they can deploy it successfully.

We provide as much help as possible to the open source community, assisting everyone to deploy our models. I’m not worried they’ll steal this business from me, because this market is big enough. I’m only worried they can’t deploy it—that they got some details wrong, made the effect relatively poor, or that their cost is relatively high.

Right, there’s no conflict here.

Then last year, when there was this To B business, a question asked more often was: our C-end—if I open-source, then won’t the C-end conflict with my C-end again? Because I don’t have a traffic advantage, or Tencent itself has lots of traffic—if they deploy our open source model, they’d take over all the C-end users, taking away my C-end users.

But actually it won’t, for many reasons.

Then the question is: is the open source model we give the same as the model we deploy ourselves? It’s the same. We won’t open-source a slightly worse model and then use a better model when we deploy ourselves—we won’t do that, it’s the same.

This also shows there’s actually no conflict. All of last year, on the C-end I basically open-sourced, and then the C-end service saw no conflict, really saw no conflict. So, this is the open source part.

Then next is the company’s long-term vision—I think our goal should be AGI. Everyone’s definition of AI isn’t necessarily the same, but that doesn’t stop us from treating AGI as our goal.

From a technical roadmap perspective, actually the AGI roadmap is relatively clear. With the current generation of AI technology, if you can describe a problem very clearly, giving it complete context and instructions, it already surpasses humans. But there’s a definition here, a premise: you give it complete context, you give it complete instructions.

Then this definition is very hard to achieve. For example, in today’s meeting, we actually have a very long and strong context beforehand—everyone might have decades of context, and this is something AI doesn’t possess. So what AI can currently possess is: within a limited context, it can do better than humans.

But it still can’t replace humans. There’s still one thing missing here—continuous learning. Because humans can also learn continuously. If you hire an employee, he might spend two months getting familiar with the company environment, familiar with his work, and after two months he can get up to speed.

He can do many things. He can understand what you say—for example, if you say “call Xiao Wang over,” he knows who Xiao Wang is. But with AI, because of this context, it doesn’t have those prior two months of learning.

If you tell it “call Xiao Wang over,” you have to tell it who Xiao Wang is, what position, where he is, how to find him, what to note when finding him. You have to give AI all the context. So in this situation, AI can do it, but you can’t possibly give it all the context—it’s not realistic.

So AI can’t replace your employees. But if AI has the ability to learn continuously, like your employees, coming to the company to learn for two months, then...

[00:51:02]

...but then it could replace everyone in the world. So we’re one step away—we’re missing learning-to-learn.

AI’s development, we can understand it as a staircase. Last year’s step was CoT, chain of thought. Because we discovered that through chain-of-thought methods, we can bring intelligence to a higher level. Through it thinking by itself, we can raise this ceiling, let this AI do more things.

Then we crossed another step. This year’s step is Agent, because we discovered that using the Agent approach, even more things can be done, its capability range is larger, its intelligence ceiling is higher.

Why is it a staircase? Because each subsequent step is based on the previous foundation. Agent uses CoT, and CoT also uses the previous step, which is the language model—so no step is wasted.

So, AI’s development, the trajectory of intelligence, is traceable. This year’s step is Agent, but this Agent step—it will also be walked to completion. That is, after it solves all the problems it possibly can, it still can’t replace your employees, but it’s already reached its capability ceiling.

Just like CoT—after CoT reached its ceiling, it already surpassed the most top-tier humans, in doing math olympiad problems and writing programs it already surpassed the most top-tier humans. But it still stops there, that technology couldn’t reach AGI.

So you see, AI’s intelligence trajectory is traceable. Then after Agent, we think the problem to be solved should be continuous learning—that is, how to let the model learn continuously, rather than you giving it strong training—it should be able to do relatively long-term continuous learning like a human.

This problem is the same thing as completing tasks and so on—they’re related, they solve the same problem. We now stand at Agent, and what we can see is the next bottleneck, which is continuous learning. The next problem to solve is how to learn continuously—this is visible, relatively clear.

That is, the obstacle stuck in front, you must cross over it, and there must definitely be a way to cross over, but it needs time. After continuous learning, we might arrive at a singularity. This singularity is: when this model can learn continuously, it can already do all the things humans can do.

It could then develop its own version, could research on its own, then develop its own next version, developing more advanced AI models. So it would reach a singularity, able to achieve its own iteration.

But this singularity—it’s not really a singularity, it’s also a gradual process. This process might also be a relatively long gradual change, not a mutation. But habitually, we all think it might be a singularity.

Because a long time ago, those prophets thought there would be a singularity here, but actually it’s not a singularity, it’s a continuous process. Then after this step is complete, I think that’s when embodied intelligence arrives.

This is our conjecture—this is what we think the timeline should be: first solve learning-to-learn, then reach that intelligence singularity, the singularity that can self-iterate, and then comes embodied intelligence. After embodied intelligence, it walks into the real world, can do housework for you, can care for you in old age.

We think this is a relatively ideal roadmap, but everyone’s views differ, there’s no right or wrong. Just that we feel this roadmap is the most relaxed.

This roadmap is because for each step, the new things you need to do are very few. This roadmap lets us avoid working overtime. But if the roadmap were reversed—say, it needs to first achieve embodied intelligence—then this is very tiring to do ourselves, a very bitter task. We don’t want this kind of roadmap—we want to do it a bit more relaxed.

If we first solve continuous learning, then solve that self-iteration singularity, then solve embodied intelligence, this path is very relaxed. Because later on, you can use earlier technology to help develop later technology. After the singularity, then doing embodied intelligence—that doesn’t need humans to do, doesn’t need us to do, the model itself can produce it.

So this answers what our long-term goal is. As I told him, this is our long-term goal, which is what we call AGI.

Everyone, back to reality. Last year’s most important reality was that everyone wanted to make Chatbots, to grab C-end traffic. This year’s reality is that everyone wants to grab To B revenue, to participate in this, because if you don’t participate, you’re simply not at the table, right?

But we don’t think this is an important matter. Or rather, within our company, what we truly care about is actually those AGI roadmaps I just mentioned, and how to break through with this technology in the next step.

But one strange thing is, the thing you most want to get, you can’t get. Whereas the thing you don’t care much about, is actually fairly easy to get.

There’s a strategic advantage here—that is, in our hearts we’re thinking about AGI, what we do is AGI. So when we do those applications, do those C-end and B-end things, we simply don’t need to put too much thought into doing those things—actually very little effort suffices.

I think it’s that, standing at a technological high ground to do relatively lower-level technology, there’s this kind of dimensional-reduction strike. At least on last year’s C-end, we saw it was indeed this way. We didn’t put much effort into the C-end—at one point we even didn’t want to maintain those users, but the users just couldn’t be driven away.

Because they really couldn’t be driven away, so in the end they all remained. But slightly... Then this year’s B-end revenue, right now this growth looks relatively optimistic. I think this figure, compared to peers, should also be relatively good, I estimate. But we didn’t put much effort into doing this thing, we simply didn’t...

[01:02:45]

...do one thing—it was just done incidentally.

Doing the launch of internet intelligence, along the way, the AGI step is one I must walk, it’s a stair-step. On the road to AGI, I must pass this stair-step. So I provide these technologies to everyone through API—I didn’t do anything extra.

We’re still doing AI—this is a byproduct. I only need a few people to maintain this API, and there aren’t even customer service reps, no need for sales, nothing is needed—users come on their own.

Or rather, what’s considered the C-end users, the C-end and B-end, are all byproducts on our road to doing AGI, an intermediate output, with no conflict with my doing AGI. I’m not doing it for the sake of doing the C-end, or for the sake of doing the B-end—rather, our doing AGI is for the sake of doing AGI, and it happens to produce these things, so I take them for commercialization.

This is different from other companies. Other companies do this for the sake of doing this—for serving C-end users, or serving B-end users, they build this model. But for us, the original intention isn’t this—our original intention is still to pursue AGI.

I think to a certain degree this is a kind of dimensional-reduction strike. AGI is a bigger vision, and this vision can cohere more excellent people—it has stronger cohesion. So I have an advantage in organization, and then I use this advantage to... it’s a kind of dimensional-reduction strike.

But if you’re a commercial company, and your vision is to serve C-end users well, then it’s a different story. It has other advantages—in product, user service, traffic there will be advantages, but in technology there’s no advantage.

The currently favorable situation is that model technology is most important. You need to make the model well, others... Right, and this can explain our previous development trajectory. We truly chose AGI, and I simply didn’t think about wanting to have many users.

When we suddenly became popular last Spring Festival, that wasn’t in our script—we hadn’t thought about that thing at all. We just wanted to make this technology well. But at that time I discovered that actually our organization, compared to fully commercialized, product-goal-oriented organizations, has extra advantages in talent and organization.

This is also amazing. At that time everyone was fighting bloody battles over the C-end, and the result was led away by someone who didn’t compete. This also indeed shows the logic I mentioned earlier has merit—there indeed are talent and organizational advantages.

This talent advantage isn’t that my people are smarter than his—rather it’s how I organize this talent, how I motivate them, and then how they cooperate. This thing has an advantage. Because when you gather smart people together, it’s not that they naturally cooperate, naturally have great passion to charge toward a goal and complete it—so you need a vision.

Our earlier experience gave me the enlightenment that the AGI vision is very powerful.

OK, that’s the question. Then the next question is, what’s the importance of core interests?

I said earlier that we need to be very restrained in many aspects. But what are our core interests? Actually our core interest is only one point: our greatest core interest is maintaining the stability of the team. This is our greatest core interest, and can even be considered our only core interest.

As long as I can maintain the stability of the team, I will definitely succeed, definitely achieve AGI—it’s that simple. As long as everyone stays, we can continue, and I will definitely... basically there’s no risk. It’s just a matter of earlier or later; we’ll encounter setbacks; if we encounter setbacks and everyone stays, then I can continue again.

Money is definitely not a problem, resources aren’t a problem, the other elements are all easily obtainable. For us, there’s only one core interest, only one thing that can’t be conceded: we must maintain the stability of the team.

This is also a very big challenge we face, or rather, I think it’s the greatest risk. Of course, this risk has been substantially relieved with our recent round of financing. Because the options everyone received are relatively many, the amounts relatively large.

From a team stability perspective, as long as some of the most important employees, the oldest employees, can be stable, then others aren’t likely to leave. Even if others have fewer options, less income, they won’t leave. Because they’re not entirely here for money—everyone hopes to do this thing in an environment that can achieve AGI.

So for talent, there’s still appeal. Historically, our talent turnover has been relatively low—compared to peers, our talent turnover is always relatively low. But this is still our greatest challenge, the only challenge, you could say.

Everything else is a matter of time—everything else at most causes us to be half a year late, a year late, but won’t mean we can’t produce it. We definitely won’t lack money, definitely won’t lack resources—actually none of these are lacking.

So many of the things we do now are to maintain the stability of the team. Aside from this point, everything else I think we can do without, everything can be restrained. We’ve always been very restrained, unwilling to become adversaries with any internet giant or small company.

I hope I can empower them, or hope I can assist everyone to do this thing, hope I can help everyone do this thing. This is also, as we said before, part of our commercial meaning. The premise is that everyone doesn’t...

[01:15:12]

Under this premise, we’re very willing to assist and help anyone, even our competitors, including Alibaba, Zhipu, Moonshot, to do better. Because we don’t lose anything—we’re open source anyway, and open source also means not making boundaries too clear about how to do things—we hope you can reproduce it; if you can’t reproduce it, you speak up and I’ll tell you how to reproduce.

This is originally part of open source—it won’t be otherwise just because you’re a competitor. Of course, if you’re a partner, I’ll do more. But on the big interests there’s no conflict.

When dealing with the outside, our attitude is: we only do the AGI main line. This is what I just mentioned—GPT, CoT, Agent and so on—only the main line. The AI field is very broad, there are many things we feel aren’t on this main line—for example, 3D, video generation—I think they may not have much relation to the intelligence main line, so we won’t do them.

There are also some, for example world models—I think currently they don’t have much relation to the intelligence ceiling either, so we won’t do them. But if others do them, we’re happy to help. Whether we have time is one matter, but on interests there’s no conflict.

We also hope these AI technologies can be used in all kinds of production environments, can improve society’s production efficiency, can help all industries improve production efficiency. We’re very motivated to do this.

Whether I have time, whether I have manpower, or whether our colleagues themselves are interested—that’s another matter. But on interests there’s no conflict, and we hope to achieve this goal. And we believe this has no conflict with business whatsoever—the benefits I should obtain still aren’t reduced.

I think our having held this attitude before—actually we didn’t obtain any less because of it, we didn’t obtain any less because I open-sourced, nor because of our goodwill or my providing help to others. For example, last year’s C-end users—we still have relatively many C-end users now, and they’re still relatively solid.

Our B-end this year, I think, is also relatively optimistic. I didn’t have my commercial interests affected because of our goodwill—no effect at all, and it may even be a bonus. This looks counterintuitive, but it’s indeed this way. Or let’s think in reverse—if we violated it, it would also be inevitable—could I obtain more things? No.

There’s a question: how to understand that world models have no relation to raising the AI intelligence ceiling? I’m talking about this current stage—this is our judgment. We have seen it—this is our own AI roadmap, not the only roadmap.

From our understanding, from our judgment, the most important thing currently is to do AI training well. To do AI training well doesn’t require world models, doesn’t even require multimodality. Because if you narrow the AI training scope a bit—without multimodality, there’s just a portion of tasks you can’t do, but it doesn’t affect the algorithm’s validity.

Multimodality ultimately still needs to be done. Right now what’s important is training, then the next step to solve is the continuous learning problem, and the step after that is it asking its own questions. But there’s no world model in this roadmap, no video generation.

When video generation first came out it was very hot—it seemed this must be done, as if if you didn’t do it you weren’t an AI company. So I found it strange—actually if you just think carefully, it has no relation to the intelligence roadmap.

In fact, you’ll also find that after video generation first appeared with Sora, everyone did it, big companies and small companies. But small companies later all cut it. It has no relation to the intelligence ceiling.

But commercially, it’s a good business—commercially it’s a good business. But this has no relation to intelligence. We won’t do something because it’s a good business—we’ll only do it because it’s something on the intelligence roadmap.

Video generation—because that’s relatively clear, I use it as an example. Then world models—the meaning of world models isn’t that clear, because many things can be said to be world models.

From our judgment, world models and intelligence aren’t the most important thing at this current stage. The most important is AI training, and how to solve continuous learning after AI training. This is our company’s judgment—of course each company’s judgment differs.

What I just said—the most important issue for our company is personnel stability. From another dimension, what do we lack? What’s our gap with the US? Actually the gap is only one thing: resources.

We don’t have that many cards [GPUs]—the number of our cards is still relatively few. We currently have roughly 20,000 H-equivalent compute cards, and most of these just arrived, arrived in the last month or two, and there may be many more machines that haven’t arrived yet.

Our total compute was relatively little last year—this year we’re very aggressively expanding this compute. We currently have roughly 20,000 H-equivalent, and in the coming months we’ll have large batches of machines bought over, basically all NVIDIA.

How many cards do we need? Right now, definitely the more the better. Within the range we can afford, definitely the more cards the better—this is without question. So our current strategy is, within a reasonable price, buy as many cards as we can buy.

If, after this round of financing is spent, however many cards I can buy, I’ll buy. The pace of spending isn’t in the plan—rather, as long as the price is reasonable, however many there are, I’ll buy them all. So if I spend all the money within half a year, I think that’s a good thing. If I spend all the money within half a year, that would be too blissful, too ideal.

Actually, spending this much money is very difficult—you can’t buy that many cards, they’re very hard to buy, and prices are very high, and you can’t spend extremely high prices to buy them—you still have to ensure the price is reasonable.

[01:26:41]

If I spend all this money within half a year, that might be most ideal. Because turning money into NVIDIA cards is definitely better than putting it in the bank. Putting it in the bank, I can now maybe earn two points... but buying NVIDIA cards, ten months of social cost.

So definitely, however much you can buy, buy that much. First, after buying cards, I have lots of room afterward—through providing services or however, I can always have cash flow. If I have cash flow I can survive, so I don’t need to keep tons of money in my account.

So, we only worry about not being able to buy that many cards. If we could turn all the money into cards, then we’d unhesitatingly turn all the money into cards, and here we’re willing to pay a certain premium. That is, we’re willing to pay a certain premium to turn it into cards, because this is too worthwhile.

Even after paying the premium, actually it’s still hard to achieve this goal. So objectively speaking, if this year I could spend 20 billion [yuan], then it would count as our procurement department’s performance being super good.

Our gap with the US is mainly in resources, and the gap in people isn’t very big. In people there’s almost no gap, because it’s the same batch of people—maybe Chinese people. When Chinese people go abroad, some stay domestic, some stay abroad, some go abroad—it’s not that the smart people go abroad, no.

Actually it’s relatively random. The smartest people—maybe not that slightly more than half go abroad, but slightly less than half stay domestic. Domestic talent isn’t lacking, and our base is large—we have so many people replenishing every year.

Talent isn’t the bottleneck—resources are the biggest bottleneck. Resources first affect talent cultivation, because with little compute, our opportunities to run experiments are relatively few, so our talent overall has a gap with the US. The talent gap is essentially also because of the compute gap.

On the current largest models, we actually can’t afford to train. Even if we spent all 50 billion, we still couldn’t afford to train. Even if we could stack it up, we couldn’t afford to use it. The current largest model has about 800B active parameters; domestically, we’re still at the several-tens-of-B scale—the largest domestic model might be just several tens of B active, so that’s a difference of an order of magnitude.

If I wanted to train a model as large as [theirs], it should require 50,000 GB300s, or Huawei 950s, 200,000 cards. This is just training, not yet considering doing research. So the biggest gap between us and the US is in resources.

Our current resources, and our resources within this year and the coming months, including soon-to-arrive large resources, are only enough for us to do more experiments at the 10B-active scale. Because at the several-tens-of-B active scale, there are still many experiments to do, still many things to figure out. We should be relatively far from being able to train an 800B model—still plenty of time, don’t have that many cards.

So the difference between us and the US, I believe, is a difference in resources. We might believe that all the differences we see—including the talent difference, the model capability difference, the application difference—can all be considered as due to the difference in compute resources.

Compute resources—on one hand, cards simply can’t be bought domestically; on the other hand, our capital investment is less than the US. We’re much less at the capital investment level, and talent-based salaries account for a very low proportion within this. You see them offering salaries of a hundred million dollars, but calculating it, talent salaries still account for very little—the bulk is still compute.

This problem is currently basically unsolvable, because Huawei’s output is also limited. Because if I want to train 800B, I need 200,000 of Huawei’s newest cards, and this is just training, not yet considering doing research.

So we currently simply won’t consider competing with the US at such a large scale. Right now we lose, but we should first do it well at the scale we can afford to train and afford to use—the several-tens-of-B active scale. Then when we have more resources in the next step, then bring it up to 150B, 156B, or 250B active scale.

So between us and the US there’s a gap here that currently looks very hard to close. If you insist on training such a large model, you can train it, but you can’t do sufficient research. That is, before training, you can’t do sufficient research.

There’s another question many people care about: where will the endgame gap of all large-model competition manifest? That is, where will the final large-model gap manifest? I think this gap might ultimately not be very large.

The final gap should be three aspects: one is cost, one is time, one is user experience. Aside from these, there might not be any gap.

Cost is relatively easy to understand—providing the same service, same quality of service, at what cost you can provide it. The same service—say, like BYD’s battery, under the same technical volume, can other companies provide it at this price? I think this is a relatively difficult matter, not that easy to achieve—definitely a barrier.

So cost is definitely a difference—I think cost is probably the number-one difference. Then the second is time, when you can achieve it. A few months earlier or a few months later—it’s different.

The third might be experience—user experience still has some differences. Among these users there will still be some user stickiness and user barriers, but it may not be essential. The essence is still, first, cost; second, time. Whether you produce it first or later, whether you make the same thing faster or slower.

For long-term commercialization paths and further enriching product lines, how to price? We feel that right now the most worthwhile thing to do, most worthwhile to spend effort on, is still doing AGI. Right now we need to push AGI forward again, that is, push the intelligence floor up, push it forward.

This should, at the current stage, be more worthwhile—or a path with greater returns—than doing more product lines or considering more commercialization paths. I think for a period in the future, and for any period in the past, it’s probably been this way. That is, if we...

[01:39:46]

We spent a lot of time thinking—what’s the use of enriching our products?

What was the commercialization discussed half a year ago? It must be that I need to do advertising, then I need to do e-commerce, I need to embed e-commerce in the product, then integrate with local services and such. It’s definitely useless, because change is too fast. This product—if you’re at the front, or at this current stage of ours, and spend a lot of time on commercialization considerations and paths, the product line’s lifecycle is very short.

I think it’s not yet the time for this. This is our judgment, or at least all the previous experiences support this judgment. In the past three years, at any point when you came to talk to me about commercialization paths and product lines, it was a waste of time, because you can’t predict, can’t foresee the future. What you can foresee is very little.

Because I’m watching the time—I don’t know if everyone wants a mid-session break? Want to eat something first? Or shall we continue talking? If no one objects, I’ll continue.

On doing world-leading AGI research, and commercializing at the appropriate time—I think we’ve always been doing commercialization, I believe we’ve always been doing commercialization, just not with commercialization as the goal. We take AGI as the goal, but we’ve always been doing commercialization—that’s why we have C-end users, why we have B-end revenue.

From historical experience, this strategy is successful. Then I think the point at which we completely turn toward commercialization should be very far off. So the biggest thing is still the extension of technology, then doing the next generation of technology, more so solving the current problems. These return ratios—personally I feel that, in the currently foreseeable future, at any point focusing on products is too early.

So this is also part of our restraint. I hope these commercial opportunities can be done by others—we hope these commercial opportunities, how to use this AI, is something the entire society, all our partners do together, everyone shares this return together, rather than me wanting to swallow it all, which is impossible. And we don’t have that much energy, our organization doesn’t have that many people to do this thing.

For partners, actually this round of financing was carefully selected. As for the specific proposal of how to cooperate—but first, I think the interests are relatively aligned, that is, those most aligned with our interests, with the least hostility toward us, or those who most hope we can succeed. Not everyone hopes we can succeed, because we still harmed many others’ interests.

Company major strategy, technical and business decision processes and decision mechanisms—our company is overall built on the foundation of consensus. I don’t decide all things by myself—rather, I need to seek consensus. My authority within the company and my influence within the company are built on the foundation of consensus.

For example, if I want to do something, I definitely first look at what everyone’s consensus is, whether everyone wants to do it. Then I might have some guidance or inclination, but the effect of this guidance is limited, the effect of guidance is very limited—it’s still built on a foundation of consensus. This decision mechanism is actually a consensus-seeking mechanism—it’s not that I can push something forward; it must be consensus for me to push it through, and then I’ll push it.

Currently the main energy is basically all on the DeepSeek side. Let’s rest for five minutes. Let me write quickly. Everyone can unmute, give me some feedback. We’re fine on our end—otherwise let’s rest for five minutes first.

The final effect gap opening up between the various models should be a comprehensive one. Comparing model effects definitely has to be done at the same cost—that’s what’s meaningful. Because when you compare two cars, you also compare cars in the same price range.

A well-made model versus a poorly-made model—this difference shouldn’t be at some specific link; it should be overall.

Anthropic currently surpassing OpenAI—is this long-term? I think this isn’t long-term, this is definitely extreme. OpenAI and Google—in the future they’ll most likely still rise alternately, they should rise alternately. Actually right now Anthropic’s advantage in Code Agent isn’t that large—it’s not that it crushes OpenAI.

Our company maybe has half the people who usually feel OpenAI is better. Actually Anthropic has a first-mover advantage, but this first-mover advantage should disappear soon—it’s not an advantage it can hold long-term. All three companies are very impressive—among these three, efficiency is highest, the cost they spend, what they spend, the money they burn should be the least.

In the global AI division of labor, the role Chinese companies are very likely to play is still being the largest producer. By common reasoning, our production capacity is the largest, including chips—chips probably we have the largest production capacity, we have the most electricity, so our AI ultimately is very likely to be one of the three-body [players].

Chinese people will make this product the cheapest, and then in terms of effect—after all, foreign goods, now many goods where the Chinese-made and American versions don’t have much difference. In the future AI might be like this too, but Chinese-made AI might have a cheaper price. This cheapness might be systematically low, just like in other industries where China provides cheaper services.

When I want to do something, my habitual thinking is: what has the greatest return for me to do at this moment? If I feel doing products has the greatest return right now, I feel I’ll go do products; if I feel realizing AGI first has the greatest return right now, then I’ll go do AGI first. Obviously, I feel doing products right now doesn’t have the greatest return.

If you’re asking about the domestic-card adaptation problem—domestic cards actually have a historic opportunity right now. Because previously domestic-card adaptation had a difficulty called “poor ecosystem.” That is, after buying cards, you couldn’t use them—it didn’t have NVIDIA’s ecosystem. So NVIDIA’s moat is very strong.

But this thing is changing. NVIDIA’s CUDA moat is rapidly disintegrating. The reasons for this rapid disintegration may be three aspects. One aspect is that now with AI, after having AI, building this ecosystem is much easier than before, because AI can write code.

[01:56:36]

I can use AI to build this ecosystem, so I can build out an ecosystem exactly like NVIDIA’s. First, because there’s AI; second, there are some new technologies. For example, our company released a technology called TileLang, which is a high-level language.

Using this high-level language to write CUDA operators, we can quickly write out NVIDIA’s entire ecosystem all over again, and then combined with AI, this looks like it has no obstacles. But right now it’s not finished yet, not done yet, though this technology path looks like it has no obstacles.

There’s another point—because CUDA, NVIDIA evolved from gaming cards, so in many places, the design of gaming cards and the settings of gaming cards are of one piece. CUDA is compatible with gaming cards. Previously because AI computation was a very small field, smaller than the gaming card market, this was reasonable.

But now the compute card market is already bigger than the gaming card market, so there’s no reason for these two to still need to be coupled. The current trend is that they’ll no longer be coupled going forward. So dedicated chips—whether Huawei or NVIDIA itself—will all be dedicated chips going forward, not the previous things.

Under this background, the role of NVIDIA’s original ecosystem is greatly reduced. Because for a dedicated chip, it has no relation to CUDA—it’s not bound to CUDA. Or rather, when this chip is designed, it already considered how to build this ecosystem.

It’s a bit complex, but anyway, domestic AI chip substitution now has a historic opportunity. We believe that within the next year, we’ll be able to see one thing verified: the domestic chip ecosystem has no problem whatsoever. Previously it was thought to have problems, thought to be unusable, not easy to use, but in the future, I think within a year, we’ll be able to reverse this perception, or reverse it with facts.

Domestic AI chips’ hardware and ecosystem both have no problem—the only problem is insufficient production capacity. On this point of domestic-card adaptation, there’s no obstacle—NVIDIA can’t block it. If it were in a normal business environment where I could buy NVIDIA cards, then domestic substitution would be relatively hard; but when NVIDIA cards can’t be bought, everyone is forced into it—everyone has to do domestic chips.

Under this background, domestic-card adaptation has no obstacle whatsoever. Domestic cards building an ecosystem as good as NVIDIA’s, even better than NVIDIA’s, I think has no obstacle, but still needs time.

We currently mainly cooperate with Huawei. Huawei does their own adaptation, but we ourselves will participate in this ecosystem, will deeply participate within Huawei. Huawei’s problem is still insufficient production capacity. Like Huawei gives us roughly 16,000 cards of capacity, internet giants maybe get a hundred-something thousand, we get ten-something thousand—I think this ratio is also relatively... but this is probably just how much capacity Huawei has.

So we also can’t count on training that bigger model on Huawei later, or training a model with several hundred B parameters active—there were some saying this year. But next year, the year after, there may be opportunities.

For Huawei-card adaptation, the main work we’re doing is making its high-level-language compiler well, making TileLang well. After making TileLang well, the problem might be solved readily. This matter is relatively complex to describe, but we’re doing it, and after it’s done it’ll be much clearer to explain.

You can understand—when V3 was trained, it still used NVIDIA cards, but it already didn’t use NVIDIA’s ecosystem. V3 used NVIDIA cards but didn’t use NVIDIA’s ecosystem—rather, we first wrote a high-level compiler called TileLang, then based on TileLang’s ecosystem completed everything else, already almost not depending on NVIDIA’s ecosystem.

As long as I take this whole set of things, and redo this process on Huawei cards once, then it’s complete. I think this might be a historic mission—it can completely reverse everyone’s previous perception that domestic-card ecosystems are poor. Right now some favorable conditions of timing and location are basically all there—only time is lacking. I think within a year, there should be many people using it, or everyone understanding that this problem is essentially solved, and the rest is just the production capacity problem.

I’m relatively optimistic about domestic compute. I think on this point, NVIDIA is digging its own grave. Huawei’s supernode, Huawei’s 950 supernode, in performance and price can completely substitute for NVIDIA’s GB200, GB300. The price is definitely more expensive, but limitedly so. Fifty percent more expensive, a hundred percent more expensive—a hundred percent more doesn’t matter, two hundred percent more doesn’t matter.

For example, a hundred percent more expensive—I think it can already be considered a price-level substitute. On tasks it’s also a substitute—all the tasks GB300 can do, Huawei supernode can do, latency and everything the same. The only cost is that four Huawei cards equal one NVIDIA card, and simultaneously lagging by two years.

Four-equal-one is understandable. Lagging two years means four Huawei 950s can equal one GB300. Lagging two years means lagging two years in time. Huawei 950 supernode is this year’s Q3 or Q4 product; NVIDIA GB200 is a product from two years ago’s Q3—two years apart.

NVIDIA this year’s Q3 might already have a new generation. So the gap between us and the US on chips—I believe there won’t be a gap on ecosystem going forward, but on chips it’s fourfold plus two years.

There’s another question: will we do vertical integration upstream? I hope not. So there’s a question: will we do vertical integration into upstream applications? We hope not to—I hope others do this thing. I don’t want to gobble up everything—I only want to eat one piece, only the piece I’m best at, or the piece we ourselves consider most core, then the piece directly related to the user...

[02:08:18]

...I think probably for many of our industry partners, they care more about similar... it should be others’ meaning, I shouldn’t interpret it.

Will we build large clusters ourselves in the future? I think building large clusters ourselves is definitely necessary—we’ve always been doing this ourselves, all our clusters are self-built. But whether to develop our own chips in the future, I think depends on how big the returns here are, depends on how big the returns are.

Tesla, cultivating... this matter. Suppose you operate a power plant—you don’t necessarily need to manufacture generators, right? The power-generation equipment can be made by others, and as long as its price is reasonable, why would you make it yourself?

So, I hope not to have to make chips. I hope I can buy chips at a reasonable price, so I don’t have to make chips. I think this is very likely the case—that is, recently NVIDIA chip profits aren’t necessarily... although...

We hope to only do one piece. I think AI is a very big thing, and it doesn’t need me... I only do one piece. If we focus, and I believe the business interest here is already big enough—that is, if the AI era will produce many trillion-level companies, I think we’re one of them.

We’ve always done one small piece of it—us being one of them is already no problem, and it doesn’t need me... I’m not confidently ambitious about doing everywhere. I think it’s most likely relatively hard to change, and if you really want to do other things, you’ll still have more ideas—this will... this is our attitude.

For example, at least in the To B and To C businesses, from what’s currently visible—those who really want to make a To C closed loop, we actually do it better; those who really want to make a To B closed loop, maybe don’t do it as well as us. The more you want...

Then also, on To B I can say a few more words. The ceiling of the To B business should still be demand—under the background of the current generation of AGI/AI technology, To B demand should be limited. It’ll grow quickly, but it’s not an infinitely large thing—ultimately still constrained by demand, not compute.

Under current technical conditions, how big the revenue is ultimately still depends on demand. Because think about it, I can recover cost in ten months—I definitely would buy in bulk if there were somewhere to put it, and it’s because there isn’t that much to do. Right, demand should grow larger and larger—if with continuous technical breakthroughs, this demand will grow larger and larger.

Multimodal deployment—we’ve always been doing it. For products it’s very important; for C-end user products it’s very important. But for the intelligence ceiling, it’s a component, it’s not the main line itself.

But as a component, multimodality we’ll definitely do, and we’re doing it too. We’ll probably release related models—that is, our V4, V4’s subsequent versions will support native multimodality. But for us, multimodality—for intelligence, it’s a component—we don’t treat it as intelligence itself, its main line is the same as search.

Search is also a component, multimodality too—our understanding is it’s also a component. Scaling—we believe in scaling, definitely the larger the scale the better the effect, able to unlock more capabilities. What stops us from scaling is actually compute—it’s not that we don’t want to scale, it’s that we don’t have that much compute to do this scaling.

We haven’t touched where this ceiling is. We train models this large not because I feel a model this large is enough—rather it’s that I happen to have this many resources. I calculate based on my resources how large a model I can accept, can train—it’s calculated this way, not that this model is enough.

Currently, model returns are still very obvious. We haven’t yet had the chance to hit this scaling wall—it’s still very far from us. When Silicon Valley talks about scaling reaching its end, that’s for Silicon Valley; for Chinese people, we’re still very far from that—we simply haven’t scaled to that degree.

This scaling includes data scaling, model-scale scaling, and training cost. We’re relatively far from exploring this scaling ceiling—that is, don’t have that much compute. But we’ll also spare no effort to push this scaling ceiling.

Including after we finish financing, we’ll have more compute, and might train larger models. The shorter the time to buy, the better; if we could exhaust all energy in half a year, that would be best—actually can’t achieve it.

The next-generation model’s core capability—I think it must have continuous learning ability, only then can it be called the next-generation model. Before that, what we can do is cost, and making the effect better, making the speed faster. But for a major breakthrough, it should possess continuous learning.

Then there’s another question: why do we seem to especially care about this model’s computational efficiency? Because I’ve indeed found that not everyone cares much about this model’s efficiency. For a commercialized company, there’s no motivation to pursue model efficiency, because slightly higher model efficiency...

So it doesn’t have that much motivation to pursue very high model efficiency. So several startups—they themselves won’t... you don’t hear them say low cost is what they pursue, because that doesn’t conform to their interests. If low cost, what money do you still make? If low cost, you can’t collect much money.

On the contrary, this is part of our vision. Or rather, our vision, our colleagues care about this cost, because our colleagues are all ordinary people, they know using this costs money. They can have this empathy: others have to spend money to use it, so if others can have it cheaper, the degree others can accept will be higher.

So we have many colleagues who still hope we can make the cost lower. But if you speak from a business perspective, you actually wouldn’t think this way. From a business perspective...

[02:21:31]

From a cost or business perspective, this isn’t the first priority.

For either startups or big companies, this service cost simply isn’t high. But I think we hope it’s relatively light, I hope it’s something affordable, especially under the background of China’s compute shortage, that it’s affordable, that it can be used on domestic cards.

I think low cost is first of all a result. Our models have indeed always been moving in a lower-cost direction on model architecture—this relates to our vision. We still have many algorithmic methods, and cost can still go lower.

Another reason cost goes lower is: the lower the cost, the more I can train larger models, the more I can afford larger models. On the same compute, when compute is limited, if my computational efficiency is higher, I can afford larger models.

For big companies, they don’t necessarily think this way. For big companies, resources can be added—they can solve it by adding resources. But we’ll prioritize cost efficiency.

The value of data-type models—data is a relatively broad range, data should be almost equal to half the model. Why would I feel that if I want that, or suppose I assume AI can occupy twenty percent of GDP, and then if I want to occupy five percent within it—absolutely won’t work. Because I’ll definitely be defeated by another person—if another person says I only want to occupy one percent, then I’ll definitely be defeated by him.

If my goal is that I want to occupy five percent of AI, of all-humanity GDP—theoretically the math still works out. Look at OpenAI—their math seems to work out, theoretically no problem. But they have a problem: they’ll be defeated by another person willing to occupy only one percent.

Because another person says, I do it this well, but I only need to take one percent of global GDP—then he’d defeat him. At this point if yet another person emerges saying I only need zero-point-one percent, then he’d defeat the previous person.

Macroscopically, no matter which of these few percent it’s taken from, there’s no difference between them—they’re all the same. Those who take more will be defeated by those who take less. You don’t even actually need to take more—if your vision is to take more, you’ll be defeated by those whose vision is to take less.

Actually no one has gotten money yet—it’s just a vision. If your vision is to take more, you’ve already lost first, you’ll face greater difficulties. This is just how the world is.

OpenAI from the start felt they could truly monopolize this world, but actually they’ll encounter many many challengers. They’ll encounter challenges, so they won’t have it that easy. Challenges the US has encountered—in the future they may also encounter China’s challenge, because Chinese people are willing to take less and can provide this service.

In China, there will also be people willing to take a bit less. But ultimately there’s a balance here, because if you take too little, the company’s business logic doesn’t hold and it can’t survive. So if you take too little, you can’t survive; if you take too much, you’ll be defeated by those who take less.

So for us, we’re not about taking the most profit, or about return-maximizing pricing—rather it’s earning just a reasonable return. This is one explanation.

I believe in this thing—I’m not looking for reasons for this matter, because there’s no need to find reasons. I do it this way to begin with, and I definitely have reasons for doing it this way. These reasons may not be very conventional, but I think the company isn’t conventional to begin with.

Our company’s management actually has two lines: one line is top-down, one is bottom-up. Bottom-up is—each person does whatever they want to do themselves, no one manages them, no KPIs.

Top-down is the formal—we collectively want to do something, needing everyone in the company to cooperate. For example, if we want to release V4, then there has to be division of labor, each person does one part. That’s top-down, and this top-down we call formal.

Generally we hope this formal doesn’t take up more than half of employees’ total time—that is, formal shouldn’t exceed half. They still have half their time that’s unassigned, and they do whatever they want. This is a research scope, letting them explore on their own—according to what they feel is important, they explore, with no prerequisite requirements.

As long as the company can support it—company compute can support them doing it, or they don’t need compute, they need to do very little—then they simply don’t need to coordinate. So this is our current organizational method.

Some people think we’re top-down, some think we’re bottom-up—I think both are right. My one standard is that formal preferably shouldn’t exceed half.

We generally also don’t work overtime much. Overtime has two reasons. The first is that doing research needs a relatively relaxed environment. If you push very tightly, you can’t do research. Because it’s precisely that you need to have this interest yourself, you need to think about these problems in your spare time, so it has to be in a relatively relaxed environment for there to be a chance to explore. This is a need arising from research culture.

The second is that we’re very focused. Being very focused means the things we need to do are few. Then I don’t have that many things to do, so I don’t need to work overtime.

This is of one piece with the earlier restraint. Because I’m restrained, so many times I just don’t do it. Then the things I need to do become fewer, and the work each person gets assigned becomes less. You see many of our products are incomplete—we haven’t gone to fill them in.

This is also a culture of ours.

OK, because there are many questions, I’ve mostly scanned through them. Everyone, if you have any more questions, please ask.

“Please, investors, feel free to unmute and exchange. Let me remind you slightly—Mr. Liang talked about a lot of relatively sensitive information, please absolutely don’t spread some numbers or situations externally, including card quantities and such. Also absolutely don’t screen-record and share externally. Thank you all very much—if you have questions, please feel free to unmute and exchange.”

[02:34:59]

“Brother Yang, could you share more about the timeline for when continuous learning will bring a breakthrough? Including if continuous learning is realized, what other architectural and algorithmic innovations are needed, and other key elements?”

Few people, research is needed. Right now the whole world is researching this problem. Or rather, for investors, what investors see most now is AGENT; but for us research people, what we now see more of is learning, and how to solve this learning problem.

Actually learning may not be a single technology—it’s a problem. How to solve this problem may have many technologies—not one technology, it’s not one thing, it’ll be many things. Or rather, AGI is composed of many things, needing models, and then needing many other things.

Actually it’s also an engineering and algorithm problem. This problem is relatively specialized, but there are many methods, and many research efforts.

“Mr. Liang, thank you. Thank you very much for this opportunity today. First, I really want to respond to and express gratitude—what you said at the very beginning moved me greatly and gave us much inspiration. You mentioned that this team carries the greatest goodwill, hoping to, within this industry, push forward society and the development of human intelligence, making a little contribution.”

“And within this, carrying this sense of mission and vision. I think this is very close to the corporate culture of the company we serve, which is ‘cultivate oneself to benefit others.’ I deeply understand why you would lead the team to do open source.”

“I would vividly feel it’s like us building a banyan tree, a little-birds’-paradise ecosystem—benefiting all things without competing, but this way it’ll be accepted by everyone, all things coexisting, and ultimately it’ll be everywhere. So we’ll use this investment to likewise express our recognition, support, and respect for this mission and vision.”

“At the same time, we also hope to contribute some strength in the future of this industry, in some areas we’re good at. On this I also want to continue consulting and discussing with you. For example, in future ecosystem co-building, now after open-sourcing, how many partners, talents, and teams in this industry can relatively well reproduce our currently open-sourced models and results?”

“In the future, when taking the next step to further develop this ecosystem, in which areas do you feel more high-quality talent is needed to connect to our models and reproduce them? Or is it that GPU compute is now relatively scarce? Will everyone in the future use a kind of model-matrix approach?”

“For example, we make the large base models better and better, and partners and teams in all industries make some vertical-industry models or application models within the model matrix. How is this developing currently? In the future, step by step, two years, three years, what kind of ecosystem do you feel it’ll grow into?”

“This is the first thing I want to consult you about. Second, you just now shared with many partners many observations about AI hardware. Like AI global big companies, each might make hundred-billion-dollar-level investments, and China currently seems to have some shortcomings in hardware and compute.”

“How long do you feel this can be solved, to support our AI development, so hardware and compute shortcomings don’t hold AGI back? Do you feel this is a mission Chinese people must accomplish in the future—we can definitely make it, it’s just a matter of time and capital investment?”

“But at the same time, it may be two-sided. On one hand, the progress of models will improve model intelligence, causing single tasks or certain intelligence units’ consumption of hardware and compute to gradually decrease, no longer needing such large compute operations, because model progress will make it compute cleverly. I don’t know if I understand correctly.”

“On the other hand, hardware technical progress will make compute’s efficiency more powerful. Will this be a path where the two sides move toward each other? Right now, at this point in time, using the current 960, or H200, to make hundred-billion-dollar-level compute investments—you just mentioned you amortize it over three years, so what’s its actual lifecycle? Do you feel technical iteration is four or five years?”

“Or put bluntly, will it be that a compute center now builds a ten-thousand-card cluster with current cards, and maybe three years later it’s actually relatively not-so-advanced compute? Will there be a situation where the current stage is under construction, not enough, and three years later becomes relatively not-so-high-quality compute with redundancy? I don’t know if there’d be such a phenomenon. These two questions I consult you on, thank you.”

Thank you. The first question is the ecosystem question.

We currently feel that maybe the problem every company faces is insufficient talent. But I think this talent shortage will be phased. In the early period of every industry’s development, talent is insufficient.

Including previously making websites—when websites were first being made, there were very few people making websites, talent was very scarce. Later the internet needed server-side work, and talent was also very scarce. But this kind of talent shortage is very quickly resolved—just two or three years, because large amounts of people are cultivated.

The AI talent shortage is also phased, and we’ve already seen it substantially alleviated. Because AI people truly aren’t lacking—every company will quickly cultivate people, cultivating people is fast. So the AI industry overall—whether ecosystem, model companies, or whatever—talent isn’t lacking.

Talent scarcity is definitely a short-term phenomenon. Historically there’s never been a long-term shortage of a certain type of person. I still remember over ten years ago it was said pilots were very scarce—pilots’ cultivation cycle is very long, but it was also quickly resolved.

So everyone doesn’t need to worry about the talent-shortage problem. Also, there are currently a bit too many companies domestically doing models—still too many. The US maybe has just three; China has too many things doing base models.

Ultimately there definitely won’t need to be that many people doing base models—it’ll definitely converge. So resources are also relatively scattered, and to some degree relatively wasteful. It first...

[02:44:00]

Every company has to do the same thing, but the US has just three companies doing it, resources concentrated only in these three. China’s resources are very scattered—each company gets even fewer resources. I think this will definitely converge—definitely—but it needs a process, and ultimately it will definitely converge.

Don’t need that many companies, because right now maybe everyone feels the profit margin of doing this thing is very high, so they definitely want to do it themselves. But when they discover this thing might not have such high profit, they might stop doing it. Recently there definitely isn’t such high profit—I don’t believe there’s such high profit, because it doesn’t conform to objective law.

This means we’re at a stage: if there’s a very high profit margin, this definitely doesn’t conform to objective law. We should have a reasonable profit. So this is a current state of the industry—I think it will definitely converge.

That is, everyone doing the large-model part—among them, don’t say some company monopolizes, saying “I want to take away all the profit,” this definitely won’t work. If each company only takes a reasonable profit, then actually there’s no need for that many people to do large models. China ultimately having three or four companies competing—competition is already very sufficient, prices absolutely already enough for a price war.

Large models—maybe not to say two big companies, two small companies—that’s probably already quite enough.

As for the ecosystem, I don’t have too many thoughts. We hope to support more people, but we don’t have that much energy. We have this willingness, and there won’t be interest conflict, but whether we actually do it is another matter.

But at least there’s no interest conflict here—we hope for win-win cooperation. First, I absolutely don’t think large-model companies can take away most of the profit—this is impossible, because with so many large-model companies, the gaps aren’t that large now.

The gap is only two things: one is time, one is cost. So it won’t reach any company having windfall profits—I think it won’t reach windfall profits. Those who control cost well earn a bit more, those who control cost poorly earn a bit less—that’s simply all.

Is that an answer? Was the first question answered?

“Everyone can... you believe that in the future there will definitely be many people who can... in the future actually... everyone’s data-application cycle iterations...”

“Can you hear now? Thank you. Right, thank you for your answer, and I very deeply understand and respect your ecosystem-strategy positioning in this industry. For example, on the data side, publicly available data now—I believe model companies all already have channels to obtain it, this method should be no problem, just a matter of time and cost.”

“Then subsequently, for example, when truly reaching AGI, one setting or ideal state everyone imagines is that the model can self-iterate, self-learn—that is, train itself. So for this part, currently on data, do you feel simulated data can be put to use, or is real data’s quality highest?”

“If it still needs to come from real data, will that limit AI’s intelligence to still being within humanity’s past... this level, because it depends on the real data humans truly once had? Or can this ceiling be broken through, letting the model’s capabilities surpass all humanity’s past real [data] through simulated data, synthetic data, created data, and so on?”

I think it can be surpassed. I think there are two points of surpassing—for example, Go, AlphaGo played a move humans had never seen. That is, it’s definitely surpassing humans within a certain range.

But it may also have a ceiling, may also have limitations. But this limitation we currently can’t see. We believe, so broadly speaking, it can surpass based on knowledge humans already have, that we can already articulate.

“Then subsequently, is this by real data or simulated data? Will it work?”

There can’t help but be many methods.

“Okay, thank you. I’ve also taken up your time. I’d also like to continue consulting on the earlier AI Infra question.”

The second question was what? A bit...

“Alright, let me quickly repeat it briefly. I want to consult—for AI Infra, in the future I believe everyone is investing at the hundred-billion-dollar level in compute. So on this side, maybe we believe Chinese people in the future are mission-bound to accomplish it on hardware, that one day there might be high-efficiency compute, but maybe in the practical process, currently it’s still a constraint.”

“So in the future, will it be two directions moving toward each other? One aspect is that after model capabilities iterate, they actually go from ‘brute compute’ to ‘clever compute,’ so per-unit-model or per-task compute requirements and consumption gradually decrease marginally. On the other aspect, hardware like cards’ capability improving will make iteration speed faster and faster, single-card efficiency improve.”

“So what kind of phenomenon is this in the process? Will it be that building a ten-thousand-card cluster now, buying H200 or 960, but after two or three years, it becomes relatively not-so-high-quality compute, relatively becomes an outdated component?”

NVIDIA cards you can basically depreciate over five years. Huawei cards at most depreciate over three years. Huawei 950—this year using it is pretty good, next year using it I think is still okay, later using it I think might really be too power-hungry.

Huawei cards’ lifecycle will definitely be a bit shorter, because it’s already two years behind NVIDIA to begin with. But I think the gap isn’t that large.

If you could buy however many B200s right now, I think it’d all be worthwhile. Suppose for Tencent, if Alibaba could buy them, then look at the quantity; if they can be bought at a reasonable price, it’s definitely worthwhile. But when it’s not a matter of calculating cost—I believe they can’t be bought.

Understood. Our compute lagging is a fact. This fact is dissolved through three aspects. The first aspect is we accept model lag—we can only use smaller models than they can, and how much smaller is a training question. We have to accept a certain model lag, and smaller model sizes.

This lag has a benefit—lagging means you have more time, you have certain technologies, and this way you can use clever methods...

[02:53:59]

Thank you.

So the gap between us and the US might be lagging the US by 12 months, lagging the US maybe 12 to 18 months, or 6 to 12 months. Anyway, simply put, lagging the US by two years, then using only one-twentieth of the US’s compute to accomplish this thing.

This narrative is lagging one to two years, but using only one-twentieth of its compute. So in the future we want to rewrite this narrative—that is, we use one-nth of its compute, but shorten this time even more, shorten it to 6 months, 3 months—I think this is a goal.

And we can even surpass them in certain aspects. But under the situation where total compute still has an order-of-magnitude gap, comprehensive surpassing is unrealistic; but in certain key, trade-off-selected places, us surpassing in some areas might be possible.

Understood, thank you Mr. Liang. Full of confidence, let’s work hard together. I’ll leave time for other partners, thank you.

“Thanks for the earlier sharing. I have two quick technical questions here. In the earlier discussion of technical roadmap, you mentioned the core problem to solve at this stage is continuous learning, which is also a current research hotspot abroad, called Recursive Improvement. I’d like to ask—currently, what’s the biggest technical difficulty? From your perspective, when can this be solved? This is the first question.”

“The second question—you also mentioned first solving continuous learning, then doing intelligence. I also want to understand—what’s the technical root behind you framing it this way? Does it mean that after solving the continuous learning problem, DeepSeek will subsequently also do general intelligence? I consult you on these two questions.”

The technical question is actually a bit... [hard] to explain—its difficulty lies in that we currently still haven’t found a method that really works. The whole world still hasn’t found a good method—everyone is groping. So right now it’s still at the groping stage—that is, we don’t know who can grope to the next method to solve this problem.

Right now it’s still at the exploration stage. We have many ideas, many ideas that currently look promising, but none have been made to work yet. Right, that’s the first one.

The second is—right now internally we relatively value this narrative: training our next-version model, we hope it can help our own development. It can improve DeepSeek’s efficiency—our model first and foremost improves DeepSeek’s own work efficiency, letting it provide more help when we develop the next-version model.

Or put simply, the model we make—the first goal isn’t for everyone to find it useful, but for us ourselves to find it useful. First it’s useful for ourselves. After it’s useful for ourselves, when I develop the next-version model I’ll be faster.

Many people internally think this way: first it should be useful for ourselves, first it’s for us ourselves to use. Then this is the fastest method to realize AGI. When it’s useful for ourselves, that means others might find it useful too, but first we have to ensure we ourselves find it useful.

This narrative is a bit odd, but indeed many people think this way. Rather than users finding it useful, I hope it helps ourselves more, so we can realize AGI, will be much faster. So the logic of this narrative is: to help us realize AGI.

But first it’s to help us realize it. Realizing AGI needs this help. Right now it’s very certain—we indeed need AI to help us realize AGI. Although it doesn’t yet work autonomously, it’s still just paired with humans, but it’s already very useful.

The second question—just now it was mentioned, first solve the continuous learning problem, then enter general intelligence. Is this an expectation of yours for what follows? I want to understand what the technical root behind this is. Why must continuous learning be solved first, then enter general intelligence? Your understanding of this subsequent part.

Because solving the continuous learning problem can greatly accelerate our R&D progress. If I first solve the continuous learning problem, then the general intelligence problem is no big deal. I’d have AI’s assistance, and if AI can learn continuously, its capabilities should be very strong.

The current Agent’s capabilities are limited because it can’t learn continuously, it can’t effectively learn continuously. If continuous learning could be done first, then AI’s capabilities are very strong—it can greatly improve the efficiency of our own research.

If continuous learning is made first, general intelligence might become very easy—using it to do it becomes very easy. So I say this is a result we relatively hope to see—we’re relatively effort-saving, we’re relaxed. Otherwise, if you were to manually do general intelligence now, it’s relatively tiring, relatively bitter, a data-intensive, manpower-intensive matter, and cost-effectiveness isn’t high either.

Thanks for sharing.

A small question—the online questions, take a look at the chat group. “How much longer until AGI? Can domestic hardware catch up in this time?”

In the Zoom meeting’s chat window.

Okay, I saw this.

Huawei 950—right now Huawei gives us 16,000 cards, this should be publicly stateable. It should be an order of magnitude less than internet giants. Huawei can only give us this much, because this price isn’t cheap either.

Internet giants’ pursuit is bigger—for internet giants, they need it more. For us, we can buy some non-compliant cards. So our purpose in buying Huawei 950 is still hoping to help Huawei build this ecosystem well.

16,000 Huawei 950 cards only equal 4,000 B-series cards. So it’s not a very large quantity, the significance isn’t very big. Not enough to train a next-generation model—it’s only enough to train our current generation model, not enough for the next generation. But it can let Huawei do this well first—that’s about Huawei 950.

Then, how much longer until AGI? Can domestic hardware catch up in this time?

I think on this AI endeavor, on this AI matter, domestically in one or two years we should be able to reach roughly the same as abroad, or maybe this year we can achieve substituting for foreign models. On this AI matter, with the current approach, current paradigm, it’s not a very hard thing, so this year we should be able to achieve it. But it’s not yet AGI.

[03:05:48]

At least I feel it needs to be able to learn continuously.

Can domestic hardware catch up in this time? I think domestic hardware might need a few years. Domestically we first need to solve the ecosystem problem, because ecosystem is a confidence problem. Solve the ecosystem problem, then solve the production capacity problem—I think it should be able to be gradually solved.

I don’t quite believe that five years from now, we’ll still be stuck on the production capacity problem. Right now we’re definitely stuck on the production capacity problem—this year, next year, the year after, I think we might still be stuck on the production capacity problem, but five years later, I think maybe not necessarily—I’m still relatively optimistic.

Then the second question is thinking about future organizational structure, planning the scale of personnel. First, our previous organizational structure was very decentralized, because there was no organizational structure. But after our people expand further, these definitely need some changes made.

Right now I can only say there will need to be many changes made here, but right now it’s hard to express it all at once. Ultimately there should still be different departments—some departments we need to build a relatively rigorous hierarchical structure for. Other departments might still maintain a relatively loose, relatively flat structure.

As personnel increase, we’ll make this adjustment. It should be that we have to make this adjustment right away, because I’m already making this adjustment. If this adjustment weren’t made, many things couldn’t be pushed forward. There indeed are many departments that should have organizational structure.

Then everyone still has the question—CV is prior to which version, right? I think right now, we released this GCV4 version online—it’s still relatively rough, and in terms of capabilities there’s still a lot that needs time.

Generally, for me, a relatively comfortable release cadence is roughly releasing one version every two or three months. The last release was maybe late April, so the next release might be late June—roughly like this. If there are no surprises, each version should still be better than the last.

At the 50B-active scale, I feel ultimately we won’t have too much difference from the current wave of open source. In inference speed and effect, I feel there might not be too much difference.

But compared to their large-size model—their one unreleased model—the gap should still be relatively large. That gap should be that our active parameters can’t achieve it—that definitely has to be a larger-size model, maybe say 150B.

So 150B—I think based on our current training progress, this year, optimistically by year-end we can start training, at least next year April... the gap is still relatively large. Right, this is the gap with OCE.

“Hello, I actually have a question—you often mention this AGI, that its realization process is a gradual process, rather than there being a mutation. So can I understand this as a process with no critical point?”

It has no critical point, but it’s nonlinear. We currently relatively believe a narrative that AI can accelerate AI research, AI can accelerate AI research. That is, it’s not linear, because you can use AI to accelerate your own research, so it might be nonlinear later on.

Understood. So currently your—I understand the earlier conclusion might be that continuing to scale language models is enough, is sufficient, to reach this state.

I can only say language model scaling—I currently don’t see a ceiling. Our current intelligence level, or the intelligence level reaching the US, neither has seen a ceiling.

Understood. Because I’m very curious—you said, for the US, this 800B-active model, they can train it but they also can’t afford to use it, so they can only train it out—it’s also hard to bring out for everyone to use, because it’s indeed a bit expensive.

What I was actually curious about earlier is—humans actually having language ability is only a matter of the last hundred thousand years, and before that they maybe evolved for 3.7 billion years. But on this matter of training AI, maybe it’s possible—you say that order can be reversed—but ultimately it might still enter into so-called, not necessarily called world models, still entering into physical models or the embodied part, right? That is, after this ceiling.

Right, I think embodiment definitely still has to be entered—ultimately embodiment. So for our company, naturally, the endpoint might all be embodiment. Because for a normal person, their needs aren’t computers, right? Because normal people—their eating, drinking, entertainment, clothing, food, housing, transportation—they don’t need computers.

What they need is—so they still need embodied intelligence to solve concrete human-labor needs. If the goal is to relieve human-labor needs, then embodiment I think is unavoidable.

Understood. So speaking in stages, suppose reaching something like—not necessarily a critical point—that is, can self-evolve, can self-evolve relatively well, or approach that... the rising to that time point, I’m very curious what state of AI you’d hope lands first is...

Might be different from now. We hope it can—that is, directly, suppose there’s no embodiment, then our definition of AGI, or what we hope AGI can do—it can help me iterate the next-version model, help me iterate the next-version model.

Then after there’s embodiment, what we hope it does is likewise—let it iterate the next-version embodiment, let it make the next-version robot.

I’m still very curious about one point—because I read previous DeepSeek interviews and such, it should be that in some important direction choices and research choices, taste and intuition are very important, rather than simple engineering optimization. So if AI can self-evolve later, are these things—taste, taste, intuition—still important, or what will be important?

AI currently doesn’t lack taste and intuition—what it lacks is continuous learning ability. AI’s taste and intuition are no problem. If you have it write an article, its taste and intuition—I think there’s no problem.

There are still several questions earlier—let me look at those questions. I saw a few questions discussed on screen, but I can’t see them now on my end.

“Mr. Liang, I left a question on my screen, let me read it to you again. Actually I’d like to consult—continuous learning, as you also mentioned, many researchers also mention it’s a still-unsolved research problem. Then the coding agent, especially catching up to MILES, that is...”

[03:17:47]

“...Scaling to this Office level, MIS level is a relatively definite goal. For a still-unsolved research goal and a relatively definite scaling goal, how do you think research resources should be allocated, especially the talent resources of researchers, to achieve the best balance and effect?”

Model Office is a relatively definite goal, but model MIS—I think it’s not yet certain to say it’s definite, can only say it’s a goal. Model Office, I think, should be relatively definite.

CoT doesn’t take up resources. Doing this kind of free-form research doesn’t consume cards, needs only very few cards—what it needs is ideas; it also doesn’t consume talent resources, because it doesn’t need someone constantly doing it. It’s not a project—rather it needs many people all thinking about this problem.

So there’s no need to allocate any resources to it, because it doesn’t need resources. To train models, to make models, release models, do model-efficiency experiments—that needs resources. As I just said, the resource consumption on people and cards is both low.

So we call this “drawing lottery tickets.” The threshold is very low—anyone can go draw, but who can draw out something—this maybe I also don’t know whether it depends on talent or what.

So there’s no need for us to allocate resources here. It’s just that where we differ from other companies is that we’ll spend time discussing this problem, will think about this problem, and then treat it as an important matter.

In the company, it’s an important problem, a problem we’ll spend time thinking about, but it doesn’t need much resource to do.

Then below I’ll look at one more question: large models’ hallucination problem relatively affects user experience. The hallucination problem also has a method that can solve it, but this is a long proposition. The hallucination problem can be considered something solvable through better post-training—it’s a solvable, improvable problem.

It’s just that everyone hasn’t put much effort into it. Or rather, for me, hallucination is a problem, but we probably attribute it to a product problem. We’ll solve it, but it’s not a key problem.

Earlier there’s also a data-labeling problem. Our data annotation—this relates to our capital investment. With our capital-investment structure, we can’t support the cost of that much high-quality data annotation, because the cost is very high.

US data-annotation cost and China data-annotation cost don’t have much difference. Labeling data in China doesn’t have a cost advantage—especially on labeling high-end data there’s no cost advantage—which makes it very hard for us to invest in labeling data like the US. This path in China is very hard, because labeling data is simply too expensive—whether we outsource labeling or label ourselves, both are very tough.

So right now it’s basically walking on two legs. It’s not that we completely can’t label—rather it’s that labeling data has some low-cost, some high-cost. We label the low-cost ones first.

So you can also consider—right now half the people in our company are labeling data. Half of the core researchers, the most important people, half are labeling data. We just concentrate on labeling data. Solving AI at this current stage relies on labeling data. You just need to look—it’s about data.

“Mr. Liang, thank you. You spoke especially—we feel it very much, very good. Thank you. I’ll consult a few questions.”

“First question—you just said Chinese models are definitely stronger than US models in efficiency. You also mentioned some other aspects where in the future we might also be stronger than the US. Which aspects do you feel we’ll be stronger than the US in intelligence or other aspects?”

I think in many experience aspects, it’s possible we can do better than the US. That is, not to speak of our own experience—we feel our own product experience is pretty good—I think in user experience we won’t necessarily be worse than the US.

In products, in product capability we won’t necessarily be worse than the US. Cost should also be lower than the US, so it’s possible China will still have competitiveness.

Other aspects—if you ask whether there are structural advantages, I think maybe there aren’t. But in cost and product, these two aspects, I think there indeed are certain structural advantages.

Cost is easy to understand—it’s because they don’t need to do it, so they don’t develop this capability. They definitely don’t value this thing as much as we do. We can treat it as a very important matter, but for them, this is unimportant.

Products too—natively many companies’ product capabilities are still okay. So I think these two aspects might have structural advantages.

Okay. Second question—I consult you—you just mentioned post-training, our investment relatively high cost, like Anthropic and OpenAI both invest huge amounts. After this round of financing, do you feel we’ll increase investment in post-training?

The gap is mainly on high-quality data annotation, then mainly in AI research. We’ll definitely increase investment, but like high-quality data annotation, typically that’s not capital investment.

The bottleneck of high-quality data annotation, I think, is time—that is, needing time. Because for OpenAI, for abroad, for Anthropic, they’re all earlier, and have more capital, more cards too.

Under this situation, domestically we can consider it as having just started in the last half year, so in time, I think more time is needed. This has little relation to capital investment, because even without more capital investment, the original capital is enough for it to expand at the fastest speed.

But this speed has a ceiling—the bottleneck isn’t that I can immediately have more people, it’s not stuck on money, nor stuck on cards. But it’s indeed in a rapid-expansion process.

So we feel within a year, the high-quality data problem done relatively well—I think domestically it should be expectable. I think the outlook might not be that cold, but it indeed needs time.

Thank you. Then the third question—we’ve seen Anthropic use their own model to make their own products, launching many vertical finance, legal...

[03:29:17]

“...even in the future wanting to move toward the medical direction. Do you feel that at some stage we’ll also consider this kind of vertical application?”

I haven’t yet thought clearly about what our domestic business model will be in the future, or what the smoothest path is—we haven’t reached that stage. Domestic and foreign situations aren’t necessarily the same—what it’ll be like domestically at that time, I think is relatively hard to judge right now.

Domestically, looking at the current situation, I think the most reasonable approach should be to go all-out on general Agent, and other Agents’ priority should be lower, including finance, doctor and such Agents. Do Coding first, because Coding Agent can accomplish a lot, and there are many vertical Agents. At the current stage, what we feel is most important should still be Coding Agent.

Explained very clearly, thank you. There’s one more question we’d like to consult you on. Actually we do DeepSeek, and we also admire you greatly—you’ve always done DeepSeek in a very pure scientific-research manner.

But now this industry has indeed also walked onto the capital markets, walked onto the capitalization path. You’re also a very responsible person—whether to partners or investors, you’re all very responsible. So, between the direction of pure scientific research, purely doing AGI, and the capital markets, the balance—you’ll definitely still go to the capital markets in the future, definitely still have public-shares channels—how do you feel about balancing this going forward? How do you consider this?

I currently feel it should be achievable—that is, both. Suppose this year I can have several hundred million dollars of B-end revenue, plus we have C-end users, then this itself already has a certain commercial foundation. With next year’s B-end revenue, if this demand can grow further, the company isn’t far from net profit—it might already be net profit.

It might already not be a pure cash-burning stage, so I feel the actions we can take, can operate afterward should still be relatively large. Or rather, in the worst case, selling API might already be able to support a public company. That is, if there’s no new technical progress later, if our technology is frozen here, then ultimately we’d go all-out selling API, do these services well—I think that’s enough too.

So I think there’s still confidence—it’s indeed not that hard. Because it’s indeed in a high-leverage place, and in a very fast-developing field, it might just not be that hard. I can only say we hope to have bigger dreams, but we also have a floor of performance we can bring out.

Thank you, well spoken. Questions are done, thank you.

“Thank you for sharing. Some questions mentioned earlier, I’d like to ask you again. Because I think DeepSeek’s biggest difference from other companies is that our organization is different from others, or our organizational form is different.”

“But the organizational form relates to our goal, and maybe also needs to consider the organization’s own boundaries and efficiency. I don’t know—from a macro perspective, does our organizational form have a good learning object? Historically maybe Bell Labs, or what kind of form might be relatively ideal? Or do we ourselves feel there isn’t an ideal one, and it more needs us to gradually explore?”

Maybe in a new era, we can only rely on ourselves to explore. Because our organizational form is definitely different from the several US companies, right? The three companies are also different from each other, but they at least explore from the angle of a commercial company.

I mainly want to ask again about this organization question.

First, we have no imitation object. Every step is us proceeding from the actual situation, seeking truth from facts, making decisions according to the actual situation, finding out how we should do it. So it’s a product of the times, or a reflection of the actual situation—it’s not a result of imitation.

That is, in this situation, the optimal solution I feel might just be this way, or I myself believe the path we chose ourselves is this way. Every step we’ve definitely thought through, definitely chosen—anyway the choice result is chosen this way. It’s not that because we saw someone choose this way, we chose this way—rather it’s because we analyzed the pros and cons and chose this way.

So in the future it might be the same—we haven’t imitated anyone. I think we’re still different from Bell Labs, because it explicitly didn’t need commercialization, because it was a... But we explicitly need commercialization. We ultimately still need to survive—we’re a company after all, the government won’t give me a single cent.

So we can have a very grand mission, but at bottom we’re a company, we need to consider how to survive. So B-end is definitely important for us, because maybe in the future we’ll need it to survive. It’s just that right now it’s unimportant, because right now it’s a cost line.

So I think this is still different—still different from Bell Labs. We’re essentially still a company. Historically there have also been many companies that have pursuits beyond profit, but you can’t say that because it has pursuits beyond profit, it’s not a company.

Many companies are great precisely because they have a pursuit beyond profit. That pursuit ultimately not only didn’t affect its commercialization, but rather let it commercialize better. We’re essentially still a company—it’s just that in considering which money to earn, when to earn money, how much to earn, what to earn by, we have trade-offs.

“Mr. Liang, I have two small questions to quickly consult you on. One is—you actually mentioned MILOS earlier, that it might not be a very definite goal, but you’ll definitely work toward this direction. Then you also mentioned active parameters might for example...”

[03:41:02]

“...the next generation might be around 150 to 250B. In this situation, do you feel 150 to 250B benchmarks against O4.7, or might benchmark against something else? This is the first question.”

“Second question—you also mentioned earlier that we now use some compilation languages other than CUDA on the whole inference side. I understand originally we were based on NVIDIA’s ecosystem, maybe using PTX and such more. Now using more of things like the TileLang you just mentioned—will it substantially reduce some of our efficiency on inference, or reduce efficiency short-term?”

“I don’t know how you’d view the efficiency loss brought by this change in compilation language, or whether long-term it’s actually a supplementable state, improving efficiency?”

It improves efficiency, substantially improves efficiency.

“OK, so there’s no negative impact at all?”

Right, it substantially improves efficiency. So this is an opportunity. It’s equivalent to—previously you couldn’t leave CUDA’s ecosystem, now we can abandon its ecosystem and use a simpler method, just use TileLang. It’s a high-level language, writing those programs is also very fast, the code you need to write is very small now, I can rewrite it all over again.

Understood. So both of these are actually one—like the relatively big opportunity brought by AI you mentioned, not a shortcoming that maybe needs to be short-term made up for.

Right, it’s a big opportunity of technological development. It’s not AI’s opportunity—because we also have a project, we’re using AI to write TileLang.

Is that faster?

Right now all TileLang is human-written, but it’s already much faster than originally writing CUDA.

Understood. So even for the hardware-underlying execution efficiency, you feel there’s also no impact?

Losing 1% to 2%, I think is acceptable.

OK, understood, got it. Alright, thank you, very clear.

Does anyone else have any questions?

No questions, let’s wrap up here today.

Okay, thank you.

Thank you all very much for your time, thank you Mr. Liang, thank you.

Bye-bye.

But that is a story for another day. Today I’m talking about the upcoming Politburo meeting. By convention, the Politburo convenes in late July to evaluate the economy and set the agenda for the second half of the year. Of the Politburo’s regular meetings, the April, July, and December sessions are the ones that typically centre on the economy, and the July meeting, falling at the year’s midpoint, has long been the best window into where macro policy is headed in H2.

Two things make the meeting important. First, 2026 is the opening year of the 15th Five-Year Plan, so the mid-year tone-setting will be about not just this year’s growth target but also how the entire five-year plan gets off the ground. Second, the economy is pulling apart. In the first half, new growth drivers such as high-end manufacturing, the digital economy, and modern services accounted for over 40% of growth, with value-added in high-tech manufacturing up 13.3%. Meanwhile, retail sales grew just 1.3% year-on-year and fixed-asset investment fell 5.7%.

That means policymakers must give the new drivers room to grow without resorting to the kind of indiscriminate, flood-like stimulus that would derail the structural transition they want, while also not standing by as the old economy drags the overall GDP number down.

This is why the July Politburo meeting will be a window for reading second-half policy. And its content is not unpredictable; some direction can already be seen from the Premier’s economic symposium and from statements at official press conferences.

In short, I do not expect a large short-term stimulus package at the end of the month, but there may be structural policies on fiscal support, employment, and services consumption.

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1. The official read on the economy remains positive

To judge how strong policy will be, first look at how policymakers define the current situation. Judging from recent statements, the leadership’s view of overall growth and the full-year target remains upbeat, and their attention regarding Q2 leans more toward cultivating new growth drivers (培育新动能), which is basically tech sector growth and industrial upgrading. At the economic symposium on July 13, Premier Li Qiang’s judgment was

We must grasp the economic situation as a whole, and in particular see that China’s economy is fully shifting onto a track of high-quality development, and that the underlying support for long-term improvement is more solid.
要注重从整体上把握经济形势，特别是要看到我国经济正全面转入高质量发展轨道，长期向好的内在支撑更加坚实。

He also stressed “maintaining strategic resolve on high-quality development” (保持高质量发展战略定力). From this wording, I see no trace of a large short-term stimulus.

Similarly, at the press conference on first-half data, the National Bureau of Statistics used four characters to describe the economy: 稳 (stable), 韧 (resilient), 新 (new), 优 (improving). “稳” refers to GDP growth staying within the 4.5%–5% range. “韧” is language often seen in last year’s Politburo statements during the US-China trade war, stressing resilience against external shocks. “新” refers to emerging industries, represented by AI and electric vehicles. “优” refers to the share of manufacturing and the growth of corporate profits. Responding to the 4.7% first-half GDP growth, the NBS said

For an economy of China’s enormous scale, 4.7% growth is hard-won. Growth did slow in the second quarter, but the fundamentals — steady operation, and a shift toward the new and the better — remain unchanged.

对于我国这样超大规模的经济体，实现4.7%的增长难能可贵。尽管二季度增速有所回落，但是经济稳定运行、向新向优的基本面并没有变化。

As for the 4.3% growth in Q2, the statistics authorities prefer to attribute it to certain industries being affected by short-term and external factors, while stressing that monthly trends still show positive signs. This explanation means policymakers, for now, do not see the Q2 slowdown as a trend decline, so the perceived need to launch a large stimulus immediately is limited. Overall, although many academics and advisers believe the economy is cooling and have raised the problem of divergence across sectors (I recommend Li Daokui’s article, translated by Yuzhe He, and Liu Shijin’s article, which I introduced last week), from policymakers’ perspective, positive factors still dominate.

2. The trade-in policy (以旧换新) is hitting diminishing returns

Until now, the main policy tool for boosting consumption has been goods consumption, centered on the trade-in policy (以旧换新). But this policy faces diminishing marginal returns. In raw terms, sales of trade-in-related goods exceeded 2.6 trillion yuan in 2025, adding more than 1 percentage point to retail sales growth.

However, Li Xunlei, an economist and policy advisor, pointed out in a related study that the boost was strong in the policy’s first year but weakened in the second, likely because consumers who had already replaced their durable goods would not replace them again soon. For high-priced items like cars, subsidy recipients may also largely overlap with people who already planned to buy, meaning part of the subsidy covered existing demand rather than creating new consumption.

As a result, this year’s pro-consumption policy is gradually shifting from durable-goods subsidies and goods consumption toward services consumption and toward a focus on the supply side.

Premier’s symposium remarks reaffirmed that from another angle,

Implement well the policies for expanding and upgrading the services sector, enlarge the supply of quality services, and speed up the cultivation of new growth points in consumption.

抓好服务业扩能提质政策落实，扩大优质服务供给，加快培育消费新增长点。

3. New language from the PBoC, but no easing signal

What I find worth noting is that the central bank’s Q2 regular meeting, when analysing domestic and international conditions, mentioned two kinds of divergence: “divergence in the performance of major economies” (主要经济体经济表现分化) and “structural divergence” (结构分化). The PBoC didn’t specify what it meant by the latter. The most likely reading is a K-shaped split between emerging tech and traditional industry, as well as production versus demand.

Judging from the policy advice circulating among government advisers, and from documents like the 15th Five-Year Plan for the Employment-First Strategy (实施就业优先战略”十五五”规划), Beijing’s concern currently centres on job displacement. The government’s response, at this stage, centres on assessment, retraining for job transitions, and the development of new occupations, rather than legislating to slow the displacement itself. Given US-China competition in AI and the leadership’s recent emphasis on tech breakthroughs in the new industrial revolution, I don’t see China pulling back on AI investment or passing laws to halt automation. So if the July Politburo does take up structural divergence, short-term policy will more likely land on stabilising employment and vocational training.

Monetary policy keeps the earlier “moderately loose” (适度宽松) framing and continues to stress counter-cyclical and cross-cyclical adjustment, but there was no new language clearly signalling another round of RRR cuts or interest rate cuts (降准降息).

Some other things

Just as I finished writing this piece, the Ministry of Finance released the fiscal data for the first half of the year. There are two interesting numbers worth paying attention to.

The first is stamp duty on securities trading: 154.9 billion yuan, up 97.3% year-on-year. Since this tax is levied solely on stock turnover, a near-doubling means trading activity in H1 roughly doubled as well, a clear sign that households’ risk appetite (mine included) has warmed up considerably.

The second is revenue from the sale of state land-use rights, 977.8 billion yuan, down 31.5% year-on-year. That’s less than one trillion for the half-year, for a revenue stream that, at its peak, brought in 8.7 trillion yuan annually. The tightening of local governments’ purse strings shows up on the spending side too: expenditure under government-managed funds fell 16.4% year-on-year. Special-purpose bonds and special treasury bonds have plugged part of the gap, but the contraction in local government investment is unmistakable.

For policy, the widening decline in land sales arguably leaves room for the Politburo to strengthen its language on property. That said, I’ve also heard an interesting counter-reading, which is the retreat of land finance (土地财政) may not necessarily be in need of rescue, but actually a catalyst for the next round of China’s fiscal transformation; they believe it’s a shift from locally driven land finance to centrally driven equity finance (股权财政). And since land revenue sits in local hands while the capital market answers to Beijing, this switch would also mean a reshuffling of fiscal power between the centre and the localities.

Britain, the dominant power of the steam age, was eventually surpassed by the United States during the Second Industrial Revolution. The United States’ victory in the Cold War-era technological competition likewise reflected its dominance in information technology. Under such a background, China’s approach to the AI-driven industrial revolution is shaped by a strong sense of urgency, perhaps even FOMO.

China has emphasized science and technology as productive forces since the Deng Xiaoping era, especially through the slogan that “science and technology are the primary productive forces.”科技是第一生产力, but this was largely the mindset of a latecomer trying to catch up after falling behind. In the 1990s, the internet revolution was still led mainly by the United States in terms of technology. China got on board and built globally competitive companies, but much of its innovation remained concentrated at the application layer.

AI may be different. China’s technological gap with the United States has narrowed to roughly six months. (Although given the speed of AI development, six months can still be a substantial distance) More importantly, the technological trajectory has not yet been fully blocked. China still sees an opportunity to compete, and potentially to catch up.

This sense of urgency is also evident in Xi’s speeches at the National Science and Technology Awards Conference, the Academicians’ Conference of the Chinese Academy of Sciences and the Chinese Academy of Engineering, and the 11th National Congress of the China Association for Science and Technology. (yes, three meetings in one) Throughout that speech, he focused on the bottlenecks and weaknesses in China’s scientific research system. One line stands out in particular:

The situation urges us forward and compels us to act. We must seize the historic opportunity, meet the challenges of the times, and accelerate the achievement of high-level scientific and technological self-reliance and self-strengthening.

形势催人，也逼人。我们必须抓住历史机遇，迎接时代挑战，加快推进高水平科技自立自强，

My reading is that this was a direct message to experts across different fields: the window of opportunity will not remain open indefinitely.

Returning to the WAIC speech itself, its tone was relatively restrained. Its main ideas can be summarized in four points.

First, open source, openness, and cooperation. Xi encouraged open-source development and international cooperation, while arguing that AI is moving from the “digital world” into the “physical world.” This both reflects China’s comparative advantage in open-source foundation models and helps offset barriers created by closed-source ones. It also suggests that policy attention may increasingly shift toward embodied AI, intelligent manufacturing, and other real-economy applications.

Second, safety and controllability. The statement that AI must “always remain under human control” is broadly consistent with international consensus. (unless someone really wants a Ghost in the Shell-style society). But the second part of the argument is more politically pointed: China opposes the “overgeneralization” of national security concepts in AI and rejects the idea that one country’s security should be placed above others'. This is clearly an implicit criticism of U.S.-led technology restrictions and export controls.

Third, the relatively softer language of “mutual learning among civilizations.” In a bit of substance, however, this is also about who gets to shape the values embedded in AI systems. Whether AI serves a particular set of values defined by a small group of countries, or different societies should have a role in defining AI governance and norms.

Fourth, improving global governance. Xi emphasized AI capacity-building for countries in the Global South, rather than allowing a small circle of technologically advanced countries, like those involved in the G7 Hiroshima AI Process, to set the rules for everyone else.

I know many will say that China is just saying fancy words. But does anyone really expect China to frame its position the same way as the US does? Just putting its own interests above all others?

World Artificial Intelligence Cooperation Organization(WAICO)

The institutional development that took place the day before the conference is also significant. Representatives from 29 countries signed the Agreement on the Establishment of the World Artificial Intelligence Cooperation Organization in Shanghai, formally creating an intergovernmental organization: the World Artificial Intelligence Cooperation Organization, or WAICO. Its headquarters will be located in Shanghai.

The founding members are mainly countries from the Global South, with no G7 members, core EU countries, or Five Eyes members involved. This suggests the emergence of a parallel governance framework outside the existing Western-led system—one promoted by China and centered on developing countries. On this point, I also want to recommend reading the excellent piece by

The Newsletter by George Chen

AI Diplomacy Divides the World: U.S. Rallies Allies with Pax Silica, China Launches WAICO for the Global South

“The Chinese often say, ‘A single string cannot make music, and a lone tree does not make a forest.’ The development of artificial intelligence should not be a solo performance by one country, but rather a sympho…

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2 months ago · 5 likes · George Chen

WAICO’s core mission appears to include four main areas:

1. Building a cross-border AI supply-and-demand platform, allowing countries with AI capabilities to connect directly with countries that need technology, infrastructure, or applications.

2. Carrying out capacity-building and inclusive-development programs to narrow the global AI divide.

3. Promoting coordinated governance on AI safety, cross-border data flows, and ethics, while jointly developing internationally applicable technical standards for large language models, humanoid robots, and related technologies.

4. Supporting open source and the sharing of scientific resources in order to lower the barriers to AI research and development for smaller and less-developed countries.

For the Global South, the most immediate problem is often not AI safety, but the lack of basic capacity to develop and deploy AI in the first place. Without such capacity, these countries risk falling even further behind in the next technological revolution.

Institutionally, WAICO adopts a structure consisting of a General Assembly of all members, a council, and a permanent secretariat. It explicitly rejects a single-country veto, highlighting a principle of “development first” rather than governance focused solely on regulation and risk control.

WAICO could give China greater influence over technical standards and create a stronger ecosystem pull for its AI industry. At the same time, it will need to address questions of funding, long-term sustainability, and the balance between promoting development and managing risks.

Overall, the agreement suggests that global AI governance is entering a period of dual-track development. The U.S. and its partners emphasize values alignment, security, and export controls; China emphasizes development, capacity-building, open cooperation, and the broader diffusion of technology.

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Below are Xi’s full remarks :

Working Together to Build a Fair and Equitable Global Governance System for Artificial Intelligence

Keynote Address at the Opening Ceremony of the 2026 World Artificial Intelligence Conference and High-Level Meeting on Global AI Governance

(July 17, 2026, Shanghai)

Xi Jinping, President of the People’s Republic of China

Distinguished Colleagues and Guests,
Ladies and Gentlemen, Friends:

Seventy years ago, a group of young scholars first put forward the concept of artificial intelligence at the Dartmouth Conference in New Hampshire, United States. Over the past seven decades, AI scientists and developers around the world have continued to explore the unknown, press forward through twists and turns, and achieve breakthroughs through perseverance. Seventy years on, facing a new wave of vigorous AI development, we have gathered here on the banks of the Huangpu River to discuss together how to promote the development of global AI in a direction that is oriented toward good and benefits humanity—a gathering of great significance. On behalf of the Chinese government and the Chinese people, I extend a warm welcome to all of you.

Looking back at history, the invention of the steam engine ushered in industrial civilization, the spread of electricity illuminated modern society, and the birth of the Internet connected the entire world. Every technological revolution has profoundly reshaped the way humanity produces and lives, propelling great leaps in economic and social development.

Today, the world is undergoing accelerating changes unseen in a century, a new round of scientific and technological revolution and industrial transformation is achieving breakthroughs at a faster pace, and global AI innovation has entered a period of unprecedented dynamism. Intelligent technologies—featuring the intelligent connection of all things, human-machine collaboration, cross-domain integration, and co-creation and sharing—are releasing enormous energy in combination, presenting both tremendous opportunities and governance challenges. Humanity must now confront the questions of our times: When machines begin to think, how should humans coexist with them? When algorithms take part in decision-making, how can safety be ensured? When technology challenges ethics, how can governance keep pace? When the divide keeps widening, how can inclusive benefits be achieved? These questions require the international community to reflect deeply and answer together.

China believes that all countries should uphold a people-centered vision and the principle of AI for good, making artificial intelligence an important driving force for promoting common prosperity and safeguarding common security, and work together to build a fair and equitable global AI governance system. To this end, I wish to propose four points.

First, upholding openness and win-win cooperation to drive innovation and development. Artificial intelligence is a new engine of world economic growth and an accelerator for the transition from old to new drivers of growth, and it is moving from the “digital world” into the “physical world.” We should seize this rare historic opportunity, encourage open-source practices and openness, cooperation, and sharing, and comprehensively promote AI-related scientific and technological innovation, industrial development, and application scenarios. We should work in concert to advance the transformation and upgrading of traditional industries, foster and strengthen emerging industries, and make forward-looking plans for future industries, so that AI can empower every industry and sector.

Second, strengthening risk awareness to ensure safety and controllability. Artificial intelligence should become a trustworthy tool for humanity. We must attach great importance to the various inherent and derivative risks arising from AI, and promote the development of systems for laws and regulations, technical monitoring, risk early warning, and emergency response, so as to build a firm foundation of safety, guard against misuse and malicious use, and ensure that AI always remains under human control. At the same time, we should jointly oppose practices in the AI field that overstretch the concept of national security or place one’s own security above the security of other countries.

Third, encouraging inclusiveness to promote mutual learning among civilizations. The development and application of AI should not erode or damage the diversity of world civilizations or the cultural distinctiveness of individual countries. We should shape the values of AI with the common values of humanity, make good use of AI technology to enhance understanding and tolerance among different civilizations, promote exchanges and mutual learning among civilizations, and carefully cultivate a flourishing garden of civilizations in which each appreciates its own beauty and all beauty is shared.

Fourth, advocating solidarity and cooperation to improve global governance. Artificial intelligence is the crystallization of the wisdom of all humanity and a precious asset shared by all. We should practice true multilateralism, give full play to the important role of the United Nations, and strengthen alignment and coordination on AI development strategies, governance rules, and technical standards, so as to form at an early date a global governance framework based on broad consensus and enable this frontier technology to better benefit human society. We should carry out extensive international cooperation to help countries of the Global South strengthen capacity building, bridge the digital and intelligence divide, promote sustainable development, and avoid creating new historical injustices in the field of AI.

Ladies and Gentlemen, Friends!

This year marks the beginning of China’s 15th Five-Year Plan. The 15th Five-Year Plan draws the blueprint for China’s economic and social development over the next five years, and also offers a list of opportunities to the international community. In recent years, China has actively embraced AI development, adhering to the combination of an effective market and a capable government, strengthening AI scientific and technological innovation, and vigorously advancing the “AI Plus” initiative, cultivating a healthy ecosystem in which all kinds of actors coexist and prosper together. The scale of the core industries of the intelligent economy has already exceeded one trillion RMB. All manner of intelligent devices have entered millions of households, delivering tangible benefits to people’s lives, and “Intelligent Manufacturing in China” has become another shining hallmark of Chinese modernization.

At the same time, China has always placed equal emphasis on development and security, grasping the trends and laws of AI development, and continuously improving relevant laws and regulations, policies and institutions, application norms, and ethical guidelines, to ensure that AI is safe, reliable, and controllable—so that this thousand-li steed of artificial intelligence can gallop both fast and steady.

As a responsible major country, China has always been committed to serving as a provider of international public goods in the field of AI. Since I put forward the Global AI Governance Initiative, China has promoted the adoption by consensus of the UN General Assembly resolution on international cooperation for AI capacity building, released the AI Capacity-Building Action Plan for Good and for All and the “AI Plus” International Cooperation Initiative, and proposed the establishment of the World AI Cooperation Organization—contributing a steady stream of Chinese solutions.

As the Chinese often say, a single string cannot make music, and a single tree cannot make a forest. The development of AI should not be a solo performed by any one country, but a symphony of global cooperation. Through the joint efforts of all parties, the World AI Cooperation Organization has come into being in Shanghai—a vision conceived a year ago has now been transformed into a tangible outcome. This is a major step by China in responding to the call of the Global South and rallying the international community to actively advance AI development and governance, and it will stand as an important milestone in the history of AI development.

To further support global AI development and advance global AI capacity building, I hereby announce that over the next five years, China will provide 5,000 places in specialized AI training programs for developing countries; build international AI application cooperation centers for ASEAN, the Arab League, the African Union, CELAC, the Shanghai Cooperation Organization, and the BRICS countries; and promote the deployment of “Mazu,” the intelligent meteorological early-warning solution, in 30 countries—watching over the lights of countless homes and safeguarding calm across the four seas.

Ladies and Gentlemen, Friends!

As the ancients said, “The wise adapt to the times; the knowledgeable act according to circumstances.” The more rapidly AI technology advances, the more firmly we must anchor its direction toward good and the benefit of humanity, the more precisely we must calibrate the scale of regulation and governance, and the more promptly we must improve measures to prevent loss of control. We must always guide the development of AI with human wisdom and international consensus, so that it truly becomes a powerful positive force for enhancing the well-being of all humanity and advancing the progress of human civilization.

China stands ready, with a more open posture, more practical actions, and a more far-sighted vision, to work with all parties to grasp and address the opportunities and challenges of AI development, and to join hands in creating an even brighter future for human society!

Thank you.

To my mind, however, what made the meeting interesting was the guest list. Alongside the usual macroeconomists sat Yu Donglai, a private entrepreneur who runs a department store and retail business. Unlike so many of his peers, who seem to have faithfully inherited the “Protestant ethic” of Max Weber’s telling and treat moneymaking as a calling in itself (and I’m not planning to point out a name), Yu pays his employees wages far above the local average and shares the company’s profits with the entire workforce. At a moment when weak household consumption has become the economy’s problem number one, giving such a businessman a seat at the table is a policy signal in itself.

Liu Shijin has been making a similar argument from a different angle. A former Deputy Director of the Development Research Center of the State Council (DRC), a top policy research and advisory body serving China’s central government, Liu is long regarded as one of the country’s most influential economists. In recent years, he has emerged as a prominent voice urging Beijing to shift its policy focus toward boosting household consumption, narrowing income gaps, and raising rural residents' pensions.

Liu believes that under a “tournament-style” competition model, local governments competed intensely around GDP targets. Combined with the export-oriented economies of coastal provinces, this sustained rapid investment growth over a long period under the earlier conditions of a shortage economy marked by insufficient supply. The structure of high savings and low consumption also provided, in objective terms, a funding source for large-scale investment in a catch-up economy, while during the period of medium to high growth, the rapid expansion of real estate and infrastructure masked the structural deviation of a persistently low consumption share of GDP.

As real estate slumped and local infrastructure spending decelerated, the long-hidden consumption shortfall was laid bare. With excessive productive investment driving capacity utilization and returns on investment steadily lower, the mechanisms embedded in this model, including excessive income disparities among households and low dividend payouts by enterprises, have suppressed society’s overall capacity to consume. The contraction of end demand is now, in turn, eroding the foundations of investment growth, and the old development model has become unsustainable.

On policy, Liu argues that the breakthrough should focus on reforming the savings and consumption formation mechanism to convert excess savings into effective consumption, and he proposes three quantitative targets. First, within roughly three years, the economy-wide savings rate should be brought below 40% and the corporate savings rate below 20%. The direct route is to raise corporate dividend payout ratios, including transferring around RMB 20 trillion of listed state capital, out of a total A-share market value of roughly RMB 120 trillion, into the social security fund, while also encouraging private enterprises to increase dividends. Second, tax reform focused on personal income and property taxes should be advanced steadily to bring the Gini coefficient gradually down to 0.4 or below, thereby raising society’s average propensity to consume and lowering the household savings rate. Third, the center of gravity of macroeconomic management and government functions should shift from the supply side to the consumption side, with more than half of macro stimulus spending devoted to building the social security system for low- and middle-income groups. Priorities include resolving the housing difficulties of migrant workers and other new urban residents, and markedly raising pension levels under the basic pension scheme for urban and rural residents, which covers 550 million people. In his view, this is a livelihood issue, but even more, it is an urgent requirement to restore investment and stabilize macroeconomic growth today.

Below is the English version I made with the help of AI:

Liu Shijin: Deepening Reform of the Savings–Consumption Formation Mechanism to Reverse the “Strong Supply, Weak Demand” Imbalance

The imbalance between strong supply and weak demand is a major challenge facing China’s efforts to stabilize growth at the current stage. The 2025 Central Economic Work Conference stated explicitly that the contradiction between strong domestic supply and weak demand is pronounced, and that insufficient effective demand is the salient sticking point in the current economy. This imbalance stems from a lopsided growth model underpinned by a series of institutional and structural factors. To reverse it as quickly as possible, attention and the point of breakthrough should be directed toward deepening reform of the savings–consumption formation mechanism, substantially lowering the savings rate, and correspondingly expanding end demand.

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I. Manifestations of “Strong Supply, Weak Demand” and Its Deeper Causes

“Strong supply, weak demand” refers to a set of seemingly contradictory phenomena frequently observed in reality—often described as a K-shaped pattern of development. On one hand, innovation is thriving, with major advances in artificial intelligence, robotics, and green technology; on the other, economic growth remains under sustained pressure, with nominal growth running below real growth. Exports have grown extraordinarily—the goods trade surplus reached a record of nearly USD 1.2 trillion in 2025—yet insufficient domestic demand continues to worsen: investment contracted for the full year of 2025, was down 4.1% year-on-year cumulatively in the first five months of 2026, and total retail sales of consumer goods fell 0.6% year-on-year in May. China’s manufacturing sector and industrial chains enjoy global competitive advantages, yet many industries suffer from severe overcapacity while the needs of certain groups go unmet.

This is not a short-term fluctuation. It stems from a series of institutional and structural factors: a GDP-oriented mechanism of competition among local governments; the dominance of state-owned enterprises—with a high share of state capital—in foundational sectors and strategic industries; a macro policy orientation that stabilizes growth chiefly by driving investment, especially infrastructure investment; and a manufacturing-centered, export-oriented economy. Together these have produced a lopsided growth model characterized by high savings, high investment, and high exports—one that prioritizes production over consumption.

The initial condition of reform and opening up was a shortage economy. During the long period of insufficient supply, this growth model was well suited to circumstances and indeed advantageous. Even as China’s economy shifted from high-speed to medium-speed growth, and from supply constraints to demand constraints, the model could keep running—displaying strong inertia and resilience—so long as room for investment remained. But its effective operation has a boundary: the point at which investment can no longer be pushed further and turns negative. That point has now been reached.

II. Insufficient End Demand as the Direct Cause of Persistently Weak Prices and Slowing Growth

The relationship between this imbalance and economic growth can be analyzed using a framework of the “height” and “breadth” of growth. Height refers to the expansion of the growth possibility frontier supported by productivity gains, driven by technological innovation, improved management, institutional reform, and opening up. Breadth refers to the extent to which different segments of society—say, divided into ten income groups—generate effective demand for existing productive capacity. Height determines the growth rate that is attainable; breadth determines the growth rate actually achieved.

Strong supply raises the height of growth, while weak demand means the breadth of growth has not expanded commensurately. Gains in height cannot substitute for expansion in breadth—indeed, they may create problems on the breadth dimension, as when artificial intelligence eliminates existing jobs and widens income disparities. This explains a common puzzle: why growth remains under heavy pressure even though innovation-driven development and new industries appear to be doing well.

Here it is necessary to introduce the concept of end demand. End demand refers to the portion of GDP that does not re-enter the next production process. It comprises all consumption plus non-productive—or consumption-oriented—investment, chiefly investment related to people’s livelihoods in real estate, infrastructure, and other services. Viewed from the natural flow of all economic activity, end demand constitutes final products in the true sense: the purposive portion of GDP devoted directly to meeting people’s aspirations for a better life. GDP minus end demand equals productive investment plus net exports—both of which are instrumental, existing to serve the growth of end demand.

For a long time, China’s consumption share of GDP has been roughly 20 percentage points below the international average—a structural deviation. But because real estate and infrastructure grew rapidly for an extended period, this deviation was effectively masked. After 2022, as real estate slumped sharply and infrastructure investment decelerated, the long-hidden structural shortfall in consumption was laid bare, becoming the choke point within end demand.

In recent years, the growth of end demand has slowed markedly and contracted in relative terms, dragging down the GDP deflator and pushing nominal growth below real growth. Combined with excessive investment—especially productive investment—this has driven capacity utilization down. When capacity utilization is too low, returns on investment are correspondingly poor, and investors become unwilling to invest more. This is the main reason for the current slide in investment.

Growth in industrial value added has held up reasonably well, driven mainly by exports and, more recently, by rising capital expenditure on artificial intelligence. But in the system of national accounts, net exports count as savings and correspondingly reduce domestic consumption. Strong exports are thus one cause of weak domestic consumption—a linkage that has not received the attention it deserves.

III. Making the Savings–Consumption Formation Mechanism the Focus and Point of Breakthrough

Behind “strong supply, weak demand” lies a national income structure of high savings and low consumption. By global standards, China’s savings rate is conspicuously high. Over the past decade or so it peaked above 50%, and though it has edged down in recent years, it remains above 42%. By contrast, the global average savings rate is roughly 25%. In terms of composition, China’s savings come mainly from the corporate and household sectors; government savings have gradually declined and have turned negative in recent years.

Take 2022 as an example. China’s flow-of-funds accounts show that GDP that year was roughly RMB 120 trillion, with total savings of RMB 55 trillion—a savings rate of 46% and a corresponding consumption rate of about 54%. Corporate savings amounted to RMB 27 trillion and household savings to RMB 27.6 trillion, roughly half each.

Corporate savings reached 22.5% of GDP—markedly high by international comparison. This is directly related to the low share of dividends in corporate capital returns. In 2022, only 10.2% of Chinese households’ property income came from corporate dividends, well below the global average of 55.7%. Historically, during the high-growth era, investment funding needs were enormous while external financing was scarce and costly, so firms leaned toward self-financing and retained more earnings. More importantly, state capital accounts for a large share of total corporate capital, and state-owned enterprises long paid little or nothing in dividends. The state capital operating budget system introduced in 2007 changed this somewhat. As SOE reform has deepened and the governance of state capital has improved, dividend payouts by state capital in listed companies have increased, but a large number of unlisted SOEs still pay little. With corporate income taking an outsized share of society’s total disposable income and being converted into corporate savings, the economy-wide corporate savings rate has ended up high. And corporate savings have only one use: investment.

Household savings are also elevated, but looking inside the household sector—ranking households by income from high to low—one finds that it is chiefly the massive savings of high-income groups that push up the overall household savings rate. China Merchants Bank’s 2024 annual report shows that its “Sunflower” clients (those with average daily assets of RMB 500,000 or more) accounted for just 2.49% of its retail customers yet held 81.90% of assets; compared with 2023, new assets from Sunflower clients made up 87.48% of all newly added assets. This indicates that a small number of high-net-worth clients hold the overwhelming majority of the bank’s savings assets, with concentration still rising. Data from other banks show similar patterns. Some argue that since China adds well over RMB 10 trillion in new savings each year, it would suffice simply to guide households to convert these savings into consumption. This view—focused on aggregates while ignoring structure, and blind to the direct link between high savings, low consumption, and excessive income disparities within the household sector—is deeply misleading both in theory and for policy.

IV. How to Advance Reform of the Savings–Consumption Formation Mechanism and Adjust Policy

Investment has now been contracting for more than a year, and in May this was compounded by negative growth in retail sales of consumer goods—something unseen since reform and opening up began, and which should command the highest attention. China’s economy once again stands at a critical turning point. The urgent task is to restore investment vitality and return investment to positive growth. The way to do so is to substantially lower the savings rate and correspondingly increase end demand. This differs from what some believe, and it is the key to understanding how China’s economy operates at the current stage.

National income divides into savings and consumption. If high savings do not come down, low consumption cannot go up—a simple, hard constraint. Only by lowering the savings rate and increasing end demand can capacity utilization be raised; and once utilization reaches a relatively high level, genuine demand for investment will emerge—precisely the “investment backed by demand and returns” that the central authorities have repeatedly emphasized. If instead the savings rate is not lowered, end demand is not increased (or is in effect reduced), and investment is forced up by the old methods, the supply–demand imbalance will only intensify, steering China’s economy in an altogether different direction.

The point of breakthrough for correcting the imbalance lies in reforming the savings–consumption formation mechanism and converting excess savings into effective consumption. Several priority areas of reform, with corresponding quantitative policy targets, can be proposed.

First, within a fairly short period—say three years—bring the economy-wide savings rate below 40% and the corporate savings rate below 20%, converting part of corporate savings into consumption and raising the economy-wide consumption rate above 60%. This would also be a concrete step toward implementing the 15th Five-Year Plan’s goal of raising the household consumption rate. The direct route is to raise corporate dividend payout ratios; transferring a sizable share of state capital to the social security fund is, in effect, one concrete form of state-capital dividend distribution.

Some harbor doubts about how state capital could be transferred: not much state capital is genuinely profitable and able to pay dividends; in some sectors state capital carries heavy debt burdens, making net assets hard to pin down; state capital falls under different departments and agencies, so transfers to the social security fund would meet resistance; and so on.

These problems are in fact not hard to solve. Simply put, the transfers can be made from state capital that is already listed. The A-share market is currently worth roughly RMB 120 trillion, of which state capital is preliminarily estimated at around 40%. A certain amount—say RMB 20 trillion—could be transferred from this into the social security fund. The transferred state capital would not change its departmental or institutional affiliation; instead, new pension funds would be established under the existing departments and agencies to manage the transferred capital, with new operating functions and objectives. From the capital market’s perspective, this merely converts a portion of state capital into pension assets, adding more long-term, patient capital.

Private enterprises should also be encouraged to raise dividend payouts. Through improved corporate governance, stronger protection of minority investors’ rights, and the promotion of long-term value investing, firms should be encouraged to return more profits to shareholders as dividends, which shareholders can then convert into consumption spending.

Second, steadily advance tax reform to curb the rise of the Gini coefficient and gradually bring it down to 0.4 or below, thereby raising society’s average propensity to consume and lowering the household savings rate.

International experience shows that economies that successfully moved from middle-income to high-income status mostly had Gini coefficients between 0.3 and 0.4, some even lower. A more balanced income distribution channels more national income into end-demand spending, easing the pressure of releasing the large capacity built up during the high-growth era.

China’s current tax structure is dominated by indirect taxes, with direct taxes such as personal income tax and property taxes accounting for a low share. From the standpoint of reforming the savings–consumption mechanism, reasonable taxation of high-income groups should be increased—focusing on personal income and property taxes—thereby raising government revenue. Some worry that this would damage the confidence and expectations of high earners. In reality, the negative effects would be limited; if anything, it would strengthen the government’s incentive to protect property rights. As one formulation puts it, the boundary of the capacity to tax determines the boundary of property-rights protection—because protecting property rights means protecting the tax base.

Third, shift the center of gravity of macroeconomic management and government functions at all levels from the supply side to the consumption side. More than 50% of macro stimulus spending should be devoted to addressing the supply–demand imbalance, with the emphasis on building the social security system for low- and middle-income groups.

There is some public confusion about how consumption drives growth. Reforming the savings–consumption mechanism and raising the incomes and consumption of low- and middle-income groups would, first, create new consumer market space, turning excess capacity into adequate—perhaps even insufficient—capacity, and thereby spurring new, effective investment. Second, and more importantly, expanding consumption enables more people, especially low- and middle-income groups, to share in the fruits of reform, opening up, and development, deepening their sense of gain as their aspirations for a better life are met. Equally important, expanding this group’s consumption—above all developmental consumption—is in essence investment in human capital, a concrete embodiment of “investing in people,” providing the human-capital foundation most vital to innovation-driven growth.

In raising the incomes and consumption of low- and middle-income groups, subsidies for goods purchases can accomplish only so much. The focus should be on two glaring shortfalls: housing and social security.

A migrant worker may own a 200-square-meter two-story house in the countryside, yet return there only a few days a year, spending the rest of the time crammed into a 10-square-meter basement room in the city. Statistically, his available housing space totals 210 square meters, but his actual housing conditions are dire. Migrant workers and similar groups face an enormous structural mismatch in housing between urban and rural areas. Housing-security policies and the reallocation of urban–rural resources should be used to accelerate solutions to the housing difficulties of migrant workers and other new urban residents—which would also supply genuine demand to help the real estate sector stabilize and return to normal growth.

Through the transfer of state capital to social security, fiscal subsidies, short-term stimulus funding, and improvements to social insurance contributions, the aim during the 15th Five-Year Plan period should be a marked increase in per capita pension income under the basic pension scheme for urban and rural residents—the scheme covering the largest number of low- and middle-income people—commensurate with the current imperative of boosting end demand and stabilizing macroeconomic growth. Among the many consumption-stimulus measures now on the table, this reform ranks among the most effective for driving growth and plays an irreplaceable role in stabilizing it.

Some contend that raising pension incomes for rural elderly people would do little to expand consumption. This is a specious argument. In fact, the excessively low pension incomes of those covered by the urban–rural residents’ pension scheme suppress society’s consumption potential in multiple ways. First, they directly constrain the spending power of 170 million pension recipients. Second, inadequate pensions for rural parents force their children to provide larger intergenerational transfers, crowding out the children’s own consumption. Third, they weaken the future expectations of the 370 million people currently contributing, pushing them into higher precautionary savings. The urban–rural residents’ pension scheme covers 550 million people—95% of them rural residents—accounting for roughly half of all pension participants nationwide. It is the segment of China’s pension system with the lowest incomes, the largest scale, and the highest propensity to consume. Seen in this light, the pension shortfall for this population constrains the consumption growth of roughly half of China’s people, with economy-wide implications that cannot be ignored.

V. Clarifying Some Misconceptions About Reversing the Imbalance

One view holds that the production-first, consumption-second growth model has existed for a long time—we have long spoken of it as unbalanced, uncoordinated, and unsustainable, yet we got through all those years, so perhaps it can continue. But in the past we were long in a shortage economy, and even after entering the demand-constrained stage there was still room for investment. Those conditions no longer exist. Investment has been contracting for an extended period—evidence that sustaining this growth model is becoming ever more difficult.

Another view holds that expanding consumption and raising the incomes of low- and middle-income groups is a livelihood issue that should proceed within our means and without haste. For a long time this view had some merit. But the situation today is that without raising these groups’ incomes and expanding end demand, capacity utilization cannot improve, investment cannot resume growth, and actual growth will fall well below potential. Raising the incomes and consumption of low- and middle-income groups is a livelihood issue, yes—but even more, it is an urgent matter of macroeconomic stabilization. In the past, when growth flagged, we reached for investment; at the current stage, we must reach for consumption. The logic is the same; only the times have changed, and with them the areas holding growth potential.

Still another view holds that while structural and institutional reforms matter, they are distant water that cannot quench present thirst, so the short run must rely on macro stimulus. In fact, structural reform and macro policy each have their functions; they are not an either/or choice, and combining them often works better. Some structural reforms—such as the transfer of state capital to social security described above—can deliver results in the short term. Others, such as reducing the Gini coefficient, may look slow in the short run once targets are set and action begins, but prove fast in the long run. Substituting short-term stimulus for structural reforms that could actually be advanced—or using it to avoid them—will only prolong the problems and raise their cost. Japan was the first country to propose and implement quantitative easing and zero or negative interest rates. More than twenty years on, it offers no record of decisively escaping deflation or restoring growth vitality. Many in recent years have studied Japan’s experience; China should draw lessons from it rather than repeat its mistakes.

On reversing the imbalance between strong supply and weak demand, the central leadership’s judgment is clear, and the path to a solution is equally clear. International experience shows that economies caught in the “middle-income trap” mostly suffered from weak innovation and uncompetitive industries; China’s shortcoming today, by contrast, is “strong supply, weak demand.” Logically, demand-side problems are relatively easier to solve than supply-side ones—but they are not without difficulty. The imbalance is deeply bound up with a web of institutional and structural factors. Breaking out of the old growth framework—shifting from growth driven mainly by investment and exports to growth driven mainly by innovation and consumption, and swiftly establishing a new growth framework—will require a new round of intellectual emancipation and a new social consensus. It means casting off path dependence and confronting and resolving the necessary transformations in thinking, interest relationships, policy instruments, and working methods, so that strong supply propels strong demand, a new cycle of dynamic mutual reinforcement between supply and demand takes shape, the macroeconomic fundamentals are stabilized, and sustained momentum is secured for long-term, stable growth.

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The East is Read

Liu Shijin Makes a Forceful Case for Raising Rural Pensions

Liu Shijin is a former Vice President (Vice Minister) of the Development Research Centre (DRC), a comprehensive policy research and consulting institution directly under the State Council, the central government of the People’s Republic of China. In recent years, he has been one of the most senior voices urging Beijing to raise the meagre pensions paid …

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3 months ago · 7 likes · 1 comment · Zhu Yutao and Yuxuan JIA

China's position can be summarized as “non-acceptance, non-participation, non-recognition, and non-implementation.” The rationale is that the dispute is essentially about territorial sovereignty, which falls outside the scope of the UN Convention on the Law of the Sea (UNCLOS) and therefore beyond the tribunal’s jurisdiction.

For today’s episode, I want to present the latest remarks from Professor Wu Shicun (吴士存) at the South China Sea Security Roundtable Dialogue. Wu is the founding president of the National Institute for South China Sea Studies. From 1993 to 2000, he took part in the China–Vietnam negotiations on the delimitation of the Beibu Gulf (Gulf of Tonkin) as a member of the Chinese government delegation and its expert group. He has also studied or pursued advanced training at the Johns Hopkins School of Advanced International Studies (SAIS), the Asia-Pacific Center for Security Studies, and Harvard University's Kennedy School of Government. He is one of China's most authoritative experts on the South China Sea issue.

In his latest commentary, Wu argues that the award lacks legal validity, has been increasingly instrumentalized for geopolitical ends, and constitutes an obstacle rather than a pathway to peace and stability in the South China Sea. As Manila marks the anniversary with renewed diplomatic and academic activity around the ruling, the article contends that the next decade will see continued contestation over its legacy and meaning.

Thanks to Professor Wu's kind authorization, I can present the English version in my newsletter.

The “South China Sea Arbitration Ruling” Is a “Bad Precedent” That Violates International Law

Ten years after the illegal ruling in the “South China Sea arbitration case,” unilaterally initiated by the Philippines, the task of refuting and detoxifying it remains arduous.

A few days ago, Manila hosted a series of events related to the illegal ruling. On the surface, these were held in the name of think tanks or academic conferences, but in substance, they were led by the Philippine Department of National Defense, Department of Foreign Affairs, or national security agencies. Looking at the nationalities of the participants, virtually none were absent among the countries supposedly “like-minded” with the Philippines, countries with maritime disputes with China, and countries seeking to exploit the South China Sea for geopolitical gain. At these meetings, certain Philippine politicians and “scholars” with vested interests tied to the Philippines proclaimed that their goal for the next decade on the “ruling” would be to translate the so-called “legal achievement” into actual strategic advantage through coordination among think tanks, the Philippine government, the military, and civil society. Philippine Defense Secretary Teodoro, who has been sanctioned by China, went so far as to declare nakedly that legal claims must be closely integrated with military buildup to serve an active defense posture and a narrative of national unity.

Clearly, this illegal and invalid ruling has been further distorted. It has become the bond and glue for interest-binding between the Philippines and certain countries seeking to manufacture a “China threat in the South China Sea” narrative. Japan and a few other countries that, like the Philippines, wish to package and “launder” illegal gains through illegal means are also taking part. It is fair to say that the countries trying to get a share of the illegal ruling have formed a de facto “interest group” and an interlocking “industrial chain.”

Precisely for this reason, while intensifying our legal refutation and exposure of the ruling’s fallacies, we must also take a multi-pronged approach: sever the interest chain built on this illegal ruling and reveal to the world the underlying logic of the “interest group” formed around it.

Looking back at the ten years since the illegal ruling was issued, the Philippines and the United States and other Western countries have sung in chorus, fabricating absurd logic and false narratives such as “the ruling is international law” and “failure to implement the ruling is a violation of international law,” and repeatedly hyping them for fear that the “ruling” would be forgotten or even “buried” by the international community. For ten years, this illegal ruling has been like a terminally ill patient, barely kept alive by life-support systems in the ICU. Judging from the Philippines’ current frequent provocations against China’s rights and claims in the South China Sea and its actions undermining regional peace and stability, the current Philippine government is intensifying its use of the “ruling” to change the status quo, entrench illegal gains, and attempt to expand the scope of its infringements. Evidently, the illegal ruling has had an extremely negative impact on political mutual trust and overall relations between China and the Philippines. Beyond the Philippines, a few other parties to South China Sea disputes have also occasionally cited or invoked the “ruling” as a basis for their claims and unilateral encroachments. Some countries outside the region have lavished praise on the illegal ruling, attempting to use it to pressure China into “complying with” or “implementing” it.

The fact that the illegal ruling has caused instability and localized turbulence in the South China Sea shows that it has not brought — and can never bring — peace and tranquility to the region. On the contrary, it has become a “troublemaker” and a “source of turmoil” for peace and stability in the South China Sea, a “spoiler” of bilateral relations between China and other claimants on South China Sea issues, and the greatest obstacle and “stumbling block” to the full and effective implementation of the Declaration on the Conduct of Parties in the South China Sea and the orderly advancement of consultations on a Code of Conduct.

From the above analysis, we can draw a conclusion: unless the illegal ruling is laid to rest, there will never be peace in the South China Sea. Unless we say a firm and thorough “no” to the illegal ruling, maritime cooperation in the South China Sea will remain merely verbal and on paper. Unless the illegal ruling disappears from public discourse on the South China Sea, China will from time to time be labeled by ill-intentioned countries or forces as “undermining the rules-based international order.” And unless the illegal ruling is uprooted entirely, other countries may follow suit, using operations that violate international law as cover and sophistry when committing infringements, provocations, and harm to public interests in the South China Sea.

At the same time, it remains essential to expose, at the root, the illegal nature of the “South China Sea arbitration tribunal” on the basis of international law, international practice, and historical facts, and to refute the political conspiracy behind it and its absurd claims of “jurisdiction.” Otherwise, some countries in the international community that do not know the truth, or observers of the South China Sea issue, may be misled by false narratives such as “the ruling is international law” or “the ruling is part of international law,” which over time could solidify into part of their perception of the South China Sea.

Looking back over the past decade, one heartening reality is that although the illegal ruling attracted some international attention when it was first issued in July 2016, its content has received no response at the level of state practice from other countries, no recognition or adherence from international judicial bodies, and no endorsement from international academia. Some countries that support the illegal ruling know in their hearts that it is illegal and invalid; institutions such as the International Court of Justice have collectively avoided substantive discussion of the “ruling” in relevant cases; and upright and conscientious authoritative international scholars have leveled sharp criticism at the “ruling” from multiple angles, including textual interpretation, historical examination, and logical consistency.

In short, the illegal ruling in the “South China Sea arbitration case” will not produce any substantive impact at the level of international law of the sea; it is primarily a tool used by certain countries or forces to stir up trouble in the South China Sea. In the foreseeable future, the “ruling” will increasingly be seen as an “isolated incident” within a specific geopolitical context, rather than a so-called “precedent” in the international law of the sea system. In any case, over the next ten years or longer, we will not relax our vigilance against any claims or actions based on this illegal ruling, and we will sternly refute, lawfully defend our rights against, and resolutely counter any words or deeds that hype it.

As a Beijing resident, the story hits close to home. The Beijing I remember was dry and hot. But since moving back in 2021, I've watched the city grow noticeably wetter. No year from my childhood was ever as rainy as the past two have been. And it’s not just my feeling. Last month, Caixin reported that Beijing’s average annual precipitation over the past decade has risen by twenty percent, with rainfall in 2025 exceeding 900 millimeters.

For anyone educated in China, that number calls to mind a concept from high school geography that Beijing sits right on the 400-millimeter isohyet—the line connecting places that receive 400 millimeters of annual rainfall. This line is about far more than weather. It marks the boundary between two ways of life that defined traditional China, between farming and nomadic civilizations. Beyond it, rainfall is too scarce to sustain agriculture, and people historically survived by herding instead. For that reason, successive Chinese dynasties treated the line as a natural defensive frontier.

Now, that line appears to be shifting. As a history enthusiast, I couldn't help wondering what this might mean, and I’m not the only one. Professor Wang Zhengxu of Zhejiang University has been thinking along the same lines. The other day, he shared with me an essay he wrote in 2023 about how rainfall shaped the social, political, and economic patterns of ancient China. I found it illuminating, and I'd like to share it with my readers here.

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Professor Wang Zhengxu (王正绪) is a distinguished professor at the School of Public Affairs, Zhejiang University. Previously, he served as a distinguished professor at Fudan University, senior fellow and acting director at the China Policy Institute, University of Nottingham, as well as a research fellow at the East Asian Institute of the National University of Singapore. His research spans comparative politics, Chinese politics, ideas and concepts of political science and East Asian state-making.

It's a long article with many Chinese names and historical events. Basically, it discusses Professor Wang's answer to the "Great Divergence" problem, which asks why capitalism and the Industrial Revolution emerged in Europe rather than in China. The traditional answer is that Europe's fragmented system of rival states drove technological, military, and fiscal innovation, while a unified China after the Qin and Han lacked that competitive pressure. But Professor Wang pushes back on this theory. East Asia, he argues, was hardly short of brutal interstate competition. The Wei-Jin era produced a sixteen-state system in North China; even the mighty Tang saw its capital fall to rebellion and Tibetan assault; and during the Song dynasties, the rivalry among Song, Western Xia, Liao, Jin, and the Mongols routinely ended in the annihilation of entire states. Competition was not the missing variable.

What was different, Wang contends, was the character of the state itself. The Confucian-Legalist state (儒法国家) looks inward rather than outward, seeking to sustain itself rather than plunder, which is why China produced Zheng He’s voyages but no Columbus's state-sponsored conquest of distant continents. And the sheer mass of China’s agrarian economy gave it a resilience that made conquest ultimately self-defeating: dynasties could retreat south of the Yangtze and flourish, while nomadic conquerors who crossed the Wall were absorbed into the agrarian order they had invaded. Measured against this civilizational bulk, Wang concludes, East Asia’s interstate wars remained storms in a teapot.

Thanks to Professor Wang's kind authorization, I can share this article in English:

Below is the full article:

Geography, Climate, and Long-Term Patterns of Socioeconomic History: The Hu Huanyong Line in History and on the Ground
地理气候与长期的社会经济历史模式——胡焕庸线的历史与现场

Natural factors such as geography and climate are structural conditions for the development of human societies. Human communities form their economic, political, and cultural patterns of development in accordance with the natural geographic conditions on which they depend. In the long sweep of Chinese history, geography and climate produced a famous economic, social, and cultural dividing line: the Hu Huanyong Line (胡焕庸线). Running from China’s northeast to its southwest, this line broadly separates the pastoral-nomadic regions of East Asia from its agricultural regions. In terms of physical geography, this boundary between herding and farming roughly coincides with the 400mm isohyet (400毫米等降雨线) — the line of equal annual rainfall — on the East Asian continent. The course of the Great Wall (长城), whose construction began in the pre-Qin era, largely follows this isohyet, making it the “institutional” boundary between the agricultural and pastoral zones of the ancient Chinese world. The Hu Huanyong Line, or the 400mm isohyet, is therefore an essential frame of reference for understanding the long-term history of East Asia.

This article addresses three questions. First, in what ways did this boundary between human economic and social modes — a boundary created by natural geography — shape the long-term patterns of economic and social development in East Asia? Second, does this natural-geographic factor continue to influence and shape economic and social development in the industrial age? Third, does the climate change now unfolding across the globe require us to re-examine the influence of this geographic dividing line on East Asian society? As its object of study, this article selects the region along the Great Wall between Pingxing Pass (平型关) and Yanmen Pass (雁门关) in northern Shanxi Province (山西省), attempting to answer the questions above through an analysis of this particular locality. The region straddles both sides of the Great Wall in North China, with the Hu Huanyong Line — the 400mm isohyet — passing directly through it. Historically, it was a crucial meeting point between the northern pastoral world and the agrarian civilization of the Central Plains (中原). In antiquity it fell under the administrative units of Daizhou (代州) and Yanmen Commandery (雁门郡), as well as Shuozhou (朔州) and Yunzhou (云州) north of the Wall; this article therefore calls it the “Yan-Yun Zone” (雁云地带). The zone principally comprises the city of Xinzhou (忻州) south of Yanmen Pass and the cities of Shuozhou and Datong (大同) to its north. Historically, the nomadic polities of the north and the agrarian polities of the south experienced military conflict here, but also exchanges of culture and ways of life, along with flourishing commerce. All of these forces shaped the highly distinctive economic and social patterns of northern Shanxi on both sides of the Great Wall. Combining historical texts, findings from general social science theory, and on-site observation, this article uses methods akin to thick description and field notes to paint a holistic portrait of the Yan-Yun Zone. It offers a detailed on-the-ground description and verification of the theoretical proposition that “three lines converge as one” — the Great Wall, the Hu Huanyong Line, and the 400mm isohyet — and, drawing on multiple disciplines, proposes a new interpretive framework. It seeks to demonstrate the important role of the Hu Huanyong Line in the evolution of the civilizational order of the East Asian continent, and its long-term shaping of historical socioeconomic patterns of agro-pastoral contact, military confrontation, and frontier trade, thereby moving beyond the single-discipline perspectives of demography or economic geography that have dominated previous research on the line. The article also examines the potential role of the 400mm isohyet in future population migration and socioeconomic development against the backdrop of global climate change, in the hope of broadening the scholarly dimensions and theoretical substance of geopolitical research, embodying the dual values of theoretical innovation and engagement with real-world concerns.

I. Natural-Geographic Social Units: Questions and Methods

In Aristotle’s view, the natural environment and its climatic features nurture heterogeneity in civic character; geography also shapes citizens’ preferences and the formation of polities. Montesquieu regarded human life as a reflection of geographic and climatic conditions; Herder analyzed the distinctiveness of different national cultures on the basis of geographic factors, famously asserting that “history is geography in motion.” Jean Bodin’s Six Books of the Commonwealth likewise contains a dedicated exposition of climate theory. The British geographer Halford Mackinder held that the geographic causation of politics is “permanent, inevitable, and omnipresent.” The east-west orientation of the Eurasian landmass allowed pathogens, crops, and domesticated livestock to diffuse across vast distances, profoundly shaping the forms taken by human civilization. By contrast, the north-south orientation of the Americas constrained the spread of crops and fettered the development of their ancient civilizations. The state of Qin (秦国) unified the territory of ancient China between the Yangtze River (长江) and the Yellow River (黄河), whereas Napoleon, for all his military might, could not unify Europe; the geographic differences between East Asia and Europe were a decisive factor. Ray Huang (黄仁宇) emphasized the decisive role of geographic factors — soil, wind patterns, rainfall — in the political development of ancient China, and he perceptively noted the influence of the 400mm isohyet on the civilizational system of the East Asian continent. Zhao Dingxin (赵鼎新), in his research on state formation in pre-modern China and on the interactions between nomadic and agrarian peoples, likewise assigns a central place to geographic-environmental factors.

The Hu Huanyong Line is a paradigmatic example of how geography shaped human social development on the East Asian continent. In 1935, Hu Huanyong (胡焕庸), using one dot to represent twenty thousand residents, hand-plotted more than twenty thousand dots on a map of China and drew isopleths to produce a population-density map of the period. The line connecting the two points of Aihui (瑷珲) and Tengchong (腾冲) on that map came to be known as the Hu Huanyong Line. To the northwest of this remarkable line lies the land of “white horses in the autumn wind” — a relatively arid region of grassland and desert dominated by animal husbandry, which at the time held only 4% of the national population. To the southeast lies the land of “apricot blossoms in spring rain” — a region of relatively abundant rainfall and developed agrarian civilization, which then contained 96% of the country’s population. By the Seventh National Population Census of 2020, China’s level of economic development, industrialization, urbanization, and population structure and distribution had been utterly transformed compared with the 1930s, when the line was first proposed — yet the population ratio between the northwestern and southeastern halves demarcated by the Hu Huanyong Line still stood at 6.5% to 93.5%. Strikingly, Ray Huang also regarded the 400mm isohyet as a major dividing line across the Chinese land: to its southeast lies a monsoon climate, with settled agriculture as the principal mode of production and social organization; to its northwest lies a temperate continental climate, with animal husbandry as the dominant mode. Huang further observed that the course of the Great Wall overlaps with the 400mm isohyet over a very wide extent. Although the isohyet shifts somewhat from year to year, it and the Great Wall have throughout history marked the boundary between the agrarian civilization of the Central Plains and the nomadic civilization of the north. Moreover, the 400mm isohyet also broadly coincides with the Hu Huanyong Line.

An examination of recent rainfall maps shows that the 400mm isohyet essentially coincides with the stretch of the Great Wall between Pingxing Pass and Yanmen Pass. Traveling north from Xinzhou and passing just beyond Yanmen Pass, one crosses the 400mm isohyet. North of this point lies the historical Yunzhou, precisely the region where the Northern Wei dynasty (北魏) arose. This dynasty, founded by the Tuoba Xianbei (拓跋鲜卑), moved its capital from Datong to Luoyang (洛阳) under Emperor Xiaowen (孝文帝), writing a chapter of history in which a steppe people voluntarily sinicized and transformed itself into a Chinese dynasty. The Yan-Yun Zone of northern Shanxi, lying along the Hu Huanyong Line and the 400mm isohyet, is precisely where the arid and humid zones, frontier and pastoral-agrarian ecologies, and nomadic and agricultural civilizations of the East Asian continent converge. Throughout history it served as a corridor and channel for the exchange and collision of Central Plains civilization with the nomadic civilization of the northern steppe. From King Mu of Zhou’s (周穆王) frontier tours to Li Mu (李牧) of the state of Zhao (赵国) crushing one hundred thousand Xiongnu (匈奴); from the campaigns of Meng Tian (蒙恬), Wei Qing (卫青), and Huo Qubing (霍去病) against the Xiongnu to Wang Zhaojun’s departure beyond the frontier (昭君出塞); from Su Wu herding sheep in captivity (苏武牧羊) to Cai Wenji’s return to the Han (文姬归汉); from King Wuling of Zhao (赵武灵王) adopting nomad dress and mounted archery (胡服骑射) to Emperor Xiaowen’s relocation of the capital, and on to the Yang Family Generals (杨家将) resisting the Liao (辽) armies — all of these underscore the region’s character as a meeting point of civilizations.

This article is based on first-hand materials — field observations, interviews, and records — gathered by the author and a study group during a visit to the Yan-Yun Zone in May 2023. It offers a relatively comprehensive descriptive account of the research object and examines existing theoretical narratives of geographically defined social units, aiming at a descriptive interpretation of this complex cultural setting. In the process of narration and description (that is, representation), the subjective impressions, reflections, and puzzlements of the research team members on site are appropriately combined with records and representations of objective reality, including exchanges and interactions between researchers and local colleagues or contemporaries at different sites. Such “reflexivity” acknowledges the connection and mutual influence between observer (researcher) and object of study; it acknowledges the interactive relationship between social reality — what, for instance, the Great Wall actually is, or what historical meanings Yanmen Pass carries — and the researcher, recorder, and narrator, which inevitably means that different researchers will produce different research records. Our itinerary covered the cities of Taiyuan (太原), Xinzhou, and Datong, and included sites that display the principal historical and cultural features of northern Shanxi in each historical period: Pingxing Pass, Yanmen Pass, the Yungang Grottoes (云冈石窟), the old city of Datong (大同古城), the Ming-era Great Wall at Yanggao (阳高) and the Shoukou Fort (守口堡), and the Hanging Temple (悬空寺), along with former residences of famous figures and memorials of the War of Resistance and the revolution. We surveyed the region’s major rivers, lakes, reservoirs, mountains, plains, and basins, and at one point crossed beyond the Yan-Yun Zone into the Ulanqab (乌兰察布) region of Inner Mongolia (内蒙古). We held long, unstructured conversations and discussions with colleagues who have long lived and worked locally — university teachers, township leaders, retired cadres of state-owned enterprises, museum staff, compilers of county gazetteers, and officials of propaganda departments — who provided us with rich information and diverse perspectives.

II. Rainfall and Its Uneven Distribution: The Divide between Farming and Herding

Central and northern Shanxi rest upon the deep, vast loess lands that nurtured several millennia of Chinese civilization. Traveling north from Taiyuan in central Shanxi, one gradually senses the diminishing surface water and intensifying aridity. For travelers from the south, the most immediate experience of the low-humidity climate is often waking to find their nasal passages so dry they bleed; clothes washed before bed are completely dry by morning. When local colleagues learned that our study group came mainly from the Jiangsu-Zhejiang-Shanghai region (江浙沪), their first thought was of their own discomfort in the humid climates of Hangzhou (杭州) and Shanghai (上海), perpetually drenched in sweat — “you have to shower the moment you step indoors.” A dry climate may be pleasant, but Shanxi, Shaanxi (陕西), and indeed all of North China are constantly threatened by water scarcity and drought — a far more consequential manifestation of climate’s influence on human society. Numerous prefectural and county gazetteers of Shanxi repeatedly record the severe blows dealt by drought to local agriculture and social life, and local colleagues all remembered summers in the past when the urban water supply was cut off.

Agriculture places demands on climate that are, in a sense, quite exacting, and precipitation is the key constraint. It is generally held that, given suitable sunlight, soil, and terrain, an annual precipitation of 250 to 400 millimeters provides the minimum basis for crop cultivation. China lies in a monsoon zone, and rainfall diminishes gradually from southeast to northwest. The many mountain ranges between the coast and the interior form natural barriers to the northwestward movement of warm, moist air. Thus a line running along the Greater Khingan Range (大兴安岭), through the Yin Mountains (阴山), the Helan Mountains (贺兰山), and the Bayan Har Mountains (巴颜喀拉山), and extending southwest to the Gangdise Range (冈底斯山), forms the 400mm isohyet — the divide between the semi-humid and semi-arid zones of the East Asian continent.

Traditionally, this isohyet marked the boundary between crop agriculture and steppe-nomadic civilization on the East Asian continent. Northwest of the line, constrained by precipitation and temperature, the institution of animal husbandry had to be interposed between humans and the grassland in order to sustain human social organization of any scale. Cattle, horses, and sheep were the steppe tribes’ principal source of food and also of clothing, footwear, tents, and other necessities. Horses, moreover, enabled steppe armies to conduct long-range raids and distant campaigns, giving them an advantage in attacking and plundering the settled agricultural units south of the Great Wall and on both sides of the Tianshan Mountains (天山). Because food could come only from livestock, the steppe’s population-carrying capacity was merely 1–2% of that of agricultural regions.

The nomadic way of life, moreover, is acutely sensitive to climatic change. Even a slight drop in average global temperature drastically shortens the frost-free season in pastoral regions and significantly raises the probability of blizzards and other disasters, causing livestock to starve or freeze in great numbers. Cooling climates thus gave nomadic peoples enormous impetus to migrate southward. Historical research shows that whether it was the Xianyu (鲜虞), Rong (戎), and Di (狄) entering the Central Plains in the pre-Qin era, the northwestern tribes and northern Xianbei (鲜卑) migrating inward during the Wei-Jin period (魏晋时期), or the rise, expansion, and eventual conquest of the Central Plains by the Western Xia (西夏), Jin (金), Liao, Yuan (元), and Qing (清) dynasties, all occurred during cold periods in Chinese history.

The Yan-Yun Zone sits at the edge of the 400mm isohyet, the northern limit of the semi-humid region. Here one can feel how deeply human survival is constrained by natural conditions. Given the limited surface water, the principal grain crop north of the Huai River (淮河) in China is wheat — yet wheat was first domesticated in the Fertile Crescent of Western Asia before spreading to Europe and across Asia, whereas Shanxi is the homeland of millet. In the Yellow River valley, the earliest grain cultivated by the ancestors of the Chinese was very likely millet. Millet was anciently called ji (稷), and the emergence of the term sheji (社稷, “the altars of soil and grain”) marked the appearance of human organization in the form of the state. Traveling through Shanxi, one finds local people speaking with relish of the province’s agricultural specialty: minor coarse grains (小杂粮). Reportedly, Shanxi accounts for roughly one-tenth of China’s coarse-grain acreage, and in recent years Xinzhou has produced one-third of Shanxi’s output — hence the saying, “China’s coarse grains are in Shanxi; Shanxi’s coarse grains are in Xinzhou.” As China’s food security has improved, coarse grains such as naked oats, buckwheat, quinoa, foxtail millet, proso millet, and maize, along with mung beans and adzuki beans, have taken up an ever larger share of the Chinese staple diet. Our study group visited many counties, cities, and townships, and wherever we went, every proper meal featured a large plate of golden fried cakes made of proso-millet flour (黄米面油炸糕) — an indispensable local dish for honoring guests.

Climate furnished two structural conditions for the region’s historical development. First, limited rainfall severely constrained the land’s population-carrying capacity and the robustness of its ecosystem. Field observation shows that in recent years numerous river-management, surface-water protection, and ecological construction projects have begun to bear fruit; the flows of major rivers such as the Fen River (汾河) and the Hutuo River (滹沱河) are now well protected. Like many other Chinese cities, Taiyuan, Xinzhou, and Fanshi (繁峙) now have places for boating and fishing and riverside wetlands, and the living environment has improved enormously. Historically, however, years of severe drought could bring crop failure and famine, and ecological pressure produced the tragic, heroic memory of “Going West of the Pass” (走西口) in northern Shanxi. The “West Pass” (西口) was the famous frontier town of Shahukou (杀虎口) in Youyu County (右玉县), Shuozhou; “going west of the pass” meant leaving through it to seek a livelihood north of the Great Wall. Second, the region’s position at the edge of the Hu Huanyong Line also meant it lay at the junction of the agrarian and nomadic worlds. Such a geopolitical and geo-economic location meant that the Yan-Yun Zone lived for long periods under threat from the Xiongnu, the Mongols, and other nomadic peoples — yet in peacetime it enjoyed superb conditions for frontier trade.

To this day we can see the traces left by these two structural conditions. The region preserves monuments and relics from the eras of nomadic regimes — the Northern Dynasties (北朝), Liao, Jin, and Yuan — and the murals of the Northern Dynasties, Jin, and Yuan displayed in local museums are breathtaking. During our fieldwork we repeatedly “encountered” the former residences, footprints, deeds, and works of the two literary giants Yuan Haowen (元好问) and Bai Pu (白朴), evoking the literary splendor of the Jin and Yuan eras. Local people are deeply familiar with the lives and works of both men; many can recite offhand Yuan Haowen’s immortal line: “I ask the world — what is this thing called love, that binds two lives unto death?” Whether through changes of regime or the voluntary exodus west of the pass, history saw continual migration, movement, and fusion of populations between the region north of Yanmen and the steppe beyond the frontier. After the founding of the People’s Republic, and again after the launch of Reform and Opening (改革开放), such migration continued — for example, the construction of industrial facilities in Baotou (包头) and the opening of farmland in parts of Inner Mongolia drew many migrants beyond the frontier.

The richest remains of the region’s role as a frontier garrison date from the Ming dynasty (明朝). The earthen ramparts of the Ming Great Wall still stand on ridgelines and in fields, and many local place names derive from Ming-era military and frontier-defense considerations. Indeed, the Ming was the last dynasty in which the Yan-Yun Zone served as the Central Plains’ bulwark against armed forces from beyond the frontier, facing the constant and formidable military threat of the Oirat (瓦剌) tribes. The Tumu Crisis (土木堡之变), the pivotal event that turned the Ming from prosperity toward decline, occurred on the return journey to the capital after the Ming emperor Zhu Qizhen (朱祁镇) personally led a campaign to Datong. Under the Qing, the empire’s territory expanded vastly northward and westward, and the Yan-Yun Zone’s role as the frontier between China and the lands beyond disappeared forever.

III. Arms and the Great Wall: Defense and Resistance

Xinzhou, the prefecture-level city with the largest territory and the greatest east-west span in Shanxi, is crisscrossed by mountains and marked by diverse landforms. It contains Mount Wutai (五台山), the “roof of North China,” and the headwaters of the Fen, Sanggan (桑干河), and Hutuo rivers — the “three river sources of North China” — while bearing the military burden of “collaring the Central Plains to the south and commanding the great desert to the north.” Separated from Yunzhou and Shuozhou by the Great Wall to the north, bounded by the Shiling Pass (石岭关) toward Taiyuan in the south, girdled by the Yellow River facing Shaanxi and Inner Mongolia in the west, and adjoining the Taihang Mountains (太行山) toward Beijing and Hebei (河北) in the east, it has long been a strategic hub of transport and defense between the Han lands and the northern pastoral world. Thirteen of Xinzhou’s fourteen districts and counties contain sections of the Great Wall, making it the linchpin of the defensive system of northern Shanxi and indeed the Central Plains. According to incomplete statistics, more than 1,700 battles were fought at Yanmen Pass alone.

Some scholars, based on the Tale of King Mu, Son of Heaven (穆天子传), surmise that King Mu of Zhou’s western tour passed north through Yanmen from within Shanxi toward Baotou and the Helan Mountains. Communications between the Han and the Xiongnu, and between the Tang (唐) and the Türks (突厥), likewise ran through Yanmen. In fact, however, the “Yanmen Mountain” (雁门山) of pre-Jin times lay north of today’s Yanggao County in Datong, within present-day Inner Mongolia, and formed the front line of the state of Zhao’s northern defenses during the Warring States period (战国). Thereafter the boundary between the Central Plains and the northern nomads shifted southward several times. Today’s Yanmen Pass was established in the Wei-Jin period and took its name from its proximity to the seat of Yanmen Commandery. In the Tang it was called Xixing Pass (西陉关); in the Song (宋), the Dongxing Pass (东陉关), five kilometers to the northeast, was renamed Yanmen Pass. After the rise of the Liao state, Yanmen Pass became a key garrison against Liao incursions — the stage on which the tragic, heroic saga of the Yang Family Generals, loyal defenders of home and country, was played out. The Ming “Nine Frontier defense system” (九边防御体系), directed against the Oirats and Tatars (鞑靼), placed northern Shanxi’s frontier defenses along the Datong line. The Great Wall system running through Jizhou (蓟州), Xuanfu (宣府), Datong, and Yulin (榆林) essentially shaped the later provincial boundaries between Inner Mongolia and Hebei, Shanxi, and Shaanxi. This east-west Wall system also constituted a “corridor” of culture, history, defense, and trade stretching from Liaodong (辽东) in the east to northern Shaanxi in the west.

After the Yuan dynasty, Yanmen Pass’s character as a military frontier diminished; it became, more importantly, a channel of trade and a commercial entrepôt. Today’s Yanmen Pass lies twenty kilometers northwest of the Dai County (代县) seat. At the “Houyaopu Post Station” (后腰铺驿站) parking lot at the scenic area’s northern entrance, one can still faintly imagine the bustle of frontier trade in former days. Along the road to the pass entrance stands a long row of statues of generals on warhorses, in armor, bearing all manner of weapons — the “Yang Family Generals sculpture group,” twenty-four figures in all, underscoring Yanmen Pass’s historic role as the Central Plains’ bulwark against steppe regimes. In fact, Yang Jiye (杨继业, also known as Yang Ye 杨业) defended the Yanmen region against the Liao as early as the Northern Han (北汉) period. Across the Northern Han and Song dynasties, the Yang family guarded the Yanmen frontier for decades with distinguished service. In nearby Lutijian Village (鹿蹄涧村) stands the Yang ancestral hall, more than a thousand years old; some five hundred descendants of the Yang family live in the village. Although the Yang commanders recorded in the official histories are chiefly Yang Ye and Yang Yanzhao (杨延昭), the Yang Family Generals saga carries rich meanings of history, culture, nation, and state; the stories of Yang Jiye, the “Seven Sons and Eight Tigers,” She Taijun (佘太君), and the Yang family’s women warriors endure in popular literature, the performing arts, and historical research.

From Datong through Yanmen Pass to the vicinity of Taiyuan runs a striking “corridor” — a strategic axis of attack and defense in wartime, and a vital artery of trade and culture in peace. North of Yanmen Pass lies the Datong Basin (大同盆地); to the south, the Xinding Basin (忻定盆地); the two basins are separated by the Heng Mountains (恒山). Mount Heng joins the Taihang range to the east and the Lüliang Mountains (吕梁山) to the west, forming a formidable barrier; only near Yanmen Pass do the mountains narrow and drop in elevation, making it the indispensable defile for north-south passage. South of the pass one enters the Xinding Basin, the gateway to Taiyuan: were the pass lost, Taiyuan would surely fall. Hence Yanmen’s traditional epithet: “Without, it strengthens Datong’s outer shield; within, it secures the lock and key of Taiyuan; it is the root of the Three Passes and the throat of all Shanxi.” The Ming Great Wall, twelve hundred kilometers long and divided into nine garrisons, has Yanmen Pass gripping the juncture of the Heng and Lüliang ranges: eastward it connects through Yanmen to the Inner Wall, westward it forms the “Outer Three Passes” (外三关) with Ningwu Pass (宁武关) and Pian Pass (偏关). Yanmen holds both the strategic significance of being “strategically unmatched” and the cultural-historic standing of being “honored above all.” Reaching Yanmen’s barbican, our study group found, inlaid on either side of the gate, the couplet in the hand of Fu Shan (傅山) — the Shanxi-born thinker, calligrapher, and physician: “Of the three frontiers, a strategic point without equal; of the nine fortresses, the most honored pass of all.”

During the Jiajing reign (嘉靖) of the Ming, Yanmen Pass was extensively enlarged, with a five-kilometer stone enceinte built beyond the fortress city. The gate-tower of this enceinte, the “Bright Moon Tower” (明月楼), now serves as the scenic area’s ticket gate. On site, what one sees most often are the signs and symbols of defense and war. To make assaults on the gates harder, for instance, the barbican gate opens eastward, and steep slopes and sharp bends lie between the barbican and the main fortress, so that once enemies entered the barbican, the defenders could counterattack with battering rams and other weapons. Past the first gate, the Dili (”Earthly Advantage”) Gate (地利门), the road on the left leads to the second gate, the Tianxian (”Natural Barrier”) Gate (天险门), while a “false path” branches to the right — designed both to confuse an enemy who had passed the Dili Gate, unsure which route to take, and to serve as a passage for defenders to encircle the enemy from behind. Atop the pass stand the Temple of Guan Yu (关帝庙), the shrine of Yang Liulang (杨六郎祠), and the shrine of Li Mu (李牧祠); siege engines such as battering carts and gate-blocking blade carts are displayed there today, drawing visitors into endless imaginings of war. The Tianxian Gate is grander and more precipitous still. Entering from the north and passing through it, one’s feet seem to stand upon the soil of the Central Plains. Though ridge upon ridge still crowds the near view, the distant prospect seems already the hills and field-rows of the heartland, stirring an unbidden sense of safety at being within China proper.

An important explanatory variable in contemporary social science for the vast divergence between the historical trajectories of China and Western Europe is the difference between their interstate systems. This so-called Great Divergence (大分流) comparison generally has two “dependent variables”: the modern capitalist economic model and elective parliamentary politics. Why did both emerge in Europe and not in China? The standard explanation holds that China formed a unified state from the Qin and Han (秦汉) onward, and the absence of interstate competition failed to propel breakthroughs in technology and political institutions; Europe, by contrast, developed a system of many competing states, whose fierce rivalry drove not only the Industrial Revolution and modern science and technology but also the modern military-fiscal state. Yet standing on the front line of contest between the Central Plains and the steppe — in the Yan-Yun Zone — we could not help but reconsider this question. Although China was unified in the Qin-Han era, East Asia also experienced long periods of intense interstate competition. Leave aside the Wei-Jin period, when northern nomadic tribes surged southward, squeezing the Jin dynasty (晋朝) south of the Yangtze and creating in North China a multistate system of sixteen successive polities; even the mighty Tang endured massive shocks from the Tibetan Empire (吐蕃), and during the An Lushan Rebellion (安史之乱) the capital Chang’an (长安) briefly fell. During the two Song dynasties alone, the East Asian continent contained, in succession, the Song, Western Xia, Liao, Tibetan polities, Jin, and Yuan; and the military competition among Song, Western Xia, Liao, Jin, and Yuan repeatedly ended in the annihilation of states — competition that can hardly be called anything but fierce. Why, then, did such interstate rivalry produce nothing like Europe’s great transformation — the great voyages, the opening (in truth, plundering) of the Americas, the colonization of all Africa and nearly all Asia — nor a gunpowder-and-firearms revolution in warfare that would spur physics and chemistry and usher in a modern scientific revolution?

Part of the answer lies in the moral constraints the Eastern Confucian-Legalist state (儒法国家) imposed on the polity: its military development was always oriented toward self-defense, and it never treated foreign lands as objects of plunder, occupation, colonization, or enslavement. Under such conditions, when land and resources ran short, there was spontaneous popular emigration — “going west of the pass” or “sailing south to the Nanyang” (下南洋) — but state-sponsored expeditions of exploration and plunder were impossible. The utterly different aims and consequences of Zheng He’s (郑和) voyages to the Western Oceans, on the one hand, and Vasco da Gama’s rounding of the Cape of Good Hope or Columbus’s landfall in the Americas, on the other, are proof of this. Another part of the answer is that the Confucian-Legalist state, grounded in an agrarian economy, displayed enormous resilience in the face of nomadic attack: the sheer mass of the Chinese agrarian socioeconomic system gradually wore down external forces. In short, even if the territory south of the Great Wall fell, a Central Plains dynasty could retreat south of the Yangtze and survive, even flourish (as the Southern Song 南宋 and Eastern Jin 东晋 both did over long periods), while nomadic regimes, even after conquering North China, could never fully occupy or colonize it — instead they were absorbed into, or actively converted themselves to, the agrarian socioeconomic model. From the long view of history, that is, relative to the enormous mass of China’s agrarian socioeconomic system and Confucian-Legalist political order, the interstate competition that did occur remained a “storm in a teacup.”

Following the natural boundary between the semi-arid and semi-humid zones, and guided by the principle of “following the terrain and using natural barriers to control the frontier,” the Central Plains dynasties built fortified passes at mountain defiles and river bends. The Yanmen section of the Great Wall is bound lip-and-teeth to Gouzhu Mountain (句注山). Part of the western Heng range, Gouzhu runs roughly southwest-northeast at elevations of about 1,700 to 2,400 meters — commandingly steep yet still climbable, and thus well suited to defensive works. Of course, owing to climatic differences across eras, the Wall’s location could vary greatly. Comparing the Qin Wall with the Ming Wall, the latter’s southward retreat is plain to see, with a range of fluctuation between 200 and 400 kilometers. Moreover, the dynasties built walls of differing thickness according to local risk levels. Walls on high summits often had two or even several courses; flat terrain near the political center received the heaviest protection of all — the Hetao Plain (河套平原), or the Juyong Pass (居庸关) and Shanhai Pass (山海关) areas close to Beijing, had as many as twenty layers of wall. Jia Yi (贾谊) of the Western Han, in his “Disquisition on the Faults of Qin” (过秦论), wrote that Meng Tian’s wall “drove the Xiongnu back more than seven hundred li, so that the nomads dared not come south to graze their horses.” Yet in later ages the Liao, Jin, Yuan, and Later Jin (后金, i.e., Qing) — northern regimes of minority peoples — all successfully crossed the Great Wall, occupying vast territories and even all of China. With the consolidation of the Qing, a dynasty of steppe character, this institutional feature of the Great Wall vanished, and the Chinese nation and Chinese civilization acquired a broader meaning.

In the twentieth century, however, the Great Wall once again saw the fires of war. After occupying the Northeast in 1931, the Japanese army quickly plotted to push south of the Wall, attacking Rehe (热河) and the Wall line east of Gubeikou (古北口) in 1933. China organized the Defense of the Great Wall (长城抗战), fighting the Japanese at Shanhai Pass, Xifengkou (喜峰口), Gubeikou, and elsewhere. Apart from the pyrrhic “Victory at Xifengkou” (of five hundred broadsword-brigade soldiers in that battle, only twenty-three survived), every engagement was lost, and China was forced to sign the Tanggu Truce (塘沽协定). North China’s gate now stood open; Japan pressed forward with plans for full-scale invasion, until in 1937 it launched the Marco Polo Bridge Incident (卢沟桥事变) and occupied Beiping (北平, now Beijing).

Against the backdrop of twentieth-century warfare — firearms and mechanized armies — the Great Wall’s function as a military installation had essentially been lost, but its institutional character as a political and identity boundary grew all the more salient. Once the Japanese forces already holding the three northeastern provinces breached this line, the danger of China’s total subjugation had begun. The bitter resistance waged along the Wall in Hebei and Shanxi after 1933 and 1937 must be understood within this framework. Many major battles took place in the Yan-Yun Zone. In October 1937, the Eighth Route Army (八路军) ambushed a Japanese transport column on the highway south of Yanmen Pass — the Yanmen Pass Ambush (雁门关伏击战). The same month, the Eighth Route Army staged a night raid on the Japanese airfield at Yangmingbu (阳明堡) in Dai County, killing more than a hundred Japanese troops and destroying or damaging twenty-four aircraft. Pingxing Pass is famous for the Eighth Route Army’s major victory there. In September 1937, a Japanese detachment attacking Shanxi approached the pass; the 115th Division of the Eighth Route Army laid an ambush on favorable ground, ultimately killing more than a thousand enemy troops and capturing large quantities of weapons and matériel — the Great Victory at Pingxingguan (平型关大捷). Yet the invading Japanese army eventually took Xinkou (忻口) and Taiyuan, and the Chinese people’s War of Resistance would not be won for another eight years. Yanmen Pass and other Wall defenses were gravely damaged during the Japanese assault and occupation. A local propaganda-department colleague told us that all the timber of the buildings of the Zhenbian Shrine (镇边祠) at Yanmen Pass was burned by Japanese troops for heat; only two pines in the courtyard survive, still green and towering today.

Pingxing Pass lies on the border of Fanshi and Lingqiu (灵丘) counties, named for its bottle-shaped terrain. With Mount Heng rising like a screen to the north and Mount Wutai towering to the south, it is the ideal pass for entering Shanxi from Hebei. In 1511, the sixth year of the Zhengde reign (正德) of the Ming, the Lingkou Fort (岭口堡) was built, making Pingxing Pass a key gate of the Inner Great Wall. Linked eastward to Zijing Pass (紫荆关) and westward to Yanmen Pass, it formed part of a tight defensive line. Pingxing Pass still crouches tiger-like over the defile today, comprising its Wall section, fortress city, fort (now Pingxingguan Village 平型关村), old pass road, beacon towers, drill ground, and the Liulang Fortress (六郎城). The old Wall was built to exploit natural hazards: a city at the pass, walls joined to the ramparts, forts beyond the walls, and beacon towers standing guard to relay alarms. The fort nearly three kilometers southwest of the fortress city — today’s Pingxingguan Village — still preserves its barbican and gate intact. Within, the houses stand in neat order; in former times it housed hereditary military households, with civil and military yamens, the sizable Sanjiao Temple (三教寺), Bixia Temple (碧霞寺), and City God Temple (城隍庙), and many shops. At the village entrance stands a chastity arch commemorating a Qing-era woman née Zhang: after her husband died at his post in Henan (河南), she kept her widowhood for sixty-one years from the age of twenty-one, serving her parents-in-law, treating her neighbors with kindness, and raising her son through hardship until he won official rank. Clearly, even in a frontier fort like those of the Yan-Yun Zone, the original inhabitants might come from distant provinces of the interior, and over sufficient time they gradually formed an organic cultural community. Walking through the Yan-Yun region, one passes such forts again and again.

In the lanes of these forts, walking past each family’s windows and under their eaves, our study group could not help wondering: when, and from where, did the ancestors of the family inside migrate here and settle? After all, state-directed migration from the interior to frontiers and strategic strongholds has been an important policy option for securing borders in both ancient and modern states.

IV. Pass Markets and Trade

Fei Xiaotong (费孝通) held that although the Central Plains and the north were constantly at war throughout history, the more important side of the story was the regular, mutually dependent exchange and trade that went unrecorded. In times without war, military strongholds such as Yanmen Pass and Shahukou became hubs of “pass market” (关市) trade. The Shanxi merchants (晋商), having accumulated considerable capital in the early and middle Ming through the kaizhong system (开中制) — delivering grain to the frontier in exchange for salt certificates — and knowing the frontier garrisons and trade routes intimately, rose swiftly once the border markets opened. Based in several gateway towns, they stockpiled horses, mules, and sheep for resale to frontier garrisons or the interior, while selling Central Plains handicrafts and agricultural goods to the frontier regions; trade in both directions yielded astonishing profits. It was said that a single iron cauldron carried out through Yanmen Pass could be exchanged for a horse, which was then sold at a profit in the interior.

But the goods passing through these gates were by no means limited to the products of the two sides of the Wall. In fact, this commerce was part of trade across the whole of Eurasia, shaping the continent’s economic corridors. In the history of world trade, besides the Silk Road (丝绸之路), routes named for their principal goods include the Spice Route, the Jade Road (玉石之路), and the Tea Road (茶叶之路); the transport networks for salt, iron, and other goods were also very dense. Historically, tea set out from the Wuyi Mountains (武夷山) of Fujian (福建), passing through Jiangxi, Hubei, Henan, Shanxi, Hebei, and Mongolia, relayed by porters, boats, horse caravans, and camel trains, by water and by land, to be traded at Kyakhta (恰克图), whence Russian merchants carried it to Moscow and St. Petersburg and into Europe. Stretching more than ten thousand kilometers from Wuyishan to Europe, this route was called the Ten-Thousand-Li Tea Road (万里茶道). Yanmen Pass held the economic lifeline of Daizhou, Guo County (崞县), Wutai (五台), Dingxiang (定襄), Xinzhou, and Fanshi to the south, and Ying County (应县), Shuo County (朔县), Shanyin (山阴), Hunyuan (浑源), and even Datong to the north. Standing today at the front and rear Yaopu post stations and the frontier-trade street within the Yanmen Pass scenic area, one can still dimly picture the prosperity of that commerce. Descending from the Tianxian Gate, the mountain road twists and turns, steep in places. Looking at the deep cart ruts worn into the flagstones and exposed bedrock, one can imagine camels, mules, and horses hauling loaded carts laboriously up the mountain.

The village built against the mountainside within the walls of Yanmen Pass was historically called Yanmen Stockade (雁门寨), renamed Mingyue Village (明月村) in the Qing and Yanmenguan Village (雁门关村) in the early Republic — a typical “frontier-pass village.” Its villagers were, historically, frontier people through and through. Those inside the pass called them people from beyond it; in the eyes of those beyond, they were people from within. Neither southern nor northern, they nonetheless connected south and north, fusing inside and outside. They were the human embodiment of the junction between the Central Plains and the lands beyond, and to this day their way of life and customs bear clear marks of blending north and south, Hu (胡) and Han (汉). Their chief livelihood was helping merchants haul goods up rugged mountain paths with a thousand meters of elevation change — a profession called “guarding the pass” (护关), which faded only after Yan Xishan (阎锡山) cut roads through the mountains for motor traffic in the early Republican era.

The Central Plains regarded this region as a frontier, or as a transition zone between agrarian and nomadic civilizations. In the imagination of people from the heartland, the frontier ought to be a bitter, desolate place, its two sides sealed off from each other — if not in constant military conflict, then at least mutually wary and hostile. Most of the time, however, local life was nothing of the sort. The “Account of the Xiongnu” in the Book of Han (汉书·匈奴传) already described the lively traffic on both sides with the phrase “coming and going beneath the Great Wall.” Geographic constraints made it hard to establish complete Central Plains or nomadic institutions in the transition zone, and loose social control gave frontier people greater room for maneuver in the distribution of gains. Gaps in corvée and taxation and the drifting of laboring populations produced a flexible, free market economy — while also intensifying collusion between officials and merchants, and between the military and merchants. Traders, adept at profiting from the needs of army camps, often gained from military conflict. The latent military risks and banditry of the border region deepened residents’ dependence on fortresses: dwelling, labor, trade, and business all centered on the various military stockades and forts — perhaps the most direct relationship between local residents and state power.

Constrained by natural ecology and economic structure, the nomadic tribes had enormous demand for the tea, salt, silk, ironware, and tools of the lands south of the Wall, while the Central Plains had great demand for horses from beyond it. Horses were vital for farming, transport, and war — so why did the vast and abundant Celestial Empire never develop large-scale horse pastoralism south of the Wall? Given its productive efficiency, the reliability of its food supply, and its potential for population growth, agriculture was the best avenue of food provision when productivity was still limited. In the Tang era, one square kilometer of farmland could sustain 62.5 people, while the same area of pasture could support only 6. In arid and semi-arid zones, environmental conditions severely restricted crop farming, compelling people to turn to pastoral production, converting grass into nutrition through cattle, sheep, and horses to secure subsistence — an effective social model formed in conformity with natural geography. Agrarian civilization in the same period achieved population growth through labor-intensive farming. From the Spring and Autumn and Warring States periods (春秋战国) onward, agriculture in the middle and lower Yellow River valley shifted steadily toward intensification, with yields often exceeding 50 kilograms per mu (亩) — clear evidence that per-unit grain yields had reached scale, and population grew rapidly. As the Song economy’s center of gravity moved south, northern migrants used two techniques — rice transplanting and rice-wheat double cropping — to raise land-utilization rates in Jiangnan (江南) from 50% to 200%. Ge Jianxiong (葛剑雄) has pointed out that while agricultural production is not the sole cause of population growth, every major breakthrough in China’s demographic history was the direct result of increased grain output; no demographic miracle could arise except on the foundation of a great expansion of agriculture. Thus, with the spatial extension of farming and yield gains from technical inputs, China’s population surpassed 200 million in the early-to-mid Ming and reached a new peak of 430 million by the mid-nineteenth century.

In most cases, Central Plains society could not convert cropland into pasture for stock-raising, so horses had to be imported from the north. Horse markets were established at many Datong forts — Shoukoubu, Zhumabu (助马堡), Bao’anbu (保安堡), Ninglubu (宁虏堡), Shahubu (杀胡堡), Yunshibu (云石堡), Ying’enbu (迎恩堡), Miehubu (灭胡堡), and others. As for the tea markets: from the Tang and Song onward, Central Plains dynasties generally held that tea was indispensable to the pastoral “barbarians” who followed water and grass. The History of Ming (明史), chapter 56 (”Food and Money IV”), records: “The tribespeople relish milk and cheese; deprived of tea, they suffer and fall ill.” From this arose even a political doctrine of “controlling the barbarians through tea” (以茶制夷), and with it the institution of tea-for-horse border markets. The Ming rulers in particular, as noted above, hoped to use the abundant products and advanced culture of the Central Plains to win over, divide, and even control the nomadic regimes, inducing their sincere submission and thus removing the frontier threat: horse markets were set up in the east to bridle the Mongols and Jurchens, and tea markets in the west to pacify the Tibetans. Tea was yet another embodiment of agro-pastoral fusion: the nomadic peoples of the old frontiers universally drank tea, developing distinctive “border tea cultures” (边茶文化) blended with local and ethnic characteristics.

Douglass North and Robert Thomas argued that in the eleventh and twelfth centuries, population pressure drove residents across Europe to migrate to more remote, previously uncultivated areas. The formation of new settlements meant differences in products between regions, creating the conditions for trade; hence cities gradually arose at the crossroads of trade routes. On the East Asian continent, the economic modes and products on either side of the 400mm isohyet differed markedly, generating enormous trade potential. If North and Thomas are right, then trading metropolises like Europe’s Venice and Bruges could well have emerged along this boundary. Dunhuang (敦煌), Zhangjiakou (张家口), Shahukou, and Yanmen Pass were all once flourishing trade centers; Quanzhou (泉州) in the Song-Yuan era and Guangzhou (广州) in the Ming-Qing era became thriving trading cities as hubs between China, Southeast Asia, and the Indian Ocean, and Southeast Asia itself produced many trading port cities or “port states” of over a hundred thousand inhabitants. Had Zhangjiakou, Yanmen Pass, and Shahukou (or Datong, Dai County, and Xinzhou) developed into trading cities like Venice or Bruges rather than military strongholds, might China’s economic history have been rewritten — and might later economists like North have studied the rise of China or Asia rather than of Europe?

This touches another great debate in scholarship: why commercial economy never rose on a grand scale in China, and why capitalist industrialization did not occur there. Zhao Dingxin argues that two features of China’s Confucian-Legalist polity were decisive: a unified Confucian moral order restrained members of society from pursuing commercial gain, and the merchant class could profit only by attaching itself to officials (the state), never wielding significant economic, military, or ideological power. Wen Yi (文一) argues that traditional China’s moral order kept it from the plunder, massacre, and colonization of the Americas, Africa, and Asia that marked Europe’s Age of Discovery — and that it was precisely those acts that supplied the wealth-foundation of Western Europe’s Industrial Revolution. Indeed, a polity staffed by Confucian scholar-officials could never tolerate the emergence, in frontier regions, of large trading ports or cities beyond official control; commercial development was thus strictly confined within narrow limits. More broadly, the Central Plains dynasties regarded the lands beyond the Great Wall as “outside the realm” — at once tributaries and potential threats to border security, even to the capital and the regime itself. Under such conditions, the frontier’s military role wholly suppressed the possibility of trading cities arising.

Even so, “mutual markets” (互市) of considerable scale did form along the frontier; military strongholds like Yanmen Pass and Shahukou became centers of border trade, and, more, became the historical memory of two cultural spheres coexisting, communicating, and blending. The Ming jingshi wenbian (明经世文编) records a memorial by Wei Shiliang (魏时亮) on Gansu: “The tribes cannot go unsuccored; the tribespeople are our people. Our lands adjoin like lips and teeth; their weal and woe are one with ours.” Plainly, farmer and herder developed an intimate, mutually generative relationship — even sentiments of shared honor and hardship, of common cause. Locals told us that the people of Dai County have many relatives in Datong and Inner Mongolia — a typical example of ethnic fusion. In the interweaving of nomadic and agrarian life, intermarriage was an inevitable fact. Marriage opened a window onto deep knowledge of the other’s language, culture, religion, and customs, and even altered the gene pool. (The so-called fujia (复甲) hypothesis may serve as evidence.) In the agro-pastoral transition zone one comes to understand profoundly that the Hu Huanyong Line is not merely a boundary of population density but a watershed between two types of culture. It was precisely through the contact, exchange, and fusion of nomadic and agrarian civilizations that the grand architecture of Chinese civilization was built up layer by layer. As the saying goes, “One Yanmen Pass, half the history of China” (一座雁门关，半部华夏史): the emperors who toured here, the generals who fought here, the princesses who passed through on marriage-alliance journeys, and the soldiers and civilians who kept the pass together created the cultural symbol of Yanmen — through which later generations may glimpse, as through a keyhole, the splendor of civilizations north and south of the Wall, so different in temperament yet so deeply mutually constitutive.

At Yanmen Pass under a full moon, walking the mountain road in darkness, the bright moon in the night sky calls to mind the poem “Mountain Studio Shaded from the Moon” (蔽月山房), written by the young Wang Shouren (王守仁, Wang Yangming 王阳明): “The mountain near, the moon far off — the moon seems small; so people say this mountain is bigger than the moon. But were there one whose eye was vast as heaven, he would see the mountain high — and the moon wider still.”

V. Geography and Human Society in the Industrial Age

The 400mm isohyet demarcated different zones of economic production, shaping the divide between agrarian and nomadic civilization. The influence of “climate and soil” on economic forms — Ray Huang’s abiding preoccupation — further shaped the state’s political-economic system, producing what he called the “precocity” and “ultra-stable structure” of Chinese politics, which blocked an industrial revolution. Zhao Dingxin argues that the Confucian-Legalist state’s near-perfect fusion of ideological and political power made it impossible for the phenomena of early modern Western Europe — civil society, religious reformation, an urban commercial class, industrial revolution — to appear in China. Wen Yi’s explanation of the Western industrial and scientific revolutions stresses instead the predatory cultural tradition formed in the West after the Crusades, and the competitive state system’s crushing demand for munitions and for the fiscal extraction to sustain war, generating a cycle in which war fed capitalism and technological revolution and vice versa, ultimately producing the West’s industrial revolution and modern scientific revolution. The significance of the 400mm isohyet, however, lies in its direct influence on productive activities and organizational forms tied to land and vegetation. Once human society enters the industrial age, the influence of rainfall on socioeconomic development declines; in some cases the effect of climate and rainfall falls almost to zero — the oil states of the Middle East being an example.

There are three mechanisms by which the influence of climate and natural geography declines in the industrial age. First, the structure of resource endowments changes: rainfall and water are no longer the decisive endowments, and minerals become a decisive resource. Second, the mechanisms driving economic growth change: human resources (labor, knowledge, and technology) and capital become paramount. Third, as industrialization advances, humanity’s capacity to actively transform and adapt to the natural environment improves. Irrigation systems, water-extraction and storage systems — including Kuwait’s seawater desalination — river regulation, and urban greening have all vastly enhanced humanity’s ability to cope with natural geography. And improved capacity to build transport infrastructure has powerfully offset the constraints that physical distance across mountains, deserts, and other terrain once imposed between peripheral regions and economic heartlands. The construction, after 1949, of industrial center cities such as Baotou and Datong north of the 400mm isohyet exemplifies these mechanisms at work.

The Yan-Yun Zone, and Shanxi as a whole, are quintessential cases. Since the modern era, Shanxi’s industrialization long ranked among the most advanced of China’s provinces, with substantial development in steel, armaments, cement, chemicals, and light industry. In the early years of the People’s Republic, Shanxi’s degree of industrialization was at one point second in the nation, behind only Liaoning (辽宁), then the great industrial province. Yet the famous “resource curse” of political science and economics seems also to have operated in Shanxi: in the latter half of the twentieth century, the province developed an economic structure dominated by the coal industry, and after the turn of the twenty-first century the many negative consequences of this model became increasingly evident. Along our route, our study group still saw abundant coal-mining facilities, and the railways and highways still visibly bore the burden of coal transport. Local colleagues frequently discussed the enormous pressure Shanxi faces to restructure its economy; in developing innovative sectors and electronics and information industries, Shanxi lags far behind the eastern provinces. In fact, however, Shanxi is pressing actively ahead with high-quality development in industry and informatization.

If the 400mm isohyet’s power to divide economic and human geography has weakened so greatly in the industrial age — and if the state has actively organized migration and development across the line, as with the Xinjiang Production and Construction Corps (新疆生产建设兵团), and industrialization and urbanization projects such as the rise of Baotou and Karamay (克拉玛依) — why does the Hu Huanyong Line still function so conspicuously as a dividing line in China’s economic and human geography today? On today’s economic and demographic map of China, the two sides of the line still differ as heaven from earth in population density, in the density of expressway and high-speed rail networks, in per-capita electricity consumption, and in daily mobile-data traffic. One reason is classic path dependence: the southeastern side of the Hu Huanyong Line was already the center of gravity of China’s population and economy — an established fact — when the country embarked on socioeconomic modernization, and this fact is deeply inscribed in the trajectories of economic and demographic geography during modernization. Another reason is that in other endowments affecting economic and demographic patterns — such as proximity to international markets and international capital — the southeastern side also holds clear advantages. The Hu Huanyong Line, in other words, is not merely a line dividing rainfall; it divides other endowments as well.

In any case, across different historical periods, many state-led efforts to promote national development and especially regional balance have greatly ameliorated regional disparities: the Third Front construction (三线建设), the Western Development program (西部大开发), targeted poverty alleviation (精准扶贫), paired assistance between eastern and western provinces (对口支援), the westward relocation of textile spindles (东锭西移), West-to-East power transmission (西电东送), the Belt and Road Initiative (一带一路), the East-Data-West-Computing project (东数西算), and the construction of the “eight vertical and eight horizontal” high-speed rail network and ultra-high-voltage transmission grids. In the Yan-Yun Zone we saw large arrays of photovoltaic installations built across farmland. In a region short of water but rich in sunshine, the opportunity costs of cultivation and solar generation clearly diverge enormously. Yet converting solar resources into economic income became possible only in recent years, once the state had provided power-transmission infrastructure and built a well-functioning electricity market. Our study group also saw the Xiong’an-Xinzhou high-speed railway (雄忻高铁) under construction, linking the Yan-Yun Zone to the economic core of North China and heralding the zone’s imminent integration into the one-hour transport circle of Beijing, Tianjin, and Xiong’an (雄安) — another example of how the industrial age transforms the structural constraints of natural geography and powerfully reshapes the economic map.

Over the past two decades, China’s nationwide efforts to improve the human living environment have drawn worldwide attention, and the Yan-Yun Zone’s achievements are striking. More than half of Xinzhou’s counties lie in the gully-scarred loess hill region, suffering severe soil erosion and frequent drought. In recent years, through combined efforts in water conservancy, agronomy, and mechanization, the fields are now level and fertile, irrigation works complete, and township road and shelterbelt networks unimpeded. To address water scarcity, small watersheds were tackled one by one — securing water supply, comprehensive management, ecological cleanup, and reinforcement of county-level small water networks — gradually raising the utilization rate of natural precipitation, strengthening resilience against natural disasters, and building the backbone of a modern water network of considerable scale. According to a report of the Xinzhou Municipal Government, in 2021 alone the city invested 501 million yuan in 203 key water projects across eight categories. Data show that Xinzhou’s green-coverage rate has risen from under 4% in the 1980s to 40% today, with urban per-capita park green space reaching 14.89 square meters. Traveling north from Taiyuan through Fanshi, Dai County, Datong, and on to Ulanqab, our study group could feel the effects of this ecological improvement everywhere.

And yet China’s efforts to improve its domestic ecology and living conditions may count for little against the backdrop of global climate change. Industrialization has raised humanity’s ability to transform local environments, but the long accumulation of carbon emissions has set the planet’s overall environment on a warming trajectory. China has acted vigorously in the global response to climate change, advancing toward carbon peaking by 2030 and carbon neutrality by 2060. But judging from current progress, humanity faces the challenge of failing to hold global temperature rise within 2°C this century. Global warming will not only devastate biological systems but greatly increase the scale and frequency of extreme weather — heat waves, blizzards, and the like. Rising temperatures are melting polar ice and the snowfields and glaciers of the world’s mountains, with sea-level rise as the direct consequence: not only will many island nations be entirely submerged, but the coastal regions of continental countries — such as China’s Yangtze River Delta (长三角) — will also be inundated. Paradoxically, for the long-arid, long-cold Yan-Yun Zone and the regions north of the 400mm isohyet, climate change is good news: these areas will receive more rainfall and a relatively warmer climate. Perhaps, over the next twenty to thirty years, as the eastern seaboard gradually faces the prospect of inundation, ever more Chinese will migrate northwest — to the Yan-Yun Zone, the Hetao region, Inner Mongolia — to live and work? As a country of vast territory, we may have living space enough to weather the catastrophic prospect of global warming; many other countries in the world, one fears, will have no such luxury.

When our study group left Taiyuan for Xinzhou, heavy rain fell on Taiyuan. Encountering a downpour in a historically arid region, one could not help recalling the torrential rains and floods that have struck Henan, Shandong (山东), and Beijing in recent years. The rain band then followed our footsteps northward; the night we reached Datong, the rain clouds arrived with us. Looking out the window the next morning, the rain was drumming down; water had pooled on the ground below and on the rooftops opposite; parents ferrying children to school on electric scooters all wore rain capes — a scene one expects of the Jiangnan rainy season. To meet such rainfall north of the traditional 400mm isohyet seemed to signal that the astonishing prospect of global warming is already knocking gently at the door.

Conclusion

On grand social-scientific questions — the interaction between agrarian and nomadic societies, and the influence of geographic conditions on economic and social patterns — this article has cross-validated and re-examined existing multidisciplinary theory against field observation. Its central concern has been the Hu Huanyong Line, or 400mm isohyet, which has so profoundly shaped Chinese history and China’s socioeconomic development. From it we see that natural geography exerts a deep influence on long-run economic, social, and political patterns.

In closing, we must answer one more question: if rainfall has declined in importance in industrial society, what is the point of studying its influence on socioeconomic patterns today? In fact, although rainfall matters less now, the Hu Huanyong Line’s influence on China and East Asia, accumulated over millennia, will persist for a long time. Simply put, the economic and demographic geography of China formed under the line’s influence over thousands of years will not change significantly in the short run. Related to this are, on the one hand, the long and enduring influence of history and culture on human society, continually narrated and transmitted; and on the other, the new meanings people will find within new socioeconomic patterns amid rapid modernization. In the four-plus decades since Reform and Opening especially, Chinese society has undergone, within a single generation, changes that took Western societies two or three centuries. As socioeconomic patterns transform at speed, people’s ways of life and the physical spaces and geographic environments they inhabit are also changing enormously. How, amid such upheaval, to understand and accept new ways of living and new social realities while maintaining psychological and cultural ties to environments and social worlds that are past — perhaps gone forever — is the great challenge that a rapidly changing society poses to the individual. The ordering and narration of past history is, one might say, itself a way of coping with change.

In the Yan-Yun Zone we saw the Xiong’an-Xinzhou high-speed railway drawing the region into a new transport “corridor,” solar installations in the fields bringing it into a new power and energy “corridor,” and the growth of Shanxi’s manufacturing and information industries incorporating it into a new industrial “corridor.” All this means that this land, once so constrained by rainfall and soil erosion, is — like many other parts of China — steadily entering a mode of economy centered on industry. This is a manifestation of the great success of Chinese-style modernization. But understanding and embracing the new socioeconomic order will, for many, still take much time. At the very least, this mysterious geographic dividing line, which has shaped the East Asian continent since the dawn of Chinese civilization, remains fascinating. Perhaps, as animals, human beings’ intense feelings for mountains, rivers, valleys, plains, clear skies, and rain and snow are written in our genes. And so today — when high-speed rail and expressways, irrigation and river systems, air conditioning and heating continually improve the human habitat and loosen geography’s grip on social and economic life — it remains deeply meaningful to keep asking what geography means for human activity. Against the backdrop of drastic global climate change, the habitable range of humanity on the earth’s surface may well shift dramatically; many people may have to leave the geographic spaces they once knew and migrate to new ones. If such a future is destined to arrive, then the mutual shaping of geography and human society deserves our sustained attention.

(This article is dedicated to Ray Huang [黄仁宇], who devoted his career to the long-term trends of Chinese history — to the tug-of-war, conflict, and fusion between Central Plains civilization and the nomadic civilization of the north, and to the invasions and shocks endured by China and East Asia after the arrival of capitalism and European imperialism and the rise of modern Japan.)

More to read:

The initiative’s director, Hu Bo, is a prominent scholar in China’s maritime strategy field. He currently serves as a research fellow at Peking University’s School of International Studies and as director of the Center for Maritime Strategy Studies at Peking University. His work centers on maritime strategy and policy, with particular focus on sea power strategy, the South China Sea, international security, and the US military. He is the author of several books, including China’s Maritime Power in the Post-Mahan Era.

Back in January of this year, I published one of their analyses in my newsletter; Mingkun Technology—whose chief scientist is none other than SCSPI director Hu Bo—had detected US forces rapidly redeploying to Europe and the Middle East in the wake of American operations in Venezuela, and used those observations to map out the likely pattern of US action against Iran. I also interviewed Hu Bo on the subject. In his view, Iran’s domestic situation is the key variable; Trump, he argued, is adept at picking low-hanging fruit, inclined to seize the moment when internal turmoil breaks out in Iran, but only when he can guarantee an absolute advantage. If Iran stays internally stable, Washington will struggle to find an opening anytime soon. Subsequent developments, along with the ceasefire the two sides have since reached, have borne out his assessment.

The report argues that the US is transforming the Philippines into a forward hub, which looks more like an asset-light exercise in strategic posturing than actual preparation for war. It notes that since Marcos Jr. came to power in 2022, the Philippines has shifted from a balanced diplomacy to the front lines of confrontation. The number of bases under the Enhanced Defense Cooperation Agreement (EDCA) has jumped from five to nine, forming a strategic layout aimed at China that “locks down the Taiwan Strait to the north and controls the South China Sea to the south.”（北锁台海、南控南海） Advanced systems such as HIMARS, the Typhon mid-range missile launcher, and the NMESIS interceptor have arrived in succession, and the US presence is now said to “amount to a permanent military presence” in the country.

Yet the report also delivers a dose of cold water. These forces, it contends, are largely a peacetime presence and would prove highly vulnerable in an intense conflict; their real value lies in the political, strategic, and diplomatic realm, to disrupt the situation, that is, leveraging the Philippines’ geographic proximity to tie down and wear down China rather than to prepare directly for war. Because the Philippine bases are poorly developed and lack wartime resilience, the US has remained cautious about investing in their expansion, and in strategic terms, the Philippines serves more as a supplement to US bases in Japan than as a frontline in its own right. The report thus arrives at a somewhat ironic conclusion that the Philippines’ hope of using American power to deter China is little more than wishful thinking. For China and other stakeholders, the takeaway is that while the wartime threat of these deployments deserves attention, even greater vigilance should be paid to how they tie down and drain China in peacetime.

Below I’ve attached the brief version of the report. Thanks to the kind authorization from Hu Bo, I can share the report in my newsletter

Full report in English

1.84MB ∙ PDF file

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U.S. Military Base Expansion and Force Posture Enhancement in the Philippines

Preface

Since Ferdinand Marcos Jr.’s inauguration in June 2022, the U.S.-Philippine alliance has strengthened significantly. The number of sites under the Enhanced Defense Cooperation Agreement (EDCA) has surged from five to nine, with the site in northern Luzon facing the Taiwan Strait and the site on Balabac Island approaching the frontline of the Nansha Islands (Spratly Islands). Consequently, the U.S. military presence in the Philippines now has acquired the practical significance of a “forward position on the first island chain”. Meanwhile, the scale and intensity of joint exercises such as Balikatan, Salaknib, and KAMANDAG have steadily increased year after year. Systems including the High Mobility Artillery Rocket System (HIMARS), the Typhon Weapon System, and the Navy-Marine Expeditionary Ship Interdiction System (NMESIS) have been successively deployed. Through these developments, the U.S. military is progressively incorporating the Philippines into its Indo-Pacific strategic system and command framework.

Nevertheless, the expansion of EDCA bases has fallen short of expectations, and U.S. efforts to strengthen its military presence in the Philippines continue to face constraints from multiple factors. First, the Philippines’ own capabilities are limited, providing little assistance to the U.S. in wartime; Second, while the U.S. needs the Philippines’ strategic geographic location, it would require significant investment to fully enable the EDCA sites for wartime readiness; Third, the political uncertainty within the Philippines and rising nationalism have added to U.S. hesitations.

Although U.S. forces have sharply increased their presence and deployments in the Philippines, these assets possess limited wartime utility, especially against a high-end opponent such as China. The main purpose of this strengthened military access is not genuine preparation for war, but rather strategic posturing, containment, and attrition: exploiting the Philippines’ geographical advantages to bolster U.S. force posture around the South China Sea and Taiwan Strait, shaping a favorable overall strategic environment, and using the Philippines to wear down China during peacetime. At the same time, the U.S. is cautious about making excessive investments in these sites and is wary of turning the Philippines into a wartime forward base.

This report aims to objectively outline and evaluate the expansion of U.S. military sites and other military presences in the Philippines, analyzing their impact on regional security in both peacetime and wartime for the reader’s reference and consideration.

Director of SCSPI Hu Bo

Key Findings

I. Base Expansion: From Strategic Access to Forward Presence

The expansion of U.S. military bases in the Philippines is a critical link in America’s strategy to implement “Integrated Deterrence” and optimize the Indo-Pacific pattern. The core objective is to transform the Philippines from a “strategic rear” into a “forward hub”. The northern base group is designed to block the Bashi Channel and Balintang Channel during crises and cut off access routes to the Western Pacific; the southern base group strengthens persistent presence and intelligence-collection capabilities in the South China Sea, providing direct support for sea-control operations. In recent years, leveraging the EDCA, the U.S. military has continuously pushed forward infrastructure expansion of military bases in the Philippines to enhance their capacity to support realistic combat-oriented joint drills and maritime cooperation activities.

In March 2016, following the annual Philippines-United States Bilateral Strategic Dialogue, the two governments issued a joint statement announcing that, pursuant to the 2014 EDCA, U.S. forces would be granted access to five Philippine military bases. These sites are Basa Air Base in Pampanga, Fort Magsaysay in Nueva Ecija, Antonio Bautista Air Base in Palawan, Mactan–Benito Ebuen Air Base in Cebu, and Lumbia Air Base in Cagayan de Oro. In February 2023, the U.S. and the Philippines announced plans that in addition to the previous five bases invested and stationed by U.S. forces, they would establish and operate four additional new bases. In April, the Philippines announced the locations of these four additional sites: Naval Base Camilo Osias and Lal-lo Airport in Cagayan, Camp Melchor Dela Cruz in Isabela, and Balabac Island in Palawan.

II. Force Deployment: From Rotational to Combat-Ready Military System

The characteristics of U.S. force deployments in the Philippines have undergone three major shifts: from intermittent exercise-based presence to sustained rotational deployments; from single-service operations to integrated joint operations; and from bilateral cooperation to multilateral alliance coordination. The U.S. military presence in the Philippines has already gone beyond the traditional scope of alliance cooperation, evolving into a fully functional, rapidly responsive, and tightly coordinated, combat-ready military system integrated with multilateral alliances. At present, the U.S. deployment in the Philippines “has effectively become equivalent to maintaining a permanent military presence” in the country.

III. Future Trends and Influencing Factors

For a long time, the U.S. and the Philippines have continuously deepened and broadened their bilateral alliance underpinned by agreements including MBA, MDT and EDCA. The fundamental drivers of progress in U.S.-Philippines relations are U.S. strategic competition with China and the Philippines’ strategy of deterring China. The U.S. exploits the Philippines to stir tension in the South China Sea and the Taiwan Strait, while the Philippines seeks to leverage U.S. power and capitalize on its geographic advantages to strengthen its own capabilities, conduct infringements and provocations in the South China Sea, and expand its international influence. However, constrained by domestic politics in both countries and different national interests, U.S. military deployments in the Philippines tend to follow a “light-asset” approach, avoiding excessive investment.

IV.Summary

As a major U.S. ally in the Asia-Pacific and a South China Sea claimant, the Philippines has long been regarded by the U.S. as a “strategic pawn” for stirring tension in the South China Sea and even the Taiwan Strait. Since Marcos Jr. took office in 2022, he has comprehensively restarted and upgraded the military alliance with the U.S., closely aligning Philippine strategy with Washington and shifting the country from “balanced diplomacy” to the “front line of confrontation.” Through EDCA, the U.S. continues to expand its military footprint on Philippine bases and conducts realistic combat exercises involving autonomous weapons and unmanned platforms to enhance bilateral and multilateral interoperability.

However, Philippine bases offer limited utility in wartime. Therefore, the Philippines’ strategic positioning is primarily as a supplement to U.S. military bases in Japan, and U.S. investment in base expansion has fallen short of expectations. To enhance interoperability and combat readiness, bilateral and multilateral joint exercises and training between the U.S. and the Philippines are expected to continue on the rise, strengthening their distributed denial capabilities in the Indo-Pacific. At the same time, to address the region’s lack of forward ammunition and equipment production capacity, the U.S. may push for the establishment of joint ammunition manufacturing and storage facilities, as well as ship repair facilities, at Subic Bay, thereby enhancing the Philippines’ ability to provide logistical support to U.S. forces.

The U.S.-Philippines military cooperation has leapt from a traditional “defensive alliance” to a key component of the Indo-Pacific “integrated deterrence” framework. The EDCA base network has completed a strategic encirclement layout against China that “locks the Taiwan Strait from the north and controls the South China Sea from the south.” Continuous investment in infrastructure expansion is turning the Philippines into a forward combat hub.

Deploying assets such as F-35, NMESIS, HIMARS, and unmanned surface vessels, the U.S. has achieved a shift from “rotational access” to “quasi-permanent presence” and from “bilateral exercises” to “multilateral joint operations”. Through a tiered cooperation network of the “core four countries” (U.S.-Philippines-Japan-Australia) plus extended partners, the U.S. has further embedded the Philippines within its Indo-Pacific strategy and command chain.

However, these forces are primarily a peacetime presence and would be extremely vulnerable in a high-end conflict. Their existence serves more political, strategic, and diplomatic purposes—using a relatively small military footprint to disrupt the situation, shape the environment, and push developments in a direction favorable to the U.S. Judging from U.S. investment and troop deployment, these bases are mainly intended to function as backup and logistics nodes in times of crisis or conflict, serving as supplements to U.S. bases in Japan.

Since 2013, although the U.S. has made significant progress in expanding Philippine bases and increasing its military presence there, the importance of these developments should not be overstated. The current situation in both the South China Sea and the Taiwan Strait remains tense but has not yet erupted into open conflict (“hot but not exploding”). The U.S. is willing to exploit these Philippine bases, actively using them to shape the strategic environment, contain China, and drain Chinese resources, yet it is unwilling to invest too heavily—especially since the existing infrastructure in the Philippines is poor and would require massive additional investment to achieve wartime resilience. The Philippine expectation that U.S. military presence will deter China is fundamentally unrealistic.

For China and other stakeholders, it is essential to objectively assess the trajectory of the U.S.-Philippine military alliance development and its impact on their own interests. While taking seriously the wartime threat posed by the U.S. military presence and deployments in the Philippines, greater attention should be paid to the restraints and attrition these arrangements and related activities impose on China during peacetime.