This brings to mind a piece in the book I’ve been reading. It was written in 2014, and it’s about how China’s wind power went from nothing to number one in the world. The funny thing is, the article is arguing about America’s “anti-dumping” case back then, yet the whole time I was reading it, what kept coming to mind were today’s European investigations and tools aimed at China. Twelve years on, the article isn’t just still relevant. It’s worth reading even more now.

This is the third episode of my series of readings of the book Pioneering Through Hardship: An Account of the Decision-Making and Construction of Landmark Engineering Projects (筚路蓝缕：世纪工程决策建设记述), the memoirs of Zhang Guobao, former Vice Chairman of the National Development and Reform Commission (NDRC). The title comes from the Zuo Zhuan 左传, an idiom describing the act of overcoming hardship to undertake a new venture under extremely difficult conditions.

Author Zhang Guobao served as Vice Chairman of the NDRC from 2003 to 2011, holding posts as the first Director of the National Energy Administration and as head of the leading group for the West-East Gas Pipeline project. He oversaw the formulation of industrial plans and policies for shipbuilding, automobiles, steel, and a host of other key sectors. More importantly, his tenure coincided with the pivotal eight-year window in which Chinese new energy shifted from a relative fringe option to a national strategy.

Reading this article on wind power, my biggest takeaway is that it’s really answering the question of whether China’s wind power competitiveness was built on subsidies or not. Zhang’s answer is a clear no. He believes the things that really did the work were three. Scale, localization, and competition.

The first is to make the market big enough. Only when the scale is there can you use the advantages of mass manufacturing to spread the cost of each turbine component over time. This is the fundamental reason costs later came down across Chinese wind power, and across the whole clean-energy industry.

The second is localization. Zhang mentions he once dealt with American middlemen who took a 200,000-yuan kickback just for selling a single turbine. With whole units relying on imports for years, costs simply couldn’t come down. The way he pushed localization was to go to the companies himself and mobilize them, piecing the whole supply chain together bit by bit, from blades, gearboxes and bearings to generators. The government’s role was more about coordinating and matchmaking than directly throwing money around.

The third is using competition to discover price. Through concession bidding, on one hand you can bring in competition among developers, and it also helps decision-makers grasp the real cost of wind power. As for private firms’ worry that state-owned enterprises would compete viciously with low prices and then monopolize the market, Zhang solved it by removing the highest and lowest bids and running multiple rounds of revision. And the facts proved it. The wind market is just too big, no one can afford rock-bottom prices time after time, so the so-called dumping and monopoly didn’t hold up.

Zhang also speaks directly about his view on subsidies. He agrees that in an industry’s early stage, it’s necessary for the state to give a certain amount of tax and R&D support, which I think is also a kind of “crossing the river by feeling for America’s stones.” But subsidies were never the reason Chinese wind power succeeded. While in office, Zhang strongly opposed the Ministry of Finance directly subsidizing domestically made turbines, believing direct government subsidies hurt market fairness. In 2009, when the U.S. accused China of industrial subsidies and sought to launch an anti-subsidy investigation, China took the opportunity during negotiations to cancel these subsidies. The clauses once used to protect domestic industry were likewise dropped voluntarily, after the NDRC judged that Chinese firms had the ability to compete head-on with their foreign counterparts. What really made Chinese wind power grow was still putting money into research, raising the industry’s competitiveness, and in the end bringing costs down through economies of scale.

Zhang doesn’t dodge the fact that, under China’s governance system, local governments, for the sake of tax revenue, would force wind companies to build plants locally, which eventually caused overcapacity. His attitude toward this, that “in the end it still has to come back to the market,” is actually a roundabout admission that the other half of this model is letting inefficient firms go bankrupt and letting the market clear. Scale and competition bring prosperity, but they also inevitably bring a reshuffle. The two are two sides of the same coin, and you can’t have it both ways.

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He also writes in detail about the delays in approving transmission lines and the arguments behind them, including whether to integrate the grid, whether to build outbound transmission corridors, and whether to go ahead with ultra-high-voltage. Everyone argued back and forth, but no one would make the call, and the result was that huge amounts of wind and hydro power couldn’t be sent out. Praise planning is easy, but it’s the willingness to talk about reality that’s convincing. The rest of the details I’ll leave to the translation below.

Honestly, while reading it, I often had a strange sense of déjà vu; the article talks about America’s “anti-dumping” case back then, but I kept thinking about Europe’s subsidy investigations into China. It’s reasonable for Europe to protect its own industries, but resorting to unilateral measures on Chinese goods does nothing, at root, to strengthen Europe’s competitiveness. By comparison, encouraging Chinese companies to invest in Europe would be a far more viable path. Yet Brussels’ approach brings to mind the satire of Yes, Prime Minister: just as British defence policy existed not to defend Britain but to make people believe it was defended, these measures exist not to protect European competitiveness, but to make people believe it is being protected. Worse still, they risk inviting Chinese retaliation that would only deepen Europe’s economic woes. And this article is itself the answer: China’s wind power succeeded not by relying on subsidies, but on scale, competition, and research. Protection might buy a moment’s breathing room, but it can’t buy real industrial competitiveness. And this holds true whether for the China of back then or the Europe of today.

Below is the full piece:

The Decision-Making Behind China’s New Energy

In ten years, China’s wind power industry leapt from an obscure sector to a position of relative global leadership. “First, make the ‘pie’ bigger; second, introduce competition; third, push for domestic manufacturing—these enabled the industry to achieve explosive growth.” But amid this explosive growth, numerous controversies also arose, such as “wind curtailment,” overcapacity, excessively high costs, the form of subsidies, and whether to pursue concentrated development or distributed development. After 2009, worries, criticisms, doubts, and even accusations about wind power’s “Great Leap Forward”–style development came in an unending stream. To sum up our experience and draw lessons, we should not shy away from the problems, and it is necessary to review the decision-making and development course of new energy over these ten years.

Three Major Policies Sparked Explosive Growth in Wind Power

The application of wind power in China can be traced back to the 1980s, but it was not until the “Eleventh Five-Year Plan” period that it ushered in explosive growth. Wind power did not appear only in recent years. Before I served as Deputy Director of the State Planning Commission, my predecessor as Deputy Director, Ye Qing—who later became Chairman of the Shenhua Group—was someone I once accompanied to the United States for an inspection visit, probably in the early 1990s. When the plane landed in California, we saw wind turbines covering the hilltops along the coast in great swaths.

New energy in China got started as early as the 1980s. In the 1990s, the predecessor of today’s National Energy Administration was the Basic Industries Department of the State Planning Commission, and within the Basic Industries Department there was a division called the Energy Conservation and Renewable Energy Division. The function of this division was to develop new energy using international loans. At that time the World Bank provided a sum of money and set up a dedicated office to promote wind and solar energy, called the World Bank Renewable Energy Loan Office. The Energy Conservation and Renewable Energy Division had also at that time selected manufacturers such as the Luoyang Tractor Factory and the Xi’an Aircraft Manufacturing Factory to produce wind power generation equipment, but none of them later amounted to much. At that time, wind power really had not developed on a large scale. In 1999, I took over as Deputy Director of the State Planning Commission, also overseeing energy. The entire country’s installed wind power capacity by 2000 was still less than 400,000 kilowatts, and this 400,000 kilowatts of equipment was basically purchased from abroad, mainly Vestas and GE equipment.

After 2003, renewable energy represented by wind power did indeed usher in explosive development, for a variety of reasons. Looking at the broader situation, worldwide the green-development concept of new energy was increasingly winning people’s hearts, and the same was true in China. The state’s emphasis on renewable energy was gradually strengthening, and public awareness was also continuously rising, which provided a very good public-opinion environment for promoting renewable energy. On the other hand, there were the state’s guidelines and policies. After I took office, I felt very puzzled: why couldn’t wind power be promoted? Later I learned that wind power was extremely expensive—the cheapest electricity price was still eight mao per kilowatt-hour, and some even reached around two yuan per kilowatt-hour; naturally, not many people were willing to use electricity that expensive.

At first I did not understand: wind resources don’t cost money to buy, so how could the cost be even higher than that of coal-fired power plants? It turned out that the main cost was in the equipment—the price per kilowatt of wind power equipment was much higher than that for thermal power, and part of the equipment investment was financed by loans. Although the wind itself costs nothing, the principal and interest repayment, equipment depreciation, and other financial expenses were the main costs, so the price of wind power was extremely expensive. Therefore, I put forward suggestions in three areas:

First, make the “pie” bigger. Since it was so expensive, we had to find ways to make it cheaper. How could it be made cheaper? By making the “pie” bigger and spreading out the cost. If there were only three to five machines and no large-scale production, the cost could not be brought down. If each manufacturer made several hundred or a thousand units, the cost would be spread thin, and enterprises would have an incentive too.

Second, push for domestic manufacturing. Why was it so expensive at first? Because we couldn’t make it ourselves. When we first did research, we encountered many middlemen. Earlier, when I went to the United States with Comrade Ye Qing, we ran into two ethnic-Chinese brothers doing this kind of business. They sold American wind turbines into China. It was said that the kickback for selling a single turbine was 200,000 yuan. This was how equipment prices were driven up. If we could solve the equipment problem ourselves through domestic manufacturing, prices would come down.

Third, introduce competition. In the past there was no competition among wind power developers. If a certain place had wind and the government wanted to build a wind farm, and a developer was willing to invest, the project would be given to him. Once it was up and running, he would go lobby the government, getting the price bureau to approve the electricity price, and some were approved at 1.5 yuan/kWh or even 2 yuan/kWh. Investors naturally hoped the price department would approve a high electricity price, because the higher the price, the more they could earn. At that time, investors and project owners were determined in this way. Later, I felt this should be changed: the government should not designate who would be the investor; those willing to invest in wind power could compete, conducting concession-rights bidding. The government would provide wind resource data to investors, and the investors would bid against one another on price, determining how much per kilowatt-hour. This created competition: there might be three to five parties all wanting to do it; one would bid six mao per kWh, another five mao five per kWh, and yet another five mao per kWh—then I could let the one who bid five mao per kWh do it.

Through these three methods, we brought down the construction cost, and the price per kilowatt-hour came down as well.

The Concession-Rights Bidding Debate

The practice of concession-rights bidding stirred up considerable debate at the time. Originally, electricity prices were all determined by the price department based on cost plus an appropriate profit. They still preferred to do it this way and did not want bidding, saying that after bidding there would be vicious competition, leaving wind power enterprises with no profit to make, which would dampen the enthusiasm of wind power investors and possibly have a bad effect. Others said that state-owned enterprises could disregard cost and maliciously drive down prices in competition, squeezing private enterprises out. This was what they considered the problem with concession-rights bidding. In addition, they raised the issue of malicious bidding: because if you bid five mao, then in order to beat you I would bid four mao—when actually four mao means a loss and can’t be done—this would dampen everyone’s enthusiasm for investing in wind power and distort the normal bidding price, and so on. At the time there were some such reasons for opposition.

Would the situations they described actually happen? Yes—sometimes bidding might indeed give rise to vicious competition. But we could do as a referee scores points: to avoid unfairness, drop the highest score and the lowest score, take a weighted average, and on the whole it could still reflect the true level. Moreover, even if someone competed viciously and deliberately took a loss, that kind of thing cannot last—once is fine, but can one keep taking losses two or three times? Some also charged that private enterprises would surely withdraw because they couldn’t afford the losses, while state-owned enterprises could compete without regard to cost. Actually this is wrong too. Don’t assume state-owned enterprises will keep operating at a loss forever. An enterprise might engage in vicious competition once, but it cannot do so every single time.

Why did the concept of concession-rights bidding come about? In the past I served as head of the leading group for the West-East Gas Pipeline construction project, and at that time we also used bidding to determine the supplier of pipeline steel. Back then we also pushed for domestic manufacturing; the domestic firms that could make it included several large steel companies such as Baosteel, Angang, and Wugang. At this point a South Korean company came in and bid lower than all the domestic firms. Many domestic steel mills came to complain, saying this was vicious competition—such low prices were dumping—but at that time there was no concept of anti-dumping yet. As the owner unit, the responsible comrade from PetroChina came to me. He said, “Director Zhang, what do you think we should do? Whom should we let win the bid?” At that time I was also in a difficult spot: the domestic steel enterprises reflected that the Koreans were competing viciously, but the owner unit’s interest was oriented toward buying from whoever was cheapest. All right then—the first time, let the Koreans win the bid. The Koreans were indeed competing viciously, dumping at below cost, but at the second bidding, that Korean bidder had no way to continue, because he had done a loss-making deal. At the second bidding, it was all Chinese enterprises that won.

Judging from this experience, I believe the logic of wind power concession-rights bidding is the same: even if someone competes viciously and bids recklessly, that situation cannot last. A similar incident also occurred during the first batch of wind power concession-rights bidding. In 2003, we held the first batch of wind power concession-rights bidding in Rudong, Jiangsu. At that time I was away on a business trip; Shi Lishan, now Deputy Director of the Renewable Energy Department, was then a division chief, and he called me and said: “Director Zhang, there’s a company called the Huarui Group, a private enterprise, and it bid only three mao eight per kilowatt-hour. Everyone who participated in the bidding thinks this is impossible to achieve. But it bid three mao eight, while everyone else bid five mao—what do we do? Whom exactly should we let win the bid?”

According to the bidding rules, since he bid the lowest he should be allowed to win, but everyone thought three mao eight was impossible. This stumped me. I could only say, just let him win the bid. I knew it was indeed false and he surely could not carry it through. It was later confirmed that he indeed could not carry it through, and construction progress remained extremely slow throughout. After this kind of thing happens once, it is very hard for it to happen a second time. Throughout this whole affair we had to keep correcting course and summing up experience; from time to time various situations would arise, but a normal enterprise cannot do loss-making business forever, and competition can still push everyone to lower costs and improve technology. I have always firmly believed that competition should be introduced, as this is somewhat more scientific than having government officials set prices arbitrarily.

To sum it up in my own words, this is called discovering the price through competitive bidding. In a given region, through several rounds of bidding and several corrections—just like dropping the highest and lowest scores—one can gradually discover a true price, at what level it is reasonable. As it now appears, it is roughly between five mao and six mao, and this price level is fairly appropriate—neither yielding windfall profits nor incurring losses.

However, the price department, which advocated government price-setting, still did not change its view and kept criticizing concession-rights bidding as no good, so later I compromised too. Now that bidding has discovered the reasonable price level, we have formed benchmark feed-in tariffs for four categories of regions—setting one benchmark tariff for regions with roughly similar wind resource conditions—so we no longer hold bidding, but set prices according to the approximate data from the previous rounds of bidding. The country is now divided into four categories of regions: 0.51 yuan, 0.52 yuan, 0.57 yuan, and 0.61 yuan. If you want to build a wind farm in a given place, you go by that region’s electricity price.

Although we have now returned to determining electricity prices according to each region’s resources, this process discovered the price through competition, and in this process it rapidly lowered the cost of wind power—from a high of 0.8 yuan or even 2 yuan, down to roughly between 0.5 yuan and 0.6 yuan now.

Some say that in this process private enterprises couldn’t make money and all withdrew. Practice has proven this is not the case. Not long ago a private enterprise even came to me, hoping I would do some work to get the Energy Administration to approve their wind power project. I also specifically asked the major wind power investors about this matter; I said, are you actually losing money or making money? Longyuan Company made 3 billion yuan last year. During the 2014 Spring Festival I also ran into He Yu, Chairman of CGN, and he said CGN was also making money in wind power, and the same was true of Hebei Construction & Investment. So it is not the way some people imagine—that state-owned enterprises compete viciously without regard to cost; if no one were making money, they could not survive forever.

Domestic Manufacturing Drove the Growth of a Group of Enterprises

In those years, several academicians working in aerodynamics, in the process of promoting domestic manufacturing, used their technology and expertise to establish AVIC Huiteng Wind Power Equipment Co., Ltd. in Baoding, going into business themselves to make wind turbine blades. There was also a new-materials company, spun off from the Building Materials Bureau, which used its strength in making fiberglass to produce fiberglass blades in Lianyungang, Jiangsu. No one had been able to make wind turbine gearboxes either, because the technology was very complex; only the Chongqing Gear Factory produced some, drawing on the capability it had formed making marine gearboxes. I thought of the Dalian Heavy Machinery Factory and the Nanjing High-Speed Gearbox Factory, and I suppose it was I who egged them on. I said wind power was about to enter a very good period, and if they got involved, they would find this was a very good market. I did some promoting to them, but in the end they themselves made up their minds to do it. At first they were rather conservative, saying they’d make a thousand units. I said a thousand is too few—make at least two or three thousand. The Nanjing High-Speed Gearbox Factory had been restructured into a joint-stock company; in the late period of the “Cultural Revolution” it had worked on the project to transmit Sichuan gas out of Sichuan. Sichuan’s abundant natural gas could be exported for gas-fired power generation, so a gearbox factory was set up. This gearbox factory made gearboxes for gas turbines, but later there weren’t many orders, so it switched to making cement and marine gearboxes, and still later it made wind power gearboxes. When I went to inspect that factory, I said to its leaders that if they got into wind power now, they’d have at least five to ten years’ worth of work to live on. Later they did it.

Once gearboxes were available, bearings still couldn’t be made and were all imported. At that time I was presiding over the revitalization of the Northeast, and there was the Wafangdian Bearing Factory locally. This was an old state-owned enterprise that originally made ordinary bearings, but now it needed new products to compete with private enterprises. I said what private enterprises can’t make at present is the large slewing bearings for wind turbines, so they too began to make them. There was also the Jiamusi Electric Machinery Factory, which had previously made explosion-proof motors, and I introduced them to making wind power generators.

Although to this day some components still cannot be domestically manufactured, the process of an industry going from being completely unable to manufacture domestically to manufacturing a considerable portion domestically not only built up the entire supporting supply chain but also drove the growth of a large group of enterprises.

Subsidies Are Not the Fundamental Solution

In the early stages of renewable energy development, quite a few countries provide subsidies to the industry, and quite a few people called on our government to provide subsidies. But I believe subsidies are not the fundamental solution to the problem. So among the policies I mentioned, I did not particularly emphasize providing subsidies.

One substantive subsidy was when we obtained some money from the Ministry of Finance at the time, about 80 million yuan, all of which was given to the Meteorological Administration to measure wind and provide nationwide meteorological data. Another item was support for research and development including wind power. At that time I asked the Ministry of Finance for some money, 200 million yuan in total, but not all for wind power—rather, it was used to build key energy laboratories, including the national wind power laboratory and the offshore wind power laboratory. This 200 million yuan was used for laboratory research facilities, and that counts as a subsidy too.

There is one more point, which is the electricity-price subsidy still in effect now. Now wind power is at minimum five mao and at most six mao one, roughly within this range. If the thermal power on-grid price is four mao five and wind power is five mao five, a difference of one mao, that price-difference portion is subsidized by the state through the renewable energy fund. Where does the renewable energy fund come from? A levy of eight li per kilowatt-hour. People nationwide pay eight li per kilowatt-hour. Some don’t pay—for instance, captive power plants and rural small hydropower don’t pay. All the remaining large power plants pay eight li per kilowatt-hour, which can collect 20 billion yuan a year to subsidize renewable energy. But I still have some worries about this subsidy method: if the scale gets larger in the future, more subsidy will be needed, and eight li won’t be enough.

It can be said that during the growth of the wind power industry, the state’s substantive financial subsidies were actually not much; it was mainly through the industry’s development prospects and policy guidance that the industry was driven forward.

New energy is a new concept, a good concept; not only were we at the Energy Administration and the NDRC willing to give support to wind power, but the Ministry of Finance and the Ministry of Science and Technology were also willing to make some contributions. The Ministry of Finance once issued a policy: for the first 50 domestically manufactured wind turbines of 1.5 MW and above, a subsidy of 600 yuan per kilowatt. The Ministry of Finance once sought my opinion on this matter. At the time I disagreed. I said this kind of subsidy is somewhat unfair—some get the subsidy, some don’t—and it would be better to use it to support wind power R&D. But the Ministry of Finance carried out the policy anyway, giving 600 yuan per kilowatt for the first 50 turbines, for a cumulative subsidy of 200 million yuan. Later this matter was seized upon by the Americans, who accused the Chinese government of providing subsidies and conducted an investigation against us similar to “double anti-dumping/anti-subsidy.” When I learned of this, I proposed holding a video dialogue with the Americans for everyone to discuss. Because the United States subsidizes new energy far more than we do—you can look up on websites the new energy subsidy policies issued by each state, which are simply as numerous as the hairs on an ox—they had no grounds to turn around and accuse us. The Americans agreed, but they did not allow the media to participate; it could only be official-to-official dialogue, and the participating departments were the U.S. Department of Energy, the Department of Commerce, and others. The U.S. Department of Energy was actually worried about coming into conflict with us, and repeatedly explained to us that this was done by the Department of Commerce and that the Department of Energy was just a foil. On our side, the lead was me; at the time I was Director of the National Energy Administration and the Deputy Director of the NDRC in charge of energy.

I also deliberately put them on the spot a bit by saying I wanted to bring in the media. I said, don’t you Americans advocate transparency? But when it really comes to being transparent, you get scared—to put it in a Chinese idiom, it’s like Lord Ye loving dragons [professing to love something one actually fears]. Their reasoning was that having the media present might make the problem harder to resolve and would only keep hyping the matter. At the start of the dialogue the American side asked, I’d now like to ask our Chinese friends to confirm—on your side there’s no media, right? I said I could confirm there was no media. In the dialogue I listed out the various American subsidies, and after going back and forth, the Americans had no truly tenable evidence, and in the end they latched onto the one item—the Ministry of Finance’s subsidy at the time of 600 yuan per kilowatt for the first 50 domestically manufactured wind turbines of 1.5 MW and above. Later the China-U.S. Joint Commission on Commerce and Trade was held in Hangzhou, led by Comrade Wang Qishan; the U.S. side was led by the current Ambassador to China, Gary Locke, who at the time was Secretary of Commerce. We assessed in advance that he would surely raise this issue of wind power subsidies.

Later I suggested to Comrade Wang Qishan that if he raised this matter, we should take the initiative to say we’d cancel this subsidy. After communicating with the various departments participating in the Joint Commission, the Ministry of Finance also agreed with our view. At the Hangzhou meeting, sure enough, Gary Locke raised this issue. Comrade Wang Qishan then said, all right, we’ll cancel it on our own initiative. Locke then had nothing more to say and could only say we are very pleased that this meeting was so productive. Later the U.S. “double anti-dumping/anti-subsidy” investigation against China’s wind power never got off the ground.

In the early development stage of an industry, the state should provide support, but such support is best placed in R&D or taxation. In fact the United States is the same: they place their support policy for wind power in taxation—not taxing or taxing less, using tax incentives as a form of subsidy rather than directly giving funds. If you directly give financial subsidies, then the larger the future development scale, the larger the subsidy scale, and at a certain point the public finances cannot bear it. So I advocate that the wind power industry should still take the development path of enhancing competitiveness, raising R&D levels, and lowering costs. There is one more point, which is to make the “pie” bigger; relying entirely on state subsidies cannot last—this has always been my philosophy.

On this development philosophy of mine, the various stakeholders did not hold uniform views. The price-control department did not agree with the bidding approach; they believed it was still best for the government to determine a price through cost plus appropriate profit. I disagreed. I was Deputy Director of the NDRC; I did not directly oversee prices, but I was also their leader, and it was awkward for them to openly defy me, so they still agreed—but in fact they always held reservations. After I was no longer in charge, they reverted to setting by region and no longer competed.

This view of mine encountered fairly large resistance in the course of implementation, and there were some critical junctures that made me feel rather strained in carrying it forward. At the time some interest groups voiced their feelings through the media, saying this approach of mine was unscientific. As mentioned before, some held that bidding might cause vicious competition, that state-owned enterprises disregarded cost, that private enterprises had no way to get in and no money to earn, and that in the future no one would be willing to invest in wind power—there was a great deal of such public opinion. But the facts proved otherwise: in these very years wind power achieved great development. This confirms that practice is the sole criterion for testing truth, rather than relying solely on what certain people imagine in their heads.

We originally had another policy: in order to encourage domestic manufacturing, there was a scoring condition in the bidding—a localization rate of 75%; if you reached 75% you could earn extra points, and if you didn’t reach 75% it wouldn’t do. The Americans also latched onto this against us. Later, since we already had three to five years of practical experience, we judged that even if this condition were removed, Chinese enterprises should have the ability to compete on the same stage as their foreign counterparts, and the state cannot adopt protective policies forever. So after the China-U.S. Joint Commission on Commerce and Trade in Hangzhou, we canceled this condition, and the handle the Americans held was gone.

There had also previously been a stipulation on operating qualifications: at the time of bidding, enterprises were required to have an operating track record of more than 100 turbines within China; later we also recognized bidders’ operating track records abroad. The United States later also used this clause to constrain us, saying that for China’s wind power equipment to be exported to the United States, Chinese companies would be required to have an operating track record of more than 100 turbines on U.S. soil. I then said, back then you used this very issue to accuse us, and now that we’ve canceled it, you instead start using this clause. We demanded that the United States should recognize manufacturers’ track records achieved elsewhere in the world, not only allow it if they had such a track record on U.S. soil. So there are all kinds of games being played in here.

In the End, We Must Return to the Market

Looking at the course of new energy development to date, the rise of both wind power and photovoltaics has been closely tied to local development. The relationship between the new energy industry and local governments over these years is also an issue in renewable energy development. Originally, local governments were quite enthusiastic about developing new energy, because many wind power locations were often barren land where not a blade of grass grows, with no income per unit of land area, but developing wind power could bring in some tax revenue and yield some returns, so local governments were supportive. Later the Ministry of Finance introduced a policy called equipment deduction; the starting point was good—to encourage everyone to invest in wind power, the money spent buying equipment to invest in wind power could be deducted from future taxes payable. This measure sounds at first like support for wind power development, and as a wind power investor one would certainly be glad, since it lightened the tax burden. But local governments’ tax-revenue interests were affected—they had no tax revenue for many years. Having lost the tax revenue, local governments began to ponder a question: why should I invite you to come and do this? What benefit can I get? Now I get no benefit, and the tax revenue is gone too. What is a local government to do? It could only force enterprises to build factories locally. For example, a certain city might have wind resources and be able to build a wind farm, but the government would require that wind turbines produced in that city must be used, thus forcing these turbine manufacturers all to build factories locally. The underlying cause behind many problems between renewable energy projects and local governments is taxation.

Regarding the relationship between renewable energy enterprises and local governments, one can look at today’s photovoltaic industry. Companies like LDK and Suntech were once leaders in the solar industry; in fact, neither the NDRC nor the National Energy Administration gave these enterprises many real benefits. When I was Director of the National Energy Administration, the national finances gave them no subsidy. But local governments believed these companies provided a relatively large boost to the local economy, so it was inevitable that they would offer all sorts of incentive policies. Most of these former leaders grew up amid the great tide of the market economy; they enjoyed the preferential conditions provided by local governments, and now, due to overcapacity and the squeeze on us from foreign-market protectionism, they are going through a very difficult period.

From this I also came to realize a principle: the development of an industry and of enterprises must rely more on market forces. In the startup phase, it is also wrong for the government to give no policy at all and no encouragement, but in the end one must return to the market and enhance one’s own competitiveness—only then can one maintain vigorous vitality over the long term.

Under the current development situation, the existing subsidy mechanism, or more broadly the entire support policy, has also reached a point where it needs further improvement. Enterprises often, on the one hand, oppose the planned economy, and on the other hand, hope the government will give more subsidies. In the long run, giving them subsidies is like giving them medicine—once the medicine stops, they have no resistance. I do not advocate giving subsidies long-term; rather, I advocate that the government make the “pie” bigger. Making the “pie” bigger may be more effective than giving subsidies, and the real financial subsidy should be applied to R&D.

The same goes for the renewable energy fund: once the scale gets large in the future, it surely won’t be able to subsidize so much, and by then even levying one fen per kilowatt-hour might not be enough. The most fundamental way out is still to bring down costs through market competition and technological progress, down to a level comparable with fossil energy—this future should be foreseeable. The problem now is that adopting an arbitrary price-setting method has shackled the motivation to keep lowering costs. Once you’ve set it at six mao one per kilowatt-hour, it’s indeed convenient and enterprises have profit to make, but then there is no incentive to pursue lower costs. I think we should still have competitive bidding, so that enterprises have the incentive to further research new technologies.

The Key Crux: Lagging Approval of Transmission Lines

In the years since the Renewable Energy Law was implemented, it has frequently run into the embarrassment of being unable to be effectively enforced. Some hold that the clause on “full guaranteed purchase of renewable energy” should be adjusted in light of actual conditions. When the Renewable Energy Law was being drafted, it happened to be when I was in charge of the Energy Administration, and the approving body was the National People’s Congress. During this process, I led teams to report to the NPC many times. The NPC delegates not only listened to my introduction of the Renewable Energy Law but also engaged legal experts to continuously refine the draft of the Renewable Energy Law.

That clause on “full guaranteed purchase of renewable energy” exists in other countries too. Compared with conventional energy, renewable energy is still weak and small, and such a protective policy is highly necessary. Our current proportion of new energy is only one-point-something percent, less than 2%; we are capable of purchasing this small amount of electricity, and I believe there should be no controversy over this. Of China’s 4.95 trillion kilowatt-hours of electricity in 2013, wind power was only 100.4 billion kilowatt-hours, accounting for just 2%.

Full purchase should not have been a problem, so why has it now become a big problem? It’s because of “wind curtailment.” According to data from relevant parties, “wind curtailment” in 2013 was about 20 billion kilowatt-hours, mainly in the Northeast region and Inner Mongolia. The causes of “wind curtailment” include both objective and subjective reasons.

The objective reason is that wind power development in these places is relatively concentrated; although it is not much for the country as a whole, in local areas it might be as high as 20%–30%. In winter the contradiction becomes even more acute, because winter is precisely when the wind is stronger and more wind power can be generated. But at this time heating must be supplied; in northern regions the heat-supply units must first be guaranteed to operate, and if wind and thermal power generation come into conflict and the electricity can’t be consumed, wind power must be shut down to give priority to the heat-supply units. The dispatch order puts heat-supply units in first place, and wind power must give way, so “wind curtailment” arises. But if the whole country could be interconnected and the electricity could be sent out, this problem would no longer exist.

In winter, the people of Inner Mongolia need heating, so the heat-supply units generate, and at the same time wind power can also generate, with the electricity sent to Jiangsu through transmission and transformation lines—then this problem would be solved. But the problem now is that the transmission and transformation lines don’t exist; it can’t be sent out, so on whose head should the blame fall?

On the surface, everyone blames the grid company—you didn’t build the grid. But the grid company doesn’t agree, saying the responsibility lies with the National Energy Administration for being slow to approve the grid plan; without approval, how can it be built? Why no approval? It still comes down to the dispute over ultra-high-voltage (UHV): some favor UHV, some don’t. There are also those who oppose connecting to the East China Grid, saying that if you send it to East China you’d turn the North China Grid and the East China Grid into a synchronous grid; they only agreed to send it to Shandong, which would still be within the North China Grid. But the grid company insisted on sending it all the way to East China, and the dispute went on endlessly with no one to make the call. No one could make the call, and it could only be argued over endlessly. Having disputes is quite normal—which major Chinese project has not had disputes? Didn’t the Three Gorges have disputes? High-speed rail had disputes too, and is still being disputed even now. But should the dispute go on for a long time, endlessly? The transmission and transformation line from Xilinhot to Nanjing still has not been decided to this day. Next, it won’t just be 20 billion kWh of wind power curtailed—there is an even more astonishing figure: in 2014 the Xiluodu and Xiangjiaba hydropower stations will also curtail 20 billion kWh of hydropower. They began generating in 2014, but the transmission and transformation lines have not yet been completed and will lag by one to one and a half years. The main problem with the lag in transmission and transformation line construction is the lag in approval. Half of the five years has already passed, and the most important grid “Twelfth Five-Year Plan” still has not been approved. Why not approved? Because of the constant arguing there. This endless arguing has caused enormous losses to the country. On the one hand we worry about smog weather, while on the other hand we have to give up 40 billion kWh of clean energy. The 100.4 billion kWh is wind power, while the country’s total generation is 4.95 trillion kWh, so wind power’s share is only 2%; therefore consuming this small amount of wind power on a nationwide basis is no problem, but it cannot be consumed in local areas. If there were transmission and transformation lines to send it out, sent to the load centers, this bit of electricity would be no problem at all.

This term of government surely won’t have time to approve it. Whether the next term of government, once it comes in, can approve it immediately, or will wait until the leaders are familiar with it before approving—that’s unknown. But the losses already caused are irreversible. In 2013, clean energy will have to curtail 40 billion kWh—20 billion kWh of wind power plus 20 billion kWh of hydropower. The hydropower is mainly from the Jinsha River, the two lines of Xiluodu and Xiangjiaba, whose completion will be postponed by a year and a half, and some still say don’t make a fuss about this figure. In fact, the situation this year is extremely grave.

So the guaranteed-purchase protective clause for full purchase is not the problem; the problem is that the lag in approval causes renewable energy generation to be unable to be sent to where it is needed. The most fundamental purpose of the Renewable Energy Law is to encourage renewable energy, to create a legal environment for the vigorous development of renewable energy, and to elevate the development of this industry to the legal level for protection. Full purchase is precisely a rigid protective measure that should be strictly observed, but the reality is that we have no way to strictly observe it—not because it can’t be done, but because much of the work has not been done.

When drafting the Renewable Energy Law at the time, we also drew on existing renewable energy policies of countries around the world, among which “full purchase” was also a policy followed in promoting renewable energy in other countries. It is worth noting that the United States has another policy: it stipulates that energy companies have an obligation to develop at least a certain percentage of renewable energy. For example, thermal power enterprises, which in the past burned coal entirely, now have an obligation to add at least 3%–5% new energy.

When the Renewable Energy Law was first formulated, we drew on this clause, and it too was mandatory, requiring power enterprises to have at least an obligation to develop 3%–5% renewable energy. But this clause was later objected to by the legal experts engaged by the NPC when we reported to the NPC; they said that if needed, you could issue an administrative order document to stipulate it, but not write it into the law, so it was removed. At the time it was I who went to the scene to argue the case, but the legal experts simply would not agree, and later no such provision was issued in administrative documents either. So we now have no such mandatory requirement that power enterprises must develop a certain percentage of new energy, and to this day I still feel this is quite a pity.

More to read:

CF40 Research

Why the OECD’s Subsidy-Centric Narrative of China’s Emerging Industries Is Increasingly Flawed and Outdated

Abstract: In a recent report, the OECD contends that the rise of China’s emerging industries has rested largely on government subsidies—with lending from the state-owned banking system as a principal channel—and that these subsidies, more than any other factor, account for the international competitiveness of Chinese firms. We examine this contention using the 2018–2025 annual reports of more than 5,300 non-financial companies listed on China’s A-share market. Classifying firms by R&D intensity and profitability, we divide the sample into a “new economy” and an “old economy”; the former corresponds closely to what the OECD designates as China’s emerging industries, namely electric vehicles, batteries and solar, together with computing, semiconductors and related sectors…

Read more

3 days ago · 1 like · CF40 Research

But , a long-term researcher of the Chinese new energy sector pointed out some of the framing and epistemic problems of the article. He argued that the “turmoil” is better understood as a structured transition. When policy protection was pulled out, and the industry was exposed to the real market, such friction is predictable. Or, to put it in our Chinese words, it’s 发展中出现的问题, and it has to be 靠发展解决—problems that emerge in the course of development, which can only be solved by further development.

In his view, the piece oversimplifies why domestic demand is softening, treating it as a story about grids becoming overloaded with solar when the real driver is the shift away from generous feed-in tariffs toward market-based pricing.

He also believes the article gets the cause and effect on curtailment backwards, describing it as a problem of too much solar when it is really a problem of insufficient grid flexibility. He thinks that the piece mischaracterizes the coal-versus-renewables dynamic, which has less to do with one fuel locking out another and more to do with the basic tension between forward contracting and real-time markets.

Finally, he questions how the article reads both the export picture and the wave of company bankruptcies, suggesting that if oversupply is truly the core problem, then firms exiting the market should count as part of the solution rather than a sign of gloom.

In the end, he argues, the article never lands on a coherent thesis tying its negative data points together.

I decided to share his correction of the article as a sort of contribution to understanding the Chinese new energy sector.

David Fishman currently works for the Lantau Group, where he specializes in China’s power sector. His work covers solar, wind, coal, nuclear, hydro, transmission, and power markets, with particular focus on renewable energy policies and market forecasting. Before joining Lantau Group, Fishman was Managing Co-Director of Shanghai-based Nicobar Group, a nuclear energy consultancy. He holds a joint MA in International Relations and Energy Policy from Johns Hopkins SAIS and Nanjing University, and is fluent in Mandarin Chinese.

He’s also the founder of a newsletter Crossing the River by Feeling the Stones where he provides first-hand observations on Chinese rural areas and poverty alleviation efforts. His conversations with locals offer valuable grassroots perspectives on China’s development, which I really enjoyed.

Thanks to Mr. Fishman for allowing me to repost his counterargument in my newsletter. Below is his piece, as published on LinkedIn.

This is a Structured Transition, Not Turmoil: Responding to The Economist’s Coverage of China’s Solar Sector

Last week The Economist ran this piece (link paywalled) titled “China’s world-beating solar industry is in turmoil“:

While it does cover some important and correct aspects of the current challenges in China’s solar sector, including low panel prices and a slowdown in capacity growth, I also found a number of problems with the piece - both epistemic and in framing/presentation.

I then became increasingly concerned to see the piece start to be quoted in some of my industry circles. This prompted me to prepare a response for Twitter/X, which I will now reproduce here on LinkedIn as well.

For each section, I will provide a screenshot of text from The Economist article, with relevant sections highlighted in yellow and my commentary following the screenshot. Let’s start:

1) Oversimplification

Unfortunately, it is a major oversimplification to say Chinese domestic demand for solar panels is falling “because the country’s power grids have become overloaded with the things”.

The real challenge right now is developers and banks still figuring out how to finance and build projects without policy-backed revenue guarantees. Domestic demand was shored up in past years by a generous feed-in-tariff (FiT) scheme that ensured stable and predictable revenues. Following the the longstanding policy trend toward liberalization, last year solar generators were shifted out of FiTs and into a Contract-for-Difference (CfD) scheme. Guaranteed CfD volumes have quotas, with non-CfD volumes expected to find customers via open markets (i.e. merchant exposure). The piece acknowledges the policy change from last year, but doesn’t seem to recognize the importance.

New solar capacity growth will likely be flat or even decline YoY in 2026 because generators and financiers are still inexperienced with merchant risk and renewable consumption quotas aren’t quite high enough yet to drive more long-term renewable power contracting demand (which financiers rely on).

Yes, low prices in daytime spot power markets reflect temporal oversupply, but that’s largely irrelevant for investment decisions, which are built around long-term contracts, not spot markets.

2) Misdiagnosis

The cause-and-effect relationships in this paragraph are backwards.

If you’re explicitly trying to build a low-carbon grid, solar curtailment is better seen as a problem of insufficient flexibility (via storage or conventional generators), not “too much solar.”

Conventional coal typically can’t ramp up or down quickly...in many cases it takes hours, or sometimes even the better part of a day for older plants. It is the lack of flexibility that leads to curtailment of assets you ideally don’t want to curtail...like renewables. When solar performance peaks at noon, you need other assets to be able to rapidly ramp down to make room. Not incidentally, the new Chinese coal plants being built these days are capable of flexible operations, and older plants are being retrofit to do the same.

Finally, there are no “shortages at night” because of solar only working during the day. System operators plan for the sun not shining...

3) Mischaracterization

I don’t agree with the characterization that “long-term contracts for coal-fired power lock out renewables even though they are cheaper”. It’s more complex and nuanced than that.

Long-term contracts for anything can lock out anything not contracted. This is less of a question of “coal vs renewables” and more “forward contracting vs real-time markets”.

This is a fundamental friction in power markets. Electricity is contracted ahead of time but dispatched and consumed in real time. You forecast load as best you can when you contract, but when it comes to dispatch, you have to match actual load with actual generation...and forward-contracted generation typically runs first. If total contracted generation exceeds load, then the system must deviate from contracts, typically by allocating curtailment proportionally.

I’d like to see the Chinese power market move away from such high reliance on annual contracting and more use of spot market price signals - and it’s going in that direction. But this can also highlight another problem: renewables often need long-term contracts to get assets financed in the first place and would never want to be reliant on spot market offtake.

Whatever workable balance China ends up with, it’s going to be achieved slowly, via trial and error.

Finally, given the current buildout of storage, UHV, and flexible generation, it’s not clear why solar installs couldn’t re-accelerate in 2027-2028. Renewable consumption quotas are only rising each year, including for data centers, so demand is only going to keep rising too.

4) Misattribution of Intent

While these details are broadly correct, I wouldn’t frame this as evidence that officials are trying to curb a bloat in solar projects. Renewable subsidies and guarantees have been gradually stripped away over the last decade, well before current market conditions.

The big policy change last year (the infamous Document 136) that shifted projects out of the guaranteed FiT scheme and into CfDs or fully market-based compensation is a continuation of long-running market liberalization trends.

Local officials aren’t anti-solar per se; they just don’t want to see rising curtailment rates (one of their KPIs). They are increasingly incentivized towards approving new projects with clearly identified offtake.

5) Misstatement of Impact

The US hasn’t been a major direct destination of Chinese solar exports since the early 2010s. The major export market has historically been the EU, not the US.

Inverters are not solar panels and the EU remains a big export market for Chinese solar.

6) Missing the Solution For the Problem

By the logic of this article so far, 40 solar companies going under should be cause for optimism, not a sign of “gloom”. If oversupply is the driving problem, then consolidation of the sector via producer exit is part of the solution, no?

This section also starts to mix up two groups with opposing incentives: Solar panel producers and solar panel buyers (i.e., developers). The former wants higher prices; the latter wants lower prices. Anything that benefits one side on price is going to hurt the other group. These two segments should not be collapsed into the same commentary.

Expanding back into blocked export markets likely doesn’t fix this, even if they were big markets (and considering the successful efforts to cultivate new export markets and triangulate Chinese products via third-country production sites, it’s not even clear how meaningful the blocks have been).

Also, developing export markets are no guarantee of profitability. For solar OEMs, oversupply brings the same vicious price competition in overseas markets. Higher volumes don’t help that much if margins are still extremely thin - and they hurt if margins are negative.

In Closing:

Stepping back, the biggest issue with the piece is that it never really lands on a thesis. It puts together a set of negative data points like falling prices, curtailment, project delays, and pressure on firms, but never explains what ties them together or what it all means.

Most crucially, it never acknowledges that most of these tensions aren’t even particularly weird. They’re the basic mechanics of power markets integrating renewables. Electricity is contracted ahead of time but delivered in real time. Low marginal cost generation smashes prices during peak performance hours. Flexibility always lags capacity. Financing depends on long-term certainty that markets don’t naturally provide. If you don’t know how to anchor the analysis in those facts, I suppose pretty much everything starts to look like chaotic dysfunction.

What’s actually happening is much simpler. China is scaling solar to a level where abundance, not scarcity, becomes an actual binding constraint. The whole sector is getting pulled out of policy protection and into market exposure. Of course that produces friction. It’s supposed to.

You can call it “turmoil” if you want. But this is what it looks like when a sector stops being policy-supported and starts behaving like a real market system.

Thanks for reading.

After returning to China in 2013, Miao served at the State Administration of Foreign Exchange (SAFE) for a decade. From 2013 to 2018, he served as Senior Advisor to the Administrator of SAFE and as Head of Research at the SAFE Investment Center, where he led global macro and strategy research related to the management of foreign exchange reserves. In May 2018, he was appointed Chief Economist of the SAFE Investment Center. In 2023, Miao joined CICC. In July 2024, he attended an expert symposium on the economic situation chaired by Premier Li Qiang.

The article takes the United States’ “countercyclical opening” of its capital account in 1974 as a case study, revisiting how—at a moment of damaged credibility and stagflation following the collapse of the Bretton Woods system—the U.S. managed to rebuild the “dollar recycling” mechanism and consolidate the dollar’s status as the global reserve currency precisely by opening up. But I believe the author also intends to offer policy recommendations for RMB internationalization.

Miao argues that China should move beyond the static mindset that equates opening up with increased risk exposure and instead adopt a dynamic perspective on trade-offs. He believes that, in the short term, capital account liberalization may indeed bring a period of pain brought by capital outflows and exchange rate volatility, similar to what the United States experienced between 1974 and 1982. Yet so long as a sustainable “outflow–inflow” cycle can be established through institutional arrangements such as greater exchange rate flexibility, the coordinated development of onshore and offshore markets, and the expansion of RMB-denominated invoicing and settlement networks, opening up will, through the very dynamics of two-way capital flows, drive market pricing mechanisms, hedging instruments, and the macroprudential framework toward greater maturity, which ultimately strengthening the resilience of China’s financial system against external shocks. Prolonged closure, the author contends, carries its own costs: if RMB-denominated assets cannot be conveniently held and allocated by overseas entities, the RMB will struggle to evolve from a settlement currency into an investment and reserve currency.

The Chinese version can be found on the webpage of the CF40 Forum. Thanks to Dr.Miao’s kind authorization, I can publish the English version in my newsletter.

How the United States Opened Its Capital Account Against the Tide

The United States today is often viewed as a symbol of free capital flows and financial openness. Yet what is little known is that the complete opening of its capital account did not happen overnight. Rather, it is a history of dynamic trade-offs centered on the interests of reserve-currency status, balancing the benefits of dollar hegemony against the risks to financial stability.

From the late 19th century to the eve of World War I, the United States was broadly part of an open system under the gold standard, but international financial centers were still dominated by London, and the dollar’s international financial functions were limited. It was only after the establishment of the Federal Reserve in 1913 that the United States, by institutionalizing the Banker’s Acceptance market and providing discount support, propelled the dollar toward internationalization.

During the Great Depression and World War II, in order to maintain financial stability and the security of gold reserves, the United States imposed controls on gold and capital flows. After World War II, the Bretton Woods system established the dollar’s status as the central currency, but it also saddled the dollar with the rigid commitment of being pegged to gold.

In the 1960s, as the U.S. balance of payments deteriorated and pressure from gold outflows intensified, the United States—in order to maintain fixed exchange rates and the dollar’s reserve-currency status—was forced to introduce a series of capital control measures such as the Interest Equalization Tax and restrictions on foreign credit.

However, entering the 1970s, capital account controls did not truly prevent the arrival of the dollar crisis; instead, they gradually came to threaten the dollar’s reserve-currency status. As global trade and cross-border capital expanded rapidly, the irreconcilable contradiction between fixed exchange rates and cross-border capital flows continued to intensify. In 1971, the Nixon administration was forced to announce the closing of the gold window, the Bretton Woods system moved toward collapse, the dollar depreciated sharply against major currencies, and the dollar’s credibility suffered a severe blow.

At the same time, the increasingly powerful offshore dollar market gradually weakened the effectiveness of U.S. onshore controls, and after the oil crisis, the massive dollar surpluses of oil-producing countries also needed a sufficiently open and deep financial market to absorb them. At this point, if the United States clung to capital controls, it might not truly prevent dollar outflows, but could instead weaken the position of the New York financial center and forfeit the reserve-currency dividend.

To consolidate the dollar’s reserve-currency status, amid the adversity of shaken dollar credibility, high global inflation, and a U.S. economy mired in stagflation and recession, in 1974 the United States instead chose to loosen restrictions on capital flows and promote the opening of the capital account.

In hindsight, this “opening against the tide” was indeed accompanied by net capital outflows and dollar depreciation in the short term, but over the long run it became the starting point for the dollar system to move from crisis toward strengthening. In the decade that followed, the United States absorbed global surplus funds through petrodollar recycling, restored price stability and reshaped dollar credibility during the Volcker era, and unleashed growth momentum with the supply-side economics of the Reagan administration—gradually forming a dollar cycle that allowed the dollar system to complete a restructuring from crisis to reinforcement.

So why did loosening capital controls at a moment of dollar fragility ultimately not weaken the dollar system, but instead become the starting point for its renewed strengthening? Was this choice a proactive plan by the United States to reshape the dollar cycle, or a passive adjustment forced by crisis?

More importantly, today—when dollar credibility is once again being questioned and the global monetary system is fragmenting at an accelerating pace—what lessons does the U.S. experience hold for the current internationalization of the renminbi and for high-level capital-account opening? This article will analyze the questions above.

I. How to Open? Under the Twin Crises of Dollar Credibility and the U.S. Economy, Rebuilding the “Dollar Cycle” Through Openness to Consolidate Reserve-Currency Status

In the early 1970s, the United States faced a critical turning point for dollar credibility following the collapse of the Bretton Woods system. In August 1971, with international capital flowing at an accelerating pace and the dollar–gold convertibility commitment becoming unsustainable, then-President Nixon announced the closing of the gold window, decoupling the dollar from gold and leaving the Bretton Woods system in name only.

In less than a year that followed, the dollar depreciated markedly against the currencies of major developed economies, and the dollar’s share of global reserves—which had reached a peak of 85% in the fourth quarter of 1970—fell rapidly. In March 1973, the dollar depreciated again, but this failed to stabilize market confidence; a large-scale dollar sell-off emerged in international foreign exchange markets, major European currencies were forced to shift to floating exchange rates, and the Bretton Woods system collapsed completely.

Just as dollar credibility fell into difficulty, the first oil crisis further amplified U.S. macroeconomic pressures—yet it also unexpectedly opened a window for rebuilding the dollar cycle.

In October 1973, the Fourth Middle East War broke out, OPEC announced an oil embargo, and the first oil crisis erupted in full. The rapid rise in oil prices, on the one hand, brought pressure to the U.S. economy—the U.S. economy fell into stagflation and ultimately entered recession in the fourth quarter of 1973. On the other hand, it also caused OPEC countries to accumulate large dollar surpluses, while U.S. financial markets—especially the Treasury market—possessed asset capacity and liquidity advantages rare in the world.

At the same time, the rise in oil prices also created demand for dollar payments. Combined with the fact that the oil crisis hit economies heavily dependent on Middle Eastern oil—such as Europe and Japan—even harder, these factors together pushed the dollar index from 94 before the first oil crisis to 109 in January 1974, briefly “steadying” a dollar that had been depreciating successively since the collapse of Bretton Woods.

At this point the United States faced a dilemma over whether to open its capital account: the United States urgently needed Middle Eastern petrodollar funds to flow back into the Treasury market, in order to consolidate demand for dollar assets and provide financing support for a U.S. economy in recession. At the same time, as cross-border capital flows became increasingly frequent, exchange rates turned to floating, and the offshore dollar market developed, capital controls became increasingly difficult to maintain (Hawley, 1987).

But the problem was that opening the capital account amid economic recession and a shaken dollar position could also amplify pressures from capital outflows and dollar depreciation. Facing this trade-off, Paul Volcker wrote in his memoirs that, in the context of 1974, opening the capital account to allow foreign funds into New York’s capital markets was more advantageous (Volcker & Gyohten, 1992).

In January 1974, the United States chose to open its capital account amid economic recession. Specific measures included:

1. Abolishing the Interest Equalization Tax (IET) established in the 1960s to prevent capital outflows, so that U.S. investors purchasing foreign securities would no longer be taxed.

2. Abolishing Balance of Payments Controls and loosening restrictions on outward foreign direct investment (OFDI) by U.S. residents.

3. Abolishing the Voluntary Foreign Credit Restraint (VFCR) and other limits on the amount of overseas lending by banks.

Subsequently, in the 1980s the United States gradually relaxed “Regulation Q,” which capped bank deposit interest rates, and formally abolished the relevant arrangements in 1986, while also establishing International Banking Facilities (IBFs)—moving toward financial deregulation and further embracing offshore markets.

In the early stage of capital-account opening, the United States did indeed experience a “painful period” of economic recession, capital outflows, and dollar depreciation. After opening the capital account in January 1974, the U.S. economy remained in recession. It was not until March 1975 that it bottomed out and stabilized.

In the early stage of opening the capital account, the United States did indeed see net capital outflows. Although in mid-1974 the United States signed a petrodollar agreement with Saudi Arabia, stipulating that Saudi Arabia would invest part of its oil revenue in Treasuries—boosting inflows under the portfolio investment item of the U.S. financial account—the simultaneous expansion of overseas lending by U.S. banks led to outflows under the other investment item.

The result was that from 1974 to 1982, the U.S. financial account overall still showed net outflows abroad, briefly turning to net inflows only from 1977 to 1979. The economic downturn and capital outflows reinforced each other, pushing the dollar index down from its peak of 109 in January 1974 to a low of 82 in October 1978—a 25% depreciation in less than five years.

But over a longer horizon, opening the capital account did not weaken the dollar system; instead, it became a necessary condition for rebuilding the “dollar cycle” and re-steadying dollar hegemony. The key was not whether capital flowed back immediately after opening, but that the United States provided global dollar funds with a financial market that could be entered, settled into, and allocated.

It was precisely under the combined effects of petrodollar reflux after capital-account opening, the repair of dollar credibility, and steady U.S. growth that the United States, from the late 1970s through the 1980s, gradually completed the restructuring of the dollar system from crisis-induced pressure to a strengthened cycle.

► The petrodollar mechanism promoted dollar reflux: In July 1974, then-Treasury Secretary William E. Simon traveled to Saudi Arabia and reached a secret agreement. Although the dollar had already dominated the pricing of international oil trade before the petrodollar mechanism formally took effect, the agreement further consolidated and institutionalized the dollar’s dominant position as the currency for pricing and settling oil.

More importantly, Saudi Arabia committed to investing part of its dollar revenue from oil exports in U.S. Treasuries, thereby forming an important reflux mechanism for the dollar cycle. In exchange, the United States provided military protection to Saudi Arabia, and the U.S. Treasury provided Saudi Arabia with an “Add-ons” special window for Treasuries, allowing Saudi Arabia to purchase Treasuries directly, bypassing open competitive bidding.

► In the 1980s, Volcker restored price stability and reshaped dollar credibility, while the Reagan administration’s supply-side economics stimulated growth, forming a positive feedback loop: In 1979, Paul Volcker became Chairman of the Federal Reserve, placing inflation control at the core of policy and stabilizing prices through tough tightening—even at the risk of triggering recession—to revive market confidence in the dollar. The federal funds rate at one point rose above 20% in the early 1980s; high interest rates suppressed U.S. inflation and rebuilt the dollar’s purchasing power, with the year-over-year U.S. CPI falling from 14.8% in March 1980 to 2.5% in July 1983.

The process of monetary tightening came at a high cost: the United States fell into recession twice, in February 1980 and August 1981, but it also raised the real returns on dollar assets, attracting global funds into U.S. bond and deposit markets and laying the foundation for rebuilding dollar credibility.

In 1981, Ronald Reagan became President of the United States, and facing economic recession he adopted supply-side propositions to stimulate growth, spurring investment and supply recovery through tax cuts, accelerated depreciation, deregulation, and other measures. Although the goal of “small government” was not truly achieved—the U.S. fiscal deficit ratio (monthly average of -4.1%) actually expanded compared with the 1970s (monthly average of -1.9%)—fiscal expansion, tax incentives, and financial liberalization together boosted U.S. economic growth.

U.S. real GDP growth, after touching a low of -2.6% in the third quarter of 1982, entered a nearly two-year upward channel, reaching a peak of 8.6% in the first quarter of 1984. The dollar also rose sharply from its low of 85 in 1980 to a peak of 165 before the 1985 Plaza Accord.

As a result, the United States formed a self-reinforcing “dollar cycle,” allowing the dollar to strengthen against the tide despite the U.S. twin fiscal and trade deficits. Price stability enhanced dollar credibility, high interest rates raised returns on dollar assets, growth recovery enhanced the appeal of U.S. assets, and capital inflows in turn provided financing support for U.S. fiscal expansion and financial-market prosperity. At the same time, the strong domestic demand brought by economic growth and a strong dollar expanded U.S. import demand, pushing up the trade deficit. And the dollar’s special status as an international reserve currency meant that the dollars flowing out through imports returned in the form of financial investment.

This mutually reinforcing process was summarized by Soros in The Alchemy of Finance as “Reagan’s Imperial Circle.” After 1983, the U.S. financial account turned to net inflows, which have continued to this day.

II. Why Open? Proactive Restructuring Under Passive Pressure—The Core Being That Capital Controls Harm Reserve-Currency Status in the Long Run

Taken together, the U.S. opening of its capital account in the 1970s, at a “fragile moment” of economic recession and dollar-credibility pressure, was essentially a proactive choice under passive shock.

It was “passive” because, after the collapse of the Bretton Woods system, the fixed-exchange-rate objective that capital controls were originally meant to serve had already become invalid; at the same time, the rapid expansion of the offshore dollar market made domestic capital controls increasingly difficult to enforce.

It was “proactive” because the United States realized that continuing to restrict capital outflows might not stop dollars from flowing out, but could instead weaken the central position of dollar assets and the New York financial market, ultimately damaging dollar credibility. Rather than clinging to an already-invalid closed framework, it was better to rebuild, through openness, the cycle of dollar funds “flowing out—flowing back.”

It is precisely in this sense that the U.S. capital-account opening in the 1970s was both a result of crisis-driven pressure and the starting point for a proactive restructuring of the dollar system.

Passive shock: The floating exchange-rate system weakened the necessity of capital controls, and the expansion of the offshore dollar system forced capital-account opening

First, under the floating exchange-rate system after the collapse of Bretton Woods, the necessity of implementing capital controls declined. According to Mundell’s “impossible trinity,” a country cannot simultaneously achieve all three goals of fully independent monetary policy, exchange-rate stability, and free capital flows (Mundell, 1963; Obstfeld and Taylor, 1997). During the Bretton Woods period, countries in effect restricted capital flows as the price for obtaining fixed exchange rates and a degree of policy autonomy.

The U.S. restrictions on residents purchasing foreign securities, on bank overseas lending, and on corporate overseas investment were all aimed at reducing dollar outflows and gold-convertibility pressure. Volcker recalled that the U.S. capital controls of the 1960s came about when continuous capital outflows pressured the dollar, leaving the Treasury no choice but to use tools such as the Interest Equalization Tax (Volcker & Gyohten, 1992). However, the irreconcilable tension between fixed exchange rates and cross-border capital flows ultimately still dissolved the Bretton Woods system (Eichengreen, 1996; Obstfeld and Taylor, 1997); the fixed-exchange-rate system thereupon exited the stage, the institutional benefits of continuing capital controls declined, and the policy costs rose.

Second, the development of the offshore dollar market also forced the United States to loosen capital controls. The offshore dollar market (also known as the Eurodollar market) originated in the 1950s. After World War II, the United States continuously exported dollars to Europe through the Marshall Plan, overseas military spending, and overseas investment. Against the backdrop of the Cold War, countries such as the Soviet Union, in order to evade U.S. regulation, deposited dollars in the London banking system, and the earliest offshore dollar deposits were thus formed.

Entering the 1960s, financial regulatory measures within the United States further enhanced the appeal of the offshore dollar market. At the time, banks within the United States were constrained by “Regulation Q,” with caps on deposit interest rates, and also had to bear regulatory costs such as reserve requirements, whereas offshore dollar deposits were not subject to such constraints. For the same dollar liabilities, onshore costs were higher and constraints more numerous, while offshore costs were lower and restrictions fewer, giving funds and business an incentive to migrate to offshore markets (Friedman, 1971).

Against this backdrop, the offshore dollar market expanded. Friedman vividly likened the formation and expansion of the offshore dollar market to “the bookkeeper’s pen,” emphasizing that offshore dollars derived neither primarily from the U.S. balance-of-payments deficit or various central banks’ reserves, nor from the large-scale cross-border transfer of dollar cash, but were the result of credit creation by the banking system (Friedman, 1971). U.S. capital controls were facing a system that could continuously derive dollar credit beyond regulatory boundaries, rather than simple capital outflows.

However, Friedman did not believe the offshore dollar market could expand infinitely; he used “leakages” to explain the boundary of its credit derivation (Friedman, 1971). So-called leakage refers to dollars lent out by offshore banks that do not return to the Eurodollar banking system, but instead settle into deposits at U.S. domestic banks, are used for foreign exchange conversion or trade payments, or go into other asset allocation.

If a borrower, after obtaining dollars, deposits them in another offshore dollar bank, the new bank can continue lending after retaining a small amount of prudential reserves, and the offshore dollar multiplier rises; conversely, if the borrower uses the funds for payments, currency conversion, or deposits them in a non-Eurodollar bank (for example, depositing them back into a U.S. domestic bank), that portion of funds is equivalent to “leaking out” of the Eurodollar system, the credit chain is broken, and the derivation multiple declines accordingly.

The lower the leakage, the higher the offshore re-deposit ratio, and the more easily dollar credit can be derived layer by layer overseas; the higher the leakage, the closer offshore activity comes to a one-off bookkeeping transfer, and the weaker the multiplier effect. Therefore, regulatory arbitrage opened up the space for offshore dollar credit creation, while leakage determined the extent to which derived credit could be magnified.

Even with the constraint of leakage, the offshore dollar market had already reached a considerable scale by the early 1970s. According to BIS statistics, by the end of 1973 the external dollar liabilities of reporting European banks had reached 130 billion dollars and external dollar assets nearly 134 billion dollars, having grown roughly tenfold in just seven years, with an average annual expansion rate of 20–30%—far exceeding the growth rate of the U.S. domestic money supply over the same period.

Even after deducting the double-counting caused by re-deposits within the European banking system, the dollar credit scale estimated by the BIS for 1973 was still about 97 billion dollars. This scale was equivalent to 7% of U.S. GDP in 1973, 1.4 times the full-year merchandise imports, and 53% of total global official reserves—already enough to affect dollar funding costs, cross-border credit allocation, and the competitiveness of the New York financial center.

Thus, the growth of the offshore dollar market created pressure compelling the United States to open its capital account. On the one hand, the rapid expansion of the offshore dollar market rendered capital controls “existent in name only.” Global demand for dollars did not weaken because the United States tightened onshore controls; instead, it shifted more toward the offshore dollar market.

In a 1971 memorandum, Shultz pointed out that the effectiveness of capital control measures was questionable: the Interest Equalization Tax reduced foreign securities purchases, but this gap was quickly diluted by increases through channels such as U.S. direct investment and bank loans; and although foreign credit restraints once curbed short-term private U.S. capital outflows, this positive effect was almost entirely offset by reverse changes in foreign private short-term capital flows. Therefore, capital controls did not truly improve the balance of payments, and even brought economic-efficiency losses and administrative costs.

On the other hand, this also put pressure on the pricing system of the onshore dollar financial system. The offshore market could conduct dollar business at lower cost, gradually forming an offshore interest-rate system represented by LIBOR. Volcker also pointed out that if the United States continued to insist on capital controls, demand for dollar funding and trading would still exist; global dollar business would not disappear, but would simply shift more to offshore centers such as London, the Bahamas, and Luxembourg, harming New York’s intermediary and pricing position in global dollar funding (Volcker & Gyohten, 1992).

Proactive choice: Strengthening the dollar’s reserve-currency status; the neoliberal current of thought provided the policy atmosphere; an opportunity to re-steady the dollar system

Beyond the passive adjustment driven by external shocks, the U.S. choice to open its capital account in 1974 also had its proactive strategic considerations. First, the foundation of openness lay in the dollar’s reserve-currency status. After the collapse of the Bretton Woods system, the dollar’s share of reserve currencies declined somewhat, and although there was still no currency that could replace the dollar (There is no alternative, TINA), concerns persisted that long-term capital controls would weaken the usability and credibility of dollar assets.

Volcker recalled that Shultz and others had real reasons for opposing capital controls: the effectiveness of controls was increasingly limited, the distortions increasingly large, enforcement increasingly difficult, and they had become a burden on businesses and financial institutions (Volcker & Gyohten, 1992).

In addition, the “neoliberal” current of thought in the 1970s also provided the policy atmosphere for the United States to open its capital account. The stagflation shock of the 1970s weakened the Keynesian policy consensus, “neoliberalism”—with monetarism and free markets as its main ideas—rose, and financial liberalization gradually became the mainstream policy direction (Harvey, 2005).

Volcker recalled that officials such as Shultz were deeply influenced by Friedman and believed that markets could allocate capital better than governments (Volcker & Harper, 2018). Simon, too, repeatedly emphasized in his memoirs his opposition to government control and his advocacy of a return to free-enterprise principles (Simon & Caher, 2003).

Against this backdrop, the United States realized that opening the capital account was not merely a source of risk, but could also become an opportunity to re-steady the dollar system. As the issuer of the reserve currency, although lifting capital restrictions might cause dollar outflows, paths such as global trade, reserves, and safe-asset allocation were still creating demand for dollars. Therefore, rather than clinging to invalid capital controls and watching the offshore market erode the influence of the New York financial center, it was better to open proactively, leveraging the depth and liquidity of U.S. financial markets to re-absorb global funds—including petrodollars—back into the domestic system, consolidate the position of the New York financial center, and rebuild the dollar cycle to steady the dollar’s hegemonic position. Dollars would flow out, but they would also flow back through global dollar demand, the allocation of oil-producer surplus funds, and the depth of U.S. financial markets.

Smooth operation after opening: The depth of financial markets and technological/institutional advantages were important supports

After the United States opened its capital account in 1974, no stable net foreign inflows formed in the initial period, and it even bore net capital-outflow pressure for a time. But these outflows did not evolve into uncontrolled capital flight, and the dollar system did not collapse as a result. The reason was that behind it lay financial markets deep enough to absorb the funds, relatively mature payment-clearing and trading infrastructure to support liquidity, and relatively complete institutional arrangements to stabilize expectations. This was specifically reflected in the following three aspects:

► Market depth: The Treasury market was large in scale and strong in liquidity, serving as an important safe-asset pool for global capital. By the 1970s the United States had gradually formed relatively mature mechanisms for Treasury issuance, pricing, and trading; medium- and long-term Treasuries began to be auctioned regularly, and short-term Treasury Bills were continuously rolled over.

At the same time, multi-tiered short-term money markets—including the federal funds market, large negotiable certificates of deposit (CDs), and the repo market—also developed rapidly, reducing friction costs for the banking system’s liquidity allocation (Gorton, 2010).

► Technological advantages: In the 1970s the technology supporting cross-border capital flows became increasingly mature; the Clearing House Interbank Payments System (CHIPS) and the Society for Worldwide Interbank Financial Telecommunication (SWIFT) were established in 1970 and 1973, respectively. Among them, CHIPS served large-value net dollar payments and was widely used for settlement related to foreign exchange and securities trading, serving as the core clearing infrastructure supporting cross-border dollar transactions; SWIFT promoted the standardization of cross-border financial communication, facilitating cross-border capital flows.

► Institutional completeness: Financial regulatory systems were mature; domestically, the securities market had established a regulatory system under the U.S. Securities and Exchange Commission (SEC), the banking system had deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve assumed the lender-of-last-resort function. Externally, the Treasury maintained dollar stability through the U.S. Treasury’s Exchange Stabilization Fund (ESF), while the Federal Reserve established liquidity-support mechanisms with major central banks through central-bank swap lines—together constituting the institutional support for the dollar’s external stability.

Volcker mentioned in his memoirs that Robert Roosa called these official financial innovations the “inner and outer lines of defense” for protecting the dollar and the international monetary system (Volcker & Gyohten, 1992); the existence of these arrangements shows that even as the United States loosened capital controls, it did not abandon management of the dollar system.

From this it can be seen that capital-account opening did not occur after “everything was ready”; it was more a trade-off made when old constraints were gradually loosening and a new cycle had not yet formed. Other countries had similar experiences. In October 1979 the United Kingdom lifted its remaining foreign-exchange controls, facing the decline of sterling’s status and pressure to reposition the London financial center; had it continued controls, it might not have held onto sterling, but could have lost its financial center. In 1979 Japan revised its Foreign Exchange and Foreign Trade Control Law, shifting from “prohibition in principle” to “freedom in principle”; West Germany in 1981 basically removed remaining restrictions on capital inflows and in 1984 further abolished the withholding tax on non-residents holding German bonds—facing current-account surpluses, currency appreciation, and demand for capital export; had they continued to remain closed, the external surpluses accumulated by the real sector would have been hard to convert into international financial influence.

Therefore, the key to capital-account opening lies not in waiting for a moment of complete stability and the right internal and external environment, but in whether, under controllable risk, passive shocks can be transformed into proactive restructuring, and whether dynamic adjustments can be continuously made during the opening process—to magnify the benefits of opening and shrink the risks of opening.

III. Lessons for Renminbi Internationalization? Establishing a Mindset of “Dynamic Trade-offs” in Opening; Capital-Account Opening and Currency Internationalization Dynamically Reinforce Each Other

At present, China stands at a critical historical juncture for steadily expanding institutional opening and promoting renminbi internationalization during the “15th Five-Year Plan.” According to the IMF’s classification of capital-account transactions, China has achieved varying degrees of convertibility for most items, but a few sub-items still implement relatively prudent management; compared with major reserve-currency economies, there is still room to raise the actual degree of financial openness. Concerning capital-account opening, the most common market concern is: will further raising the level of capital-account openness lead to large-scale capital outflows?

Referring to the U.S. experience, the early stage of capital-account opening may indeed bring the pain of capital outflows. But the crux of the matter lies not in whether capital outflows occur in the early stage of opening, but in whether a sustainable funding cycle can form after opening—and this ultimately depends on whether prices are stable and growth is robust.

In the early stage of currency internationalization, capital-account opening is not a precondition; but in the long run, an internationalized currency must be freely convertible. As a reserve currency, it must open its capital account, exporting liquidity overseas, while overseas demand in turn prompts the currency to flow back, forming a cycle of two-way flows.

The history of U.S. capital-account opening is, in essence, a history of dynamic trade-offs between strengthening reserve-currency status and maintaining financial stability. In this process of dynamic balance, the reserve-currency dividend and the financial-stability risk brought by opening are not fixed. In the long run, once the internationalization network and the reflux mechanism mature, the institutional benefits brought by opening will continue to magnify, and the financial system’s resilience to risk will also continuously strengthen amid the two-way cycle.

The U.S. case shows that the reason capital-account opening was ultimately able to strengthen the dollar system lies not in opening itself, but in the institutional synergy formed among opening, floating exchange rates, offshore-market development, financial-market depth, and macroeconomic stability.

First, long-term capital controls weaken the availability and credibility of reserve-currency assets, ultimately disadvantaging reserve-currency status. Second, floating exchange rates and offshore-market development are important conditions for the capital account to be able to withstand the shocks of two-way flows. Third, whether funds can continuously flow back after opening depends on whether the home country’s assets are sufficiently attractive—which in turn depends on price stability, growth resilience, and financial-market depth.

Thus, the lessons for renminbi internationalization are as follows:

► Establish a mindset of “dynamic trade-offs” in opening, driving a “Pareto improvement” in macro-finance through high-level opening to the outside world. For the United States in 1974, between the risk of capital outflows and the benefit of consolidating reserve-currency status, it chose to open its capital account. Although it faced the pain of capital outflows and exchange-rate depreciation in the early stage, it ultimately still became the starting point for strengthening the dollar’s status.

For China, “no sugarcane is sweet at both ends”—there is no completely risk-free shortcut to capital-account opening, and the process of opening must be a dynamic trade-off between risk and benefit. Statically, relaxing capital controls a bit more seems to mean exposing a bit more outflow risk. However, dynamically, long-term closure also comes at a cost. If renminbi assets are difficult for overseas entities to conveniently hold and allocate, the renminbi will struggle to move further from a settlement currency to an investment currency and a reserve currency, and thus will be unable to obtain the reserve-currency dividend.

Therefore, the significance of high-level institutional opening is not simply to enlarge risk exposure, but to reshape the risk-return combination at a higher level, achieving a “Pareto improvement” in the macro-financial sense: enhancing both the efficiency of resource allocation and the appeal of renminbi assets, while also—through more mature market pricing, richer risk-hedging tools, and a more complete macroprudential framework—improving the entire economy’s ability to withstand external shocks. In other words, opening is not about sacrificing safety for efficiency, but about simultaneously enhancing both efficiency and safety at a higher level.

Just as a person can only learn to swim in the water, the renminbi must also learn to open within openness; it cannot learn to open within closure. Actively advancing high-level institutional opening, in an environment of two-way capital flows, helps market participants better develop pricing, hedging, and risk-management capabilities, and only thus can the macro-policy framework be continuously improved. From this, the renminbi can achieve a dynamic unity of high-level development and high-level security, and the process of dynamic capital-account opening will also mutually reinforce the historical process of renminbi internationalization.

► Increase exchange-rate flexibility, and coordinate the development of onshore and offshore renminbi markets. An important precondition for the U.S. opening of its capital account in 1974 was the floating exchange-rate system after the collapse of the Bretton Woods system; exchange-rate floating is the “safety valve” of capital-account opening, capable of relieving the pressure of large capital inflows and outflows.

In addition, the pressure from offshore markets was an important reason the United States loosened capital controls, while the depth of the onshore market provided a key condition for the United States to open its capital account. Only through the coordinated development of onshore and offshore markets can a solid and sustainable institutional foundation be provided for renminbi internationalization. In the onshore market, market depth can be enhanced by improving the liquidity of the secondary market for Chinese government bonds and enriching interest-rate risk-hedging tools; in the offshore market, efforts should focus on developing the Hong Kong offshore renminbi financial market, promoting offshore renminbi bond issuance, enriching financial products in the offshore renminbi market, and improving offshore renminbi market infrastructure.

► Seize opportunities to actively promote renminbi-denominated settlement and improve the “renminbi cycle” mechanism. The reason funds did not evolve into long-term large-scale capital flight after the United States opened its capital account lies chiefly in the “petrodollar” mechanism and in the asset appeal brought by U.S. price stability and strong economic growth in the 1980s, which together drove the formation of the “dollar cycle.”

For China, to form a “renminbi cycle,” it should first broaden the channels for exporting renminbi liquidity overseas. Obstfeld (2026) pointed out that the export of dollar liquidity does not necessarily occur through a current-account deficit; it can also occur through outward investment via the capital and financial accounts, or through credit creation in the offshore dollar market. In the 1960s, the United States was still running a current-account surplus, but the offshore dollar market was already able to derive dollar liquidity overseas through the banking system. Similarly, while maintaining a current-account surplus, China can also export renminbi liquidity through the “Belt and Road,” enterprises going overseas, outward investment, and other means.

In addition, it can also seize the opportunities brought by external shocks and global industrial transformation, actively promoting renminbi-denominated settlement and the reflux of renminbi funds. China is the world’s largest manufacturing center, an important importer of energy and commodities, and has strong industrial influence in fields such as new energy, strategic minerals, and green industries. In the future, it can explore raising renminbi settlement and pricing in key resource goods such as strategic minerals, the “new three” [New energy vehicles, lithium batteries, and photovoltaic products], and even computing power.

Finally, stable prices, deep financial markets, and stable growth are key to attracting funds to continuously flow back. Overseas entities being willing to accept renminbi is only the first step of renminbi internationalization; being willing to invest in and hold renminbi assets over the long term is the key to the renminbi moving from a settlement currency to an investment currency and a reserve currency.

The reason the United States attracted funds to flow back after opening in the 1980s still lay chiefly in the asset appeal brought together by the price stability following Volcker’s inflation control and the growth vitality unleashed by Reagan’s supply-side economics. In the long run, only by building an internal ecosystem with stable prices, more resilient growth, sufficient market depth, and attractive asset returns can funds be attracted to flow in sustainably over the long term amid the dynamic allocation of global capital.

What stands out most is that the article relies on “exclusive disclosures from sources” to suggest that China could launch anti-discrimination and supply chain security investigations into the EU’s practices. The use of unnamed “sources” typically signals an unofficial backchannel, suggesting this is not the journalist’s personal speculation but rather a message to Brussels that, if the “overcapacity instrument” actually moves forward, these are the tools China is prepared to use in response.

Equally telling is that, in the following paragraph, the article goes out of its way to single out several EU exports to China. French cosmetics come first, with the article emphasizing that France has been the top source of China’s cosmetics imports for three consecutive years, accounting for 29.6% of total cosmetics imports in 2025. Meat, wine, and luxury goods are mentioned next. In my view, these product categories all command a significant share of the Chinese market, and their sources are concentrated in core EU member states such as France, Italy, Germany, and Spain. They are also “national flagship industries” in the countries concerned, tied to substantial employment and local political interests.

If the EU’s logic is that “production capacity exceeding domestic demand” qualifies as overcapacity, then these flagship European exports to China fit the same definition just as well, and could naturally become targets for countermeasures. Taken together with China’s earlier anti-dumping investigation into French cognac, the signal the article is sending, in my reading, is that the cost of pushing this legislation forward will fall first on the EU member states’ own pillar industries, and it is time to hit the brakes within the European Commission.

Below is the full article:

Exclusive Disclosure: If the EU Insists on Pushing the “Overcapacity Tool,” China Will Retaliate

On the 29th, the European Commission is set to convene a meeting to explore adjustments to its economic and trade policy toward China.

Just days before the meeting began, several EU member states submitted a proposal seeking to push forward the “Resilience Tool”—the so-called “Overcapacity Tool.”

While the EU has not stated it explicitly, this new tool is strongly targeted at China by design.

As early as 2023, the European Commission began hyping up the “China overcapacity theory.” Since the beginning of this year, whether it is the “Overcapacity Tool,” the draft amendment to the Cybersecurity Act, or the recently released Industrial Accelerator Act, all signify that protectionism is being directly entrenched by the EU into its economic and trade policy framework toward China.

The EU’s economic and trade policy toward China is moving further and further down a radical path.

So, where does this radical turn come from? And what impact will it have on the EU itself?

Some EU officials believe that traditional anti-dumping and anti-subsidy investigations take too long, and that it is more efficient to directly preset quotas—imposing tariffs as soon as the quota is exceeded, which would be faster and more efficient.

This means that once a country’s products exceed the limit, the EU can systematically attack all related industries of that specific country under the pretext of “overcapacity.” Any industry with high market share and competitiveness in the EU market could become a target.

The conceptual logic applied here is full of holes. To understand why the EU is accelerating its turn toward protectionism at this moment, one must extend the timeline.

It must be recognized that this is not a momentary impulse on the EU’s part. Over the past two decades, Europe’s industrial competitiveness has continued to decline, and now this “chronic disease” has deteriorated to the point where extreme measures must be taken.

From a macro data perspective, European industrial production had just strongly recovered from the pandemic in 2021, with industrial production growth reaching 8.5%; in 2022, the year-on-year growth rate plummeted to 0.3%, almost stagnant; in 2023, it fell 1.4% year-on-year; in 2024, it fell 2% year-on-year.

Why did European industrial production growth suddenly hit the brakes in 2022? The answer lies in the energy bill.

Europe’s benchmark natural gas price soared from about €20/MWh in early 2021 to nearly €340/MWh in the summer of 2022.

Over the following three years, although the EU worked hard to diversify its energy imports, energy costs failed to fall back to low levels. In 2023, EU industrial electricity prices were about 158% higher than those in the United States, and natural gas prices were 345% higher; this gap had still not significantly narrowed by 2026. In other words, this is not a one-time price fluctuation, but a structural wound.

When energy costs remained high, the defenses of European industry began to collapse.

The chemical industry is the EU’s fourth-largest manufacturing sector, long known as “the industry of industries,” with its products penetrating 95% of manufacturing categories. From automobiles to medicine, from defense to daily necessities—once the chemical industry falls, the entire industrial chain will be affected.

And the data for the chemical industry presents precisely a collapse-style decline.

Data from the European Chemical Industry Council shows: chemical production capacity announced for shutdown in 2022 was 2.9 million tons; in 2023 it surged to 8.7 million tons; in 2024 it remained at a high level of 8 million tons; in 2025 it further skyrocketed to 17.2 million tons.

Over four years, cumulative lost capacity totaled 37 million tons, directly leading to 20,000 job losses, with nearly 90,000 indirect jobs at risk—the industry is on the “brink of collapse.”

At the same time, the decline of these industries is spreading to other sectors: the construction industry continues to decline, and the aluminum industry has been almost uprooted—the EU’s primary aluminum production is only 950,000 tons, while annual consumption is as high as 13.5 million tons, with a structural gap of 93%.

Together, these industries paint a bleak picture: a complete energy-intensive industrial chain is quietly disintegrating.

It can be seen that the root cause of the EU’s industrial predicament is structural, and its manifestation at the trade level is the widening trade deficit.

As the China Finance 40 Forum’s research concludes: the widening deficit is not the spillover pressure of so-called Chinese “overcapacity,” but rather “the combined result of the upgrading of Chinese manufacturing and Europe’s energy constraints.”

In other words, it is not that Chinese industry has “attacked” Europe, but rather that Europe itself has fallen into difficulty.

However, we have seen that since 2023, the European Commission has been trying at the level of economic and trade policymaking to deflect contradictions in order to avoid the truly difficult structural problems.

According to a report by the European Council on Foreign Relations, the EU is aware that whether rebuilding supply chains or cultivating domestic industries, it will take years to see results, while real-world shocks are often immediate.

Therefore, the report argues that only by adopting tough confrontational measures can the EU gain the initiative in economic and trade competition, and uses this as an excuse to accelerate the turn toward trade protectionism.

Last December, the document “Strengthening EU Economic Security” explicitly proposed shifting “from a reactive posture to a more proactive and systematic use of various policy tools.” Even in some cases, “the EU, its member states, and industry will increasingly need to be prepared to bear corresponding economic costs in order to reduce external dependence and enhance overall security levels.”

This was followed by the successive appearance of documents such as this year’s Industrial Accelerator Act.

Taking the Industrial Accelerator Act as an example, this act claims to be industrial support, but in reality wraps layer upon layer of discriminatory provisions, setting up multiple barriers against foreign enterprises in the four major industries of batteries, electric vehicles, photovoltaics, and critical raw materials.

Its main proponent is Stéphane Séjourné, Executive Vice-President of the European Commission in charge of industrial strategy, who is also a representative figure of EU protectionism. And people like him are not few among current EU economic and trade policymakers. Behind these policymakers, an important force is surging.

Related reports show that within one year of the launch of the Clean Industry Deal, more than 750 lobbying sessions were held around it—an average of more than three per working day.

Among them, the most active are not new energy enterprises, but traditional heavy industry giants in steel, energy, automobiles, cement, and so on. Séjourné and his team are among the most frequently lobbied targets, having held 131 meetings with 192 lobbying groups.

These industries, without exception, are the sectors that find it most difficult to pivot amid the EU’s structural economic predicament.

However, for an EU economy in urgent need of structural transformation, engaging in protectionism according to the demands of these traditional industries runs completely counter to the direction of energy structure and industrial structure transformation—it is essentially drinking poison to quench thirst.

This is a vicious cycle—the more difficulties internally, the more protection; the more protection, the less impetus for transformation, and the deeper the entanglement in the predicament.

Based on the above analysis, several conclusions can be drawn.

First, the EU’s turn toward trade protectionism is essentially the result of the long-term decline of European industry colluding with the lobbying of vested interest groups. The structural disadvantages in energy costs, the continuous shrinking of manufacturing... these chronic ailments accumulated over two decades have erupted at an accelerated pace after 2022.

Faced with the predicament, the EU has not chosen to “scrape the poison from the bone” but instead uses layer upon layer of barriers to avoid reform. From the draft amendment to the Cybersecurity Act to the Industrial Accelerator Act, from the “Overcapacity Tool” to the Foreign Subsidies Regulation—standing behind all of these are both politicians who accumulate political capital through “tough narratives” and traditional industrial giants worried about being eliminated by the green transition. Preserving market share and defending vested interests is the real script of this drama.

Second, China’s countermeasures are not verbal warnings.

According to exclusive disclosures from sources, China can launch anti-discrimination investigations and supply chain security investigations into the relevant EU practices. The Ministry of Commerce has made it clear that once China’s national interests and the rights and interests of its enterprises are harmed, China will resolutely take countermeasures.

If the EU insists on pushing forward the so-called “Overcapacity Tool,” China will immediately take action and adopt comprehensive countermeasures. China is neither unfamiliar with nor afraid of trade frictions, and will see it through to the end.

Third, the logic of the EU’s accusations does not hold up in itself.

For three consecutive years, France has been China’s largest source of cosmetics imports, accounting for 29.6% of China’s total cosmetics imports in 2025. EU exports to China—meat, alcohol, luxury goods, cosmetics, and other products—all occupy significant shares of the Chinese market.

If the EU accuses Chinese products of “overcapacity” using the absurd logic of “production capacity exceeding domestic demand,” then whether these European products sold in China face the same situation is also worth considering.

The session focused on the trajectory of China-U.S. relations after the Xi-Trump meeting, the prospects for managing strategic competition, and the implications of “a constructive bilateral relationship of strategic stability”.

The event was moderated by Mabel Lu Miao, Co-founder and Secretary-General of CCG, and drew diplomats, scholars, journalists, and representatives from international organisations, think tanks, and the business community.

During the Q&A session, Vebjørn Dysvik, Norwegian Ambassador to China; Marcelo Suárez Salvia, Argentine Ambassador to China; Colum Murphy, Senior China Economy and Government Reporter at Bloomberg News; Zhuorui Fu, Associate Economic Officer, UN ESCWA; Shi Yinhong, retired Professor at the School of International Studies, Renmin University of China; and Zhao Shengchuan, Professor at Josai International University, raised questions and exchanged views with Shambaugh and Wang.

This transcript is based on the event recording and has not been reviewed by any speaker.

Mabel Lu Miao, Co-founder & Secretary-General, CCG

Your Excellencies, ladies and gentlemen, friends and colleagues, good afternoon. A very warm welcome to the Center for China and Globalization, and to this special edition of our CCG Global Dialogues series.

My name is Mabel Lu Miao, Co-founder and Secretary-General of the Center for China and Globalization. First of all, I thank you all for your presence as we gather to explore one of the most consequential relationships of our time: the future of U.S.-China relations.

We meet at a pivotal moment. The dynamics between the United States and China are shaping not only the bilateral landscape, but also the very architecture of global stability, trade, and innovation. Following the recent high-level summit between President Xi and President Trump, we find ourselves at what many call a critical crossroads. The consensus to build a constructive relationship of strategic stability offers a new framework, a diplomatic anchor in turbulent seas. Yet the fundamental forces of strategic rivalry and deep economic interdependence continue to coexist, defining a relationship that is as complex as it is crucial.

The question before us today is not merely academic; it is urgent and profoundly practical in an era of persistent contestation: How can these two great powers stabilise their interaction? Where are the realistic avenues to expand cooperation on global challenges, from climate change to public health? And perhaps most pressingly, how can both sides effectively manage risks and prevent miscalculation amid inevitable competition?

These are the questions that today’s dialogue seeks to address. To guide us, we are honoured to welcome a scholar whose work has illuminated the U.S.-China relationship for decades. It is my great pleasure to introduce our distinguished keynote speaker, Professor David Shambaugh.

David Shambaugh is Gaston Sigur Professor of Asian Studies, Political Science, and International Affairs at George Washington University’s Elliott School of International Affairs. He is also a distinguished visiting fellow of the Hoover Institution. Professor Shambaugh is an internationally renowned scholar on contemporary China, Asian affairs, and, of course, U.S.-China relations, with a career spanning academia, policy analysis, and extensive field research. He brings a rare blend of theoretical depth and practical insight. His perspectives have informed policymakers, business leaders, and scholars across the globe.

We are privileged to have him with us today to set the stage for our discussion. Following his keynote, Professor Shambaugh will be joined for an in-depth dialogue with Henry Huiyao Wang, Founder and President of the Center for China and Globalization, former Counsellor of the China State Council, and a professor at China Foreign Affairs University. Henry Huiyao Wang has dedicated his career to fostering international exchange and think tank diplomacy, engaging in profound dialogues with world leaders and thinkers. His unique global perspective will help bridge theory and practice, ensuring our discussion is both grounded and forward-looking.

Our agenda today is designed for substance and interaction. After the dialogue segment, we will open the floor for your questions, because the insights from this distinguished audience, comprising policymakers, senior scholars, business leaders, and journalists, are an essential part of this global conversation.

Before we begin, I would like to extend my sincere welcome to our distinguished guests, including His Excellency Marcelo Suárez Salvia, Ambassador of Argentina to China. Welcome, Your Excellency. His Excellency Vebjørn Dysvik, Ambassador of Norway to China. Welcome. Also, Ms. Amakobe Sande, UNICEF Representative to China and Professor Shi Yinhong from Renmin University. We also warmly welcome scholars, diplomatic officials from various embassies, business delegates, and media friends. Thank you all for your presence.

Let us begin this important conversation now. Please join me in giving a warm welcome to our keynote speaker, Professor David Shambaugh. Welcome.

David Shambaugh, Gaston Sigur Professor of Asian Studies, Political Science, and International Affairs, George Washington University; Distinguished Visiting Fellow, Hoover Institution

Henry and Mabel, colleagues and friends, 各位观众, distinguished members of the diplomatic corps here in Beijing, I am very honoured, actually, that all of you came out on a rainy day in Beijing. But thank you for making the effort. I know getting around Beijing is not the easiest thing with the traffic, although I think traffic has improved slightly from the last time I was here. The air has also improved considerably.

Thank you for coming. It is truly a great pleasure for me, and that is an understatement, to return to Beijing, a city I first visited in 1979 when I was a student, and have lived in myself for six years altogether. This is indeed another home of mine, I might say. But for reasons I am not going to go into, this is only my second visit in the past 11 years. Therefore, I am sincerely grateful to Henry, to Mabel, and to CCG for the invitation to return and for making this visit possible.

I truly hope that my long absence is now firmly in the past, and that I can look forward, hopefully, to many more visits in the future, resuming my longstanding relationships with the many institutions and friends here in Beijing and in China, and making new friends, particularly with the younger generation.

I have been coming to China every year from 1979 to 2015. That is a long time. I have studied at three different Chinese universities as a student. I have been a visiting scholar at six different institutes of the Chinese Academy of Social Sciences, and other universities and think tanks. We have a long and good past. It is wonderful to be back, and I am really very grateful.

I would also like to begin by paying tribute to CCG, in all sincerity, for the extremely important role that you have played for the past 18 years since your establishment in providing multifaceted forums for dialogue between China and the world, both inside China and, of course, around the world. I think Henry and Mabel live on airplanes. I do not know how you travel as much as you do. I receive your CCG activity emails in my inbox, as I am sure many of you do. One day they are in Latin America, the next day they are in Europe, the next day they are in Southeast Asia, then they are back in Beijing, and then they are off to some other place. I do not know how you do it.

But in all sincerity, I want to congratulate you on the forum that you established 18 years ago, and on how it has grown into what it is today. In fact, just this morning over breakfast, I was reading your annual report, which, by the way, is here on the table. If any of you need copies, I commend you to pick one up on your way out. It is very impressive in its range of activities. As they say in Chinese, 加油 keep it up. You really deserve congratulations for what you have created, established, and developed. People-to-people exchanges among thought leaders and other elements of societies are really more critical than ever before in today’s very turbulent world.

I am going to speak for about 20 minutes, I am told, about a very big subject: U.S.-China relations, the state and future of the relationship following the very recent summit meeting here in Beijing between our two presidents. So, let me say a little bit about how I view the results of the summit and the possible evolution of the relationship going forward. Then Henry and I are going to have a constructive, strategic, and stable dialogue.

中美建设性战略稳定关系 is the new 提法 (tifa). We have a new tifa. For those of you who speak Chinese, tifa means narrative. There is a new narrative to define the U.S.-China relationship, an official narrative, which is very important because policies derive from narratives. Narratives are like a grand strategy, 大战略 in Chinese. We have a new tifa coming out of this last summit: to build a constructive, strategic, and stable U.S.-China relationship. It is the first time those terms have been used in these narratives.

First, before I talk a little bit about the narrative and unpack it, let me give you my bottom-line takeaways and evaluations. Let me talk a little bit about the summit, because I am sure you have all been following it and digesting the tsunami of information that came forth during and susequent to the summit. It actually takes a number of days, oftentimes weeks, before you really get to understand what happened and what came out of a summit. We are beginning, day by day, to learn more. It occurred just a week ago, so I do not think we have heard everything yet. I have no inside 消息, no inside knowledge.

There were relatively few concrete and specific deliverables, as Americans call them, that came out of the summit. There was no joint communique, no joint agreements, and very little tangible that one could identify in the immediate aftermath of the summit. Day by day, we are learning a little more. But that is not the most important thing.

In Washington, where I live, there has been some criticism of the summit because it did not achieve so-called concrete deliverables. Americans are very concrete. They like specifics; they do not like abstract phrases. They want concrete deliverables. This summit did not produce concrete deliverables, so there has been a bit of criticism and frustration in D.C. I have to be honest with you.

But for me, the greatest value and the most important outcome was that the summit occurred at all. It is absolutely crucial that our two governments and top leaders meet, and do so with some frequency. This is just the first of four meetings this year. They have three more to go. There will be a return state visit by President Xi, General Secretary Xi, to the United States in September, a meeting in Shenzhen, and a meeting in Miami. So this is really important.

This particular summit succeeded in putting a floor, I think, under a very fluctuating, rocky, and troubled relationship. It has not been in free fall; I would not say that. A few years ago, in the second year of the Biden administration, it was in free fall. So the Biden administration tried to put a floor under it and arrest the deterioration. This time we needed a floor to be relaid, you might say, and that is the major accomplishment to my mind. A floor was relaid, as well as establishing some guardrails and boundaries, both of which will serve to stabilise relations and, I hope, begin to re-establish a more lasting framework to manage the competition.

“Manage the competition” is a particular American phrase. The Chinese side does not like that phrase and does not use that phrase specifically. But the summit allows us, I think, to have a new framework to restrain and limit points of friction and keep the elements of contention, including the all-important issue of Taiwan, within manageable boundaries, hopefully.

So I view this summit as having been quite successful. Let me be very clear about that. I am not disappointed by it, because I think the signals that were sent, both the optics of the summit as well as what we have learned about the substance. So I think it might hopefully be a turning point in the relationship. I have been studying U.S.-China relations long enough to know that there is never any real turning point. We never get around the corner and stay there in a stable place. But this is a new attempt, and it is the best attempt in about 10 years, I think. Let us hope it endures.

The United States and China are not going to stop competing and having points of friction, many points of friction. But I think it is important to understand what competition means. Let me digress a little onto that subject.

What I have found most instructive recently in terms of understanding competition is the May 17 press conference and media briefing by State Councillor and Foreign Minister Wang Yi. He gave a very extensive readout on the summit. You should all read it. It is four or five pages long. On the subject of competition specifically, let me quote briefly what State Councillor and Foreign Minister Wang had to say, because I think it is very useful and instructive.

For the last six years, the Chinese side has refused to even engage with the Americans over the term competition. They thought it was some sort of negative, hostile conflict. You only compete with adversaries. But now the Chinese side seems to have come around to not viewing competition as an adversarial phenomenon, which is not.

Foreign Minister Wang said, and I quote, competition should be healthy and stable, “where competition is kept within proper limits and is not turned into a zero-sum game.” “Major-country competition is nothing new,” he said. “When competition does happen, it must be a healthy one where we learn from each other, pursue excellence together, and compete fairly in compliance with rules.” “The purpose of competition,” Foreign Minister Wang said, “should be to outdo oneself, so that both sides become better.” That is a positive-sum definition of competition.

Then he concluded that “it should be constant stability where differences are manageable, and the relationship should not be like a roller coaster”. Notice the word “manage”, 管理. We Americans have been working on the Chinese side with this concept of managed competition for six years. It seems to have finally sunk in a little bit.

I completely agree with Foreign Minister Wang’s characterisation, and I commend him on it. The entire press conference is worth reading. I just read a little bit. Competition is an entirely natural 自然的 part of life in many domains: in commerce and economics, in sports, in the realm of ideas and even ideologies, and in geostrategic affairs. So there is nothing abnormal about competition. Quite to the contrary, as Foreign Minister Wang said, it can spur one to improve themselves and to compete with others, and that in itself is a positive-sum phenomenon. Now, to effectively manage competition necessitates direct exchanges at many levels and candid dialogues. So I think that was a very useful contribution by Foreign Minister Wang.

He also said that President Xi raised with President Trump the topic of the Thucydides Trap. That is interesting. It is not clear to me that President Trump has read Graham Allison’s book and even understands the notion of a Thucydides Trap, but obviously President Xi has, and has had personal discussions with Professor Allison.

This is important, I think, because his book, which had a very bad title, Destined for War—believe me, I know about bad titles. Publishers sometimes give articles and books very provocative, inappropriate titles with which the author does not share. Believe me, that has happened to me personally. Personally, that is one of the reasons I have not been here for 10 years. The Wall Street Journal gave a very inappropriate title to an article I wrote 10 years ago.

Professor Allison’s book looks at, I think, 16 historical cases of rising powers and established powers, going back to Athens and Sparta. He found historically, 14 of the 16 cases resulted in conflict, usually because the established power was feeling threatened. Sometimes the rising power attacked the established power early because they thought they had an opportunity. Sometimes the established power attacked the rising power to keep it from parity and from becoming a peer competitor. Anyway, in 14 of 16 historical cases, the historical record is pretty clear and very dangerous.

I think it was very appropriate that President Xi raised this with President Trump. But the point here is that nothing is structurally predetermined in international affairs. In political science, in what I do, we call this the agent-structure paradigm. Leaders possess agency, and the exercise of human will can ameliorate and overcome structural dynamics that produce tensions in a relationship. So nothing is predetermined, and I hope President Trump took that away from his discussions.

The last thing that Wang Yi said I found very useful was that he reported, among the other topics discussed, people-to-people exchanges should be increased. Indeed, they do need to be increased. These have atrophied badly between the United States and China during and since Covid, and we need to rebuild people-to-people exchanges on a reciprocal basis.

Cutting off dialogues, or worse yet, banning people from the other country, is not helpful. In fact, it is harmful. We need to be more tolerant and open to various perspectives. Again, this is what CCG, Henry, and Mabel do so well.

People-to-people dialogue needs to be rebuilt. And I hope that includes not just tourists and students. Students are very important. President Xi reiterated his invitation to 50,000 American students to come to China over a five-year period. That is a very nice aspirational number, but it is going to be very hard to achieve, especially given that today, as we sit here, there are only 1,200 American students in this entire country. Ten years ago, there were 20,000 American students in this country. There are, by contrast, 270,000 Chinese students in the United States this academic year, including in my classrooms. We have got to work on that.

But I would also like to suggest that we need to work on improving scholarly exchange, not just student exchange—scholars who already have their PhDs and are already researching different topics. There are so many interesting things going on here in China that the international China studies community, not just the American China studies community, is very anxious and curious about. We all want to come here. We want to do research in archives, libraries, factories, laboratories, and travel in the countryside. I hope that when the two governments get around to implementing the people-to-people component, that they really pay attention to the scholarly component.

I am relatively positive about the recent summit. It was very businesslike and obviously very formal. It was a state visit, and the Chinese side puts on such ceremony like hardly any other country in the world so well. It was a very respectful and polite summit, and there was even personal warmth between the two leaders. It was very obvious and good to watch.

We have this new framework to constructively stabilise and develop a strategically stable relationship. Foreign Minister Wang—I am not going to go into it—also identified eight specific areas. So, again, I commend you to look at his May 17 press conference. The United States and China, according to him, are going to improve exchanges on foreign policy, military-to-military relations (hugely important), the economy and trade, public health, agriculture, tourism, people-to-people ties, and law enforcement. Those are the eight priorities. I think those are the right priorities.

Let us move back to the new tifa, the new narrative, and unpack that a little bit. I will be very interested to hear Henry’s observations on this new phraseology. Both governments have officially committed themselves to this as the guiding framework for the relationship.

I personally am not the biggest fan of slogans and narratives in international relations to define relationships, but I think they can be very useful at certain times. I see the utility in them because they serve as a kind of compass to guide a relationship, even a road map, you might say, to keep it more or less going in the same general direction, what the Chinese call the 主要方向, so you do not get off the road and have an accident or run out of petrol. But if you have a Chinese EV, you will not run out of petrol.

I think this new phrase is better than previous phrases. I was not a particular fan of the 新型大国关系 [new type of major-country relations] that was announced between President Xi and President Obama many years ago. But we have a new one now, so let us talk about this.

Given the extreme complexity and the various systemic elements of the U.S.-China competition, stability is indeed a very worthy and appropriate goal for the two sides to work towards. Nonetheless, as in economics, equilibriums are hard to sustain. True stability is very difficult to maintain.

And I recall, in this context, my good friends and colleagues Professor Wang Jisi of Peking University and Kenneth Lieberthal of the University of Michigan, who was one of my mentors, and Jisi is one of my mentors and friends. They wrote an article about 10 years ago for the Brookings Institution in which they used the term “dynamic stability”. [Transriber’s note: The speaker appears to be referring to Lieberthal and Wang Jisi’s 2012 Brookings monograph, although the term “dynamic stability” does not appear in that work.]

In other words, you should not think of stability as something static and fixed. That is not the way to think of stability. It is unrealistic, not something where you achieve stasis, right? Life, all of us in our relationships, personal and between countries, evolves. Relationships are affected by all kinds of factors all the time. The question is how to create a framework that permits evolution, you might say, while working to achieve basic equilibrium. I think that is the first thing I would say about the 稳定 stability factor. Stability is not stasis. You have to think of it as a more fluid concept.

What about the term constructive, 建设性? That is an interesting term. When it first came out, it made me think about the history of the People’s Republic of China. There is a certain period of the 1950s known as the 建设时期, the build-the-country period. But that is not what they have in mind here.

I think “constructive”, first of all, is different from “cooperative”. Do not equate constructive with cooperation. They are two different concepts. Constructiveness indicates intention, and the intention to act and speak constructively indicates a kind of positive intention towards another party. Even criticism—in English, we have a common saying, “constructive criticism”. You all have heard that term. That means you can criticise someone if it is intended constructively for them to sort of self-reflect a little bit on whatever, and to maybe alter their thinking. That is an important point. Not all people or societies take criticism constructively. Some are reflexive; they just cannot take any criticism. I am not identifying anybody in this context. The point is to have an open mind and take criticism constructively, because it is positively intended.

I have spent my entire professional career studying the role of mutual perceptions in U.S.-China relations, beginning when I was a graduate student here at Peking University from 1983 to 1985. That is a long time ago, folks. I researched and wrote my PhD dissertation here. I was in fact the first foreign, not just American, student permitted by the Ministry of Education to study in an international relations department in China in 1983. They opened the door, and I was the first one to walk through that door. Many more have walked through the door subsequently. It was a wonderful experience, two years in the 国政系. I also played for two years on the Beida [Peking University] basketball team, and we had a lot of success. We won two city championships. I played in the Chinese national basketball tournament for two years. I had great experiences. I have wonderful memories of Beida, and previously Nankai University and Fudan University.

The reason I am telling you this, sorry about the tangent, is because I was researching a dissertation on China’s America specialists and their perceptions of America, 中国的美国问题专家看美国知觉. I am an American China specialist, so I wanted to look at my counterparts: What about China’s America specialists? What are they thinking about the United States? How do they understand the United States? That was my doctoral dissertation almost 40 years ago, and it turned into a book titled Beautiful Imperialist, 美帝 (mei di)—mei for America, di for imperialism—because Chinese views of America at that time were ambivalent. On the one hand, America was to be emulated, studied, and learned from. On the other hand, America was imperialist and should be rejected and criticised. So there is this ambivalent tension Chinese views of America for a long time. It goes back even earlier than the 1980s.

The reason I raise this is that if I have learned nothing more in my decades of study of perceptions in the U.S.-China relationship, it is that it is actually THE most important factor, much more important than the trade balance or other functional dimensions of the relationship. We need to understand each other better. And language means different things to different people. One should never assume that others understand your language and see things the way you do.

This is precisely why sustained dialogue between our two societies, and all societies, is crucially important. All of you representing other countries here in China, I know, have the same view. Here again, I wish to pay real tribute to Henry, Mabel, and CCG for what you provide in China’s dialogue with the world. There is no institution like this in China other than CCG. Very impressive. Keep up the good work.

Last point, and then I should stop and we should have our dialogue. What about the term strategic? Constructive, strategic, stability: those are the three operative adjectives and nouns in this new tifa. Strategic is interesting because there are differences of definition that need to be further explored through dialogue. For Americans, I can tell you, the term strategic usually, if not always, refers to the security and military domain. Full stop. Security, military equals strategic for Americans. That is how we think. Not for others.

The Chinese—and I have been reading these articles in the last week after the summit—many Chinese scholars are writing very interestingly that, oh no, 战略 strategic is a kind of comprehensive, elastic term that encompasses all dimensions of a relationship, and therefore it’s strategic; all dimensions equal strategic. Well, that is a big difference in the way Americans and Chinese think about that term. I think we need to have some dialogues to unpack our thinking about “strategic” and about “competition”.

We are making progress on competition. As I said, I think Foreign Minister Wang’s statements this week, and even at the Munich Security Conference, show a lot of evolution in Chinese thinking. I am not going to say progress, but it is just evolution. So it is good.

So, Henry, keep it up. We need to have more of these kinds of dialogues. I have gone on long enough, but those are my general impressions of the summit and the state of the relationship. Henry, you and I can now sit down and have a constructive, strategic, and stable dialogue. Thank you very much.

Henry Huiyao Wang, Founder & President, CCG

As we all know, as Mabel just introduced, David is a very famous and renowned China expert in the U.S. As you said, you studied in China for so many years and did all those studies. Of course, you went back to the U.S., and you were also the chief editor of The China Quarterly for almost a decade. That was really a very prestigious China research journal, a top journal in the world, while you were in the UK for 10 years. You have also published many books.

I know you came to Beijing two years ago with a Central Party School Track II dialogue, where I was also participating. I am glad to see you come back again, and, as you put it, to promote better dialogue and understanding.

I am very glad to have you join us for CCG Global Dialogue. We have had almost 100 dialogues, including with a few dozen top American scholars, such as Joseph Nye, Graham Allison, Tom Friedman, Jeffrey Sachs, and many more. Now we are adding you to this long list of well-known strategic global dialogues.

Your timing is very significant. You came just one week after the summit. My first question and comment to you is that this visit, I personally feel, is very significant. It is almost a decade—nine years—since Trump’s last visit. This is his second visit. You can see that President Trump used much more positive terms with the Chinese side. He basically praised what China has done and expressed many good gestures towards China. I think that has been appreciated.

At the same time, as a Chinese person, I feel China is now getting a lot of international attention. Since the beginning of this year, we have had almost all G7 leaders come, except Japan. At the end of last year we had President Macron, and at the beginning of this year, Mark Carney, then Starmer, then Merz, and almost all of them. Then after that, Putin. You see those big powers all coming, and that really shows that China has become a focal point, an internationally attractive assembly place where world leaders come to compare notes and build consensus.

How do you think China has reached this kind of influence and impact in the world, with almost all G7 leaders and other global leaders coming? Also, we are in a much more turbulent world now. We still have a war going on in Ukraine. We have a terrible war going on in Iran. The whole world has these choking points. What do you think about this? This is the first U.S. state visit in nine years. During the four years of Biden, as you rightly said, we never saw a U.S. official visit China, which is unthinkable for the two largest economies in the world. There was no dialogue or exchange.

Now this high-level exchange has resumed. We are going to see another President Xi visit in September, another APEC summit in Shenzhen, and the G20 summit in Miami. Could 2026 be a turning point, as you just mentioned, between China and the U.S., and perhaps another turning point for China, the West, and the world as well? Maybe you can give some of your thinking on how special 2026 can be, or what China has done right.

David Shambaugh

Thank you, Henry. There were a number of elements in there, and I will see if I can unpack them. But your main point about foreign heads of state and dignitaries increasingly coming to China is a very well-taken point. That is not necessarily a new development. China’s diplomacy, in quantitative terms, is really unparalleled, both here in Beijing and in travel by President Xi. President Xi is not travelling as much in recent years as he used to, but I was reading the other day that he has made 71 trips abroad to 112 countries during the time he has been in office.

Anyway, I think Beijing and China are becoming more of a destination point for various heads of state. Part of that is the result of the Trump factor. We know what has been happening within Europe in particular: very unfortunate transatlantic policies and verbiage. So, several European heads of state have beaten a path here to Beijing. Canadian Prime Minister Mark Carney came here and delivered a very significant address in Davos about middle powers.

So China is reaping some of the benefit of the alienation that American allies and others are feeling about the United States under President Trump. There is a kind of, you might call it, a bump or an effect—the Trump bump. How is that for a phrase?

Nonetheless, even without Trump, other countries are hedging. I just published an article in Foreign Affairs last week about how the whole world is hedging against both America and China. Countries around the world do not trust either power. They do not trust China, they do not trust America, and they certainly do not trust Russia. Everybody is hedging, and part of hedging is in fact engagement.

You just had President Putin here last week. I think China is playing its diplomatic role very effectively at the moment, and will continue to. That is important. For the rest of 2026, there are going to be these multilateral meetings. I will give President Xi and China real credit here in the realm of global governance. China has really stepped up its game in the global governance domain under President Xi.

I teach about this in my Chinese foreign policy classes. Up until President Xi became the leader of China, China was very ambivalent about multilateralism. Verbally, they were supportive, but in practice not. There has been a much greater convergence of China’s behaviour and participation with the verbiage and language, which has always been supportive of multipolarism.

Ladies and gentlemen, multipolarism and multilateralism are not the same thing. International relations specialists will tell you that polarism has to do with poles, with powers. Powers attract other countries to them like magnets. That is what a power is. Multilateralism is institutional: the United Nations and all these other IGOs in the world.

China is now playing a much more central role—the new Global Governance Initiative that China just published three or four months ago. I was along with Xi Jinping’s Global Civilisation Initiative, Global Security Initiative, and Global Development Initiative. Now we have a Global Governance Initiative. These are all indications of China’s increased activism—not just centrality, but activism in world affairs. This is very positive. Very positive. So I think we can anticipate that, going into the end of 2026 and into next year, that that trend will continue.

Henry Huiyao Wang

Thank you. Yes, David, absolutely. You see China becoming more active, particularly in turbulent times, making many proposals and initiatives, particularly for global governance, where we are actually embracing a multipolar world. Global governance is really at the heart of the issue. This centrality that you mentioned is gaining some momentum now.

Again, you mentioned during your speech that I was quite delighted to hear that the U.S. and China, as President Xi put it, have reached constructive stability and strategic stability. I know the U.S. added “on a reciprocal basis”. But I remember that in 2017, when the first national security strategy report came out under the first Trump administration, strategic rivalry was really the buzzword. Strategic rivalry was even before Russia. So this turnaround, from Trump 1.0 strategic rivalry to Trump 2.0 strategic stability, is really a big shift over the last decade.

The first Trump term started with a trade war, a tariff war, and sanctions. Even today, there are about 2,000 Chinese companies on the American entity and sanctions lists. But that profile does not really work that effectively. As a matter of fact, I had a dialogue with the late Joseph Nye about a year or two ago. He told me that there is a cycle in U.S.-China relations roughly every 20 years. China and the U.S. were at war in the Korean War, that was the lowest point. Twenty years later, the Nixon moment came, and then there was a revival, followed by another downturn.

Are we now seeing the bottom? Are we starting to realise that we cannot really decouple? One of the things I noticed when I went to the United States last month for a world economy summit with 500 CEOs was that I never heard anybody talk about decoupling with China. Even senior U.S. officials were saying that the U.S. does not seek decoupling now.

In that sense, are we achieving this kind of realisation because we have achieved mutually assured disruption? From MAD, mutually assured deterrence, and mutually assured disruption, to what you just said: mutually assured construction. By that kind of realisation, after nine years, we figure out that as wars are going on and the world is in a different chaotic place, the U.S. and China have to work together. We have to, as President Trump put it properly, recognise a G2 or near-peer status.

What we get from strategic stability, or what you have called for many years managed competition, is that we have to recognise reality. We cannot go on fighting each other or sanctioning each other. We have to find a way to coexist peacefully. Even though strategic stability may not be that concrete, as you said, in the Chinese narrative, if you have a guiding narrative, then everything else follows through and can be much easier. That is how Chinese people approach things: it is a long-term objective.

What do you think about this paradigm shift, from the first term’s strategic rivalry to the second term’s strategic stability? I hope we are going to bottom out and maybe keep managed competition, as you mentioned. Minister Wang mentioned Olympic-style competition. Maybe we could seek a more stable world as time goes on. What do you think about this paradigm shift, or this move from strategic rivalry, which the Trump administration no longer emphasises? I have not heard any official talk about strategic rivalry. On the contrary, I still hear Europeans talk about systemic rivalry, which probably was inspired by the first Trump term. But the U.S. is not mentioning strategic rivalry; now it talks about strategic stability. It adds some modifiers at the end, but it is still strategic stability. What is your take on that?

David Shambaugh

Again, these phrases and narratives are important for us to consider, but we should not put too much stock in them. Just because you declare something does not make something that way in reality. We can declare that the U.S.-China relationship is a strategically stable relationship, but in fact, that is aspirational, I would argue.

Henry Huiyao Wang

Could this also be a recognition of reality?

David Shambaugh

The reality is comprehensive competition, comprehensive across all domains and every region of the world.

Henry Huiyao Wang

But it has to be managed.

David Shambaugh

But it has to be managed, exactly. I was the first one to use the term “managed competition” about 12 years ago, Henry. That is interesting; you knew that. I also coined the term “competitive coexistence” six or seven years ago. That is what I think we should try and achieve in the U.S.-China relationship.

The U.S. and China are going to be competing across every domain and every region of the world as far as the eye can see. We need to recognise that reality. We should not deny it, but you have to learn how to manage it. There are different mechanisms for management, beginning with dialogue, but there are other institutional mechanisms for managing strategic rivalry, in the military domain, for example.

Let us be clear about why the narratives are important, because they set the general direction, the 主要方向, and they produce guardrails and a road map. That is all very positive. We did not have guardrails and a road map before last week. Throughout the Biden administration, they tried a little bit, but the Biden administration did not succeed very well. Now at least we have a framework, a floor under the relationship, and we have guardrails around it to a much better extent.

But look, these are the two big powers in the world. If you take International Relations 101, you start with Athens and Sparta, and you move on through late 19th-century Europe, into the 20th century in the Cold War, and into the 21st century. These two powers are competitive. They are intrinsically competitive in every domain. But that goes back to what I was saying earlier, that competition is not a negative concept. It is not a zero-sum phenomenon. It can be a positive-sum, constructive element in a relationship. So I guess that is how I would respond.

Henry Huiyao Wang

Great. You mentioned the Thucydides Trap. Actually, President Xi talked to President Trump during the meeting, saying that this trap does not have to happen and we do not have to follow that old path. I remember we had a dialogue with Graham Allison a few times. I even wrote a book on how to escape the Thucydides Trap, summarising our dialogues. Basically, I think the title of his first book is very frightening: Destined for War. We want to avoid that.

But peace in the whole world is in danger now. You see what happened in the Russia-Ukraine war, and what happened in Iran with the U.S. and Israel. Larger peace and the stability of the world are in jeopardy, while China is the largest trading partner with every one of them. That is why I understand why President Trump and Putin came to China, and also why the Pakistani prime minister is coming, and why the Iranian foreign minister was here not long ago. They all want to know where China stands.

If China says, for example, that the Strait of Hormuz has to be open, that war should not continue, and that dialogue must be sought, that is an enormous message China can give. I think Trump has gained some consensus from China on that as well.

On the other hand, Trump also said that the U.S. does not want to see Taiwan become independent and does not want to send soldiers 9,500 miles away. Do you think that, since the U.S. president wants to be a peace president, as he said in his inaugural speech, and now he is involved in wars and wants to calm them down, he is looking for a larger peace? China is looking for peace across the Taiwan Strait, so perhaps they now have a lot of common understanding on peace.

Trump can better understand China’s position, because for China, to take Taiwan would be very easy. You can see what Iran did by blocking Hormuz. If China were going to block the Taiwan Strait, Taiwan probably would not have to be fought; it could get into real difficulties. I think the separatist movement has no future. Is that also why President Trump recognises reality, and also China’s support for peace in the Middle East and eventually maybe in the Russia-Ukraine war?

Do you think there are many exchanges on these greater global peace and security issues, including peace across the Taiwan Strait, that both China and the U.S. want? Many people interpret Trump’s visit to China as seeking China’s consensus on some of those peace issues and global conflicts. China did make a very strong statement to make sure peace is maintained in the Middle East, and they also talked about Iran. That was in Wang Yi’s statement on the bilateral talks between President Xi and President Trump.

What do you think about the future, and Trump’s position on Taiwan, which is also quite positive, I think? He does not support Taiwan independence, and he does not want to fight 9,500 miles away.

David Shambaugh

Thank you, Henry. I neglected to answer your previous question about the first Trump administration’s National Security Strategy references to China and the second Trump administration’s National Security Strategy references to China. They are very different, obviously.

So what has changed between Trump 1.0 and Trump 2.0? That is, I think, President Trump himself is less encumbered by the bureaucracy, who sees China across the American bureaucracy as a peer competitor. Trump does not have that view of China. Trump does not think in global strategic terms. He is a businessperson. He does have some intuitive sense, though, about great powers, and he understands China in that context. He wants a major commercial relationship with China in both directions: Chinese investment into the United States, and an improved climate for American business here in China, which has had difficulties for a number of years.

It is again an example of this agent-structure paradigm that we call in political science. The agent is the president: he is the leader, and he is imposing his personality and his own views about China, and Russia by the way, onto the bureaucracy. It is affecting American support for Ukraine, and it is affecting the China relationship and Taiwan.

So I will answer your question with regard to Taiwan, but here we have a classic example of a leader who is really imposing his vision. Indeed, in China, the leader is imposing his vision. I am sure the bureaucracy here...I know the bureaucracy here sees the United States in adversarial, competitive terms. But the two leaders met last week, and they have created this new environment. It is not a G2. It never will be a G2. People who argue in that direction, I think, are dreaming. But it is now a managed competitive situation.

Now, with regard to Taiwan, I haven’t been privy to previous discussions at that level about Taiwan between previous American presidents and Chinese leaders, but this time there was some significant. But that is the significant outcome of the summit that I saw. Two things: number one, going into the summit, we were all expecting that the Chinese side would somehow get President Trump to say that he opposes Taiwan independence instead of saying that he does not support Taiwan independence. That did not happen. He did not use that language. There were fears that Trump was going to say he supports the peaceful reunification of Taiwan and China, but Trump did not fall into that trap and did not say that.

When it comes to Taiwan arms sales, Xi Jinping directly asked him—I saw the footage—“Are you going to militarily intervene in Taiwan?” And Trump replied, “I do not discuss that.” That is continuity of the strategic ambiguity principle that the United States has followed with respect to possibly intervening in a Taiwan situation. Possibly. The United States has never, by law or policy, been committed to intervening. Americans have always said it will depend on the situation. The Taiwan Relations Act simply stipulates that the United States shall give Taiwan adequate articles of self-defence, I think is the language.

So, Trump dodged three traps on Taiwan: the “oppose independence” trap, the “peaceful reunification” trap, and the commitment not to sell weapons to Taiwan. That was when he was here in Beijing. Then he gets on the airplane, leaves, goes back, and is very provocative. He says to the media journalists on Air Force One, “I need to talk to the person”—he called him the person; he did not call him the leader or president—“in Taiwan concerning this.”

Well, that is what we are all waiting for now, right? A telephone call between Trump and Lai Ching-te. I do not know if it is going to happen, ladies and gentlemen. If it did, it would be highly provocative. It would violate every principle that the United States has had since 1979. The United States does not talk to the president and the government on Taiwan or the authorities. We do not call it a government; we call it the authorities. But in his first administration, Trump did receive a phone call of congratulations on his election.

So we have to wait to see whether the $14 billion arms sales package is going to go through. I do not know. But last point: if you read Wang Yi’s speech, I think one of the most significant parts of it is that Wang Yi says President Xi really got through to Trump about China’s perspective on the Taiwan question and its historical dimensions. I think this is registered with Trump in a way that it did not previously, and perhaps did not with other previous American presidents. So progress was made in that regard. We will have to wait and stay tuned. But there are three actors here: Beijing, Washington, and Taipei.

Henry Huiyao Wang

I see. I noticed that the Ministry of Foreign Affairs spokesperson mentioned that China opposes any official ties with Taiwan, and any discussion of a possible call. I think the MFA spokesperson strongly condemned that. It is also interesting to hear that, because the U.S. has used up its arsenals and military supplies in the Ukraine war, it may delay or cancel arms sales to Taiwan. That was also in the news.

I do see some positive signs from this visit. At least Trump is saying that they do not want to send soldiers 9,500 miles away. I am sure there will still be another three summits. I hope this is recognised as China’s core interest. Of course, the U.S. has many core interests everywhere now: in Latin America, the Middle East, and Europe. They all need China’s support and understanding, or maybe some consensus there. If we can have a better understanding of each other, maybe we can solve these things much more easily.

Let us come to another subject, perhaps our final two questions. One question is that we saw Trump bring 17 top CEOs, the biggest companies in the U.S., to China. That was really impressive. President Trump said many CEOs still wanted to come, and they only allowed the number ones to come; other senior executives were not able to come. There was a big coverage of those major CEO visits.

The business ties between China and the United States are still pretty strong. To see how eager all those big CEOs were to come shows the interest. The U.S. Chamber of Commerce has also indicated that American interest in China is still very strong. Of course, they also set up two boards, one on trade and one on investment, specifically to increase trade and explore categories of goods that can be exempted from tariffs, as well as investment and what non-sensitive, non-security areas can be invested in.

I think, also, people-to-people exchanges and students are important. Maybe next time, China could announce visa-free entry for Americans. The U.S. is the only G7 country that has not received visa-free treatment. Maybe we can reopen the consulates shut down in Houston and Chengdu. There are many low-hanging fruits that we could pursue.

One of the things we need to get rid of is this over-security issue. Too much of everything is treated as security. There are about 2,000 Chinese companies on the U.S. sanctions list, whereas only about 20 U.S. companies are on the Chinese sanctions list, mainly for selling weapons to Taiwan. With these two boards on trade and investment, maybe we can lower this hype of securitisation, which is everywhere: people-to-people exchanges, students, professors, academics, think tanks, and experts. Over-securitisation is probably something we need to overcome. What do you think we should do to increase business and people-to-people exchanges?

David Shambaugh

Henry, I could not agree with you more. In fact, last night, we were discussing this over dinner. I too feel that the relationship has become over-securitised on both sides towards the other, and there is collateral damage being done to the business community, to the academic community, and to others who should be interacting normally between our two societies.

Both sides have prioritised national security. Xi Jinping has made it the number one national goal. China’s number one national goal is no longer development. 不是发展，现在第一是国家安全, right? That is a change; that is a narrative change. The same is true for the United States. The American side has over-securitised various activities of Chinese entities, not just companies on the entity list in the United States.

I think both sides have to step back and remove these impediments to normal people-to-people interaction. It is going to be very hard to build the framework relationship that they have just stated they are trying to do until they can unwind and dismantle some of these impediments that both sides are putting on. That is the responsibility of each country to define their own national security: What is real national security and what is not necessarily.

So I just wanted to say one last point on the Taiwan arms sales question. Whether the new $14 billion package is approved or not, there is already a six-year backlog of weapons that have not been delivered to Taiwan. So far as the Taiwanese are concerned, it is not the current package they want; it is the six years that are sitting somewhere in the pipeline. The types of weapons that have been moved from Northeast Asia to the Persian Gulf to attack Iran are not the types of weapons that the Taiwanese would be receiving from the United States. Taiwan is not going to get Tomahawk missiles, ladies and gentlemen, and those sorts of munitions.

Henry Huiyao Wang

David, on the securitisation issue, maybe I have somewhat different views from yours. China did not put the U.S. as a strategic rival. China did not sanction thousands of U.S. companies. It was actually the opposite. When China faced the U.S. national security strategy, where China was described as the number one rival, even before Russia, and with 2,000 Chinese companies on American lists, of course China had to put security as a top priority because China felt threatened. There is quite a bit of reinforcement of China’s position, to some extent.

But I do think President Trump’s visit to China is a great way forward. A good example is that under President Trump, we have solved the TikTok issue. It has been solved pretty well and is now operating smoothly.

Maybe we should take advantage of the fact that 17 CEOs came. Next time, when President Xi visits the United States from September 24 to 26—President Trump announced those dates—perhaps China could bring 18 or maybe 20 Chinese CEOs. Let us even have a China-U.S. CEO summit, alternating between the two countries every year. That would be really great. Maybe we can gradually build up some trust.

As you said, we have put a floor at the bottom. I hope now is the bottom, and we can gradually rise up. Of course, we have structural problems. As the two largest economies, there is bound to be some competition, and particular things will happen. But let us not get into conflict. As I discussed with Graham Allison, if we end up in a fight, possibly a nuclear fight, we are going to return to the Stone Age. It would devastate the whole world, and that is not an option. When that option is mutually deterred, the only option left is that we work together. Let us conquer Mars together. Let us fly to the moon together. Let us tackle climate change.

I give high credit to President Trump’s visit this time, and I am sure 2026 will be a good stabiliser for China-U.S. relations.

David Shambaugh

I certainly hope so. And I like very much your suggestion of a CEO summit, which maybe they could do under this new Board of Investment, because we need more Chinese investment into the United States in certain industries. We have national security concerns too, but there is a large variety of sectors in which there are no national security concerns, and Chinese companies should be welcomed into the U.S., and vice versa: American companies here. So we need to improve that dimension.

The last point I would make is: What do we need to be careful about going forward? I would say we need to be more careful about over-securitisation. That is the first thing. I completely agree with you, Henry.

The second thing we need to be careful about is not over-institutionalising the relationship. There is a temptation to go back—this is what governments do: “Let us set up working groups, then we will turn a working group into a vice-ministerial dialogue, turn a vice-ministerial dialogue into a ministerial dialogue, and then we will go up to even higher.” During the Obama administration, there were no fewer than 98, basically 100, bilateral U.S.-China dialogues at the government-to-government level. Trump came in 2017 and cut them to under five. Good. It was a waste of airplane fuel, flying these delegations back and forth, preparations going into these meetings, and then they would produce some communique, perhaps at the end, and then the communique would not be implemented.

Many countries, not just the United States, including European countries and others, developed what they called “dialogue fatigue”. China loves dialogues, and dialogue is intrinsic to diplomacy. But I think there is a temptation, now that we are to put a floor under the relationship, to reconstruct the architecture of dialogues and ministerial interactions. I believe in working groups. Small is beautiful. You do not need this big edifice, because it is never implemented. So I think we have to be careful not to go there.

Henry Huiyao Wang

I have a different view on that, because China is very highly centralised. There is always a top-down approach. Government bureaucrats have to work through these things, and then they can trickle down to business. Different countries may start differently. For the U.S., a smaller government is better and fewer meetings are better. But in China, it is really about building consensus through collectivism, and then trickling down. I still think we need high-level summits, like what happened just last week, and also high-level meetings. I think eventually they will promote better relations. Maybe at the Obama time there were too many, but now there are too few. We need a good balance.

David Shambaugh

Wang Yi identified eight specific areas in his press conference that the two sides agreed to. This is critical. The American administration, after the summit, did not say anything about those eight areas. It is the Chinese side that said eight specific areas. So I would imagine and hope that they can establish working groups in all eight areas: public health, and all eight. That is the first step. My suggestion is that I do not want it to become too large. I want it to be efficient, focused, and professional.

This brings us back to another article in the book Pioneering Through Hardship: An Account of the Decision-Making and Construction of Landmark Engineering Projects (筚路蓝缕：世纪工程决策建设记述), which I introduced in my last piece, namely “The Origins and Development of the National Strategic Petroleum Reserve.”国家战略石油储备的发展

Author Zhang Guobao served as Vice Chairman of the National Development and Reform Commission (NDRC) from 2003 to 2011, was the first head of the National Energy Administration, and also led the West–East Gas Pipeline project. It was during his tenure that China built its national strategic petroleum reserve system from scratch and defined its operating model. Also, big thanks to my friend Mao Keji for the book recommendation. Every conversation with him is a lesson. from renowned newsletter did an interview with him last year, and I highly recommend it.

The Aoshan base in Zhoushan that Li Qiang inspected is in fact one of the Phase I national strategic petroleum reserve bases whose construction Zhang personally oversaw more than two decades ago. As an old Chinese saying goes, one must know not only what something is, but also why it is so. 知其然，知其所以然 I would like to take this opportunity to introduce Zhang’s account of that decision-making process to my readers.

The article opens with the first oil crisis of 1973, traces the birth and maturation of emergency petroleum reserve systems in Western countries, and then turns to the State Council’s formal decision in late 2002 to launch construction of national petroleum reserve bases. The most valuable parts of the piece are Zhang’s detailed accounts of three core decisions, namely siting, storage format, and operating model, along with lesser-known episodes such as seizing low oil prices during the 2008 financial crisis to fill the reserves, the push to domestically produce the high-strength steel plates needed for storage tanks, and attempts to expand reserves through idle tankers and futures operations.

My understanding is that the article tells several characteristic features of the Chinese decision-making model. The first is a flexible blend of government leadership and enterprise coordination. For the operating model, Zhang proposed a three-tier management structure. At the top sits the Petroleum Reserve Office of the National Energy Administration, responsible for policy and planning. In the middle is the National Petroleum Reserve Center, a public-service institution responsible for project implementation and day-to-day management. At the operational level, the actual work of construction, management, stockpiling, and release is contracted out to nearby state-owned oil companies (Sinochem, Sinopec, and CNPC). This setup preserves the government’s ultimate authority over strategic reserves, while drawing on the human capital, industry resources, and market responsiveness of the central state-owned enterprises, and avoids the fiscal cost of building yet another large bureaucracy from scratch.

The second is what the Chinese call “crossing the river by feeling the stones,” a kind of pragmatism that learns from Western experience without copying it wholesale. Reading Zhang’s account, one can clearly sense the influence of his study of the U.S. Strategic Petroleum Reserve. Yet when it came to institutional design, he placed greater weight on China’s own industrial capacity and market conditions. At the time, China lacked a mature ecosystem of oil companies and oilfield service providers; the market was overwhelmingly concentrated in the “three oil majors,”三桶油 and a fully marketized, U.S.-style competitive bidding system would have been neither meaningful nor feasible. At the same time, Zhang opposed the NDRC, a government agency, sending officials directly to run the bases. The three-tier management system emerged as the compromise. This habit of referencing without replicating is itself a fairly typical pattern in Chinese policymaking.

The third is gradualism, testing first and then scaling up. Phase one aimed simply to solve the problem of having a reserve at all. All sites were located along the eastern coast, close to demand centers, near large refineries, and convenient for seaborne imports, and they used the relatively mature aboveground storage tank format. Only after experience had accumulated and engineering capacity had improved, did Phase II gradually introduce the technically more demanding underground water-sealed rock cavern storage and extend further inland. This step-by-step quality is itself a distinctive part of the Chinese approach.

That said, Zhang’s memoir does not omit the shortcomings of the existing decision-making mechanism, and he repeatedly recounts how he tried to “work the edges” within the system to circumvent procedural inefficiencies. Funding for the petroleum reserve comes from the central budget. Each year’s stockpiling plan must first be drafted by the Reserve Office, then approved by the Ministry of Finance and the State Council before it can be carried out. The cycle is long, and opportunities to buy at price troughs are often missed. During periods of depressed oil prices, Zhang considered leasing idle tankers as floating storage and partnering with privately owned tank farms to expand capacity, but the idea fell through because the Ministry of Finance refused to pay rent to private operators. On another occasion, when prices fell below the $40-something range, Zhang told state-owned enterprise executives at a meeting to start stockpiling first and complete the paperwork later, saying he would take personal responsibility if anything went wrong. The companies, however, did not dare move, and the window closed. His candor about this tension between compliance and efficiency leaves a great impression.

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Below is the English version of the article I made

The Decision-Making Process Behind China’s Strategic Petroleum Reserve

In 2015, international oil prices declined continuously. By late January 2016, U.S. West Texas Intermediate (WTI) crude oil futures had fallen below $30 per barrel, a drop of more than 60%. Currently, international oil prices hover around $50 per barrel and remain in a slump. Meanwhile, in 2016, China imported 380 million tons of crude oil, reaching a record level with a growth of 13.56%.

Faced with the sharp drop in international oil prices, everyone agrees that China’s earlier decision to establish strategic petroleum reserve bases during the period of high oil prices was an extremely wise and timely move. After the reserve bases were completed, they coincided with the drop in oil prices, allowing for bargain purchases that significantly reduced the cost of stockpiling oil, providing strong energy security for China’s future economic development.

As a participant in this decision-making process, looking back, I deeply feel that the decision was extremely correct and timely. However, the process was accompanied by repeated comparative analyses, demonstrations, overcoming difficulties, and accumulating experience—it was not as simple or easy as it might seem. This decision-making process fully reflects the strong sense of responsibility of China’s energy workers in ensuring national energy security, as well as their persistent efforts.

International Background

Internationally, strategic petroleum reserves were born out of the first oil crisis after World War II, strengthened during the second oil crisis, and continuously matured and improved through subsequent oil price fluctuations. During the first oil crisis of 1973-1974, the Organization of Petroleum Exporting Countries (OPEC) controlled production, causing crude oil prices to rise from $3 to $11 per barrel. This dealt a heavy blow to Western economies heavily dependent on oil imports, making developed Western nations realize that oil supply was an “Achilles’ heel” of their economies. Therefore, in 1974, OECD countries jointly established the International Energy Agency (IEA), requiring member countries to maintain reserves of at least 60 days of import volume to cope with oil crises. This is known as emergency oil reserves. Oil reserves include two forms: government reserves and corporate reserves, and member countries should provide mutual reserve support when necessary. The government reserves are also known as strategic petroleum reserves.

During the second oil crisis in the 1980s, primarily triggered by the Iranian Revolution, oil prices rose from $13 to $43 per barrel, further highlighting the vulnerability of oil-dependent economies in the face of oil price crises. The IEA then required member countries to increase oil reserves to more than 90 days of net imports. The oil reserve system was gradually improved and expanded. Since then, over 30 years have passed, and whenever international oil supply faces risks, IEA member countries mobilize their oil reserves. For example, the U.S. government released 33 million barrels of reserve crude oil to the market through direct sales during the 1991 Gulf War. The United States also once asked China, as another oil-importing country, to coordinate with the U.S. in releasing crude oil reserves and stabilizing international oil prices.

Through emergency oil reserves, Western countries have: first, effectively weakened oil-producing countries’ ability to use oil as a weapon to deter Western countries, preventing artificial supply shocks from occurring or occurring frequently; second, in the event of an actual supply crisis, mitigated the crisis risks by releasing crude oil reserves, minimizing the impact of oil supply shocks, and ensuring their own economic and political stability. It can be said that emergency oil reserves have become an important and effective energy protection measure and economic weapon for Western countries.

China’s Background

When Western countries established emergency oil reserves in the 1980s, some Chinese comrades who closely followed international developments proposed that China should also establish a strategic petroleum reserve. However, at that time, China’s oil supply still exceeded demand—China was an oil-exporting country—and there was no strong sense of crisis at the national level regarding oil supply shortages or interruptions. It was difficult to predict at the time that China’s future oil demand would grow rapidly and substantially, that China would become a net oil importer with external dependence exceeding 60%, and that it would become one of the world’s largest oil importers. Therefore, this proposal did not receive particular attention and was not implemented.

The year 1993 marked a major watershed in China’s energy supply and demand. Due to rapid economic development, crude oil imports increased sharply. That year, China transformed from a net crude oil exporter to a net crude oil importer, ending 30 years of oil self-sufficiency and slight surplus exports since the discovery of the Daqing Oilfield. Since then, crude oil imports have continuously reached new milestones. In 2004, they exceeded 100 million tons for the first time; in 2009, they exceeded 200 million tons; in 2014, they exceeded 300 million tons. In 2015, China’s oil import dependence reached 60.6%, and in 2016 it further rose to 65.4%. It was against this dramatically changing energy landscape that the necessity and urgency of establishing China’s strategic petroleum reserve became increasingly prominent. The research community and decision-makers gradually unified their views.

As China’s oil consumption and imports increased year by year, the Party Central Committee and the State Council, from the overall perspective of modernization and the need to safeguard national energy security, repeatedly issued important directives on establishing a national strategic petroleum reserve and ensuring national energy and economic security.

On March 17, 1996, the Fourth Session of the Eighth National People’s Congress approved the “Outline of the Ninth Five-Year Plan and the Long-Term Goals to 2010 for National Economic and Social Development of the People’s Republic of China,” which proposed “strengthening oil reserves.” In November 2000, at the Central Economic Work Conference, then-General Secretary Jiang Zemin explicitly required that projects related to the overall situation, such as establishing a national strategic petroleum reserve, be promptly studied and implemented as soon as possible. On March 20, 2002, the State Planning Commission submitted “Several Points on Increasing Crude Oil Reserve Facilities Construction” to the State Council. Then-Premier Zhu Rongji wrote on the report: “Please have the Planning Commission further demonstrate this, and submit it to the Premier’s Office Meeting for review and approval.” At the end of 2002, the Premier’s Office Meeting of the State Council heard and reviewed and approved “The State Planning Commission’s Request for Instructions on Establishing the National Petroleum Reserve Implementation Plan” (Ji Zonghe [2002] No. 2082), marking the official launch of China’s national petroleum reserve base construction.

Key Decisions in Construction

The construction of strategic petroleum reserve bases was put on the agenda. But where exactly should they be built? What management model should be adopted? Should aboveground oil depots or underground reserve depots be built? These questions, while seemingly very specific and minor, would greatly affect the construction process and work efficiency if not properly resolved. These decisions all underwent very detailed demonstration and research.

The First Question: Where to Start Construction?

When news spread that the state was preparing to build a strategic petroleum reserve, various regions became very enthusiastic, seeing it as an important opportunity to stimulate the local economy and the development of local petrochemical industries. However, due to China’s vast territory, varying levels of economic development, and existing petrochemical production capacities, plus the fact that this was an entirely new undertaking, pilot projects were necessary to accumulate experience before full-scale implementation. To this end, we invited the China International Engineering Consulting Corporation to organize experts to evaluate the site selection and other construction conditions, project investment, and safety production facilities for the national petroleum reserve base project. They proposed that “the establishment of a national petroleum reserve base should follow the principles of unified planning, rational layout, standardized management, and step-by-step progress, fully relying on and utilizing existing facilities.”

The first phase was to address the question of “to have or not to have,” choosing as soon as possible to build in the eastern coastal areas. The eastern region had large oil demand, more existing refineries, and oil reserves could serve refineries nearby. Meanwhile, the eastern coastal area had the advantage of being convenient for importing crude oil by sea.

In 2004, except for a small amount of crude oil transported across borders by railway from Kazakhstan and Russia, the vast majority of China’s imported crude oil was transported by sea.

In the end, four reserve projects were selected for the first phase, including the Zhoushan Aoshan, Ningbo Zhenhai, Qingdao Huangdao, and Dalian bases. All four locations were in the eastern coastal area, economically developed, with strong demand, and all had large refineries nearby. It was also determined at the time that subsequent second and third phase reserve projects could be built in suitable western regions to make the layout more rational and secure. Later, multiple locations in the southwest and northwest enthusiastically applied to build reserve bases. The second phase project arranged for several western petroleum reserve bases.

The Zhoushan Aoshan Port has an annual oil throughput of nearly 27 million tons. Aoshan Island is currently the largest petroleum reserve and throughput base in China.

The Second Question: What Management System to Adopt?

The U.S. strategic petroleum reserve management model is divided into two levels. At the management level, the Strategic Petroleum Reserve Office of the U.S. Department of Energy, located in Washington, D.C., is responsible for reserve policies and planning; the Project Management Office located in New Orleans is responsible for the implementation, operation, and management of specific projects. At the operational level, a market-based mechanism is adopted, with oil companies and base management companies determined through market bidding. Oil companies are responsible for procurement and release of reserves, while base management companies are responsible for the daily operation, maintenance, and security protection of reserve bases.

At the time, some comrades in the National Development and Reform Commission and the Ministry of Finance suggested partially imitating the U.S. model. The management level would be the same as in the U.S., but at the operational level, they proposed establishing specialized base management agencies responsible for base management as well as the procurement and release of crude oil at the bases. In other words, the Petroleum Reserve Office would manage everything from top to bottom—personnel, finances, materials, production, supply, and sales—forming a top-down management system. Other comrades suggested fully imitating the U.S. model.

But at the time, I believed that both approaches had flaws. If specialized base management agencies were established and personnel recruited, the state would have to pay various expenses for these agency staff, adding extra cost burdens to reserve work. Moreover, since talent and resources were concentrated in a few large state-owned oil and petrochemical enterprises at the time, it would be impossible to immediately recruit so many workers familiar with oil storage, procurement, and sales, which would inevitably affect reserve work efficiency. An office in Beijing might appear to have authority, but remotely directing base work could not effectively seize market opportunities for stockpiling oil, and in the event of safety accidents, responsibilities would be difficult to define. Fully copying the U.S. model was not feasible given China’s national conditions at the time. The U.S. oil market is fully market-oriented, with a large number of specialized oil companies and service companies that can quickly determine oil and management companies through bidding. But China’s oil market did not have the same conditions as the U.S., and this could not be achieved in the short term.

Both models had shortcomings. I believed that the U.S. model’s design at the management level was good. The main issue was at the operational level. To save operating costs and improve work efficiency, the U.S. model of determining the operational level through market bidding should be adopted. However, China’s oil was mainly concentrated in three major oil companies, and large refineries belonged to these three oil companies. Looking at it from another angle, China’s market structure is dominated by state-owned enterprises, and the interests of state-owned enterprises should be consistent with national interests. So we could directly delegate base management and operation as well as crude oil procurement and release responsibilities to oil companies near the bases. This would not only save various operational costs for the state but also fully utilize the talent and resource advantages of state-owned enterprises, improving work efficiency. At the same time, this allowed state-owned enterprises to obtain more information, hardware, and funds for their own operations through managing oil reserves. Since the construction and operational costs of oil reserves were funded by the national finances, this approach was also more acceptable to the Ministry of Finance.

At relevant meetings, I proposed establishing a three-level management model for petroleum reserves with Chinese characteristics, and everyone expressed support. A Petroleum Reserve Office would be established under the National Energy Administration as a government management agency responsible for top-level reserve policies and planning, representing the government in deciding the scale of stockpiling and the use of petroleum reserves. An institution similar to the U.S. Project Management Office would serve as a middle-tier public institution specifically responsible for project implementation and operational management. The operational level would be entrusted to nearby state-owned enterprises, which would be responsible for constructing and managing the corresponding petroleum reserve bases and bearing safety responsibilities. Crude oil reserve release would be operated by the enterprises according to the national plan prepared by the Petroleum Reserve Office.

Following this approach, in 2003, the Energy Bureau of the former National Development and Reform Commission added the sign of the National Petroleum Reserve Office, which later, with institutional reforms, was adjusted to become the current Reserve Office of the National Energy Administration, serving as the head of the petroleum reserve system. On December 18, 2007, the National Petroleum Reserve Center was officially established as a public institution under the National Development and Reform Commission, later adjusted to become a public institution under the National Energy Administration. As the middle tier of China’s petroleum reserve management system, it exercises investor rights, is responsible for the construction and management of national petroleum reserve bases, undertakes strategic petroleum reserve stockpiling, rotation, and utilization tasks, and monitors supply and demand changes in domestic and international oil markets. The operational level consists of reserve base companies funded by the state and entrusted to state-owned enterprises for management. Of the four first-phase bases, Zhoushan base was entrusted to Sinochem Corporation for management; Zhenhai and Huangdao bases were entrusted to Sinopec’s Zhenhai Petrochemical Company and Qingdao Refinery for management; Dalian base was entrusted to PetroChina’s Dalian Refinery for management. This saved on additional personnel allocation and also increased the daily operational management and safety responsibilities of the enterprises.

The Third Question: Aboveground Oil Depots or Underground Reserve Depots?

Since the United States has large salt domes concentrated in Louisiana and Texas near the Gulf of Mexico, close to the petrochemical industrial belt, most U.S. strategic petroleum reserve facilities are underground salt cavern oil storage facilities. Constructing such caverns is very easy—water is pumped into the salt dome to dissolve the rock salt, then the brine is extracted, leaving large underground cavities with good sealing properties. Construction and maintenance costs are very low. Countries without such natural conditions can only adopt the approach of building large aboveground oil tanks. There is also a type of underground water-sealed rock cavern, which refers to artificially excavating caverns of certain shapes and volumes in rock formations below the groundwater table for oil storage. This has the advantages of small land occupation, low construction and maintenance costs, and being safe and reliable. Being below the groundwater table ensures that the water pressure in the fissures is higher than the oil pressure inside the cavern, preventing oil leakage. Many regions in China have the geological conditions to build underground water-sealed rock caverns.

There was also debate about which approach to take. Some comrades believed that strategic petroleum reserves were related to national energy security and should imitate the U.S. model by building underground reserve facilities to maximize reserve safety. But eastern China did not have underground salt domes like those in the U.S. Building caverns required directly excavating in underground rock, with construction costs far exceeding aboveground tank construction. It was difficult to balance cost and safety. We held multiple meetings to discuss this. We comprehensively analyzed the main factors affecting reserve safety, including war factors and terrorist attack factors. These were problems that all countries generally faced, not unique to China. Therefore, we should not refrain from building aboveground oil depots. Future reserve facilities should combine aboveground oil depots with underground reserve facilities.

For the first phase, we would first address the question of “to have or not to have.” Everyone thought this made sense. Therefore, all four first-phase bases adopted the aboveground tank approach. Of course, considering that we had built underground water-sealed rock caverns for LPG in places like Yantai and Shantou, in order to accumulate experience with underground reserve facilities, we also considered adapting to local conditions and planning to build large underground water-sealed rock caverns in places like Qingdao Huangdao, where aboveground space was limited and underground geological structures were favorable. Using underground salt domes for oil storage was not adopted due to issues such as existing underground salt mines being far from the coast, insufficient salt layer thickness, and difficulty in brine treatment.

Construction Begins

After these issues were resolved, in March 2004, the National Development and Reform Commission held the launch meeting for the first-phase project construction of the national petroleum reserve bases. At the meeting, I delivered a mobilization report on advancing the first-phase project construction and signed project construction responsibility agreements with leaders of several group companies. The Zhenhai base was the first to begin construction, opening the curtain on China’s establishment of national petroleum reserves.

However, the first-phase project construction did not proceed entirely smoothly. The project encountered problems with the trial production and supply of domestic high-strength steel plates for large storage tanks, while the prices of imported steel plates multiplied. For this reason, I decided to organize relevant departments to undertake the localization of high-strength steel plates for large storage tanks. Through joint efforts from various parties, high-strength steel plates produced by Shanghai Baosteel Group, Wuhan Iron and Steel Group, and other companies successively passed certification by the National Pressure Vessel Standardization Technical Committee and welding process experiments by construction units. They were successfully promoted and used at reserve bases, breaking the monopoly of Japanese steel companies in China’s high-strength steel plate market, saving the country a large amount of construction funds, and improving the manufacturing level and competitiveness of domestic steel enterprises.

Through the joint efforts of project builders, the Zhenhai, Huangdao, Dalian, and Zhoushan bases were completed and put into operation in September 2006, December 2007, November 2008, and December 2008, respectively.

The completion of the first-phase project coincided with the outbreak of the 2008 global financial crisis, with international oil prices dropping from $150 per barrel to $50 per barrel. The four bases seized the opportunity to stockpile large amounts of cheap crude oil, completing oil injection in the first half of 2009. The average stockpiling cost was only about $56 per barrel. The base construction and crude oil stockpiling were a great success. I also wrote a special report on this to submit to State Council leaders.

Based on the successful experience of first-phase project construction, we organized and began compiling petroleum reserve plans. In 2008, the State Council approved the “National Petroleum Reserve Medium and Long-term Plan,” planning to complete three phases of strategic petroleum reserve base construction by 2020. Starting in 2009, the second-phase reserve bases were launched, with new reserve bases including Zhoushan (Phase II) and Huangdao (Phase II). The second-phase reserve bases included western regions and underground reserve facilities, making the reserve layout more comprehensive and the reserve methods more rational. The construction of national petroleum reserve bases entered a phase of normal progress.

Other Episodes Related to Petroleum Reserves

During this period, several other events related to petroleum reserves occurred.

In October 2008, I went to the Zhoushan base to inspect construction progress, accompanied by Comrade Zhong Ren from Sinochem Corporation, who was in charge of crude oil futures business. Comrade Zhong Ren was an expert in crude oil futures operations and had obtained substantial profits for Sinochem through futures hedging. He had been honored as a National Model Worker. During the inspection, he introduced crude oil futures to me, and I learned a lot about hedging. One evening after dinner, while taking a walk, I was chatting with my secretary.

I said: International oil prices are currently falling, our reserve facilities are nearly full, and we have no way to buy more oil. To seize the opportunity of falling oil prices, we could lock in some cheap crude oil by purchasing futures. Even if futures prices continue to fall in the short term, they will certainly rise again in the long term. As long as our purpose of buying futures is not speculation but to obtain physical crude oil in the future, we will definitely buy cheap crude oil in the long term. I judge that oil prices are currently at a low level, and taking the opportunity to buy futures should be cost-effective. Even if price fluctuations occur, as long as we are not speculating, the risks are controllable.

In early spring 2009, I went to inspect the construction of the Dalian petroleum reserve base. Comrades from the Dalian shipbuilding industry told me that due to the international financial crisis, many shipowners had tight cash flows and could not pay shipbuilding fees, resulting in many new ships, including oil tankers, being stranded at shipyards. At the time, there were reports that some European countries were using idle oil tankers to stockpile crude oil at low prices. I thought at the time that we might as well lease these semi-finished oil tankers that shipowners did not want. Without installing power or other equipment, we could directly tow the sealed hulls to nearshore waters as floating oil storage bases, which would solve the current problem of insufficient storage capacity—a multi-purpose solution.

I shared this idea with the comrades from the National Petroleum Reserve Center who accompanied me, and everyone thought it was a good approach. Later, the National Petroleum Reserve Center cooperated with China Shipbuilding Heavy Industry Group to research and propose a plan to directly manufacture Very Large Crude Carrier (VLCC) modules at the shipyard and place them on hard bedrock tidal flats in a sit-on-bottom manner, building large petroleum reserve facilities in a short time.

When oil prices were low, I hoped to take advantage of low prices to increase stockpiling. At that time, most reserve bases had not been completed, and we had considered using private oil depots, but private oil depots were small in scale, and their port locations could not accommodate large oil tankers. More importantly, the Ministry of Finance did not agree to pay rent to private oil depots, so this did not materialize.

I wrote specific reports to the State Council on these ideas. However, possibly due to the complexity of the operations, the Ministry of Finance had different opinions, especially regarding futures operations, which everyone still had doubts about. So they were not actually implemented. Looking back now, it is very regrettable. But I think these ideas can serve as a vision for future diversified petroleum reserves. Gratifyingly, there are now private enterprises building 3 million cubic meters of private reserve facilities in Yangpu, Hainan, pioneering private enterprise participation in stockpiling.

Due to our system, petroleum reserve funds are provided by the Ministry of Finance. The annual stockpiling amount is first proposed by the Reserve Office, then sent to the Ministry of Finance for joint signing. After the Ministry of Finance agrees, it is jointly submitted with the National Development and Reform Commission to the State Council for approval before implementation. So this decision-making process is very slow, often missing the best opportunities to stockpile when oil prices are low.

Once, when oil prices fell to over $40 per barrel, I urgently convened a meeting. I believed that oil prices had basically fallen to the bottom and we should stockpile quickly. I asked PetroChina, Sinopec, and Sinochem to act quickly while initiating the procedures for joint signing with the Ministry of Finance and submission to the State Council. I knew that international oil prices change rapidly, and by the time approval came through, the moment would have passed. So at the meeting, I said: After everyone returns, act immediately. Don’t wait for approval to come down before acting. If problems arise, I will take responsibility. But no one dared. PetroChina bought a small amount, but later, seeing no approval document, sold it off.

Another incident: On July 16, 2010, a crude oil tank fire accident occurred at PetroChina’s Dalian commercial reserve depot. I happened to be on a business trip to Dalian. Because I did not know in advance which oil depot was on fire, I thought it was the Dalian reserve base. I quickly rushed to Dalian’s Xingang Port to participate in the firefighting operations organized by the on-site emergency command. Only later did I learn that it was not the Dalian reserve base but a commercial reserve depot of an enterprise. Afterward, an accompanying staff member asked me whether insurance had been taken out. Inspired by this, I thought about the insurance issue for state-stored petroleum. Upon returning to Beijing, I immediately convened a meeting. At the time, the national petroleum reserve bases were indeed not insured, and there had even been lightning strikes.

The Reserve Office and Reserve Center then negotiated with the Ministry of Finance. With the support and leadership of the Ministry of Finance, starting in 2011, the National Petroleum Reserve Center selected several insurance companies through bidding and insured all assets of the four first-phase bases, also building lightning protection devices.

Underground Water-Sealed Rock Caverns

By the time China’s first large underground water-sealed rock cavern was completed, I had already retired. I took advantage of the time before the cavern was sealed to go deep into the underground cavern for a detailed inspection. Underground water-sealed rock cavern oil storage is quite common in Europe, especially in Sweden where it has a history of sixty to seventy years, from military to civilian use. They had also wanted to transfer technology to China, but later we had mastered the technology ourselves and could basically build it independently. Through the inspection, I corrected the previous misconception that underground water-sealed rock caverns were expensive to build—in fact, construction costs are even lower than aboveground oil storage facilities, with less land occupation and lower operating costs. Only the construction period is longer. China has very strong tunnel and culvert construction teams in hydropower and railway construction, and we should strive to build more underground water-sealed rock caverns where conditions permit.

I later reported the situation of the first large underground water-sealed rock cavern to relevant departments through the National Development and Reform Commission’s “Economic Situation and Suggestions,” which received attention and was also prepared for application to refined oil reserves. In subsequent construction, multiple underground water-sealed rock caverns were planned, some of which have already been completed.

The Aoshan Base

The reserve base located on Aoshan Island in the Zhoushan Islands is the only base managed by an entity other than the three major oil companies—it is managed by Sinochem Group, because Sinochem Group originally had its own enterprise reserve depot at Aoshan. After the Aoshan base was completed, it was spectacular. Sinochem Group organized retired cadres to visit, and these old comrades were extremely excited about the country’s construction achievements when they saw each 100,000 cubic meter large oil storage tank that had been built.

When General Secretary Xi Jinping was serving as a leader in Zhejiang Province, he was very concerned about the construction of the Aoshan petroleum reserve base and visited the base on the island. After becoming General Secretary, when inspecting Zhejiang, he made a special trip to inspect the Aoshan base and gave important instructions.

When a central leader inspected the Aoshan base, base leaders reported that there were still a small number of residents on the island and hoped the state would fund the relocation of all residents on the island, turning the entire island into a reserve base for greater safety. After receiving the opinion forwarded by this central leader, I coordinated with the Investment Department of the National Development and Reform Commission to allocate 300 million yuan, turning the entire Aoshan Island into a reserve base.

After the Aoshan base was completed, it was spectacular. Sinochem Group once organized retired cadres to visit, and these old comrades were extremely excited about the country’s construction achievements when they saw each 100,000 cubic meter large oil storage tank.

When I saw the rows upon rows of huge white storage tanks, I was also very moved and composed a poem to the tune of “Xi Jiang Yue”:

Xi Jiang Yue · Zhoushan Aoshan Island西江月·舟山岙山岛
Commemorating the Completion of the National Petroleum Reserve Base建成国家石油储备基地

The East China oil pipeline begins at Aoshan, passes through Cezi Island, crosses the Xihoumen Strait shipping channel, lands at Jintang Island, and goes along the Yangtze River to Wuhan.

华东输油管道起自岙山，经册子岛，穿过西堠门海峡航道，经金塘岛登陆，沿长江直到武汉。
Five years of planning and construction, finally bearing fruit.

五年筹划建设，终成正果。

Putuo, the Buddhist realm of sea and sky,

海天佛国普陀，散落岛屿星罗，
Islands scattered like stars,
Aoshan suddenly displays white encampments,
Erecting giant tanks one after another.

岙山惊现白营盘，筑起巨罐座座。

Looking like masts joined to the clouds,
Yet it is national reserve crude oil.

观似连云樯橹，却是国储原油。
Sea pipelines pass through Xihoumen,
Directly supplying Jiangsu, Anhui, Hunan, and Hubei.

海上管道穿西堠，直输苏皖湘鄂。

In the past, many petrochemical plants were laid out along the Yangtze River, such as Yangzi Petrochemical, Anqing Petrochemical, Jiujiang Petrochemical, Wuhan Petrochemical, Yueyang Petrochemical, etc. The crude oil they needed was transported upstream by Changjiang Shipping Company’s vessels. After the Aoshan base and the Yangtze River pipeline were completed, the crude oil needed by these petrochemical enterprises along the river was mainly switched to pipeline transportation, saving transportation costs. But a problem arose: the operations of Changjiang Shipping Company were affected. For this reason, I conducted special research and approved Changjiang Shipping to develop ocean transportation business, and asked Sinopec to give Changjiang Shipping some refined oil transportation business.

The completion of the first-phase national petroleum reserve bases coincided with the oil price drop caused by the 2008 international financial crisis. When the second-phase national petroleum reserve bases were successively completed, they coincided with the oil price drop caused by the 2015 global economic slowdown. China’s strategic petroleum reserve has accumulated very rich and successful experience in site selection and layout, operational models, and timing.

Facing the rapidly changing international economy and oil market, as long as we continue to learn from international experience, realistically combine it with China’s national conditions, remain humble and prudent, and pioneer innovation, we will surely grasp the laws of economic development and international oil price changes, build a good strategic petroleum reserve, and provide solid energy security for the country’s economic construction.

I’m probably the first one to introduce this book to the English-speaking community. What makes this memoir unusual is that it mentions the thinking and bargaining details behind major policy decisions: from the initial vetting of proposals, to disagreements between ministries, to balancing local demands against central objectives, and finally to the top leadership’s call. In recounting the deliberations behind the West-East Gas Pipeline, he lays out in detail how the route, gas sources, and natural gas pricing mechanism were determined. Discussing the development of Chinese wind power, he does not shy away from the large-scale “wind curtailment”（弃风） that resulted from inadequate transmission line buildout during the buildout phase. He also writes in detail about the negotiations over the China-Russia crude oil pipeline, including his complaints about the Russian negotiating style and how the two sides maneuvered against each other. In my view, for anyone trying to understand the logic and considerations behind Chinese government decision-making, this book has an irreplaceable value.

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Zhang served as Vice Chairman of the NDRC from 2003 to 2011, holding posts as the first Director of the National Energy Administration and as head of the leading group for the West-East Gas Pipeline project. He oversaw the formulation of industrial plans and policies for shipbuilding, automobiles, steel, and a host of other key sectors. More importantly, his tenure coincided with the pivotal eight-year window in which Chinese new energy shifted from a relative fringe option to a national strategy.

During his time in office, the Renewable Energy Law was enacted in 2005, providing policy support for wind and solar; installed wind capacity leapt from under 600 MW in 2003 to over 60 GW in 2011, making China the world’s largest wind power market virtually overnight. Gigawatt-scale wind bases in Jiuquan (Gansu), Inner Mongolia, Hebei, and elsewhere broke ground in succession. The solar PV industry also gradually pivoted from export dependence toward the domestic market. At the same time, a slate of projects that define today’s energy landscape—ultra-high voltage transmission, third-generation nuclear power (including the introduction of the AP1000), and large hydropower projects such as Xiluodu溪洛渡 and Xiangjiaba向家坝 were also given the green light during this period. Because of the singular depth of this experience, I'm planning to spend some time, through a series of newsletters, sharing pieces of his memoirs.

It is worth noting that this book is considered essential reading within China's Industrial Party (工业党) circles, a tech-savvy online group that argues that engineering and scientific capability are the primary drivers of national power. If Illumine Lingao临高启明 represents the cultural archetype of this current of thought, then Zhang Guobao's memoirs is a rare top-down perspective; it's a real-world affirmation of how the Industrial Party ethos manifests at the level of national governance.

I chose "A Fifteen-Year Negotiation: The China-Russia Crude Oil Pipeline" as the opening piece of this newsletter series. Published in 2018, the article is Zhang’s detailed recollection of the 15-year history of pipeline negotiations stretching back to the 1990s. It's a window into how geopolitics, diplomatic relations, and commercial bargaining shaped the cross-border infrastructure decision. He also shares many rarely-seen negotiating details, like dozens of hours of continuous talks with the Russian Deputy Energy Minister, only to share cigarettes afterward and joke about U.S. Energy Secretary Bodman. A last-minute change of stance from the Russian side just before signing, leaving the Chinese and Russian Vice Premiers waiting at the Great Hall of the People for three hours while their teams hashed things out on the spot. After the talks finally concluded, Zhang even wrote a classical-style poem to commemorate the grueling experience. I believe these are the kinds of details that no official readout could ever convey.

A Fifteen-Year Negotiation: The Inside Story of the China-Russia Crude Oil Pipeline

Why Build the China-Russia Crude Oil Pipeline?

China was once an oil-poor country. The gasoline, kerosene, and diesel it used almost entirely depended on imports—hence the term “foreign oil.” In the late 1950s and early 1960s, the Daqing Oilfield was discovered and developed, and in 1963 China achieved oil self-sufficiency, with some surplus exported for foreign exchange. But as the economy grew and living standards rose, demand surged. Self-sufficiency lasted only 30 years: by 1993, imports exceeded exports and China once again became a net crude oil importer—a trend that has grown year after year. By 2016, China imported 380 million tons of crude while producing 200 million tons domestically, putting external dependency above 60%.

In the 1990s, extraction at Daqing gradually shifted from natural flow and pumping to water injection, with water injection accounting for an ever-larger share. Tertiary recovery techniques were later developed, using chemical agents with detergent-like properties to wash oil out of rock fissures. The petroleum sector recognized that Daqing was moving past its peak into decline. Yet Daqing had become the main crude source for China’s major refineries: its oil flowed through pipelines to refineries in Jilin, Liaoning, and other areas. As Daqing output fell, those refineries faced supply problems. So from the 1990s onward, the petroleum sector began contacting the Russian side, exploring a pipeline from Siberian oilfields to Daqing to compensate for Daqing’s declining output.

Yukos: The Initial Private-Sector Partner

The original idea was to build a pipeline from Russia’s Sakha and Chayanda fields to Daqing, but negotiations with Russia were extremely difficult and made no substantive progress.

In 1994, CNPC made contact with Yukos, a private Russian oil company. Yukos was more enthusiastic than Russia’s state oil company about cooperating with CNPC on a China-Russia oil pipeline. After the Soviet collapse, many private enterprises emerged; one of the larger ones was Yukos. Its chairman, Mikhail Khodorkovsky, had been a Komsomol secretary in the Soviet era. After the USSR’s dissolution, he went into business and founded both a company and a bank; affiliated entities acquired Yukos shares during the privatization wave and gradually came to hold 90% of Yukos. The company was a joint-stock firm whose raised capital included shares held by American citizens.

Yukos proposed the “Anda Line”（安大线）—a pipeline from Russia’s Angarsk oilfield to Daqing. It would start at Angarsk in Irkutsk Oblast, head south into the Republic of Buryatia, skirt Lake Baikal, run east through Chita Oblast, enter China, and reach Daqing. This fit CNPC’s thinking, and so Yukos remained the principal negotiating counterpart.

In 1996, the two sides completed a pre-feasibility study for the Anda Line. But by 1999, when I took office as Vice Chairman of the State Development Planning Commission, no result had been reached. In September 2001, CNPC, Yukos, and Russia’s Transneft pipeline company signed a general agreement to conduct a feasibility study on the Anda Line—but the Russian government’s views seemed inconsistent with Yukos’s, and no substantive progress was made.

Zhu Rongji’s Idea: Trade $1.4 Billion in Cash for the Tianwan Nuclear Plant in Exchange for Russian Approval of the Pipeline

After I assumed my deputy-director post and took charge of energy and raw materials, I began participating directly in negotiations on Russian crude imports and pipeline construction. On one occasion, then-CNPC General Manager Ma Fucai马富才 returned from Russia and reported to Premier Zhu Rongji that the Russian side had offered the following: if the $1.4 billion in barter funds that Russia was using to supply equipment to China’s Tianwan Nuclear Power Plant in Lianyungang, Jiangsu could instead be paid in cash, Russia would agree to build the China-Russia crude oil pipeline.

The Tianwan plant was being built with Russian technology and equipment. At the time, post-Soviet Russia faced economic hardship and was eager to export major equipment such as nuclear technology. It struck a barter arrangement with China National Nuclear Corporation: China would not pay cash for the equipment; Russia would provide a $1.4 billion supplier credit, which China would repay with textiles, light industrial goods, household appliances, and other exports. The terms were attractive to China. By the late 1990s, under Premier Zhu, China’s foreign exchange reserves had improved dramatically, and paying $1.4 billion in cash was no longer a concern.

After hearing Ma Fucai’s report, Premier Zhu decided to accept the Russian terms—paying the $1.4 billion in cash instead of barter—in exchange for Russian agreement to build the pipeline, and dispatched me to lead a delegation to Russia to follow through. I went to Russia, stayed at our embassy in Moscow, and held discreet talks with various Russian ministries. A female director-general from Russia’s Finance Ministry accompanied us. I visited the Ministry of Economic Development, the Finance Ministry, and other departments, but I sensed the Russians did not share Ma Fucai’s message: on whether Chinese cash payment for Tianwan would buy Russian agreement to the pipeline, they were noncommittal—evasive and equivocating. The visit yielded no progress, and the matter fizzled out. My guess was that Ma Fucai had gotten his information from Yukos—perhaps it had been Yukos’s idea.

“Anda Line” vs. “Anna Line”: Japan Stirs the Pot

Opposition to the Anda Line then grew louder within Russia. The main objection was that the route passed near the southern end of Lake Baikal, the world’s largest freshwater lake, said to hold one-seventh of Earth’s terrestrial freshwater and a critically important Russian nature reserve. Critics feared a pipeline accident could pollute Baikal. Another objection was that Russia should maximize its national interest: the Anda Line would only deliver oil to China, while routes oriented toward Japan, South Korea, and other Asian markets deserved consideration.

The “Anna Line” then emerged. It was reportedly proposed by Japan. The route would run from Angarsk along the Baikal-Amur Mainline railway and the Sino-Russian border region to Nakhodka, Russia’s Far Eastern port. Unlike the Anda Line, the Anna Line stayed entirely within Russian territory, allowing Russia to export oil to other East Asian countries via the Pacific port of Nakhodka.

Japan, also a major oil importer, sought import diversification to reduce its dependence on Middle Eastern crude and was uncomfortable with the idea of Russia building a pipeline only to Daqing. From late 2002, Japan began actively lobbying Russia for the Anna Line. In the first half of 2003, then–Prime Minister Junichiro Koizumi met Putin twice specifically to discuss energy cooperation. In June, Japanese Foreign Minister Yoriko Kawaguchi and former Prime Minister Yoshiro Mori visited the Russian Far East and pledged $7.5 billion in loans for Siberian oilfield development and pipeline construction—conditional on the Anna Line being built. Japan also hoped energy cooperation with Russia would expand Japanese influence in the Far East and weaken the China-Russia strategic partnership. Bluntly put, Tokyo wanted to torpedo the Anda Line.

Owing to Japanese involvement, Russia reopened internal debate over the pipeline’s route. China and Japan engaged in a quiet tug-of-war over which route the Russian Far East pipeline would take.

Putin Finally Decides on the “Taina Line”—But Suspense Remains

In 2003, China’s government changed, with Hu Jintao becoming President. In May 2003, while SARS raged in China, Hu made his first overseas trip as head of state, attending the 300th anniversary celebration of St. Petersburg and the third SCO summit. I accompanied him. During the visit, Hu personally worked on Putin. The SCO Moscow Declaration was issued, the China-Russia strategic partnership was further consolidated, and the visit gave strong impetus to Russia’s decision to build the pipeline.

After more than two years of debate, on December 31, 2004, Putin personally decided to build the East Siberia-Pacific Ocean (ESPO) pipeline—the “Taina Line.” It moved the original Anda route more than 400 kilometers north, well away from Lake Baikal, resolving the long-running domestic environmental dispute. The Taina Line begins at Taishet in Irkutsk Oblast, runs more than 400 km north of Lake Baikal, follows the Baikal-Amur Mainline, runs along the Sino-Russian border from Skovorodino, and ends at the Pacific port of Nakhodka.

The Taina Line was to be built in two phases. Phase one would lay the Taishet-Skovorodino segment with a designed annual throughput of 30 million tons, while large oil storage facilities were to be built at Nakhodka. Skovorodino sits across the Heilongjiang River from Mohe in China’s Heilongjiang Province. The pipeline would cross the river at Tenda on the Russian side, after which China would build a pipeline from Mohe to Daqing. Phase two would lay the Skovorodino-Nakhodka segment with annual capacity of 50 million tons and expand the Taishet-Skovorodino capacity to 80 million tons.

The Russian federal government issued Order No. 1731, and on April 26, 2005, the Russian Ministry of Industry and Energy issued Order No. 91 approving construction of the Taina Line.

The decision came against a backdrop of strengthened mutual trust within the China-Russia strategic partnership. Russia recognized China’s strong desire for the pipeline; indeed, the pipeline had become a test of the strategic partnership and bilateral trust. It also reflected Russia’s domestic politics, economics, and social dynamics, its energy diplomacy and pursuit of national interest, and its broader posture on exporting oil to East Asia. But Russia had not yet committed to a branch line into China to Daqing. Some Russians even said: “If China wants oil, it can just import it from Nakhodka!” Building the pipeline was only the first step of a long march; tough negotiations and bargaining still lay ahead.

President Hu Jintao Points to Russia’s “Internal Cause” for the Stalled Talks

Looking back, Russia’s prolonged indecision had much to do with CNPC’s initial choice of Yukos. Khodorkovsky had been a Komsomol secretary who had “jumped into the sea” of business during privatization. He was politically at odds with the authorities and had political ambitions. In 2004, the Russian government began investigating Yukos for tax evasion, and Khodorkovsky was imprisoned.

When Hu Jintao visited Russia, he summoned Ma Fucai and me to his presidential suite to report on the pipeline negotiations. Hu and his wife Liu Yongqing were having dinner, and he gave me a piece of roasted sweet potato—I held it in my hand but didn’t dare eat. Ma emphasized that Japan’s interference was the main reason talks were stalled. I remember Hu’s response: “Don’t only look for causes externally—look for causes inside Russia too.” We didn’t fully grasp this at the time. The next day, Ma and Khodorkovsky still held a joint press conference, but only a deputy foreign minister attended on behalf of the Russian government—a clear signal of official coolness.

Ma Kai马凯 and You Quan尤权 Push Through the $6 Billion “Loans-for-Oil” Plan, Securing China’s Priority for the Branch Line

After the tax-evasion arrest of Khodorkovsky, Russia publicly auctioned 76.79% of Yugansk Oil & Gas, a Yukos subsidiary, on December 19, 2004, to settle Yukos’s tax claims. Baikal Finance Group won with a bid equivalent to roughly $9.3 billion in rubles. Rosneft then acquired all of Baikal Finance Group, becoming owner of the 76.79% stake in Yugansk. Yukos’s American shareholders sued the Russian government in the United States for expropriation. To raise funds, Rosneft proposed a “loans-for-oil” arrangement to China: it would borrow $6 billion, repaying through oil sales.

No Chinese bank had ever made such a large one-time loan to a foreign enterprise. Moreover, after the Soviet collapse, China’s public sentiment was generally pessimistic about the Russian economy and skeptical about Russian creditworthiness. A one-time $6 billion loan to Rosneft was hard to support in China’s financial circles.

Then-NDRC Chairman Ma Kai convened a coordination meeting. Only Ma Kai and I clearly favored extending the loan. We argued that China needed Russian oil, that imports from Russia were rising annually, and that if the loan was linked to Chinese oil purchases, the risk would be manageable. This was a chance to expand energy cooperation with Russia and break the pipeline deadlock. The China Development Bank, then headed by Chen Yuan, had long held to lending principles aligned with national industrial policy. Chen advanced a “development finance” approach, and CDB indicated it was willing to be the lead bank for the loan if the State Council so decided.

The NDRC reported the coordination outcome and our recommendation to the State Council, where it received leadership support. Then-Deputy Secretary-General of the State Council You Quan played an active coordinating role, persuading various departments to agree to extend $6 billion to Rosneft, linked to Chinese oil purchases. Commercial negotiations were left to CNPC, CDB, and their Russian counterparts.

On January 8, 2005, CNPC and Rosneft signed a long-term trade contract for importing 48.4 million tons of Russian crude. Under it, Russia would supply 48.4 million tons of oil by rail to China between 2005 and 2010, receiving the $6 billion loan from China and repaying it from oil sales proceeds. CDB agreed on commercial terms—the LIBOR rate plus 300 basis points, a not-low rate following fully commercial principles, with a six-year term. A dedicated bank account was established: Chinese payments for Russian oil went into the account, and CDB was repaid principal and interest from it on schedule. CNPC’s purchase price followed international benchmarks—Brent, WTI, Dubai—via a formula. During implementation, as LIBOR rose, adding 300 bps exceeded then-prevailing commercial loan rates, and at Russia’s request CDB reduced the spread to around LIBOR plus 200-plus basis points, roughly in line with commercial loans. Media speculation about the oil prices and loan rates was simply inaccurate. By 2011, Russia had repaid the entire $6 billion principal and interest, and China had bought 48.4 million tons of oil—a true win-win. CDB used this loan as a launchpad for its international finance business, which later became a major line.

Subsequently, Rosneft sought to go public and looked for strategic partners. CNPC and Sinopec had done the same when they listed—BP and Shell became strategic investors holding 10% stakes, only to sell when share prices rose. They reportedly profited roughly the equivalent of all their prior investment in China. CNPC and Sinopec were furious, calling this “unfriendly,” but the response was that this was normal commercial behavior. Rosneft turned first to CNPC for strategic investment. Ma Kai and I argued China should seize the chance to acquire a larger stake in Rosneft—something we had long pursued. But CNPC took a more commercially conservative view, judging the share price too high. Later, CNPC Vice President Zhou Jiping reported to Ma Kai and me that they had bought $500 million of Rosneft shares as a strategic investor, and that Rosneft was grateful. I was displeased and told CNPC right in front of Ma Kai: India bought $1 billion—we ought to be Rosneft’s strategic partner, and we had long wanted upstream Russian oil assets, so wasn’t this the moment? Why did we buy less than India? CNPC’s explanation was that the share price was overvalued. But after Rosneft’s IPO, with oil prices high, the stock rose. As the saying goes, “man proposes, but heaven disposes.”人算不如天算

There was also a side episode: oil and gas cooperation with Russia had been handled solely by CNPC, as we worried that if Sinopec or others joined, internal Chinese competition would be exploited by the Russians, to our disadvantage. The government, therefore, endorsed CNPC’s sole role and restrained the others. But Sinopec, also one of the “three barrels of oil,” was unhappy to be sidelined and quietly bought $200 million of Rosneft shares. Sinopec also secretly negotiated with Rosneft on another pipeline route from Russia through Mongolia to Yanshan near Beijing. This conflicted with our original goal of using Russian imports to offset Daqing’s decline, and risked derailing the Daqing pipeline. Then-Vice Premier Zeng Peiyan informed Sinopec Chairman Li Yizhong that Sinopec should stop negotiating the Mongolia route, and Sinopec withdrew. Still, Sinopec imported some Russian crude by rail through Mongolia to Yanshan Petrochemical. That was a minor side note.

“Loans-for-oil” warmed Russia’s attitude toward a branch line to China. On July 8, 2005, Putin said at a press conference in Scotland for the first time that Russia would prioritize a branch line to China when building its Far East pipeline. On September 7, Russian media reported that Putin had told Western journalists at the Kremlin: phase one of the East Siberia-Pacific pipeline would extend to Daqing, Russian oil would first flow to Daqing, and the Daqing branch line would come first—although the pipeline would eventually reach Nakhodka. The “China-first” principle was thus established.

On March 21, 2006, Putin visited China. Energy cooperation was a central issue, and the two sides signed a series of major documents, moving cooperation into a new, more substantive phase. Among the documents was a Minutes of Meeting between CNPC and Transneft, whose core content was that the Russian side would complete the project proposal and investment justification for the Skovorodino-China border segment and submit them to Russian authorities for review. After this, the companies worked intensively on surveying that segment, designing the Heilongjiang River crossing, and more.

Russia’s attitude warmed but remained ambiguous. Although Putin repeatedly mentioned a Chinese branch line, the Russian government had never formally committed to it in any official bilateral document. The pipeline’s fate remained uncertain.

Grueling Marathon Talks—Russia Keeps Adding Conditions

Negotiations with Russia were extremely difficult. The intergovernmental agreement was led on our side by me and on the Russian side by Deputy Energy Minister Yanovsky. Yanovsky was an expert-style leader—meticulous, careful, and patient. I greatly admired his professionalism, but “in war, each fights for his own master.” At the negotiating table, he scrutinized every word, haggled over every detail; with language barriers added, it was common to spend several hours on a single clause.

Russia knew well how much we wanted the pipeline and sought to maximize national interest by linking the pipeline to other items of Russian interest. For example, they wanted the agreement text to specify that Units 3 and 4 of the Tianwan Nuclear Plant would still use Russian Rosatom technology and equipment; they insisted not just on exporting crude but on Russian investment in a refinery and gas stations in Tianjin; they wanted to write in 15 million tons of Chinese coal imports from Russia per year; they wanted China to expand imports of Russian electricity; and so on. Because of long-standing mutual wariness, both sides were extremely cautious about wording: which sentence came first, which clause came first—endless disputes. Besides Chinese and Russian, the text required an English or French version as a counterpart. There were also disagreements over the arbitration court and governing law. So Yanovsky and I sometimes negotiated for a full day and night—dozens of hours straight.

In 2007, Hu Jintao visited Russia again to attend the “Year of China” in Russia. In meetings with Putin, energy cooperation was unavoidable. So CNPC representatives and I went to Moscow in advance to prepare, hoping the intergovernmental agreement could be signed during the visit. Yanovsky and I had another all-night marathon. I took a sleeping pill and was about to rest when President Hu arrived at the presidential hotel and immediately asked his secretary Chen Shiju to hear our update. The next morning I woke to find someone sleeping on the sofa in my room. I had a single room—who was there? It turned out to be my secretary, Fu Chaoqi. He told me I had fallen asleep at Chen Shiju’s meeting the night before, and he and then-NDRC Director-General of External Affairs Ma Xin had carried me back. Such was the toll of the negotiations.

After Putin Became Prime Minister, Pipeline Cooperation Was Unaffected

Work continued on every level. Transneft completed its investment justification for the Skovorodino-border segment, and on April 26, 2007, Russia’s General Administration of Construction Review approved it. On that basis, in June 2007 CNPC and Transneft signed a Memorandum on Accepting the Engineering Design of the Skovorodino-Border Segment. At the 9th China-Russia Energy Cooperation Committee meeting in July 2007, Russian Energy Minister Shmatko and I jointly hoped the companies would negotiate the intergovernmental pipeline agreement and submit proposals to both governments soon. China then provided a draft text. On March 2, 2008, Medvedev was elected President, with Putin as Prime Minister. After the Russian election and government reshuffle, in July 2008 Transneft completed engineering design for the Skovorodino-border segment and submitted it for Russian government approval. Preparations advanced steadily.

On a parallel track, talks on a new long-term Sino-Russian crude trade contract for the post-2010 period were also under way, replacing rail transport with pipeline delivery. The sticking point was price. Russian negotiators said reaching agreement on long-term contract pricing was a precondition for Russia to commit to the pipeline. Through difficult negotiations, the two sides gradually converged on the volume (10–15 million tons per year), start date (January 1, 2011), and term (10–20 years).

On August 18, 2008, I chaired a meeting to discuss progress on oil and gas cooperation. The companies still hadn’t agreed on pricing principles and formulas, but they agreed to complete contract talks soon, aiming to sign the long-term oil trade contract by the end of October. But on September 22, a meeting of senior CNPC and Rosneft leaders still failed to reach an agreement. The dispute centered on Russia’s insistence on pricing exports to China based on the Nakhodka price, hoping Nakhodka would become a new benchmark alongside Brent, WTI, and Dubai. China demanded that the export price equal Nakhodka minus the Skovorodino-Nakhodka pipeline transport cost.

Vice-Premier-Level Energy Negotiation Mechanism Established, with Wang Qishan as the Chinese Chair

At the state level, the two countries’ leaders attached great importance to energy cooperation. In May 2008, the two heads of state proposed a vice-premier-level energy negotiation mechanism. On July 26, then-Vice Premier Wang Qishan and Russian Deputy Prime Minister Sechin launched the mechanism in Beijing and held its first meeting. The mechanism operated on a non-fixed schedule, convened by either side as required for cooperation.

In late October 2008, Premier Wen Jiabao visited Russia and held the 13th regular Sino-Russian heads-of-government meeting with Prime Minister Putin. Such high-level meetings were standard occasions for advancing energy cooperation. To prepare, the Sub-Committee on Energy Cooperation (which I co-chaired with Shmatko) and the newly established vice-premier mechanism met successively in Moscow.

On the morning of October 23, 2008, Shmatko and I co-chaired the 10th meeting of the Sub-Committee. The focus was the pipeline. In drafting the meeting minutes, China hoped to clarify the pipeline at the governmental level and proposed signing an intergovernmental document during the upcoming premiers’ meeting—but Russia agreed only to let the companies continue engineering design and government approval.

Settling the Oil Pricing Formula

In a parallel venue, CNPC and Rosneft finally agreed on the long-term oil pricing mechanism, resolving the key obstacle. The export price would be the Nakhodka price minus Skovorodino-Nakhodka transport. The formula: P = N − T. The value of T remained undetermined. China had asked for a $10/barrel discount—clearly unrealistic, a typical opening gambit; even CNPC knew Russia wouldn’t accept it. Later Shmatko pressed me to set T at zero, which I, of course, could not accept. I responded: if T equals zero, why does the original formula include the “minus T” component? The matter remained pending. Later, through Wang Qishan and Sechin’s vice-premier talks, T was gradually narrowed and eventually agreed.

At the Initialing Ceremony, Negotiators Embraced and Wept

But the intergovernmental agreement remained in stalemate; Russia’s stance remained inscrutable. They seemed to be waiting for something.

On October 24, 2008, Russia scheduled no negotiations. Deputy Minister Yanovsky said he had nothing scheduled and asked whether I’d like to visit Rosneft headquarters. I said yes. At Rosneft headquarters, my hosts told me I had come at just the right moment: Deputy Prime Minister Sechin, Energy Minister Shmatko, and the heads of Rosneft, Transneft, Gazprom, and other top energy companies happened to be there discussing work. Would I like to meet them? I would. Through this “chance encounter,” I met Sechin at Rosneft headquarters.

Sechin was very warm. In the reception room, he told me: China needs oil, Russia has oil, and Russia is willing to export to China. But since he had assumed responsibility for energy as deputy prime minister, he had carefully reviewed the plan to export oil to China and concluded that Russia’s existing production capacity could not guarantee 15 million tons per year for 20 years. New oilfields had to be developed and new pipelines built. He had a map brought in and laid it on the floor, showing me Russia’s existing fields and proven reserves. He pointed to a spot near Taishet and said a new field there must be developed, and that the pipeline would have to cross swamps—construction would be difficult, requiring huge investment, and Russia lacked the capital. He proposed that if China would provide a $15 billion loan, Russia could build the pipeline at 15 million tons per year. The 2007 US subprime crisis had triggered the global financial crisis; oil prices had collapsed, the ruble had depreciated, and Russian companies indeed faced funding shortages. I said I would have to report this to Beijing. Back at the embassy, I reported home immediately. China convened emergency consultations, with Deputy Secretary-General You Quan coordinating views that very day.

Our delegation was housed in a diplomatic apartment near Moscow, where we tended a fireplace ourselves. Outwardly I admired the autumn scenery along the Volga, but inwardly I was anxious—I knew the domestic process, where multiple agencies often disagreed and delays could be costly. Much depended on the coordinator’s skill and the leadership’s resolve.

To my relief, around 3 a.m. Moscow time, word came back from Beijing: the loan was approved, conditional on the pipeline being finalized. My heart settled. I was grateful for the swift and decisive coordination at home. Unable to sleep, I went out alone to walk along the Volga and watched the sunrise turn the river crimson. After daybreak, I asked Embassy Counselor Pei Jiansheng to notify the Russian side; the initialing ceremony was held immediately. Veterans of the pipeline talks could not contain their emotions—an old Russian Energy Ministry hand lifted up our young Chinese interpreter, Cao Wei, and the two embraced and wept.

Russia Raises the Loan to $25 Billion

On October 26, 2008, accompanied by Deputy Secretary-General Bi Jingquan, Wang Qishan arrived in Moscow to meet Sechin under the vice-premier energy mechanism.

I made an embarrassing slip-up going to meet Wang Qishan at the airport. Counselor Pei Jiansheng arranged the vehicles and departure time. Worried about Moscow traffic, I had asked to leave early; Pei thought we had ample time. We got stuck on the road, unable to move forward or back—there was no real expressway from central Moscow to the airport. Wang’s plane had landed; I was still on the road. I improvised: jumped out, climbed a nearby pedestrian overpass, hailed a cab going the opposite direction, and rushed back to the hotel—arriving at the entrance just in time to welcome him.

The next day, in Wang Qishan’s meeting with Sechin, Russia raised the loan amount to $25 billion. After internal consultation, China agreed and asked the two energy ministries to implement the details.

Round-the-Clock Combat; The Bank’s Comments Made Me Furious

On the afternoon of October 27, 2008, I sat down with Yanovsky to negotiate the intergovernmental documents on the pipeline and the loan. Talks were held at the presidential hotel in a friendly atmosphere, but on textual details both sides argued meticulously.

By 4 a.m. on the 28th the text was basically agreed, and both lead negotiators could finally relax. Yanovsky invited me down to the lobby for a drink while the staff finalized printing. At 4 a.m. the lobby bar had no attendants. Yanovsky lit a cigarette; I, who never smoke, cheerfully took one too—it was a thin cigarette, the sort women might smoke—and we joked about then–US Energy Secretary Bodman. Yanovsky, in good spirits, suggested adding one more line to the text: that the two sides could also explore the possibility of Russia exporting 30 million tons per year to China. I was delighted to agree—I thought it was a bonus. But that line caused trouble.

After everything was settled, Yanovsky went home to sleep. At 6 a.m. Deputy Secretary-General Bi Jingquan毕井泉 obtained the draft Yanovsky and I had finalized to circulate within the delegation. A banking official thought the added final line was inappropriate. He argued that Russia’s commitment to export 15 million tons per year was tied to China’s $25 billion loan. By adding a possibility of 30 million tons, didn’t Russia implicitly want another $25 billion loan later? So the bank demanded the line be removed. But by then I couldn’t find Yanovsky—he had gone home—and I had to ask Counselor Pei to track him down and remove the line. I was furious. I bluntly told the bankers: through which department did you discuss buying all those US bonds? ” Moreover, the text said nothing about another $25 billion loan.

Last-Minute Reversal at the Great Hall of the People; Premier Wen Jiabao’s Meeting Delayed Three Hours

On October 28, 2008, Premier Wen Jiabao met Putin in Moscow for the 13th regular Sino-Russian heads-of-government meeting. That day, Shmatko and I signed, on behalf of our governments, the Memorandum of Understanding on Cooperation in the Oil Sector; CNPC and Transneft signed the Principle Agreement on the Construction and Operation of the Skovorodino-China Border Crude Oil Pipeline. During this visit, China and Russia essentially decided to build the pipeline—only one step remained before legally binding agreements.

Over the next nearly four months, governments, companies, and financial institutions held many more rounds of arduous talks on contract details and interest rates. On February 17, 2009, the third meeting under the vice-premier mechanism was scheduled; relevant documents were to be signed there, so on the eve of the meeting the companies and banks negotiated through the night to settle the texts.

On the morning of February 17, 2009, in the Great Hall of the People, Wang Qishan and Sechin led their teams in a meeting. The morning went well; all seemed smooth. Wang hosted a lunch for Sechin, with the signing planned for after the meal and Premier Wen to receive Sechin’s delegation at Zhongnanhai after the signing. But during lunch, Transneft President Tokarev suddenly reported to Shmatko that several points in the contract text could not be reconciled with the Chinese side. The key issue was that Rosneft and Transneft demanded separate loans and separate repayments—each with its own document, refusing to be combined into one. If not changed, the contract could not be signed.

Russia’s habit of last-minute changes was not new to me—I had to wonder if it was a negotiating tactic. Later, at Blagoveshchensk, when we negotiated the Tianjin refinery project, the same thing happened: everything was settled, the Russians arranged a riverboat dinner on the Heilongjiang, and we were to sign upon disembarking—but on the boat, Russia suddenly said it could not guarantee crude supplies for the Tianjin refinery and demanded the text be altered. I was puzzled: wasn’t selling crude to us Russia’s own goal? Otherwise, what was the point of a joint refinery in Tianjin? Over that one clause, we negotiated past midnight. Other unrelated company representatives grew sleepy and impatient; the Russians, taking the lead, started a “gambling game”—betting on whether we’d sign that night and at what time. Then-Shenhua Chairman Zhang Xiwu was at the meeting and put down a ruble for fun. Talks with RUSAL over a joint venture at Vanino on the Pacific went the same way: a JV text agreed in the morning, and at the afternoon ceremony Russia abruptly demanded reducing the Chinese share. I angrily walked out.

When I reported the latest snag to Wang Qishan, he said: “If you can’t agree, keep talking. We’ll wait.” The two energy ministers and the CNPC and Transneft heads then left the table to confer.

Sechin and the Russian ambassador pulled me aside, repeatedly urging China to accept splitting the deal into two documents. That itself was not a big issue, but convincing CNPC and CDB took time—CDB had to worry about how Transneft would secure repayment and would need new clauses. We waited three hours. I was on tenterhooks, anxious that the leadership was growing impatient. Because no one had expected new negotiations, the unusual scene emerged of company leaders and staff negotiating standing up. Sechin, the Russian ambassador, and I, plus one interpreter, talked standing beside the elevator. Once the differences were resolved and we waited for the companies to prepare the texts, Sechin’s usual stern look gave way to smiles and ease, and he even posed for photos with Chinese staff. Finally, after 5 p.m.—more than three hours later than scheduled—a grand signing ceremony was held at the Great Hall of the People. Shmatko and I, on behalf of our governments, signed the intergovernmental agreement. At the same time, the package was signed: the $25 billion financing loan, the pipeline construction and operation contract, and the long-term oil trade contract (under which, starting January 1, 2011, Russia would supply China 15 million tons of crude annually via pipeline for 20 years).

With Wang Qishan and Sechin as witnesses, 15 years of negotiation were finally sealed. Premier Wen’s meeting at Zhongnanhai was also delayed by three hours; the leaders’ immense patience deeply impressed me. The two countries’ leaders had made a political decision from the heights of long-term strategy.

That day, moved by emotion, I wrote a Pusaman lyric poem to commemorate the grueling negotiations.

菩萨蛮·庆中俄原油管道签约Celebrating the Signing of the China–Russia Crude Oil Pipeline Agreement
十五载跌宕博弈，Fifteen years of seesaw bargaining,
一昼夜鏖战斗智，One full day and night of hard-fought wits,
安大多诡谲，The Angarsk–Daqing line so full of twists,
泰纳藏玄机，The Taishet–Nakhodka route concealing hidden scripts.
政经相交织，Politics and economics intertwined,
外交暗角力，Covert diplomatic wrestling behind,
首脑亲运筹，Heads of state themselves the strategy designed,
远东布新局。In the Far East a new chessboard is now aligned.

The intergovernmental agreement on oil cooperation, the loan agreements, pipeline construction agreement, and oil trade contract took formal effect on April 21, 2009.

In June 2009, President Hu Jintao made another state visit to Russia. On June 17, meeting with Medvedev, he again emphasized: “Fully implement the intergovernmental agreement on oil cooperation between China and Russia, lay a solid foundation for long-term, comprehensive, and stable energy cooperation, actively advance cooperation in renewable energy, new energy, and other fields, and forge a comprehensive, integrated energy cooperation framework.”

After the oil pipeline breakthrough, mutual trust strengthened, and cooperation quickly expanded into natural gas, coal, electricity, and renewables. After the talks, Minister Shmatko and I signed MOUs on China-Russia gas and coal cooperation.

China and Russia Sign Cooperation Documents

In 2009, then–Vice President Xi Jinping led a delegation to Russia’s Far East, Moscow, and St. Petersburg, accompanied by me and Chen Yuan. During the visit, Xi continued to engage Russian leaders to develop and consolidate energy cooperation. Under the witness of Xi Jinping and Liu Yandong, the energy and regional cooperation documents were signed.

The pipeline was settled, but international political and economic gamesmanship remained complex. While deciding to build the pipeline to Daqing, Russia also moved to placate Japan, deciding to build a 7-million-ton-per-year LNG plant on Sakhalin as a joint venture with Japan to supply LNG. The Japanese Prime Minister personally attended the groundbreaking ceremony on Sakhalin, and Japan got its psychological compensation.

I Jokingly Scolded Counselor Pei Jiansheng for “Serving Two Masters”

After the signing, the construction agreements—defining obligations and responsibilities—still saw friction.

The lead Chinese negotiator was Jiang Qi蒋奇 of CNPC, a former economic counselor at our Moscow embassy. In Moscow, Counselor Pei Jiansheng裴建胜 handled day-to-day talks.

It was agreed that China would carry out the Heilongjiang River crossing, requiring our crews to cross to the Russian side frequently. Treating every crossing as a formal border exit would be too cumbersome. We asked Russia to designate a construction zone on its bank where our workers would operate as if domestically, without immigration formalities—effectively, Russian border control and customs would retreat behind the zone. Russia agreed. Frankly, were the situation reversed in China, this might not have been possible—it touches on territorial sovereignty. Next: Chinese construction equipment moved into that zone should not count as exports to Russia and should not be subject to import duties. Russia agreed (with the exception of tobacco, alcohol, and private cars). We also requested that Chinese personnel working in the zone be exempt from Russian taxes. Russia agreed. Frankly, these were lawyers’ inventions; once the first issue was solved, the rest followed, but the lawyers’ “rigorous” follow-up questions kept complicating things. Finally, the lawyers also demanded that any foreigners hired by the Chinese side also be exempt from personal income tax. Russia balked.

Talks stalled, and the issue came to me. Counselor Pei kept me informed throughout, but because he was seconded to NDRC from CNPC (Pei was fluent in Russian, a Tsinghua undergraduate, and held a PhD from a Moscow management university), his personnel file remained with CNPC, and he reported to CNPC first and largely conveyed CNPC’s position to the Russians. When the foreign-employee tax exemption came up, I lost my temper. I asked: where do “foreigners” come into this? He said: what if we hire foreign supervisors or engineers later? I said: then it should depend on whether that foreign employee’s country of nationality has a double-taxation agreement with Russia. We’ve spent 15 years on this pipeline; we won’t be held up by hypotheticals that may never occur. I joked-scolded Pei: don’t serve two masters. You’re now NDRC’s representative on this matter, so listen to me. If we do hire foreigners later, we’ll follow the tax treaty between their country and Russia.

That settled it.

“Looking Back, the Bleak Road; The Tide of the Heilongjiang Surges to Launch a Grand Vision”

On April 27, 2009, construction began on the Russian-side segment. On May 18, the Chinese-side segment began at Xing’an Town, Mohe. Deputy Secretary-General Bi Jingquan, I, and other ministry and CNPC representatives accompanied Wang Qishan to the Mohe groundbreaking ceremony. After landing at the airport, we took a train segment, then a long car ride, crossing a mountain pass. The season was as the song “Spring in the Northern Country” describes: birches were just budding, but as we crossed the pass, heavy snow fell; once past, the sky cleared, sunlight blazed, and as we drove toward the Heilongjiang riverside site, wind and clouds danced over the vast forest, with rays breaking through the clouds. Our worry about rain dissolved.

Su Shi’s Dingfengbo contains the line: “Looking back at the bleak place I came from, going home, neither wind and rain nor sunshine.” Recalling the 15 years of negotiations—like a road of storms and bleakness—we had finally reached a sunny groundbreaking day on the Heilongjiang. China-Russia energy cooperation was opening a new chapter. Unable to contain my excitement, I composed a Dielianhua poem.

Putin Personally Drives a Lada to the Opening Ceremony and Turns the Valve

In late September 2010, the pipeline was completed and entered trial operation. Russia held a grand opening ceremony at Skovorodino, opposite Mohe. I was invited to lead the Chinese delegation; CNPC Vice President Wang Dongjin attended. We first arrived at Blagoveshchensk across from Heihe, where Shmatko and I co-chaired a Sub-Committee meeting; a Russian aircraft then took us to Skovorodino. Deputy Prime Minister Sechin had arrived earlier. He invited me to wait at a roadside, saying someone would arrive shortly. A Lada drove up—Putin himself was behind the wheel. He personally opened the valve, symbolizing Russian crude beginning to flow through the pipeline to China. At the grand ceremony, I spoke on behalf of the Chinese government to offer congratulations.

The Significance of the China-Russia Crude Oil Pipeline

As a strategic artery for China’s oil and gas imports from the northeast, the pipeline begins at the Skovorodino metering station on Russia’s ESPO line, crosses the Heilongjiang at Tenda, reaches Mohe in Heilongjiang Province, and passes through 13 counties, cities, and districts in Heilongjiang Province and Inner Mongolia, ending at the Mohe head station of the Mohe-Daqing pipeline. The Russian-side segment is about 63.4 km long, the Heilongjiang crossing is 1.5 km, and the Chinese segment from Mohe to Daqing is 965 km. Phase one’s designed throughput is 15 million tons per year.

In line with the agreement, the pipeline officially began operation on January 1, 2011. Operations have gone smoothly, and Sino-Russian oil trade has grown steadily. By May 2017, China’s imports of Russian crude via the pipeline had exceeded 100 million tons. According to customs data, Russia became China’s largest source of crude oil imports in 2015, supplying 42.43 million tons that year; in 2016, China imported 52.48 million tons from Russia—a record high. To reinforce friendship, we proposed awarding Friendship Medals to 10 Russians who had played key roles in the pipeline’s decision-making and construction: Deputy Prime Minister Sechin, Energy Minister Shmatko, Deputy Minister Yanovsky, the heads of Rosneft and Transneft, and others. A grand ceremony was held during Premier Wen’s visit to Russia. Russia later reciprocated by awarding Friendship Medals to 10 Chinese.

Gratifyingly, in March 2013 the two sides also agreed to increase supplies to 30 million tons per year. To this end, China began building the Mohe-Daqing parallel line (the Skovorodino-Mohe segment was designed for up to 30 million tons per year), to be completed and put into operation by the end of 2017. The pipeline would then deliver 30 million tons of Russian crude annually—a long-term, stable source of supply for China.

In 2016, China imported 380 million tons of crude. Only three onshore pipelines existed—Sino-Russian, Sino-Kazakh, and Sino-Burmese. The Burmese line still transships Middle Eastern oil arriving by sea, so the genuine onshore arteries are only the Russian and Kazakh lines. Pipeline imports account for only about 10% of all crude imports; the remainder must come by sea. The strategic importance of the China-Russia pipeline is therefore evident.

The pipeline was negotiated for 15 years, with politics and economics intertwined. What ultimately made it possible was the foresight of the leaders of both countries; several generations of leaders personally guided energy cooperation with Russia and established the China-Russia strategic partnership. Tens of thousands of officials at all levels, oil-industry cadres, technicians, and workers contributed their efforts. Looking back, I salute them all with deep respect.

The article is co-authored by Li Jia 李嘉, Dean of the School of Economics and Lee Kong Chian Professor of Economics at Singapore Management University, and Zhang Dandan 张丹丹, Vice Dean and Professor of Economics at the National School of Development, Peking University. Both are well-regarded labor economists, and Zhang in particular has done extensive empirical work on China’s labor market using large-scale recruitment data

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Their research, based on roughly 1.63 million job postings scraped from Zhaopin (智联招聘), constructed an AI-LLM occupational exposure index showing that white-collar jobs are disproportionately concentrated in high-AI-exposure occupations. More importantly, the higher the occupational exposure risk, the higher the entry barriers employers are setting for junior-level applicants. In other words, AI is closing off the on-ramps for young workers at the very start of their careers. This also echoes Zhuo Xian’s concern about the “learning by doing” ladder being broken, but here it is grounded in microdata from China’s actual labor market.

Li and Zhang argue that AI-driven labor substitution generates an aggregate demand externality; each firm internalizes the cost savings from automation but does not internalize the consequence that displaced workers, with reduced incomes, consume less, which eventually feeds back to the economy as weaker demand. It’s treated not just as a job-loss problem, but also as a market failure.

Li and Zhang lay out four distinct national approaches:

• Singapore: “State-led coordinated transformation” — integrating industrial upgrading, Company Training Committees through NTUC, and the new SkillsFuture Jobseeker Support Scheme into a single transition framework.

• EU: Procedural constraints via the AI Act, requiring prior consultation with worker representatives before deploying high-risk AI systems — slowing substitution to buy time for adjustment.

• US: Federal retrenchment under the Trump administration, combined with fragmented state-level regulation (California’s SB951, NYC’s algorithmic bias audits) — focused more on the fairness of AI substitution than on its pace.

• China: An emerging “governance-within-development” path that emphasizes the creation effect of AI rather than just limiting the substitution effect.

At the policy proposal level, Li and Zhang sketch out a “one fund, two pillars, three supporting measures” framework. The “one fund” is a dedicated AI Employment Compensation Fund, financed through fiscal allocations, surpluses from the unemployment insurance system, employer contributions, and possible surcharges tied to data and computing power revenues. And that fund should be used for targeted interventions, such as retraining displaced workers and support groups like young and low-skilled workers.

The two pillars then divide the intervention timeline. In the short term, an AI-exposure-based employment risk monitoring and early warning system, with more flexible working hours and income support arrangements in high-risk industries. In the long run, they propose institutionalizing a lifelong learning system through portable “skills accounts” and “learning accounts” that move with workers across jobs, alongside formally incorporating AI employment governance into the Employment Promotion Law and future AI-related legislation.

Tech progress does not determine social outcomes on its own. Whether AI broadens shared prosperity or deepens social divisions depends on how the government mediates the relationship between technology and labor. This line of thinking also reflects the Chinese scholarly understanding of the relationship between the state and technological progress: on the one hand, rapid technological development is welcomed and actively promoted, viewed as a key engine for boosting productivity and national competitiveness; on the other hand, the government keep vigilance to the employment shocks and social risks that technology may bring, with a strong emphasis on publishing new policies as a safety net for technological change, preventing technological transformation from tipping over into social disintegration.

Thanks to Professor Zhang’s kind authorization, I can share her piece in English.

How to Build an “Interactive Compensation” Public Policy Mechanism in Response to AI’s Impact on Employment

By Li Jia and Zhang Dandan

The new wave of artificial intelligence (AI) technology, represented by large language models, is evolving from an auxiliary tool into a key factor of production at an unprecedented pace, rapidly reshaping the structure of the labor market. The AI-LLM Occupational Exposure Index, constructed by our research team based on approximately 1.63 million online job postings from Zhaopin, reveals that white-collar positions are more heavily concentrated in occupations with high AI exposure risk. At the same time, the higher the occupational exposure risk, the more pronounced the rise in entry barriers that employers impose on applicants for junior positions. AI is not only reshaping occupational structures, but also reinforcing labor market stratification at the very starting point of career development.

Even more noteworthy, this round of technological disruption is overlapping with trends such as population aging, rising youth employment pressure, and the expansion of flexible employment, presenting new governance challenges to the “employment-first” strategy. Against this backdrop, an unavoidable core question emerges: when the pace of AI substitution systematically outstrips the creation of new jobs and the reallocation of labor, are traditional employment policy tools still sufficient? And how are countries around the world responding to this wave of AI disruption?

Aggregate Demand Constraints in AI Substitution and the Logic of Government Intervention

Before discussing specific public policy options, it is necessary to first address why government intervention in the governance of AI-driven employment restructuring is necessary.

When deciding whether to use AI to replace workers, each firm only calculates its own returns—such as how much wage cost it saves and how much operational efficiency it gains—while ignoring the “social cost”: once replaced workers experience income declines, their consumption capacity weakens accordingly, and the resulting contraction in demand ultimately feeds back into the entire economic system in the form of fewer orders and declining sales.

In other words, the cost-saving benefits from corporate automation are typically captured exclusively by the firms themselves, while the demand decline triggered by employment contraction is collectively borne by society as a whole. This means that under a fragmented, competitive market structure, the automation process driven by rational decision-making at the individual firm level is unlikely to produce a socially optimal outcome. The more competitive and dispersed the market, the harder it is for any individual firm to “internalize” the impact of its own behavior on aggregate demand, and the stronger the “aggregate demand externality” caused by employment displacement becomes.

What makes this round of AI technological revolution unique is that its “breadth” and “speed” simultaneously and significantly exceed those of most historical technological transitions, making this aggregate demand externality logic especially important.

Historically, technological revolutions usually had relatively clear industry boundaries. Even when some jobs were displaced, workers generally still had relatively sufficient time and space to migrate to other industries or occupations. For example, industrial automation primarily affected manufacturing jobs, while the spread of computers mostly transformed office administrative workflows.

This round of AI technology represented by large language models, however, exhibits highly horizontal diffusion. A large number of cognitive jobs—including copywriting, customer service, junior programming, drafting legal documents, translation, and research report writing—are simultaneously entering the scope of AI substitutability. Technological disruption is no longer confined to a single industry, but is unfolding synchronously across industries and occupational tiers.

At the same time, the speed of technological diffusion far exceeds historical experience. It took electricity about 30 years to permeate the industrial system, personal computers about 20 years to become widespread, and the internet roughly 10 years to spread. By contrast, once a large language model goes online, it can be rapidly deployed and replicated globally via cloud computing platforms and digital infrastructure.

This means that when AI’s pace of labor substitution systematically outstrips the economic system’s pace of creating new jobs and workers’ pace of retraining and occupational transition, the problems brought by technological progress are no longer merely short-term frictional unemployment, but may evolve into persistent aggregate demand shortfalls and social welfare losses.

Precisely for this reason, the “externality” perspective provides theoretical space for public policy intervention. The use of AI is not in itself a “deviation” from corporate norms; on the contrary, it is often a rational choice under the pressure of market competition. The problem is that when all firms move in unison toward “reducing labor costs,” individual rationality can accumulate into systemic social welfare losses through a mechanism akin to the “prisoner’s dilemma.”

This kind of aggregate demand externality, which the market mechanism itself cannot easily repair, is precisely one of the areas where institutional intervention is most justified. In this sense, establishing new cooperative mechanisms among government, firms, and workers around AI transformation has implications not only for social stability, but also for correcting externalities and improving overall economic efficiency.

International Perspectives: Different Approaches in Singapore, the EU, and the United States

Facing the impact of AI on the labor market, different economies are forming sharply different response paths. The differences reflect not only the policy choices themselves, but also each country’s institutional structure, governmental capacity, and traditions of labor-management relations.

1. Singapore’s “Collaborative Governance” Approach

Entering 2026, Singapore is accelerating the formation of a governance framework that links AI industrial upgrading with employment stability. Its core logic is not simply to restrict technological substitution, but to actively promote AI diffusion and industrial upgrading while cushioning technological shocks, enhancing labor adaptability, and maintaining social stability through national coordination, skills training, and employment protection.

Overall, Singapore’s AI governance can be summarized as a “state-led collaborative transformation” model: industrial policy, labor policy, and social security policy are not isolated from one another, but are integrated into a single national transformation strategy.

First, at the national governance level, Singapore has elevated AI to the core of its national competitiveness and industrial upgrading strategy. In the February 2026 Budget, Singapore announced the establishment of a “National Artificial Intelligence Council,” chaired by Prime Minister Lawrence Wong. This is the first time Singapore has elevated AI governance to the level of cabinet coordination, attempting to integrate the dispersed regulatory and developmental functions of the Infocomm Media Development Authority, the Monetary Authority of Singapore, and the Personal Data Protection Commission, while advancing national-level AI action plans in priority areas such as advanced manufacturing, logistics, finance, and healthcare.

This arrangement reflects Singapore’s fundamental positioning of AI: AI is not merely a technological tool, but key infrastructure for raising national productivity, driving industrial upgrading, and reshaping international competitiveness. Therefore, the governance focus is primarily on “promoting adoption” and “facilitating transformation,” rather than restricting technological diffusion.

At the same time, Singapore does not treat AI solely as an industrial policy issue, but simultaneously incorporates it into the labor market governance framework.

In April 2026, the Ministry of Manpower, the National Trades Union Congress (NTUC), and the Singapore National Employers Federation (SNEF) jointly established the “Tripartite Employment Council” as a unified coordination point for the employment effects of AI transformation. This mechanism is built upon Singapore’s long-standing tradition of “tripartite consultation” among government, business, and unions, with the goal of minimizing the employment impact of technological substitution while promoting corporate digitalization and AI transformation.

An important foundation of this system is the “Company Training Committee” institution, which the NTUC has been advancing since 2019. To date, Singapore has established more than 3,800 Company Training Committees, covering more than 300,000 blue-collar and white-collar workers; among these, AI-related training programs doubled in 2025 compared with the previous year.

A key feature is that training is not “external re-education” detached from corporate needs, but is directly embedded in the firm’s internal transformation process. Firms, unions, and government jointly identify which positions will be affected by AI and which skills need upgrading, and they organize training and job-transition arrangements around actual production processes. In other words, Singapore seeks to push “corporate upgrading” and “worker transformation” forward in parallel, rather than waiting until jobs disappear before providing ex-post relief.

Therefore, the logic of Singapore’s AI governance is not “preserving jobs,” but “preserving employability.” This concept was reflected in Prime Minister Lawrence Wong’s emphasis at the May 1, 2026 Labor Day Rally that “We may not be able to save every job, but we must protect every worker.”

This approach is also reflected in institutional integration. The 2026 Budget announced that the former “Singapore Workforce Development Agency” and “SkillsFuture Singapore” would be merged into a unified “Workforce and Skills Agency,” creating—for the first time at the institutional level—a single entry point for both “job seeking” and “skills learning.” Against the backdrop of AI-accelerated occupational restructuring, employment services, vocational training, and skills upgrading can no longer be treated as separate policy modules, but must form a continuously connected “employment-training-reemployment” cycle.

At the same time, Singapore is also beginning to establish employment buffer and relief mechanisms under AI transformation.

The “SkillsFuture Jobseeker Support Scheme” was fully implemented in 2025–2026. This is the first time in Singapore’s history that a cash bridging support mechanism has been established for involuntarily unemployed workers. Eligible unemployed workers can receive up to S$6,000 in phased support over six months.

Notably, the scheme sets a threshold of “an average monthly income of no more than S$5,000 over the past year,” which roughly corresponds to the median income of full-time resident workers in Singapore. This means that the scheme mainly covers low- and middle-income workers, with its core objective being to reduce the short-term income risks faced by vulnerable groups during the process of technological transformation.

Thus, from industrial upgrading, corporate training, and worker skills transitions to employment relief, Singapore is in effect building a relatively complete AI transformation governance system: the government is responsible for overall coordination, firms are responsible for implementing transformation and training, unions are responsible for organizing workers and articulating their interests, and the fiscal system bears part of the transformation costs.

2. The EU: Slowing the Impact of Substitution Through Procedural Constraints

Unlike Singapore, which emphasizes the simultaneous promotion of technology adoption and labor transformation, the EU has chosen to incorporate AI into a high-risk governance framework through horizontal legislation and ex-ante regulation, raising the institutional cost for firms to engage in large-scale labor substitution through procedural constraints.

The core carrier of this approach is the “EU AI Act,” formally adopted in 2024. The Act will become fully mandatory in August 2026, and for the first time, it provides systematic regulation through unified legislation of the use of AI in the workplace.

The Act explicitly classifies AI applications involving labor relations—such as recruitment screening, job assignment, performance evaluation, promotion and dismissal decisions, and employee behavior monitoring—as “high-risk AI systems.” Before deploying such systems, firms must fulfill obligations such as ex-ante risk assessment, algorithmic bias testing, technical documentation retention, design of human oversight mechanisms, and ongoing compliance review.

Particularly important is the requirement that before officially using a high-risk AI system, firms must notify worker representatives and affected employees in advance.

This means that the EU has effectively established a “prior consultation mechanism” for AI deployment at the institutional level. AI is no longer merely an internal corporate technology upgrade decision, but has been incorporated into the labor relations governance framework. Even if firms possess the technical capacity and economic incentives, they must procedurally address concerns regarding worker rights, transparency, and fairness.

In a sense, the EU is not directly preventing AI substitution, but rather attempting to slow the pace of substitution by raising institutional friction and procedural costs, thereby buying time for labor market adjustment.

A similar approach is reflected in the “EU Platform Workers Directive,” which took effect at the end of 2024. The directive, for the first time at the level of EU law, stipulates that platform workers cannot be dismissed or subjected to adverse treatment solely on the basis of automated algorithmic decisions; decisions involving major labor rights must retain “human intervention” and appeal mechanisms. EU member states must complete domestic transposition by the end of 2026.

It can be seen that the EU’s institutional focus on AI and employment is not primarily on “promoting technological diffusion,” but rather on “procedural legitimacy in the use of technology.” Behind this lies the core idea of Europe’s long-standing “social market economy” tradition: technological efficiency cannot automatically take precedence over worker protection.

The limitations of the EU approach are equally evident. The EU is relatively active in “limiting the pace of substitution,” but its institutional capacity in “bearing the consequences of substitution” remains limited. The EU’s strengths are primarily reflected in ex-ante regulation, information disclosure, and procedural constraints, but its existing policy tools give insufficient consideration to the income losses, reemployment transitions, and aggregate demand shocks that AI substitution may cause.

In addition, the EU approach also faces the typical problem of “high consensus thresholds.” AI governance involves complex tradeoffs among member states’ industrial interests, labor regulations, and competitiveness in innovation, making it difficult for the EU to form stable and consistent policy consensus internally. Many seemingly ambitious institutional designs have repeatedly encountered member state disagreements and industry resistance during implementation.

A typical case is the “AI Liability Directive” proposed by the European Commission in 2022. The proposal sought to lower the burden of proof for AI victims and establish a unified liability framework for harm caused by AI systems. However, because member states and the business community could never reach agreement on the boundaries of liability, the proposal was formally withdrawn in 2025.

This reflects a deeper tension in EU AI governance: its institutional design tends to carry strong normative idealism, yet under the pressures of rapid technological evolution and global industrial competition, maintaining a balance between “regulation” and “innovation” remains a persistently difficult policy challenge.

3. The United States: Federal Retrenchment and Fragmented State-Level Governance

The United States exhibits a pattern of “light federal intervention and decentralized state-level advancement” on AI and employment issues.

After 2025, the policy priorities of the US federal government have shifted back toward “technological leadership,” “reducing regulatory burdens,” and “enhancing national competitiveness,” while issues of worker protection have clearly receded into a secondary position.

The federal government’s attitude on the issue of “AI and worker protection” has clearly contracted. In January 2025, the Trump administration formally revoked the Biden-era executive order that had designated “AI’s impact on the labor market” as a federal priority. That executive order had required relevant agencies to conduct assessments of AI-induced job losses, establish labor consultation mechanisms, and study the long-term effects of automation on employment and wage structures. Under the Trump administration’s new executive order framework, much of this content has been substantially scaled back.

The “America’s AI Action Plan” released in July of the same year proposed more than 90 federal-level AI policy actions, covering areas such as infrastructure, energy, computing power, defense, export controls, and research support. Content related to the labor market, by contrast, was only briefly mentioned as an ancillary issue, with no new fiscal budget or systematic institutional arrangements.

To some extent, this reflects the basic orientation of US AI policy: prioritizing technological innovation and industrial competitive advantage, rather than first establishing large-scale employment buffer mechanisms.

From the second half of 2025 to early 2026, multiple bipartisan bill proposals have emerged in the US Senate, including requiring large firms to disclose AI-driven layoffs, establishing a national-level AI workforce research center, and strengthening firms’ obligations to notify employees about automation deployment. However, as of May 2026, most of these proposals have not yet completed formal legislative procedures.

In the United States, what is genuinely driving concrete restrictive measures are certain state governments and local regulatory bodies.

California’s SB951, the “Worker Technological Displacement Act,” currently under deliberation, is somewhat representative. The bill would require firms conducting large-scale layoffs due to AI or automation to give workers at least 90 days’ notice in advance and submit a technological substitution statement.

New York City has moved even earlier. Since 2023, New York City has formally required firms using automated recruitment tools to conduct annual “algorithmic bias audits” and to disclose to job applicants the use of AI recruitment systems. Subsequently, Illinois, Colorado, and other jurisdictions have also advanced local legislation related to workplace AI.

Overall, however, most current US state-level regulation still focuses on “AI should not produce discriminatory outcomes”—such as algorithmic bias, fairness in recruitment, and information transparency—rather than truly addressing the deeper issue of “the scale of AI substitution itself.”

In other words, the US institutional framework is currently more concerned with “whether AI is fairly replacing labor” than with “whether AI is replacing labor too quickly.”

Behind this difference lies a long-standing feature of the US political-economic system: compared with Europe, the United States is more inclined to view technological progress as a matter of market competition and innovation efficiency, rather than primarily incorporating it into frameworks of social protection and redistribution. The federal government has always remained cautious about directly intervening in corporate automation decisions, while labor market adjustment relies more heavily on local governments, market mechanisms, and individual workers’ adaptive capacities.

Therefore, the US model may achieve higher efficiency in technological diffusion and innovation incentives, but the cost is that the employment risks and income volatility brought by AI shocks must, to a greater extent, be borne by individual workers themselves.

4. China’s Policy Direction: From “Shock Response” to “Interactive Compensation”

China’s understanding of the relationship between AI and employment is accelerating into an institutionalized stage.

In recent years, policy formulations on “AI and employment” have clearly shifted from “paying attention to impacts” to “active governance.” In May 2024, General Secretary Xi Jinping, during the 14th group study session of the Politburo, clearly stated the need to “strengthen the positive employment-creating effects of new technologies and prevent the substitution effect from being released in a concentrated way over the short term.” In the same year, the “State Council’s Opinions on Deeply Implementing the ‘AI Plus’ Initiative” proposed establishing a mechanism for assessing the employment impact of AI applications, and preventing and mitigating technological shocks. Subsequently, the Third Plenary Session of the 20th CPC Central Committee and the related arrangements in the “15th Five-Year Plan” further emphasized “promoting high-quality and full employment” and “building an employment-friendly development model,” and proposed a systematic response to the impact of new technological changes on employment structure.

Unlike some countries that mainly focus on “restricting substitution,” an important feature of China’s current policy logic is its greater emphasis on “enhancing the creation effect.”

In other words, the policy objective is not merely to slow AI’s impact on existing jobs, but more importantly to accelerate the formation of new employment demand and income sources through industrial expansion, the cultivation of new business forms, and skills upgrading—aiming to make technological progress a “blood-generating mechanism” rather than merely a “substitution mechanism.” This approach is highly consistent with China’s long-standing governance logic of advancing development and stability in tandem.

Against this backdrop, China’s policy framework around AI and employment is also gradually moving from fragmented response toward systematic construction. Its core direction is not simply to restrict technological diffusion, but to establish, while promoting AI development, a comprehensive governance system covering risk assessment, employment buffering, skills transitions, and social security adaptation, so that technological progress and labor market adjustment can be mutually coordinated.

From an international comparative perspective, China’s exploration is forming a path that places greater emphasis on “governance within development”: different from the US, which relies relatively heavily on spontaneous market adjustment; different from the EU, which focuses on procedural regulation; and different from Singapore, which relies heavily on tripartite consultation mechanisms—China seeks to maintain the pace of technological diffusion while simultaneously incorporating employment stability, skills upgrading, and social security into its national development framework.

Against this backdrop, the next step in policy design may need to shift further from “passively responding to technological shocks” to “actively building interactive compensation mechanisms.”

The core of so-called “interactive compensation” is not simply income redistribution, but the establishment, at the institutional level, of more stable adjustment mechanisms between the beneficiaries of technology and those harmed by technology, allowing the efficiency dividends created by AI to partially flow back to the worker groups bearing the costs of transformation, thereby easing the structural imbalances during technological diffusion.

Around this goal, a policy framework of “one fund, two pillars, three supporting measures” can gradually take shape.

First, “one fund” refers to exploring the establishment of a dedicated AI employment compensation fund. Its funding sources can adopt a diversified financing model, including fiscal support, surplus from unemployment insurance, corporate contributions, and supplementary revenue arrangements related to data and computing power. The focus of the fund is not on universal cash distribution, but on targeted support for job stabilization and expansion, retraining for job transitions, reemployment assistance, and support for key groups, so that part of the technological dividend can flow back to labor market adjustment.

Second, the “two pillars” correspond to short-term buffering and long-term institutional construction.

In the short term, an employment risk monitoring and early-warning system based on AI exposure should be established; more flexible working-hour and income support arrangements should be explored in high-risk industries; and more precisely targeted transition support should be provided for key groups such as young workers and low-skilled workers.

In the medium to long term, it is necessary to institutionalize lifelong learning systems and skills accumulation mechanisms. For example, arrangements such as “skills accounts” and “learning accounts” could be explored, allowing training resources to follow workers as they move; meanwhile, AI employment governance should gradually be incorporated into the framework of the “Employment Promotion Law” and future AI-related legislation, to enhance policy continuity and institutional stability.

Finally, the social security system must be made to adapt to the labor structure of the AI era. Priorities include improving protections for flexible employment and platform workers, expanding the role of unemployment insurance in supporting skills transitions and occupational shifts, and further exploring how to more stably channel the productivity dividends brought by AI back into the pension and social security systems.

Ultimately, AI’s impact on employment is not merely a technological upgrade, but rather an institutional test of “how growth is distributed.” Technological progress does not automatically determine social outcomes. What ultimately decides whether AI expands social prosperity or aggravates social divisions still depends on how institutions coordinate the relationships among technology, capital, and labor.

Authors: Li Jia is Dean of the School of Economics at Singapore Management University and Lee Kong Chian Chair Professor of Economics; Zhang Dandan is Vice Dean and Professor of Economics at the National School of Development, Peking University.

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The main outcomes include:

• A constructive consensus on tariff arrangements

• The establishment of a Trade Council and an Investment Council — the Trade Council will focus on tariffs on imported goods, while the specific mandate of the Investment Council has yet to be disclosed and may still be under negotiation

• A two-way breakthrough on agricultural tariffs and market access: the US side will move to address issues such as the automatic detention of Chinese dairy and aquatic products, exports of Chinese bonsai (with growing medium) to the US, and the recognition of Shandong as an avian-flu-free zone; meanwhile, China will push forward on US beef facility registrations and poultry imports

• Mutual reductions in agricultural tariffs

• China to purchase aircraft from the US, with the US committing to safeguard the supply of engine components for those purchases. (During last year’s trade war, Washington suspended the export licenses that had allowed GE to sell engines to China, which we needed to develop the C919.)

It's worth noting that the official communique uses the qualifier “preliminary outcomes,” signaling that negotiations are still ongoing. The text also explicitly states that “the two sides are still consulting on the details of the relevant outcomes,” which explains why no concrete numbers appear in China’s announcement. We'll likely have to wait for further information from both sides in the coming days. On a deeper level, releasing a preliminary outcomes list before the two sides have fully aligned on specifics also seems aimed at managing external expectations around Trump's China visit.

(Just before I publish this, the White House published its fact sheet-including an initial Chinese purchase of 200 American-made Boeing aircraft, the first such commitment since 2017, Chinese commitments to purchase at least $17 billion per year of U.S. agricultural products in 2026 (prorated), 2027, and 2028, on top of the soybean purchases agreed in October 2025, the renewal of expired listings for more than 400 U.S. beef facilities, the resumption of U.S. poultry imports from avian-flu-free states, and Chinese undertakings on rare earth and critical mineral supply chains covering yttrium, scandium, neodymium, and indium.) On political achievement, it put Iran in a high position. It’s not surprising he wants to get China on board, but whether it's about denuclearization or opening the Strait of Hormuz, and against the charge tolls. It's China's long-term position, so I don't think China would alter its Middle East stance.

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No surprise Chip is not included; it’s connected to the AI race, and neither side is there yet; risk management would be good enough for this time.

What exceeded my expectations was the creation of the Investment Council. In the working-level exchanges leading up to these talks, the US line had consistently been that it was “not yet ready” to engage China on bilateral investment issues. Yet an agreement on this point was reached in Busan, which I read as an indirect signal that the negotiations themselves went relatively smoothly, without major friction. In his May 14 CNBC interview, Bessent explained that the Investment Council’s core purpose is to pre-identify non-strategic, non-sensitive sectors suitable for Chinese investment, so that those investments wouldn’t need to be submitted to CFIUS for review.

The market didn't react well to Trump's announcement that China would buy 200 Boeing aircraft (China hasn’t confirmed this yet), and Boeing’s stock slid as a result. I never expected a so-called “Grand Bargain“ to begin with. After a year of trade-war escalations and de-escalations playing out on repeat, the two sides are still very much in “crisis management” mode, with low trust level, landing a mega-deal simply isn’t realistic.

My expectation going into these talks was that if the two sides could maintain stability, achieve a breakthrough on coordination mechanisms, and tack on a few trade deals in non-security-sensitive areas, that would already count as a success. Looking at the results, the two sides reached a consensus on framing the relationship as “constructive strategic stability” and established two new coordination mechanisms in trade and investment. So from China's perspective, this round of consultations is, without question, a positive development.

Below is the translation I made based on MoFCOM's release

MOFCOM Spokesperson Answers Press Questions on Preliminary Outcomes of China-U.S. Economic and Trade Consultations

Q: On May 14, the heads of state of China and the United States held a meeting and announced that the two countries’ economic and trade teams had achieved overall balanced and positive outcomes. Could the Ministry of Commerce share more details about the results of these consultations?

A: The heads of state of China and the United States held a meeting in Beijing, where they had in-depth discussions on economic and trade issues, charting the course and providing strategic guidance for the further development of bilateral economic and trade relations. President Xi Jinping noted that the essence of China-U.S. economic and trade relations is mutual benefit and win-win cooperation. The overall balanced and positive outcomes reached by the two economic and trade teams are good news for the people of both countries and for the world, and both sides should work together to safeguard the hard-won positive momentum.

On May 13, the Chinese and U.S. economic and trade teams held consultations in South Korea, laying the groundwork in the economic and trade arena for the meeting between the two heads of state. Guided by the important consensus of the two presidents and upholding the principles of mutual respect, peaceful coexistence, and win-win cooperation, the two sides engaged in candid, in-depth, and constructive exchanges on resolving each other’s economic and trade concerns and further expanding practical cooperation. Following this, the two sides held intensive consultations on the specific content of the outcomes and reached positive consensus.

The preliminary outcomes reached by the two sides in the economic and trade field mainly include the following:

First, the two sides will continue to implement the outcomes of earlier consultations and have formed positive consensus on relevant tariff arrangements.

Second, the two sides have agreed to establish a Trade Council and an Investment Council to discuss their respective concerns in the areas of trade and investment. Through the Trade Council, the two sides will discuss issues such as tariff reductions on relevant products, and have agreed in principle to reduce tariffs on products of concern to each side on a comparable scale.

Third, the two sides will resolve or substantially advance the resolution of certain non-tariff barriers and market access issues regarding agricultural products. The U.S. side will actively work to address China’s long-standing concerns regarding the automatic detention of dairy products and aquatic products, the export of medium-grown bonsai to the U.S., and the recognition of avian influenza-free zones in Shandong, among others. The Chinese side will likewise actively work to address U.S. concerns regarding the registration of beef facilities and the export of poultry meat from certain states to China.

Fourth, the two sides have agreed to promote the expansion of two-way trade in areas including agricultural products through arrangements such as mutual tariff reductions on a certain range of products.

Fifth, the two sides have reached arrangements concerning China’s procurement of aircraft from the U.S. and the U.S.’s assurance of the supply of aircraft engines and components to China, and have agreed to continue advancing cooperation in related areas.

The positive outcomes of the China-U.S. economic and trade consultations demonstrate that, by upholding the spirit of mutual respect, equality, and reciprocity, and through dialogue and cooperation, the two sides are able to find solutions to their problems. The two sides are still consulting on the specific details of the relevant outcomes. Following the direction of consensus set by the two heads of state, the economic and trade teams of both countries will work to finalize the outcomes as soon as possible and jointly ensure their implementation, so as to inject greater certainty and stability into future China-U.S. economic and trade cooperation and the world economy.

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A new vision on China-US relations:

It is worth noting that China has put forward (with both President Xi and Trump agreeing) a new vision for U.S.-China relations, namely “constructive strategic stability.” My quick thought is that there might be two considerations behind.

First, the very language of “strategic stability” carries an implicit suggestion that U.S.-China relations should be managed on the basis of a “two equal major powers” model, rather than within a hierarchical order dominated by Washington. In a certain sense, this also reflects China’s growing confidence in dealing with the United States.

Second, the term “strategic stability” is more familiar to the American strategic community and therefore easier for them to accept. However, the deliberate addition of “constructive” signals that this is not meant to be a passive form of stability in which the two sides merely probe each other’s red lines. Rather, it implies that Beijing wants to cooperate where possible and that the two sides should actively cooperate rather than settle for passive crisis management.

Xi also gave his definition, basically four “stabilities. “

应该是合作为主的积极稳定，应该是竞争有度的良性稳定，应该是分歧可控的常态稳定，应该是和平可期的持久稳定

positive stability with cooperation as the mainstay, healthy stability with competition within proper limits, constant stability with manageable differences, and lasting stability with expectable peace.

Taiwan

The Taiwan question was placed at the very end of the Chinese side’s statement, while the opening of that section immediately emphasized Beijing’s framing of Taiwan as the “most important” issue in the relations.

The expression “The U.S. side must exercise extra caution in handling the Taiwan question.” This is the only passage in the entire readout carrying an admonitory tone. This tonal contrast is itself the message, it underscores just how central the Taiwan question remains on China’s agenda.

Others

One small detail worth noting is that Xiaomi’s auto super-factory has suspended visitor registrations from May 13 to 22. This may suggest an American business delegation will use the window to take a close look at one of China’s most advanced EV production lines.

On Monday, I gave an interview to a Spanish television channel, my first time on a TV program. While preparing, I kept asking myself what Trump’s visit to China could deliver. I went through the usual checklist of soybeans, Boeing orders, and the rest of it, and eventually gave up trying to find the headline. I’d prefer focusing on the less photogenic stuff that matters more than the leaders’ handshake. The dialogue mechanisms, the working-level channels, and the unglamorous plumbing of the relationship are the things that actually hold weight. By the time the interview ended, I felt a bit of relief. I know it sounds diplomatic. But still, even if no short-term consensus emerges, as long as the two sides can still talk, even if they’re arguing, it beats mutual silence, where each side’s imagination of the other quietly replaces reality.

In a sense, Jensen Huang's boarding the plane at the last minute is also a positive signal. It suggests that even in chips, arguably the most contested front in the US-China divide, there is still an appetite to test whether this visit can establish a baseline. My friend recently wrote about her visits to Chinese AI labs, and she noticed that the competition narrative tends to cover the deep human network between the two AI worlds. They are bound together by the people doing the work.

Other than that, the formation of CEOs also tells some stories, Boeing and Cargill represent the areas where deals are most likely to break through—commercial aircraft orders and agricultural procurement have long been the easiest “deliverables” in high-level U.S.-China interactions, the kind of “meeting gifts” both sides are happy to cash in.

Elon Musk (Tesla) and Tim Cook (Apple), on the other hand, lead the two companies that form the tightest links in the bilateral supply chain.

GE Aerospace sits in the delicate position of being “both a competitor and a dependent.” BlackRock, Blackstone, Goldman Sachs, Mastercard, and Visa represent the market-access agenda in financial services—arguably the most flexible space for bilateral cooperation.

Illumina was once placed on China’s “Unreliable Entity List” and later removed; this in-and-out itself speaks to the high sensitivity of the biotech sector. And Chinese cross-border e-commerce players such as Temu and SHEIN are among Meta’s largest advertising clients—a reminder that even in seemingly walled-off domains, U.S.-China commercial interests remain deeply intertwined.

Another question hanging over the trip is whether Marco Rubio, previously sanctioned by Beijing, will actually make it to China. My read is that the purpose of Chinese sanctions has always been to compel a change in behavior, not to sever channels of communication. Since taking office, Rubio’s public posture on China has become more measured, and ahead of the visit, he signaled goodwill on the Taiwan question. By allowing him to participate, Beijing is sending its own signal that it isn’t refusing dialogue and is willing to manage differences. At the level of head-of-state diplomacy, having Rubio in the room directly reduces layers of communication and gives American policymakers a closer look at China than they would otherwise get.

I’ve also seen the argument that Washington can use this period of de-escalation to build out its own rare earth supply chain and consolidate its lead in AI. Fair enough, but the same logic cuts the other way. China can also use this window to patch vulnerabilities exposed by last year’s escalation. I don’t need to overstate China’s capacity for long-term planning. But on the current trajectory, compared with where things stood when tensions first spiked last year, China has more advantages than it did then.

I’ve been reading the memoirs of Zhang Guobao, the former vice chair of China’s NDRC. He describes how China’s strategic petroleum reserve was first planned back in 1996 and broke ground in 2002. It is precisely because of that kind of patient preparation that, amid the latest Strait of Hormuz crisis, China’s energy reserves look comparatively steady. The US side, by contrast, is chasing short-term results. chose to strike Iran rather than invest political capital into the harder, slower work like building the US industry.

Below is the translation of the Chinese official readout:

President Xi Jinping Holds Talks with U.S. President Donald J. Trump

On the morning of May 14, President Xi Jinping held talks with U.S. President Donald J. Trump, who is on a state visit to China, at the Great Hall of the People in Beijing.

5月14日上午，国家主席习近平在北京人民大会堂同来华进行国事访问的美国总统特朗普举行会谈。

President Xi noted that transformation not seen in a century is accelerating across the globe, and the international situation is fluid and turbulent. Can China and the United States overcome the Thucydides Trap and create a new paradigm of major-country relations? Can we meet global challenges together and provide greater stability for the world? Can we build a bright future together for our bilateral relations in the interest of the well-being of the two peoples and the future of humanity? These are the questions vital to history, to the world, and to the people. They are the questions of our times that the leaders of major countries need to answer together. I stand ready to work together with President Trump to set the course and steer the giant ship of China-U.S. relations, so as to make 2026 a historic, landmark year that opens up a new chapter in China-U.S. relations.

习近平指出，当前百年变局加速演进，国际形势变乱交织，中美两国能不能跨越“修昔底德陷阱”，开创大国关系新范式？能不能携手应对全球性挑战，为世界注入更多稳定性？能不能着眼两国人民福祉和人类前途命运，共同开创两国关系美好未来？这些是历史之问、世界之问、人民之问，也是大国领导人需要共同书写的时代答卷。我愿同特朗普总统共同为中美关系这艘大船领好航、掌好舵，让2026年成为中美关系继往开来的历史性、标志性年份。

President Xi stressed that China is committed to a steady, sound and sustainable development of China-U.S. relations. I have agreed with President Trump on a new vision of building a constructive China-U.S. relationship of strategic stability. This will provide strategic guidance for China-U.S. relations over the next three years and beyond, and will be well received by the people of both countries and the international community. “Constructive strategic stability” means positive stability with cooperation as the mainstay, healthy stability with competition within proper limits, constant stability with manageable differences, and lasting stability with expectable peace. Building a constructive China-U.S. relationship of strategic stability is not a slogan. It means actions in the same direction.

习近平强调，中方致力于中美关系稳定、健康、可持续发展。我同特朗普总统赞同将构建“中美建设性战略稳定关系”作为中美关系新定位，将为未来3年乃至更长时间的中美关系提供战略指引，相信会受到两国人民和国际社会的欢迎。“建设性战略稳定”应该是合作为主的积极稳定，应该是竞争有度的良性稳定，应该是分歧可控的常态稳定，应该是和平可期的持久稳定。“中美建设性战略稳定关系”不是一句口号，而应该是相向而行的行动。

President Xi noted that China-U.S. economic and trade ties are mutually beneficial and win-win in nature. Where disagreements and frictions exist, equal-footed consultation is the only right choice. Yesterday, our economic and trade teams produced generally balanced and positive outcomes. This is good news for the people of the two countries and the world. The two sides should jointly sustain the good momentum that we have worked hard to create. China will only open its door wider. U.S. businesses are deeply involved in China’s reform and opening up. China welcomes more mutually beneficial cooperation from the U.S.

习近平指出，中美经贸关系的本质是互利共赢，面对分歧和摩擦，平等协商是唯一正确选择。昨天两国经贸团队达成了总体平衡积极的成果，这对两国老百姓和世界都是好消息。双方应一道维护好当前来之不易的良好势头。中国开放的大门只会越开越大，美国企业正在深度参与中国改革开放，中方欢迎美国对华加强互利合作。

President Xi pointed out that the two sides should implement the important common understandings we have reached, and make better use of communication channels in the political and diplomaticand military-to-military fields. The two countries should expand exchanges and cooperation in areas such as the economy and trade, health, agriculture, tourism, people-to-people ties and law enforcement.

习近平指出，双方要落实我们达成的重要共识，进一步用好政治外交、两军沟通渠道。拓展经贸、卫生、农业、旅游、人文、执法等领域交流合作。

President Xi stressed that the Taiwan question is the most important issue in China-U.S. relations. If it is handled properly, the bilateral relationship will enjoy overall stability. Otherwise, the two countries will have clashes and even conflicts, putting the entire relationship in great jeopardy. “Taiwan independence” and cross-Strait peace are as irreconcilable as fire and water. Safeguarding peace and stability across the Taiwan Strait is the biggest common denominator between China and the U.S. The U.S. side must exercise extra caution in handling the Taiwan question.

习近平强调，台湾问题是中美关系中最重要的问题。处理好了，两国关系就能保持总体稳定。处理不好，两国就会碰撞甚至冲突，将整个中美关系推向十分危险的境地。“台独”与台海和平水火不容，维护台海和平稳定是中美双方最大公约数，美方务必慎之又慎处理台湾问题。

President Trump said that it was a great honor to pay a state visit to China. The United States and China have a very good relationship. President Xi and I have had the longest and greatest relationship the presidents of the two countries have ever had. We have enjoyed friendly communication and worked out many important issues. President Xi is a great leader, and China is a great country. I have tremendous respect for President Xi and the Chinese people. Our meeting today is the biggest summit the world is watching. I will work together with President Xi to strengthen communication and cooperation, properly handle differences, make bilateral relations better than ever before and embrace a fantastic future. The United States and China are the most important and most powerful countries in the world. Together, we can do a lot of big and good things for the two countries and the world. I have brought with me the best representatives of American businesses. They all respect and value China. I strongly encourage them to expand their dialogue and cooperation with China.

特朗普表示，非常荣幸对中国进行国事访问。美中关系很好，我同习近平主席建立了历史上美中元首之间最长久和最良好的关系，保持着友好沟通，解决了很多重要问题。习近平主席是伟大的领导人，中国是伟大的国家，我十分尊重习近平主席和中国人民。今天的会晤是一次举世瞩目的重要会晤。我愿同习主席一道，加强沟通合作，妥善解决分歧，开启有史以来最好的美中关系，开创两国更加美好的未来。美中是世界上最重要、最强大的国家，美中合作可以为两国、为世界做很多大事、好事。我此访带来了美国工商界杰出代表，他们都很尊重和重视中国，我积极鼓励他们拓展对华合作。

The two presidents exchanged views on major international and regional issues, such as the Middle East situation, the Ukraine crisis, and the Korean Peninsula.

两国元首就中东局势、乌克兰危机、朝鲜半岛等重大国际和地区问题交换了意见。

The two presidents agreed to support each other in hosting a successful APEC Economic Leaders’ Meeting and G20 Summit this year.

两国元首一致同意相互支持，办好今年亚太经合组织领导人非正式会议和二十国集团峰会。

During the meeting, President Trump asked each of the business leaders who were traveling with him to present themselves to President Xi.

Prior to the talks, President Xi held a welcome ceremony for President Trump on the square outside the eastern entrance of the Great Hall of the People.

As President Trump arrived, honor guards lined up in salutation. After the two presidents stepped onto the reviewing stand, the military band played the national anthems of China and the United States. A 21-gun salute was performed on the Tian’anmen Square. President Trump reviewed the guard of honor of the People’s Liberation Army and watched the march-past in President Xi’s company.

Cai Qi, Wang Yi, and He Lifeng attended the talks.

会谈期间，特朗普逐一向习近平介绍随访企业家。

会谈前，习近平在人民大会堂东门外广场为特朗普举行欢迎仪式。

特朗普抵达时，礼兵列队致敬。两国元首登上检阅台，军乐团奏中美两国国歌，天安门广场鸣放礼炮21响。特朗普在习近平陪同下检阅中国人民解放军仪仗队，并观看分列式。

蔡奇、王毅、何立峰参加会谈。

Chinese economist Li Xunlei also shared his view about the boom recently. Li Xunlei is the Chief Economist of Zhongtai Securities. He has been engaged in macroeconomic, financial, and capital market research for over thirty years and is one of China's earliest experts in securities market research. Last April, he joined Premier Li Qiang's symposium on economic conditions.

In Li’s view, the prosperity of the silicon-based era is far from evenly distributed. Silicon-based firms and traditional “carbon-based” enterprises are diverging at an accelerating pace in terms of wealth creation, employment absorption, and valuation — giving rise to what he calls a “K-shaped economy.” The so-called Magnificent Seven account for 27% of total profits and more than 33% of total market capitalization in the U.S. stock market, yet together they provide only about 2.5 million jobs. NVIDIA, now the world’s most valuable company by market cap, employs a mere 36,000 people. A handful of firms “stand in the light,” reaping enormous profits, while the vast majority of traditional enterprises struggle to survive along the downward arm of the K. Meanwhile, the wealthiest 1% of Americans hold 50% of all stock market wealth, while 124 million people cannot come up with $400 for an emergency. He warns that AI is likely to widen the wealth gap further and intensify structural pressures on employment.

Li also cautions against the risk of an AI bubble fueled by the ongoing race in capital expenditure. Current projections suggest that the U.S. Magnificent Seven will spend between $700 billion and $750 billion in capex in 2026, a year-on-year increase of 70–80%. As he puts it: “Not expanding capex means certain death, but expanding capex doesn’t guarantee survival either.”不扩大资本开支一定是死，但扩大资本开支也未必能活

In the silicon-based era, Li argues, evaluating a company can no longer rest on commercial value alone; its social value must also be taken into account. The public must think ahead and consider how to respond to the social polarization and employment shocks that the silicon-based era will bring. He believes that only by vigorously developing the service sector and creating new employment opportunities can more people be brought aboard the train of economic progress, rather than left behind on the platform.

Below is the English ver of the article. His work was published on his WeChat account:

The Silicon-Based Era Is Here — Are We Ready?

In the first quarter of 2026, the Taiwan region posted real GDP growth of 13.69%, with nominal GDP growth reaching a remarkable 16.88%. As is widely known, this is largely thanks to the Taiwan region’s electronics industry — and, above all, to TSMC. In Q1 alone, TSMC posted a net profit attributable to shareholders of $18.1 billion, up roughly 60% year-on-year. NVIDIA did even better, with a Q1 net profit of $18.78 billion and a market capitalization approaching $5 trillion. For comparison, the entire U.S. GDP in 2025 was just $30.76 trillion.

I still remember visiting financial institutions in Taipei ten years ago, when everyone was lamenting hard times. In Q1 2016, the Taiwan region’s GDP had fallen 0.89% year-on-year — the third consecutive quarterly decline — and salaries had been stagnant for years.

Has the Taiwan region’s industrial structure undergone a radical transformation in the past decade? Clearly not. The electronics industry in the Taiwan region has long been highly developed. The reason for this boom is simple: the silicon-based era has arrived.

In fact, the electronics industry had already entered an upward cycle ten years ago, when everyone was talking about the Apple supply chain. These past few days, Berkshire Hathaway has been holding its annual shareholders’ meeting. At the meeting, Warren Buffett noted that ten years ago, he spent $35 billion on Apple stock, and over the past decade — interest included — it has generated $150 billion in profits for Berkshire, all while he did nothing.

To be fair, expecting a 95-year-old like Buffett to have a forward-looking, penetrating grasp of the silicon-based era is perhaps asking too much. In all likelihood, when he bought Apple ten years ago, he saw it mainly as a high-growth consumer stock.

Ten years ago, I recall, upstream raw materials in the global semiconductor industry — silicon wafers and the like — saw their first price increases in five years, which arguably signaled the dawn of the silicon-based era. At the time, I had a conversation with our firm’s chief electronics analyst. He argued that new downstream demand, led by HPC, IoT, and automotive electronics, was driving the official arrival of the fourth wave of rising silicon content. Upstream tightness in silicon wafers and capacity, combined with the surge in downstream silicon-intensive applications, was forming a closed loop — and memory chips, as the core category within that loop, would benefit the most.

Today, AI applications have become ever more pervasive. The launch of ChatGPT marked the dawn of a new era in which large language models are being widely deployed. Multimodal large models can now process and generate content across multiple modalities, overcoming the limitations of traditional LLMs in vision, hearing, and other domains. The dominant form is evolving from chatbots into agents capable of independent reasoning, tool use, and task execution. Major powers have entered an era of competition over computing power: from CPU shortages to GPU shortages and back to CPU shortages again; from optical chips to optical modules to CPO optical interconnects — a dazzling, kaleidoscopic progression.

One benefit of working in the securities industry is that, regardless of how quick a learner you are, you have no choice but to grit your teeth and let the silicon-based era push you along. If you fail to pay attention to the surge in A-share optical communications stocks, someone will shout at you: “Stand in the light — don’t just stand around.”

By contrast, Buffett’s Berkshire has shown considerable discipline, reducing its U.S. equity holdings for ten consecutive quarters and now sitting on $397 billion in cash. Buffett has likened today’s U.S. stock market to “a church with a casino attached” — valuations are simply too high. The right time to invest, he says, is when “no one else is willing to pick up the phone.”

From a valuation standpoint, the S&P 500 trades at an average P/E of nearly 30, with a dividend yield of only 1% and a P/B ratio of 5.6. By comparison, the CSI 300 has an average P/E of 14.4, a P/B of 1.47, and a dividend yield of 2.62%. The U.S. market does look expensive — especially given that U.S. inflation in March was still 3.3% and the 10-year Treasury yield stood at 4.4%.

Of course, valuation methods rooted in the carbon-based era may already be outdated. In the silicon-based era, only a handful of companies create enormous value, while most are destined to languish. According to available data, the Magnificent Seven collectively earned $567.25 billion in profits in 2025, against the S&P 500’s total of roughly $2.09 trillion — a 27.1% share of total profits. Their share of total market cap is even higher, at roughly 33–35%.

This raises the question: are we not living in an era of ever-deepening divergence, in which a handful of companies capture a vast share of society’s profits with staggering margins — the silicon-based growth model — while the majority of carbon-based firms struggle to stay afloat? This is the so-called K-shaped economy: the problem is that only a few companies and individuals ride the upward stroke of the “K,” while the majority slide down the other.

In other words, although we have entered the silicon-based era, our way of life will remain carbon-based for a long time to come. For example, these past few days, more than 50,000 people made the pilgrimage to Omaha to see Buffett — flying on planes, staying in hotels, touring Berkshire, eating steak, joining morning runs. All of this is carbon-based consumption. Even so-called silicon-based consumption requires enormous amounts of fossil fuel energy and releases vast quantities of carbon dioxide.

Let us now look at some features of this age of divergence and ask whether they bode well for healthy economic development. First, consider the ownership structure of assets in the U.S. stock market. According to Federal Reserve data, the wealthiest 1% of Americans hold about 50% of total stock market value, while the bottom 50% hold just 1%. The Fed has also reported that 124 million Americans cannot produce $400 in an emergency.

Second, although the seven U.S. tech giants account for more than 33% of total market cap, the number of jobs they create is strikingly limited. In 2025, their combined employment was around 2.5 million, of which Amazon alone accounted for 1.56 million. Nvidia — the world’s most valuable company by market cap — employs a mere 36,000. Moreover, in order to expand their capital expenditures, these giants have been laying off workers in droves: reportedly more than 100,000 jobs were cut in the first two months of this year alone.

In short, in the silicon-based era, AI firms can create far more wealth than their carbon-based counterparts, driving GDP growth — but at the same time widening the wealth gap and generating new employment pressures across society.

So the silicon-based era has arrived. How will it evolve, and what problems will it bring? Everyone is thinking about these questions, but clear answers remain elusive.

Among U.S. companies with market caps above $1 trillion, nearly all — aside from Walmart — are silicon-based enterprises. Over the past 30 years, traditional manufacturing, energy, telecoms, and financial firms have all dropped out of the top ten by market cap. Looking globally, the trillion-dollar club includes America’s Magnificent Seven along with Broadcom, Berkshire, and Walmart, plus TSMC from the Taiwan region, South Korea’s Samsung, and Saudi Arabia’s Aramco. Not a single firm from the Chinese mainland makes the list.

Comparing the equity markets of the Chinese mainland and the United States reveals one striking difference: the largest companies in the A-share market are simply not large enough, and the degree of divergence is less pronounced than in the U.S. Globalization levels are generally lower, large-cap trading volumes are relatively modest, and valuations for large firms are comparatively cheap — while small-caps trade at higher multiples and enjoy livelier turnover. Moreover, America’s big companies have grown largely through continual mergers and acquisitions, whereas successful M&A stories are far less common among the large companies on the Chinese mainland.

To be sure, the Chinese mainland has quite a few companies with market caps above one trillion RMB, but most are in traditional industries or are state-owned enterprises. These large firms employ tens or even hundreds of thousands of workers. Furthermore, the real employment generated by SOEs on the Chinese mainland is often underestimated, because in addition to formal employees, SOEs also rely heavily on labor dispatch and service outsourcing arrangements — in some central SOEs, these workers outnumber formal employees several times over.

Among the Chinese mainland’s internet giants, employment levels vary dramatically depending on the business model. Tencent, for example, has a market cap thirteen times that of JD.com and posted net profits of more than 220 billion RMB in 2025, yet its workforce numbers only around 100,000 — about one-ninth the size of JD’s. This underscores the point that evaluating a company requires looking not just at its commercial value, but also at its social value — especially as the silicon-based era delivers ever-larger shocks to employment.

After the internet era arrived in 2000, online transactions became increasingly active and dealt heavy blows to brick-and-mortar retailers. The rise of express delivery and food delivery services also brought with it massive “white pollution” — plastic bags, packaging boxes, tape, and the like.

Moreover, price wars among the internet giants have led to misallocation and waste of social resources. Today, the Chinese mainland’s flexibly employed workforce is estimated at 287 million (as of November 2025, according to the Tianjin CPPCC website), accounting for nearly 40% of the 725 million total employed population. The sheer size of this flexible workforce raises serious questions about future employment and social security that warrant thorough assessment.

Once the AI industry’s high-growth phase comes to an end, will these high-profit, low-employment silicon-based companies still be able to sustain such lofty valuations? Right now, America’s major AI firms are engaged in a frenzied expansion of capital expenditure: the Magnificent Seven are projected to spend between $700 billion and $750 billion on capex in 2026, a 70–80% increase over 2025. This is shifting U.S. GDP growth onto an investment-driven footing, and AI firms on the Chinese mainland are also ramping up capex sharply.

As the saying goes: not expanding capex means certain death, but expanding capex doesn’t guarantee survival either. In such a fierce, winner-takes-all environment, the bursting of the AI bubble is likely only a matter of time — just as the internet bubble burst years ago. Buffett has been steadily trimming stocks and accumulating cash, preparing for the coming winter.

Viewed over a longer historical horizon, the bursting of bubbles is actually a good thing. It restores rationality to investors and markets, and — through the elimination of weaker players — further improves labor productivity and the efficiency of resource allocation. After the U.S. internet bubble burst in 2001, for example, the internet became even more widely adopted, giving rise to a generation of tech giants that have since led the world into the silicon-based era.

For the global economy and society, the AI revolution is driving gains in labor productivity and human progress, rewriting traditional disciplines such as economics and sociology. Modern development economics, for instance, holds as a matter of consensus that an aging population must bring slower growth — and that once a society becomes super-aged, growth will fall below 3%.

Yet in Q1 of this year, the already super-aged Taiwan actually posted double-digit growth; South Korea, also super-aged, has performed quite respectably as well. The technological advance of the silicon-based era, then, will continue to push the wheel of history forward — even if it stirs up dust along the way, and even if it may at times crush the very roadbed beneath it.

From “Internet+” to “AI+,” we must prepare ourselves in advance. How do we confront the deepening divergence among societies, industries, companies, and households, and cushion the shocks this divergence will bring? How do we vigorously develop the service sector to create new jobs and counter the sharp drop in labor demand that the silicon-based era threatens to cause? And how do we plan ahead, so as to reduce the risks that a future AI bubble burst would spread across every industry?

In China’s political machinery, a cadre selection and evaluation system grounded in performance assessment ensures that decision-makers are tested and competent, while promotion incentives encourage them to balance short-term local interests with the nation's long-term goals.

In 2020, China’s crude steel output surpassed one billion tons for the first time, reaching a historical peak before gradually declining. That figure also marked China’s formal entry into a post-industrial society. As anxieties over material scarcity have largely dissolved, the long-obscured flip side of meritocracy has begun to surface.

In education, the single metric of test scores has narrowed the developmental pathways available to young people, compressing the full range of life’s possibilities into a contest of exam-taking ability. Given that admissions to top universities remain relatively fixed in number, this evaluation system has produced no matching gains in development; instead, it has intensified unnecessary, excessive competition. Participants pour in ever more effort, while overall returns fail to rise; this is the exact meaning of involution (内卷).

At the level of social psychology, the accelerating adoption of artificial intelligence has steadily amplified AI’s displacement of entry-level positions (at least what people believe to be), and the labor market’s pursuit of “quantifiable performance” has been magnified further still, with the threshold for success raised ever higher. Even as “super-individuals” rise to prominence, ordinary people feel more acutely than ever that they are replaceable. Meritocracy’s promise that “hard work will surely pay off” has grown more fragile than at any time before, fueling the anxiety that pervades today’s youth.

May 4 is China’s Youth Day. On this occasion, I’d like to share an essay by Mr. Wang Mingyuan王明远, written for Professor Lian Si’s new book A Journey Without a Map无图之旅-一代青年的自我寻路. Wang is a researcher at the Beijing Reform and Development Research Association and a senior, well-connected scholar of the history of Reform and Opening Up. He previously worked at China Economic System Reform Magazine and the China Society for Economic System Reform. He also runs his own WeChat public account, Fuchengmen No. 6 Courtyard (阜成门六号院).

Professor Lian Si is a famous social scientist with a long-standing focus on the values of successive generations of Chinese youth. He once captured the precarious lives of college graduates with the term “ant tribe,” and in his new book, he continues to probe the fate of young people. He also serves as Deputy Director of the School Department of the Central Committee of the Communist Youth League. I had the opportunity to speak with him once before, and I was deeply impressed by the empathy he expressed toward the realities facing Chinese youth, as well as by the precision of his understanding of the motivations behind their behavior.

In his book, Lian Si pointed out that meritocracy is, in fact, a modern disguise for hierarchical order; it stratifies young people through labels such as income, educational credentials, and rank. He calls for policies that grant young people greater room to make mistakes, that offer better-protected working conditions, and that reserve opportunities for others to switch tracks in life. To my mind, all of these points, at a deeper level, reflect a more substantial commitment to “investing in people” and strengthening the social safety net for the young.

Thanks to Wang Mingyuan’s kind permission, I had the chance to publish the English ver of the piece

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Farewell to Meritocracy, Restoring the Essential Value of Youth: A Reading of Lian Si’s A Journey Without a Map

“The bottom line of a civilized society is not that everyone can succeed, but that even the ordinary retain dignity and worth. Genuine social progress does not lie in turning everyone into a winner, but in allowing ordinary people to live with decency; not in compelling everyone to climb upward, but in ensuring that those who do not climb are not trampled underfoot.”
—Lian Si, A Journey Without a Map, p. 356

May Fourth Youth Day has arrived, and so it seems fitting to talk about young people. Today, the question of youth is becoming one of the decisive questions shaping China’s historical destiny. Why do I say this?

First, China currently faces a host of pressing problems—technological chokepoints, intensifying international competition, social stability, and sustainable development—and from the perspective of who must actually solve them, all of these come down to how well we do youth work. Resolving these difficulties depends, above all, on unleashing the potential of the young. Young people may be immature and imperfect, and in terms of social resources they are a “marginal group,” yet they are also the most creative; they are, in the end, the masters of the future, and the only ones with the right to define what that future will be.

Whether China can convert the intellectual and demographic advantages of its youth into a developmental advantage is the key to whether we achieve our modernization goals. Successful nations, in the end, are those that allow each new generation to fully realize its potential. Failed nations are those in which the energies of the young find no outlet, or are exhausted in the internal frictions of social conflict.

Second, youth work today faces unprecedented new challenges. In the past, youth work was largely about questions of survival, education, and development—at its core, raising the cultural level of young people and expanding their opportunities to make a living. But this generation, especially those under twenty-five, are themselves natives of an information-based, industrialized society. Their worldviews, aspirations, and modes of reasoning differ markedly from those of the post-1970s and post-1980s generations.

The opportunities the times can offer no longer match the capital and expectations young people bring to the table; the mechanisms of social management increasingly clash with their patterns of behavior. The younger generation is expressing its emotions in its own way. Over the past two or three years, vocabulary like “lying flat” and “anti-involution,” and behaviors such as “mourning the Ming” or the Zibo barbecue craze, should not be dismissed as fleeting internet subcultures—they are refractions of the psychological and existential condition of the young.

“Mourning the Ming” is not really about debating history or pining for the Zhu imperial house; it is a way of expressing rebellion against “institutionalized” information and orthodox values. The millions of college students from northern China descending on Zibo for barbecue, or the tens of thousands of students night-cycling between Zhengzhou and Kaifeng—at heart these are searches for an outlet from the suffocation of campus management, and cautious expressions of longing for a more uninhibited way of life.

But among those who hold society’s resources and command its public discourse—nearly all of them middle-aged or older—those genuinely capable of listening to the voices of the young are vanishingly few. Whether they are intellectuals indignant in the face of social injustice or officials wielding local power, whether their political values lean left or right, when they speak about youth issues they almost reflexively assume a posture of instruction or persuasion, often giving off what young people mockingly call the “old man flavor”老登味 or “patriarchal vibe.”爹味 This only makes the problem more intractable.

Last month, I received a copy of A Journey Without a Map by the renowned sociologist Lian Si. It was a refreshing surprise, followed, after I read it, by a kind of excitement and emotion I had not felt in a long time. Based on years of fieldwork, this rare book understands young people from a level, listening posture and asks how to help them grow, rather than lecturing them in bureaucratic or paternalistic fashion. It concerns itself with the circumstances of countless ordinary young people, not with celebrating success stories. The book is suffused with the humanistic concern proper to an intellectual, and supported by sound, professional analysis. Below, I share some of its insights.

An Authentic Record of Youth Lives and Mindsets in the Post-Industrial Era

If Lian Si’s Ant Tribe offered the most vivid historical portrait of young people during China’s industrial age, A Journey Without a Map offers a comprehensive and finely textured picture of how the historical forces of the post-industrial era—technological transformation, urbanization, globalization, and a revolution in social values—are reconstituting the lives and mindsets of the young.

The first shift is the “de-institutionalization” or “decentralization” of work. In the past, whether in agrarian or industrial societies, work was institutional in nature: non-agricultural employment was tightly bound to organizations, anchored either in public-sector units or in firms. The spread of digital technology has now broken work free of its old constraints of time and place, dissolving the strong link between worker and “work unit.” For the majority of young people, work has become “non-institutional” or “decentralized.”

A Journey Without a Map selects ten groups representing the social “median”: livestream hosts, industrial workers, high-tech professionals, the new bohemians of the arts, freelancers, small-town youth, programmers, grassroots civil servants, employees of social organizations, and delivery riders. Through careful interviews, the book traces their life stories and inner journeys.

Of these ten groups, only industrial workers, grassroots civil servants, and those in social organizations remain within traditional institutional frameworks; the other seven have all drifted toward de-institutionalization. China now has more than 200 million workers in flexible employment. While this certainly reflects the difficulties young people face in the labor market, it also reflects the fact that, for a substantial share of them, this has gradually become a chosen—even preferred—new way of working.

The second shift is an unprecedented intensification of “modern” consciousness around self-worth, dignity, freedom, and rights. Young people of earlier generations, even the post-1980s, tended to make life choices on utilitarian grounds—income, promotion, and so on. This generation, shaped by revolutionary changes in their educational, material, and informational environments, places personal feeling at an unprecedented height. Hence the popularity, among the young, of concepts that bewilder their elders: “rectifying the workplace,”整顿职场 “emotional value,”情绪价值 “spending to please oneself.”悦已消费

The convergence of this value shift with technological change is one of the root causes of the increasing de-institutionalization of young people’s careers. Their compliance with rules and material incentives is weaker than ever, and their friction with established institutions and values has intensified—another reason why, in recent years, youth have been so frequently “problematized.”

The third shift is that, although material scarcity is no longer the issue, existential uncertainty and anxiety are on the rise. Technological change has separated employment from the work unit. The upside is a lower threshold of entry and more job opportunities for everyone—if we take 2012, when China essentially completed its industrialization, as a marker, the new economy built around digital infrastructure has since generated roughly 150 million additional jobs, bringing China’s non-agricultural employment ratio close to 80% last year. But the accelerating pace of technological iteration and the deepening capitalization of industries have introduced enormous uncertainty into young people’s working lives, accompanied by an unease and anxiety about where they will land next. Although they have shed the traditional bonds of authority within the work unit, they have inherited the more concealed forms of control that come with technology and capital. The freedom they hoped for has not materialized; if anything, the constraints upon them are now omnipresent.

In sum, this generation is walking a path quite different from any before. Their careers and lives no longer follow fixed coordinates. They enjoy more freedom and greater autonomy over their own fates, but they also face many challenges and confusions. Lian Si calls this entirely new mode—self-navigation amid pervasive uncertainty—”a journey without a map.”

Through his interviews, we see that the chemical reaction of these three transformations is reshaping not only those in new industries but also workers in traditional occupations, whose mentalities and circumstances are changing too.

Take grassroots civil servants. The old stereotype is of complacent, supercilious, indifferent men who spend the day with a single newspaper and have nothing to worry about. The reality is that today’s grassroots civil servants—whose educational credentials have improved fundamentally—include many idealists, and their professional capacities are far above those of the previous generation. The improvement of grassroots services in recent years owes much to this generational turnover. Yet with sharply heightened performance evaluation pressure, the formalization of administrative procedures, and constant scrutiny from both superiors and the public, the work of these young civil servants is anything but easy. The room for individual personality and talent has narrowed considerably.

A Reflection on the Reigning Cult of Meritocracy

Another intellectual contribution of A Journey Without a Map is its diagnosis of how meritocracy alienates human worth—a diagnosis that helps explain young people’s anxiety and resigned coping.

A value system centered on results—celebrating effort, success, and wealth—undeniably propels modernization. But the problem in China today is that, lacking a humanistic counterweight, meritocracy has come to dominate social evaluation almost completely. Aided by the spread of management science and digital technology, it has insinuated quantifiable indicators into every domain of life, inverting the relationship between tools and ends across society. Human beings have become machines living for their metrics. As Lian Si puts it, “The mutual coupling of market mechanisms, algorithmic distribution, and performance assessment has tightened ‘success’ grip on the daily lives of the young.”

I share this view deeply. Today, when universities recruit faculty, what they look at first is not academic ability but quantifiable indicators: whether the candidate’s first degree is from a “Project 985” school, how many papers in CSSCI journals they have published, how many national-level grants they have won. Beijing’s most famous matchmaking corner—the northeast corner of Zhongshan Park on weekends—is a vivid arena of meritocracy in action. Here, young men and women are reduced to a numerical index of income, education, and height. Onlookers gaze in worshipful admiration at those with the most prestigious degrees, the highest titles, the largest paychecks. Whether someone has a sound personality, emotional intelligence, moral integrity, or long-term potential are essentially invalid parameters. Anyone bold enough to foreground such qualities at work, in school admissions, or in courtship risks being labeled “naïve,” “overly idealistic,” or “useless.”

Lian Si perceptively observes that meritocracy is, in fact, a modern disguise for “hierarchical order”—it stratifies young people through labels such as income, educational credentials, and rank. “The bloodline hierarchy under meritocracy does not proclaim noble birth in any explicit law; it embeds itself silently into public discourse and individual minds through words like effort, ability, performance, and willingness.” “It reproduces itself culturally, narrowing the diversity of life paths into a single road, and quietly implanting self-discipline into both conscience and desire.”

Meritocracy has narrowed the developmental paths available to the young and intensified competition. This is why even upper-middle-class families in Haidian remain gripped by the fear of falling, and trapped in the anxiety of ceaseless “chicken parenting.”鸡娃 The new generation, raised within the meritocratic logic of an industrial society, may appear to have higher degrees, better foreign-language skills, and more cultivated hobbies than their predecessors. Yet performance metrics have atomized and fragmented their abilities, and the most vital capacities—thinking and creativity—have not necessarily improved. They may even have declined.

What contradicts meritocracy’s incentive logic is this: once the wheel of history turns into the post-industrial age and channels of upward mobility narrow, continuing to demand and assess young people through meritocratic criteria can only deepen their sense of frustration and powerlessness. After 2021, the inflection point in China’s economic development, terms like “lying flat,” “involution,” and “anti-involution” came into wide circulation. This is not “meme play” or “internet subculture”—it is the manifestation of a contradiction between the social evaluation system and social reality.

What Makes a Youth Most Meaningful, and What Society Owes the Young: Philosophical and Institutional Reflections on the Predicament of Youth

In his book, Lian Si does not, in the manner of “successful people,” instruct young people on how to live. Instead, he answers a question that society itself needs to redefine: what kind of youth is most meaningful? He writes: “The bottom line of a civilized society is not that everyone can succeed, but that even the ordinary retain dignity and worth.” Lian Si argues that we must dismantle the meritocratic narrative that exalts the strong and move toward a pluralism of life paths; that we must respect the choices of the younger generation and accept their ordinariness; that we must abolish the utilitarian, externally imposed “social pricing” of careers, and instead use as our compass whether one’s work benefits others and accords with one’s own heart. This is a return from instrumentalization to the essence of human life—and it is fully consonant with the humanism of Marxism.

Lian Si also displays the professional rigor of a sociologist. For each of the ten occupational groups, he proposes specific recommendations to improve their conditions. The core thrust, in my reading, is this: a shift from the past emphasis on supporting youth through technological supply to strengthening youth through institutional supply.

In all candor, the level of anxiety among Chinese youth is disproportionate to the country’s level of economic development and opportunity. China is on the cusp of crossing the high-income threshold. In the eastern regions and major cities—precisely where anxiety runs highest—social development has approached OECD levels. China’s growth rate, while not what it was at the turn of the century, remains second only to India’s among major economies. Young Chinese, by rights, should not be this anxious.

Looked at from another angle, we find that an important source of youth anxiety is inadequate institutional protection. Our society lacks a mechanism to incentivize sustained creativity, lacks a mechanism that fully recognizes the worth of persons, and lacks adequate systems of social assistance and welfare. This is a sentiment shared by everyone from high-tech entrepreneurs at the top of the income distribution to flexible-economy workers and livestream hosts at its lower and middle reaches.

This is what Lian Si calls for at the close of his book: “This book is not about telling young people ‘what you should do,’ but about asking society ‘whether we can’: whether we can, at the policy level, grant young people greater room to make mistakes; whether we can offer better-protected working conditions for some; whether we can reserve opportunities for others to switch tracks in life.”

There are three kinds of books. The first is a complete, original work, written in a single sustained effort, grounded in serious, rigorous, logically coherent thought. The second is a collection assembled from previously published articles. The third is the kind put together by gathering several authors—you write one piece, I write another—and stitching the result into a volume. In my view, only the first kind truly deserves the name “book.” Today’s publishing industry is so prolific that anyone can put out a book, yet the first kind accounts for less than one percent of what is published. Despite his many social commitments, Lian Si has produced in A Journey Without a Map an original work grounded in rigorous investigation and careful analysis. Every word is considered; not a sentence is wasted. In an age awash in academic fast food (or academic garbage), this is a rare luxury.

I rarely write reading reflections. Bad books do not merit comment, and good ones I dare not comment on lightly. Counting them up, I have written endorsements for only four books, all at the invitation of the author or publisher: Michel Bonnin’s The Lost Generation: The Rustication of China’s Educated Youth, Ezra Vogel’s Deng Xiaoping and the Transformation of China, Wu Jinglian’s China’s Economic Reform Process, and Hu Deping’s The Private Economy Advancing with the Times. This essay, by contrast, I have written entirely of my own accord, moved by what I read—as a tribute to China’s 370 million young people, and as a tribute to the scholars who still take original work seriously.

More to read:

• Yin Hejun, Minister of Science and Technology

• Huai Jinpeng, Minister of Education

• Hou Jianguo, President of the Chinese Academy of Sciences

• Chen Jining, Party Secretary of Shanghai

• Liu Ruochuan, Dean of the School of Mathematical Sciences, Peking University

• Liu Chenli, Director of the Shenzhen Institute of Advanced Technology, CAS

• Qiao Yu, Professor at Shanghai AI Laboratory (Pujiang Lab)
  (He got over 120,000 citations on Google Scholar — ranked #1 in mainland China and #12 globally in the field of pattern recognition.)

• Zhang Pingxiang, Chief Scientist of Western Superconducting Technologies Co.

Other senior officials in attendance:
Yin Li (Party Secretary of Beijing)
Shi Taifeng (Head of the Organization Department of the CCP Central Committee)
Liu Guozhong (Vice Premier of the State Council, overseeing health and agriculture)
Zhang Guoqing (Vice Premier of the State Council, overseeing industry and information technology, workplace safety, and related areas)
Huang Kunming (Party Secretary of Guangdong Province)

Here are the key takeaways from Xi’s speech, along with some of my own observations:

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1. Basic research has been elevated to an unprecedented strategic height — framed as the “wellspring” of the entire scientific system and the “master switch” for all technological problems. This signals that more substantive measures are likely coming on funding, evaluation mechanisms, and talent policy.

2. Xi's emphasis on “original and disruptive innovation” reflects the realities of the China-US tech rivalry and broader global competition. Beijing is signaling that China is no longer content to leverage its industrial strengths merely for 1-to-100 scaling. It now wants to seize the commanding heights in frontier basic research and pull off indigenous 0-to-1 breakthroughs.

3. The language around “tolerating failure” and a “differentiated evaluation system” speaks directly to a long-standing pain point in the scientific community: short-termist, utilitarian performance metrics. Of course, KPI-driven culture is hardly unique to this field — but I’m curious to see how evaluation reform will actually be implemented in the basic research area. How to balance openness and safety is also an ongoing problem worth observing.

4. Pairing youth talent development with science popularization suggests the leadership recognizes the generational continuity problem in the basic research workforce and wants to cultivate scientific curiosity from adolescence onward. Two scientists, Liu Ruochuan and Liu Chenli, born in 1980, and Qiao Yu, were also born at a similar age. They represent the new face of young Chinese scientists in basic research.

Usually, I’m the one doing the explaining, but I haven’t figured out why this meeting was held in Shanghai, rather than Beijing, where top universities are more concentrated, or the Pearl River Delta, which is stronger on industrial translation. But I do see the presence of the party secretary in Beijing and Guangdong. If any readers have thoughts, please enlighten me.

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Below is the full English transcript of the official readout I made with the help of AI:

Xi Jinping Stresses at Symposium on Strengthening Basic Research: Reinforce Basic Research with Greater Efforts and More Substantive Measures to Further Consolidate the Foundations for Building China into a Country Strong in Science and Technology

On the morning of the 30th, Xi Jinping — General Secretary of the CPC Central Committee, President of China, and Chairman of the Central Military Commission — attended a symposium on strengthening basic research in Shanghai and delivered an important speech. He emphasized that basic research is the wellspring of the entire scientific system and the master switch for all technological problems. Greater efforts and more substantive measures must be taken to strengthen basic research, enhance China’s capacity for original innovation, and further consolidate the foundations for building a country strong in science and technology.

Cai Qi, member of the Standing Committee of the Political Bureau of the CPC Central Committee and Director of the General Office of the CPC Central Committee, attended the symposium. Ding Xuexiang, member of the Standing Committee of the Political Bureau of the CPC Central Committee and Vice Premier of the State Council, chaired the meeting.

At the symposium, the following officials and scholars spoke in turn, sharing their work and offering recommendations on strengthening basic research: Yin Hejun, Minister of Science and Technology; Huai Jinpeng, Minister of Education; Hou Jianguo, President of the Chinese Academy of Sciences; Chen Jining, Party Secretary of Shanghai; Liu Ruochuan, Dean of the School of Mathematical Sciences at Peking University; Liu Chenli, Director of the Shenzhen Institute of Advanced Technology under the Chinese Academy of Sciences; Qiao Yu, Professor at Shanghai AI Laboratory (Pujiang Lab); and Zhang Pingxiang, Chief Scientist of Western Superconducting Technologies Co., Ltd.

After listening to the speakers, Xi Jinping delivered his keynote remarks. He noted that since the 18th National Congress of the Party, the CPC Central Committee has placed great importance on basic research, and through measures such as optimizing the research landscape, increasing funding and support, and innovating institutional mechanisms, China’s basic research capabilities have improved significantly. At present, a new round of scientific and technological revolution and industrial transformation is accelerating, global tech competition is increasingly focused on frontier basic research, and the importance of original and disruptive innovation is becoming ever more pronounced. We must seize the opportunities, rise to the challenges, place basic research firmly on our priority agenda, and pursue it persistently to achieve continual progress.

Xi emphasized the need to strengthen overall planning and top-level design to optimize the systemic layout of basic research. We must adhere to the strategic orientation of the “Four Orientations,” further clarifying the main directions and priority areas of basic research. We must reinforce the leading role of national research institutions and top research universities, encourage and properly regulate the development of new types of R&D institutions, promote enterprise-led deep integration of industry, academia, research, and application, and connect the full innovation chain — from basic research and applied development to the commercialization of results. Greater efforts must be made to strengthen basic disciplines and to promote coordinated development between applied and foundational fields.

Xi pointed out that the development of education, science and technology, and talent must be advanced in an integrated manner, with comprehensive efforts in cultivating, attracting, and utilizing talent to expand the basic research workforce. We must respect the laws of talent development, improve educational quality, and steadily cultivate a reserve of basic research talent. We must optimize collaborative mechanisms between scientific research and education, and place emphasis on identifying and nurturing talent on the frontlines of research. We must adhere to a “mission-driven” approach, with senior scientists mentoring junior ones, and provide strong support for young researchers. The spirit of scientists should be championed, science popularization strengthened, and the imagination and curiosity of young people sparked — so that pursuing basic research becomes a life aspiration for more youth.

Xi stressed the need to strengthen support and safeguards for basic research. The proportion of funding allocated to basic research should be gradually increased, and a diversified investment structure formed. Major scientific and technological infrastructure should be systematically planned and developed, alongside intelligent research platform systems. A differentiated evaluation system tailored to the characteristics of basic research must be established, working and living conditions for researchers improved, and an innovation environment fostered that is open, inclusive, and tolerant of failure. Research integrity must also be reinforced.

Xi noted that China should proactively integrate into the global innovation network, deepen international exchanges and cooperation in basic research, jointly tackle major scientific challenges in areas such as climate change, energy and the environment, and life and health, and take an active part in global science and technology governance.

In chairing the meeting, Ding Xuexiang stated that General Secretary Xi Jinping’s speech fully affirmed the achievements of China’s basic research, comprehensively analyzed the new circumstances and challenges ahead, and laid out strategic plans and clear requirements for strengthening basic research. The speech, he said, is visionary in scope and rich in substance, with strong political, ideological, and guiding significance, charting the course and providing fundamental principles for advancing basic research. We must thoroughly study and internalize the spirit of the General Secretary’s remarks, accurately grasp the strategic intent of the CPC Central Committee, heighten our sense of urgency, responsibility, and mission, and — with firmer confidence and resolve, and more pragmatic measures and actions — comprehensively strengthen basic research, focus on enhancing original innovation capacity, and strive to achieve high-level technological self-reliance and build China into a country strong in science and technology.

Yin Li, Shi Taifeng, Liu Guozhong, Zhang Guoqing, and Huang Kunming also attended the symposium.

Also present were principal officials from relevant departments of the CPC Central Committee, state organs, and military units; leading officials from selected provinces and municipalities; and representatives from universities, research institutions, national laboratories, enterprises, and the scientific community.

The Assessment of China’s Economic Situation

The overall assessment is relatively optimistic. The phrase

China’s economy has gotten off to a strong start, with major indicators exceeding expectations and demonstrating strong resilience and vitality

is consistent with the series of statements made by senior officials following the release of the January–February economic data.

In terms of identifying problems, the readout states that

the economy faces some difficulties and challenges, and the foundation for sustained economic recovery and improvement still needs to be further consolidated.

Notably, it does not specify particular problems, nor does it use phrases such as “strong supply but weak demand”供强需弱 or “prominent contradictions.”矛盾突出 The relatively mild wording “the foundation still needs to be further consolidated”基础还需进一步巩固 replaces the more urgent expressions used in the past.

Rebalancing Short-Term and Long-Term Objectives

China’s economic policy must balance two objectives across different time horizons. The short-term objective is to maintain the pace of economic growth: the government needs to sustain a certain growth rate in order to create enough jobs and thereby preserve social stability. The long-term objective is to transform the economic model, shifting from extensive growth toward high-quality development. If short-term policy attention and resources are excessively tilted toward growth speed, economic transformation becomes impossible; however, if all efforts are directed toward long-term transformation, a short-term loss of economic momentum could in turn undermine the stability of China’s economic development. As Keynes famously put it, “In the long run, we are all dead.”

Based on the signals conveyed by this Politburo meeting, the short-term macroeconomic policy will not be aggressively scaled up, and the current policy focus lies in reforming the economic structure.

This judgment is corroborated by the wording on monetary and fiscal policy. On monetary policy, the meeting calls for “enhancing the forward-looking nature, flexibility, and precision of monetary policy, and maintaining ample liquidity,” but makes no mention of cutting the reserve requirement ratio or interest rates. On fiscal policy, the phrase “implementing a more proactive fiscal policy in a precise and effective manner” introduces “precise and effective” as a new qualifying term. Combined with the call to “continue to optimize the structure of fiscal spending,” this likewise points toward structural optimization rather than expansion of scale.

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Domestic Demand and Infrastructure: Services Take Precedence

As I argued in last week’s newsletter, Services Sector Moves Up China’s Policy Agenda, within the section on expanding domestic demand, it first mentions actions to expand and upgrade the services sector, followed only afterward by new infrastructure projects. The formulation of the “Six Networks” deserves attention:

strengthening the planning and construction of the water network, the new-type power grid, the computing power network, the next-generation communications network, the urban underground pipeline network, and the logistics network.

Although this set of projects is presented under the banner of “expanding domestic demand,” it differs from traditional infrastructure stimulus in that the core orientation of these projects is security-and-resilience infrastructure.

Viewed through the logic of medium- and long-term high-quality development, these infrastructure projects serve as the backbone for technological self-reliance, energy security, and the digital economy. The phrase “advance the launch of major engineering projects when conditions are ripe” emphasizes the words “when conditions are ripe,” which implies that such projects are not intended as short-term growth-stabilizing infrastructure investments to be rushed through.

Industrial Policy

The industrial section reflects the recent intensification of policy efforts on structural adjustment. On one hand, “deeply rectifying involutionary competition”深入整治内卷式竞争 represents a step further than the earlier formulation of “comprehensive rectification,”综合整治 signaling that the anti-involution drive is being continually reinforced.

On the other hand, the formulation “maintaining a reasonable share of manufacturing in the economy” has been explicitly written into the Politburo readout, echoing the policy line laid out in the earlier article in Qiushi, the Party’s flagship journal, titled Maintaining a Reasonable Share of Manufacturing in China’s Economy Is a Major Issue. The intersection of these two formulations suggests that while the anti-involution campaign will continue to be pushed forward, it will not come at the expense of the overall scale of the manufacturing sector.

The line “systematically responding to external shocks and challenges, and improving the security of energy and resource supplies”系统应对外部冲击挑战，提高能源资源安全保障水平 responds to the recent impact of the Strait of Hormuz crisis on China, while also indicating that energy security has become a core consideration in policymaking. China’s development of green energy is, at its core, similarly driven by the imperative of resolving energy security concerns.

Below is the translation ver I made with the help of AI

Politburo of the CPC Central Committee Convenes Meeting to Analyze Current Economic Situation and Economic Work; General Secretary Xi Jinping Presides

On April 28, the Political Bureau of the CPC Central Committee held a meeting to analyze and study the current economic situation and economic work. Xi Jinping, General Secretary of the CPC Central Committee, presided over the meeting.

The meeting held that, since the beginning of this year, the CPC Central Committee with Comrade Xi Jinping at its core has strengthened overall leadership over economic work, taking a holistic perspective and making forward-looking arrangements. Localities and departments have moved proactively and adopted comprehensive measures. China’s economy has gotten off to a strong start, with major indicators exceeding expectations and demonstrating strong resilience and vitality. At the same time, the economy also faces some difficulties and challenges, and the foundation for sustained economic recovery and improvement still needs to be further consolidated. It is necessary to strengthen confidence and to carry out economic work with greater intensity and more concrete measures.

The meeting pointed out the need to adhere to the general principle of seeking progress while maintaining stability; to fully, accurately, and comprehensively implement the new development philosophy; to accelerate the construction of the new development pattern; to better coordinate the domestic and international situations; to coordinate development and security; to unswervingly deepen reform and opening-up; to advance scientific and technological self-reliance and self-strengthening as well as the autonomy and controllability of industrial chains; to implement a more proactive fiscal policy and a moderately loose monetary policy in a precise and effective manner; to continue to expand domestic demand and optimize supply; to upgrade incremental capacity and revitalize existing stock; to focus on stabilizing employment, enterprises, markets, and expectations; to enhance the internal driving forces of economic development; to further strengthen the domestic economic circulation; to improve the dual circulation of domestic and international flows; and to strive for a good start to the 15th Five-Year Plan period.

The meeting emphasized the need to make full and effective use of macroeconomic policy. Efforts should be made to continuously optimize the structure of fiscal spending and firmly secure the bottom line of the “three guarantees” at the grassroots level (guaranteeing basic livelihoods, salaries, and government operations). The forward-looking nature, flexibility, and precision of monetary policy should be enhanced, and ample liquidity should be maintained. The RMB exchange rate should be kept basically stable at a reasonable and balanced level. Consistency assessments of the orientation of macroeconomic policies should be properly conducted.

The meeting pointed out the need to deeply tap the potential of domestic demand. The supply of high-quality goods and services should be expanded, and consumption upgrading should be promoted. Actions to expand and upgrade the services sector should be implemented in depth. The planning and construction of the water network, the new-type power grid, the computing power network, the next-generation communications network, the urban underground pipeline network, and the logistics network should be strengthened. Major engineering projects should be launched when conditions are ripe.

The meeting emphasized the need to accelerate the construction of a modern industrial system and to maintain a reasonable share of manufacturing in the economy. The construction of a unified national market should be advanced in depth, and “involutionary” competition should be deeply rectified. The “Artificial Intelligence Plus” initiative should be implemented in a comprehensive manner, new forms of the intelligent economy should be developed, and AI governance should be improved. Reform of state-owned assets and state-owned enterprises should be further deepened. External shocks and challenges should be addressed systematically; the level of security in energy and resource supplies should be raised; and the certainty of high-quality development should be used to respond to various uncertainties.

The meeting pointed out the need to effectively prevent and defuse risks in key areas. Efforts should be made to stabilize the real estate market and to solidly advance urban renewal. Local government debt risks should be defused in an orderly manner, and the issue of overdue payments owed to enterprises should be earnestly resolved. Reform of small and medium-sized financial institutions should be advanced, and confidence in the capital market should be stabilized and strengthened.

The meeting emphasized the need to strengthen the policy orientation of giving priority to employment, and to reinforce the development of public services in education, healthcare, childcare, and other livelihood-related areas. Agricultural production should be properly managed, and the prices of hogs and other agricultural products should be kept stable. Regular assistance mechanisms should be improved to ensure that no large-scale return to poverty or new poverty occurs. Work on production safety, disaster prevention and mitigation, and food and drug safety should be carried out properly. In-depth study and education on establishing and practicing a correct view of political performance should be conducted, and the results of such study and education should be translated into concrete progress in promoting high-quality development.

The meeting also studied other matters.

For today’s piece, I want to introduce an interview with Dr. Liu Zongyi, Director of the Center for South Asia Studies at the Shanghai Institutes for International Studies (SIIS), who shares firsthand observations from a four-day visit to Kabul at the invitation of the Taliban’s Ministry of Foreign Affairs. There, he held extensive discussions with Taliban diplomats.

Dr. Liu holds a bachelor’s degree from Shandong University of Finance and Economics, and a master’s and doctoral degree in International Relations from China Foreign Affairs University. He has served as a visiting scholar at the German Institute of Development and Sustainability (IDOS, formerly DIE), the OECD Heiligendamm Process Support Unit, the Center for Strategic and International Studies (CSIS) in Washington, D.C., the National Institute of Public Finance and Policy (NIPFP) in India, and the Institute of Strategic Studies Islamabad (ISSI).

He observed that while the Taliban seeks investment from China, it refuses to cooperate on Beijing’s core security concern to expel the presence of the East Turkistan Islamic Movement (ETIM) on Afghan soil.

The Taliban government, it seems, has inherited the aid-dependent mentality of its predecessors. During the visit, a Foreign Ministry official handling China affairs even asked: “Look how much the US and the EU give us every year — what China has given us over the past five years doesn’t even amount to a fraction of that. Have you no shame?”

Yet for all the Western money that has flowed into Afghanistan, little of it appears to have reached ordinary people. Liu talked with Chinese citizens in Afghanistan, who described the system as the Americans took most of the share, while Afghan middlemen, involved in procurement, logistics, and translation services for the Americans, seized the opportunity to enrich themselves, amassing considerable personal fortunes in the process.

On the ground, Dr. Liu describes a Kabul where armed men roam the streets, beggars are everywhere, women have largely vanished from universities and workplaces, and the few Chinese nationals remaining operate small restaurants. Basically, the commercial is shrinking.

Dr.Liu was shocked that the Taliban’s young, many Western-educated diplomats, with PhDs from universities in Malaysia and New Zealand, who nonetheless defer completely to the ultraconservative religious authority in Kandahar. There’s tension between the Taliban’s desire for international recognition and its commitment to building what its clerical leadership envisions as “the world’s purest Islamic state.”

This interview was originally done in Chinese by Guancha Net. Thanks to Dr.Liu’s authorization, I can put the English version here. (Dr. Liu also provided some pictures he took, but due to the length limit of the newsletter, I couldn’t include them all here)

Guancha Net: In your exchanges with Afghan government officials, did you get a sense of what concerns them most?

Dr. Liu: In our conversations, the issue they raised most frequently was their hope that China would come and invest.

Their current foreign policy doctrine centers on what might be called “economy-first balanced diplomacy.” They subscribe to the notion that economics is politics, and seek to leverage economic cooperation as a platform to normalize bilateral relations with China, Central Asia, and other countries and regions. According to them, they are willing to establish formal diplomatic relations with anyone willing to engage — regardless of past grievances, no questions asked.

Guancha Net: It has been over four years since the Taliban returned to Kabul in August 2021. We know they previously generated revenue through opium cultivation, but in 2022 their supreme leader, Hibatullah Akhundzada, issued a decree banning poppy cultivation and the trade of related products nationwide. What is the situation now? And what steps has the Taliban government taken on the economic front over these years?

Dr. Liu: Drug cultivation has not been entirely eradicated. Their economy currently rests on two main pillars: agriculture and livestock on the one hand, and international aid on the other. That said, assistance from the US and other Western nations has been drastically reduced. Funding from the World Bank and the United Nations, however, continues to flow — large sums arrive in Kabul every month to sustain the basic livelihoods of the population.

On the whole, the Afghan economy has shown modest but steady improvement since the Taliban’s return to power. However, overall output has yet to recover to the levels seen under the former Ghani government prior to 2020.

Guancha Net: Based on everything you have observed, what is the single greatest bottleneck preventing Afghanistan from achieving self-sustaining economic development? Is it a shortage of capital, a lack of technology, international isolation, weak domestic governance — or something else entirely?

Dr. Liu: All of the above. A major reason many countries are reluctant to invest in Afghanistan is that the United States has yet to lift its financial sanctions on the country. This means foreign capital struggles to enter, and even when it does, any profits earned are extremely difficult to repatriate. Beyond that, Afghanistan’s domestic investment environment remains deeply inhospitable, with security being the single most formidable obstacle.

Under the Karzai and Ghani governments, terrorist attacks were rampant across Afghanistan — the majority of which were carried out by the Taliban themselves. Now that the Taliban are back in power, the overall security situation has improved noticeably compared to those years. Yet serious challenges remain. Organizations such as ISIS-Khorasan Province (ISIS-K), the Eastern Turkistan Islamic Movement (ETIM), Tehrik-i-Taliban Pakistan (TTP), and the Balochistan Liberation Army (BLA) continue to operate on Afghan soil. Some have even relocated their headquarters back into the country and are in a position to expand further.

Guancha Net: Ambassador Fu Cong made a point of raising this very issue in his remarks at the UN Security Council open debate on Afghanistan on March 9, stating that “eradicating terrorism is the foundation of security.” What is the Taliban’s posture on this question?

Dr. Liu: Security — and the ETIM issue in particular — has become the thorniest sticking point in our exchanges with the Taliban. They expressed confidence that ETIM is now entirely under their control, yet at the same time made clear they are unwilling to fully accommodate China’s demands on the matter.

They offered us several reasons. Historically, many members of these organizations fought alongside the Taliban against the Soviet invasion, creating bonds of so-called “battlefield brotherhood.” On the religious front, they share the Islamic faith. Under Pashtun tribal custom, they are duty-bound to protect those who seek refuge rather than hand them over. And at the societal level, these individuals have forged ties with local Afghans through intermarriage and other social bonds. For all these reasons, the Taliban indicated they are unwilling to make easy concessions on this issue.

Complicating matters further, ETIM has now pledged allegiance to the Taliban government and is helping maintain order in certain areas — a reality that makes the diplomatic equation all the more intractable.

Guancha Net: There seems to be something inherently contradictory about refusing to cooperate on security while simultaneously expecting large-scale Chinese investment.

Dr. Liu: Indeed. And this is precisely why their society remains so heavily dependent on international aid. During our visit, the Foreign Ministry official responsible for China affairs said to us point-blank: “Look how much the US and the EU give us every year — what China has given us over the past five years doesn’t even amount to a fraction of that. Have you no shame?” We pushed back on the spot: “Your problems are not of our making. Afghanistan’s current predicament has nothing to do with us. Whatever aid we provide is purely humanitarian — you can hardly compare us to the very Western powers that wreaked havoc in your country.” He seemed to realize he had overplayed his hand and dropped the subject after that.

According to some Chinese nationals familiar with the local scene, Afghanistan’s historical position astride major trade routes has bred a distinctive national trait: the people are remarkably skilled at what might politely be called “creative persuasion.” Over its twenty-year occupation, the United States poured roughly two trillion dollars into Afghanistan, yet barely managed to build a single decent road. A large part of the reason is that funding was siphoned off at every level — the Americans took the lion’s share, while locals involved in procurement, logistics, translation services, and other support roles seized the opportunity to enrich themselves, amassing considerable personal fortunes. These figures need further verification, but Kabul has undeniably seen the emergence of quite a number of ultra-wealthy individuals.

Guancha Net: Do you have a sense of what industries Chinese nationals in Afghanistan are currently engaged in? And how are they faring?

Dr. Liu: I specifically asked officials at the Chinese Embassy in Afghanistan about the exact number of Chinese citizens currently in the country, but even they were unable to provide a precise figure. There are two main reasons: first, Afghanistan’s customs system is not yet digitally interconnected, making accurate tracking difficult; second, Chinese travelers do not necessarily fly directly from China — we ourselves, for instance, flew to Dubai first and then connected to Kabul, which further complicates the count.

As for the industries in which Chinese nationals are active, state-owned enterprises have very little presence in Afghanistan from what I understand. A mining project originally slated to commence development after the Spring Festival was shelved following the terrorist attack on a Chinese restaurant in Kabul on January 19. The Taliban, fearing the incident would spook foreign investors, initially tried to cover it up by claiming it was a gas explosion. Additionally, the Taliban previously terminated a 25-year exclusive development contract awarded to a Chinese firm for the Amu Darya oil field — reportedly in exchange for an EU aid package, one of whose conditions was the cancellation of that very partnership with the Chinese company.

Among Chinese enterprises in Afghanistan, not only are state-owned firms scarce, but private ones are few and far between as well — only a handful of private companies maintain representative offices. Overall, formal commercial activity is steadily contracting, with some operations having ceased altogether. At the individual level, apart from small-scale entrepreneurs running restaurants or trading in Chinese herbal medicines, there are also a number of risk-takers lured by the prospect of fortune in dangerous lands — people hoping to try their luck in mining or prospecting.

Guancha Net: From what you personally observed on the streets of Kabul, what is the most honest picture you can paint of local social order and everyday life?

Dr. Liu: For this trip, the Afghan Foreign Ministry provided us with two armored SUVs. On certain occasions, armed police from the Chinese Embassy also provided on-site security to guard against potential attacks. On the streets of Kabul, armed individuals are a ubiquitous sight. On the one hand, the Taliban currently have no standardized military uniforms, so their soldiers are largely indistinguishable from civilians — most wear turbans and traditional robes. On the other, after decades of war, virtually every household in Afghanistan is said to possess firearms.

Moreover, given Afghanistan’s dire economic conditions and extremely high unemployment, beggars are a common sight on the streets. People familiar with the local situation warned us that because of the proliferation of weapons, a short visit without any financial commitment is one thing — but if you actually invest money, certain locals may begin to take a calculating interest in you.

Guancha Net: The rights of women and girls are among the international community’s primary concerns regarding Afghanistan — Ambassador Fu Cong addressed this in his remarks as well. Did you have any opportunity to observe the real living conditions of women, whether on the streets of Kabul or in specific settings? Since returning to power, the Taliban have enacted numerous bans restricting women’s access to education and employment. From your observations, is there any “room for flexibility” in how these bans are actually enforced?

Dr. Liu: The Afghan government’s cabinet is based in Kabul, but the supreme leader Akhundzada resides year-round in Kandahar, his birthplace, and all major national decisions are made from there. Akhundzada is surrounded by a circle of theological clerics who are deeply devout and aspire to build Afghanistan into “the purest Islamic state on earth” — ideologically, they gravitate toward something resembling a return to the medieval era. In other words, they are profoundly conservative, which is precisely why policies such as the ban on girls’ education have been enacted.

From my own observations during this trip, women were still visible on the streets. Most wore black abayas and headscarves; some had their faces covered rather thoroughly, while others — particularly younger women — did not veil their faces at all. Some women were out on their own, though more commonly it was mothers accompanied by their children.

At Kabul University, however, we did not see a single woman. At the hotel where we stayed for four days, we encountered only one female staff member — the front desk was manned exclusively by men for the first three days, and it was not until checkout on the final day that a woman suddenly appeared to process our bill. In today’s Afghanistan, women are generally not permitted to work. As for why she was allowed to, we did not dare ask.

Guancha Net: If I recall correctly, when the Taliban first returned to power, they co-opted a number of technocrats from the broader society. At the time, many scholars and observers hoped these individuals might help modernize the Taliban’s governance capacity. Yet judging from the subsequent marginalization of these figures and from your analysis, reality appears to have diverged sharply from those initial expectations.

Dr. Liu: One thing that genuinely surprised me on this trip was that the Foreign Ministry officials we dealt with — directors-general, deputy directors-general, and the like — were mostly born in the 1980s and 1990s. Some had received higher education abroad, in countries like Malaysia and New Zealand; a few even held doctoral degrees. And yet their deference and obedience to Kandahar was absolute.

This speaks volumes about Akhundzada: not only is he a hardened political operator, but he enforces an exceptionally rigorous standard of ideological discipline. My personal sense is that the reason these Western-educated young officials display such reverence for religious authority has everything to do with the family and social environments in which they were raised.

Guancha Net: And how do they view international concern over women’s rights in Afghanistan?

Dr. Liu: They believe the outside world has it wrong. In their view, the Taliban face two principal challenges on the international stage since returning to power. The first is the narrative battle over their international image — they are convinced that their negative reputation is entirely a Western construct. The second is what they see as a fundamental gap in the outside world’s political understanding. They regard themselves as a revolutionary government, one bound by a strong internal cultural identity with its own framework for understanding ideology and international relations — and yet the world insists on treating them as a problem to be solved.

Frankly, I believe the Taliban leadership suffers from certain cognitive blind spots. They have a limited understanding of the outside world and seem disinclined to learn more, which has left them without an objective assessment of their own standing. For example, they are well aware that India is an unreliable partner, yet they have deliberately courted New Delhi in order to pressure Pakistan — a move that has deeply antagonized Islamabad. Or take the case I mentioned earlier: terminating an oil field development partnership with a Chinese company in exchange for an EU aid package. In my view, these are profoundly short-sighted decisions.

Below is Dr. Liu's analysis of how this crisis intersects with the US–Iran confrontation, published in another piece:

Against the backdrop of ongoing US and Israeli military strikes on targets inside Iran, the risk of conflict spillover poses multiple direct threats to Pakistan.

First, Pakistan and Afghanistan remain in a state of active hostilities. Although China-brokered trilateral talks among China, Afghanistan, and Pakistan are currently underway in Xinjiang, whether a ceasefire can be achieved remains uncertain. The principal obstacle lies on the Afghan side. Beyond the reasons we analyzed in our previous conversation, there is another important factor behind the Afghan Taliban’s sheltering of insurgent and terrorist organizations such as the TTP and ETIM: ETIM’s headquarters is located in Afghanistan, and Western countries — seeking to undermine China’s unity and stability — have funneled substantial funds to the group. In other words, ETIM effectively operates a global fundraising network, and the Taliban are able to tap into a steady stream of revenue through their so-called “protection.” The TTP, too, enjoys the backing of regional or international actors. If Afghanistan and Pakistan cannot reach an agreement on the issue of terrorist organizations, the war between them will be exceedingly difficult to bring to a definitive end.

Second, should the conflict spill over further, the United States and Saudi Arabia may seek to use Pakistan as a corridor for deploying forces against Iran. Pakistan shares a long border with Iran — in particular, Pakistan’s Balochistan province abuts Iran’s Sistan-Baluchestan province to the southeast. The Balochistan issue is an existential concern for Pakistan. If insurgent groups such as the Balochistan Liberation Army exploit the chaos of a US–Israeli–Iranian war and the Afghan–Pakistani conflict to secure support from countries like India and expand their strength — and then link up with Baloch populations inside Iran — Pakistan could face a genuine risk of territorial disintegration.

Furthermore, Pakistan is home to a substantial Shia population. Should Pakistan be drawn into a war against Iran, its Shia citizens would clearly not side with the government, compounding the risk of national fracture.

On top of all this, Pakistan is heavily dependent on oil imports from Gulf states such as the UAE and Saudi Arabia. An escalation of the war would trigger a severe energy crisis — and given that Pakistan’s domestic economy is already struggling, an energy crisis is the last thing its leadership wants to see.

Pakistan thus finds itself squeezed between Saudi and American pressure. Its goal is to avoid antagonizing either side while giving all parties a satisfactory account of its actions. This is why it has stepped forward as a mediator: by passing messages that help shield Saudi Arabia’s critical infrastructure from attack, it deflects Riyadh’s demands for direct involvement; by easing the awkwardness for Trump, it extends the US–Pakistan honeymoon; and all the while, it safeguards its own oil supply.

1. The High-Level Configuration of the National Services Sector Conference

The background to Xi’s directive was the National Services Sector Conference held on April 7–8. The seniority of the attendees alone signals the weight Beijing is placing on the sector: following Xi’s directive, Premier Li Qiang attended and delivered a speech, while Vice Premier Ding Xuexiang gave the concluding remarks. The combination of “General Secretary’s directive + Premier’s speech + Vice Premier’s summary” represents a relatively high-level configuration for a specialized economic conference. It’s an especially high one when applied to a specific sector like services.

2. Xi Jinping’s Directive on the Services Sector

Xi first framed the role of the services sector:

“It has played an important role in supporting industrial upgrading, meeting the needs of people’s livelihoods, and driving employment expansion.”

In a sense, the ordering of these three functions may reflect their respective weight in the leadership’s thinking. This is consistent with the priority structure embedded in the recent official narrative around the “modernized industrial system”

On the direction of services sector development, Xi stated:

“Highlight demand-driven growth, reform breakthroughs, technological empowerment, and opening-up and cooperation; deeply implement the services sector capacity-expansion and quality-upgrading initiative; advance producer services toward specialization and the high end of the value chain; promote high-quality, diversified, and convenient development of consumer services; and cultivate more ‘China Services’ brands.”

What stands out here is that “China Services” is singled out as a branding concept. This, in a sense, suggests that its importance has been elevated to a level comparable to that of “Made in China” (I avoid the word “equal”, cause from a first-principles standpoint, manufacturing remains the top priority within all industrial sectors). This formulation is reiterated in the State Council’s document and echoes the quantitative target of “pushing the total scale of the services sector above the 100-trillion-yuan threshold by 2030.”

3. Li Qiang’s Speech: Strategic Positioning and “Balancing Openness with Regulation”

Li Qiang followed with a speech calling for the need to “consciously deepen our understanding of the services sector from a strategic and holistic perspective” — a phrasing that in itself reaffirms the policy standing now accorded to the sector.

In terms of wording, Li Qiang’s emphasis centered on “capacity expansion and quality upgrading.” It’s a distinctly supply-side orientation, indicating that policy is focused primarily on the industry itself rather than on stimulating demand.

Also worth noting are several parallel formulations that immediately follow:

“Coordinate development and regulation… ensuring that the sector is both vibrant and healthily ordered.”

And later, this is reiterated as:

“Adhere to both ‘letting it flow freely’ and ‘governing it well.’”

The repetition of these paired phrases emphasizes that as the services sector is “opened up,” regulation must keep pace. This reflects a cautious attitude toward the potential risks that may accompany the services sector’s development.

4. The State Council’s Opinion

The Opinion on Promoting Capacity Expansion and Quality Upgrading of the Services Sector issued yesterday carries forward this supply-side approach. It sets the target of pushing the total scale of the services sector above 100 trillion yuan by 2030, meaning that services sector policy during the 15th Five-Year Plan period will have explicit quantitative benchmarks, making assessment and evaluation more operational.

The Opinion divides the services sector into producer services and consumer services.

Producer services (six sub-items) cover: technology services, modern logistics, software and information services, supply-chain finance, energy conservation and environmental protection, and business services. The emphasis here is on “shoring up weak links,” with the phrase “extending toward specialization and the high end of the value chain” appearing repeatedly. In my view, this targets the sector’s supporting role for manufacturing and the broader modernized industrial system.

Consumer services (four sub-items) cover: household services, elderly care and childcare, health, and culture/tourism/sports. The emphasis here is on “increasing high-quality supply,” corresponding to Xi’s call for development that is “high-quality, diversified, and convenient.”

An interesting feature appears in Part V (”Improving the Supporting Policy System”), where the first and last provisions form a closed loop. The first provision calls for clearing out unreasonable standards and restrictive measures in the services sector, corresponding to “letting it flow freely.”

While the final provision specifically addresses unfair contract terms (”overlord clauses”), false advertising, food safety, and the rights of workers in new forms of employment, corresponding to “governing it well.” And I think the final one is primarily a response to recent public concerns surrounding the platform economy and sectors such as food and beverage services, and it basically translates Li Qiang’s “letting it flow freely, governing it well”(放得活，管得好) principle.

Below is the full translation of the document I made with the help of AI

State Council Opinion on Promoting Capacity Expansion and Quality Upgrading of the Services Sector

To: The People’s Governments of all provinces, autonomous regions, and municipalities directly under the Central Government; all ministries and commissions of the State Council; and all directly subordinate agencies:

In order to promote capacity expansion and quality upgrading of the services sector, to foster the high-quality and efficient development of the sector, and to better bring into play the role of services in supporting industrial upgrading, meeting the needs of people’s livelihoods, and driving employment expansion, the following Opinion is hereby issued.

I. Overall Requirements

Guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, thoroughly implementing the spirit of the 20th Party Congress and of all plenary sessions of the 20th Central Committee, earnestly carrying out the arrangements of the Fourth Plenary Session, fully and faithfully applying the new development philosophy in all respects, upholding the integration of an effective market and a capable government, pursuing capacity expansion and quality upgrading in parallel, coordinating development with regulation, and highlighting demand-pull, reform breakthroughs, technological empowerment, and opening-up and cooperation — we will coordinate the optimization of new increments with the revitalization of existing stock, deeply implement the services-sector capacity-expansion and quality-upgrading initiative, remove the institutional and mechanism-related barriers constraining services-sector development, advance producer services toward specialization and the high end of the value chain, promote the high-quality, diversified, and convenient development of consumer services, and provide robust support for accelerating the building of a modernized industrial system.

By 2030, notable progress shall be achieved in the high-quality development of the services sector: the total scale of the services sector shall climb past the 100-trillion-yuan threshold; a development pattern featuring higher quality, a better structure, finer grade, and greater vitality shall have taken basic shape; more “China Services” brands shall be cultivated; the global competitiveness and influence of China’s services sector shall be markedly enhanced; and the people’s sense of gain shall continue to grow.

II. Shoring Up Weak Links in Producer Services Across the Full Chain

(1) Strengthening the Supporting Role of Science and Technology Services

R&D and design. Cultivate leading industrial-design enterprises and raise their professional and international standing. Enhance the service capacity of the national network management platform for major research infrastructure and large-scale scientific instruments, and improve the evaluation and assessment mechanisms for open sharing of research facilities and instruments. Upgrade full-process services such as engineering survey, design, and supervision.

Intellectual property. Develop IP-related services such as strategic consulting and patent navigation, and screen for high-value patents. Support the establishment of patent pools in key industries, systematically raise IP service standards, and strengthen the capacity to respond to foreign-related IP risks and provide legal services. Strengthen the international-operations capacity of copyright services.

Transformation of scientific and technological achievements. Enhance policy support for the high-quality development of incubators, and set up incubators oriented toward emerging industries and industries of the future. Build a pilot-scale service network for the manufacturing sector, cultivate manufacturing pilot-testing platforms in a tiered fashion, and develop, to a high standard, the National Pilot Base for Artificial Intelligence Applications. Improve the network of technology-trading service platforms, and build high-caliber technology-transfer and dissemination institutions. Establish regional technology-transfer and commercialization centers at universities, and promote the clustering of scientific and technological innovation factors.

Inspection, testing, and certification. Benchmarking against world-class standards, upgrade inspection and testing service capabilities and push for international mutual recognition of results. Advance the construction of laboratories for industrial-product quality control and technical evaluation, quality inspection and testing centers, and industrial metrology and testing centers. Strengthen testing and assessment capabilities for infrastructure conditions, agricultural-product quality, and the like. Strengthen R&D on high-end metrological instruments and inspection and testing equipment.

(2) Enhancing the Comprehensive Competitiveness of Modern Logistics

Freight transport. Improve the multimodal-transport system and promote the implementation of “one-document” and “one-container” systems. Vigorously develop rail-water intermodal transport, and accelerate the shift of bulk cargo and medium-to-long-distance freight “from road to rail” and “from road to water.” Accelerate the transition of rail freight toward rail logistics, and refine industry rules on railway dispatching, clearing, and line connection. Improve the operations and dispatching mechanisms for oil and gas pipeline networks, and accelerate nationwide interconnection. Vigorously develop international shipping and air-freight services. Accelerate the cultivation of integrated logistics integrators, and strengthen resource dispatching and supply-demand matching.

Warehousing. Advance the renewal, renovation, and upgrading of aging logistics and warehousing facilities; explore the reactivation of idle facilities and rail-freight yards; and promote the construction of distributed warehousing facilities. Strengthen services such as origin-based cold storage and preservation, post-harvest pre-cooling, and cleaning and packaging for agricultural products. Coordinate the layout of public, circulation-oriented, and multifunctional cold storage, and upgrade aging cold-storage facilities.

Wholesaling. Guide the rational layout of spot markets for bulk commodities, and promote linked development between futures and spot markets. Enrich the business formats of industrial consumer-goods markets, and explore integrated services such as centralized procurement and warehousing-distribution. Strengthen the systematic layout and policy support for agricultural wholesale markets, and promote the renovation and upgrading of farmers’ markets.

(3) Accelerating the Innovative Development of Software and Information Services

Software. Deeply implement the “AI Plus” initiative, accelerate R&D and adoption of intelligent programming tools, and support procurement of large-model and intelligent-agent services. Accelerate breakthroughs in industrial software, and build compatibility-adaptation and application-demonstration centers for industrial software in key industries. Strengthen the ecosystem of foundational software and open-source communities. Optimize the ecosystem for intelligent audio-visual systems.

Information transmission. Deeply advance the large-scale application of 5G. Promote the development of 5G-A networks, and strengthen R&D on 6G technology. Build mobile IoT infrastructure with appropriate forward-looking deployment. Develop satellite-internet application services.

Data and information technology. Deeply implement the Industrial Internet Innovation and Development Program. Advance the initiative to lay the foundation for industrial data, cultivate data cooperation consortia, and build a number of high-quality industry datasets. Develop specialized services such as data labeling and certification, and explore the establishment of a tiered and classified mechanism for data rights confirmation, valuation, and pricing. Advance, in an orderly manner, the layout of computing power and the construction of edge computing, and improve the intelligent-computing cloud-service system. Accelerate the adoption of City Information Modeling (CIM) platforms and Building Information Modeling (BIM) technology.

(4) Strengthening the Specialized Service Capacity of Supply-Chain Finance

Banking, securities, and insurance. Guide financial institutions — on the premise of lawful compliance and controllable risks — to provide financing secured by movable assets and rights such as inventory, orders, and warehouse receipts. Establish a full-lifecycle financing system oriented toward investing early, investing small, investing long-term, and investing in hard tech. Give full play to the role of the National Venture Capital Guidance Fund, and refine and extend the “Innovation Points System” and the evaluation system for “Little Giant” (SRDI) development of SMEs. Promote new financial-service instruments such as supply-chain bills. Expand the coverage of product-R&D liability insurance, promote insurance for pilot-testing services, and implement the insurance-compensation policy for “first-unit-set” products. Launch the Digital RMB Empowerment Initiative. Explore mutual recognition of cross-border supply-chain-finance standards.

Financial leasing. Encourage financial-leasing enterprises to make coordinated use of service models such as direct leasing, sale-and-leaseback, and joint leasing, to provide customized solutions and reduce lessees’ operating costs. Strengthen monitoring and assessment of lessees’ credit status and repayment capacity, and build a sound valuation system for leased assets. Give full play to the role of government-backed financing guarantee institutions, and establish a risk-sharing mechanism for supply-chain finance.

(5) Actively Developing Energy-Conservation and Environmental Services

Energy conservation and carbon reduction. Advance energy-efficiency diagnostics in key industries, promote the energy-cost-hosting service model for public institutions, and carry out energy-saving and carbon-reduction retrofits for public institutions and large public buildings. Lawfully and prudently conduct financing secured by carbon-emission rights, pollution-discharge rights, water-use rights, and the like. Encourage financial institutions to participate in carbon-market trading, explore carbon-insurance business, and promote innovative products such as carbon-neutrality bonds.

Environmental governance. Develop technical services for green, high-yield, and efficient agriculture, and for the treatment and utilization of agricultural waste. Accelerate the development of environmental services such as marine ecological restoration and pollution control. Expand services such as water-conservation assessment, environmental monitoring, and pollution insurance.

Recycling and reuse. Advocate the concept of green economy and thrift, encourage the adoption of products with higher energy-efficiency grades, and phase out — in accordance with laws and regulations — products that meet the mandatory scrapping standards or fail to comply with safety technical specifications. Improve the layout of recyclable-resource collection networks, strengthen the “trade-in + recycling” logistics system, and coordinate the construction of recyclable-resource sorting centers. Support remanufacturing services in key industries. Establish a certification system for recycled materials, and promote international cooperation and mutual recognition. Deepen research on carbon-footprint accounting standards and methodologies for key recycled materials.

(6) Making Business Services Stronger and Better

Legal and consulting services. Actively develop foreign-related legal services, and cultivate a group of world-class arbitration institutions and law firms. Vigorously develop professional services such as business consulting, asset appraisal, accounting and auditing, taxation, and advertising, and enhance capacity in quality consulting and supply-chain management services. Strengthen industry think tanks, and build world-class consulting brands.

Human-resources management. Release catalogs of demand for “high-end, cutting-edge, and scarce” talent, and continue to implement the Knowledge-Updating Program for Professional and Technical Personnel. Improve the vocational skills competition system with Chinese characteristics. Develop service products such as job-search-and-recruitment large models and VR-based training. Deeply advance the “Belt and Road” Human-Resources Services Initiative.

III. Raising the Development Level of Key Areas of Consumer Services

(7) Increasing High-Quality Supply of Household Services

Community and domestic services. Innovate integrated community-service models, and advance the expansion, upgrading, and efficiency enhancement of “complete communities.” Carry out an initiative to raise the quality of property-management services. Pursue institutional and model innovation in domestic services, expand new types of at-home services, improve the caliber and professional standards of practitioners, and enhance the public’s micro-level experience. Focus on meeting the special-care needs of disadvantaged groups.

Retail. Promote rational urban-rural planning and layout of the retail sector, implement the Retail Innovation and Upgrading Program, and support eligible cities to craft new consumption settings on a “tailored, store-by-store” basis. Encourage the development of instant-delivery formats such as community micro-cold-storage and forward-positioned warehouses. Implement the High-Quality Rural E-commerce Development Program, and advance the “Thousand-Market, Ten-Thousand-Store” upgrading initiative.

(8) Improving the Fit of Elderly-Care and Childcare Services

Elderly care. Strengthen the three-tier county-township-village elderly-care service network, expand the coverage of community-based elderly-care services, and encourage home-based aging-friendly renovations. Expand the supply of services such as rehabilitation and nursing care, integrated medical and elderly care, and long-term care, and develop new service formats such as travel-based retirement living.

Infant and childcare. Develop inclusive childcare and integrated childcare-and-preschool services, deeply carry out demonstration pilots for childcare-service subsidies, and support child-welfare institutions in providing care, rehabilitation, and special education services for children with disabilities in need.

(9) Enhancing the Professional Capacity of Health Services

Medical and health services. Support medical and health institutions in carrying out personalized family-doctor contracting services, providing health assessments, chronic-disease management, home visits, and medication guidance. Prudently advance pilots for international medical services.

Prevention and health care. Develop women’s preventive health care and integrated medical-care services, and improve the health-service network for children and the elderly. Strengthen the construction of a socialized service system for mental health and psychiatric wellness. Accelerate the development of services such as sports-data analytics and nutritional consulting.

(10) Innovating Service Models for Culture, Tourism, and Sports

Culture and tourism. Guide the healthy and orderly development of performing arts and entertainment, gaming and animation, online literature, and similar formats, and promote positive values. Encourage popular scenic spots and cultural and museum venues to extend opening hours. Improve public facilities at scenic areas, revitalize existing tourism projects, strengthen refined management, and optimize service supply.

Sports and fitness. Widely carry out nationwide fitness activities to strengthen the people’s physical health. Advance the high-quality development of the sports-events economy and the ice-and-snow economy, cultivate new formats such as RV camping, and build high-quality outdoor-sports destinations. Nurture new sports-consumption models that are intelligent, customized, and experience-based.

Accommodation and catering. In response to the upgrading of public needs — from “having a place to stay” to “staying well and staying worthwhile” — raise safety and hygiene standards, expand new service models, and develop new accommodation formats incorporating historical-cultural, technological, and family-oriented elements. Cultivate catering services that are healthy, safe, nutritionally balanced, and reflective of local character, and release curated gourmet-tourism routes.

IV. Raising the Digital-Intelligent, Standardization, Integration, and Internationalization Levels of the Services Sector

(11) Advancing the Digital-Intelligent Transformation of the Services Sector

Focusing on key segments such as R&D and design, inspection and testing, logistics and distribution, wholesale trade, and consulting services, build vertical industrial-internet platforms and lower the threshold for digital-intelligent transformation through “small, fast, light, and precise” solutions. Implement a special initiative to accelerate the development of digital-intelligent supply chains, and advance the digital-intelligence empowerment program for commercial and trade logistics. With data as the enabler, implement comprehensive major-scenario and high-value application-scenario projects, cultivate digital-intelligent transformation service providers, and build benchmark applications integrating data, algorithms, and scenarios.

(12) Accelerating Standardization in the Services Sector

Strengthen top-level design and improve the standards system for key areas. Refine standards and norms for domestic services, caregiving, catering, and related fields. Accelerate the formulation of service standards for emerging and integrated formats such as low-altitude services and socialized agricultural services. Build a standards system and interconnection technical specifications for industrial-internet platforms, establish a standards system for computing-power services, and formulate or revise green-service standards. Improve service standards for the platform economy. Promote the establishment of international industry and standards organizations, and advance the “going global” of Chinese standards.

(13) Raising the Level of Integrated Development Between Modern Services, Advanced Manufacturing, and Modern Agriculture

Deepen pilots on the integration of advanced manufacturing and modern services in key areas. Innovate the development of service-oriented manufacturing, and push manufacturing enterprises to transform into providers of “product + service” solutions. Improve the convenient and efficient socialized-services system for agriculture, and optimize the functions of agricultural-product market-information service platforms. Actively promote the deep integration of agriculture with health care, cultural tourism, and the like.

(14) Steadily Advancing Opening-Up and Cooperation in the Services Sector

Further expand opening-up pilots in fields such as value-added telecommunications, biotechnology, and wholly foreign-owned hospitals. Refine the negative-list management system for cross-border trade in services. Enhance service capabilities for cross-border data-transfer compliance assessment and security certification. Strengthen services-trade cooperation with key countries and regions, and coordinate the layout and construction of major opening-up and cooperation platforms such as Pilot Zones for Innovative Development of Trade in Services. Promote the export of cultural and tourism services, and expand inbound consumption.

V. Improving the Supporting Policy System

(15) Deepening Reform and Innovation

Adhere to both “letting it flow freely” and “governing it well.” Clear out unreasonable standards and restrictive measures in the services sector, and promptly eliminate barriers in areas such as factor access, qualification recognition, tendering and bidding, and government procurement. Deepen the reform of public-service institutions in service-related fields, and enhance their development vitality. Optimize the market-access environment in areas such as medical care and technological innovation. Enrich the supply of service scenarios, and roll out lists of application-scenario projects in batches. Improve the statistical system, build a multi-dimensional comprehensive evaluation-indicator system for services-sector development, and accelerate big-data-based oversight.

(16) Enriching Fiscal and Financial Policy Instruments

Enhance the targeting and effectiveness of policy support, and improve a financing credit-enhancement system covering elements such as quality, standards, brands, trademarks, patents, and copyrights. Make good use of the relending facilities for service consumption and elderly care. Enrich the development of pension-finance products, and roll out long-term care insurance. Optimize the implementation of loan-interest-subsidy policies for services-sector business entities; provide phased interest subsidies for qualifying loans to small, medium, and micro private producer-services enterprises; and step up financial support for new consumption scenarios. Use existing national-level government investment funds to support integrated development of advanced manufacturing and modern services. Support eligible projects in the services sector in issuing infrastructure Real Estate Investment Trusts (REITs).

(17) Strengthening the Supporting Role of Infrastructure

Revitalize and make good use of various types of existing stock resources. Accelerate the construction of urban parking and charging/battery-swapping facilities, and advance the upgrading of aging equipment. Strengthen the construction of modern integrated agricultural-service centers. Lay out and build integrated, efficient quality infrastructure, and step up support for investment in intangible assets such as software, R&D, and data. Systematically advance the construction and functional upgrading of national logistics hubs, and optimize the layout of overseas warehouses. Push forward the expansion and upgrading of “15-minute community convenience living circles.” Promote the renewal of commodity-trading markets, urban retail outlets, and rural commercial outlets. Renovate aging neighborhoods and industrial areas, and support the upgrading of commercial districts, cultural-industry parks, and similar formats.

(18) Expanding High-Quality Business Entities in the Services Sector

Accelerate the cultivation of backbone services enterprises, and support eligible ones in IPO financing and in M&A and restructuring. Promote the specialized and “Little Giant” (SRDI) development of SMEs in the services sector, and step up the cultivation of “famous, special, high-quality, and new” self-employed businesses. Cultivate and strengthen socialized-service providers in agriculture. Strengthen the consolidation of industry credit information, encourage business entities to make service-quality commitments, and advocate for “higher quality at higher value.” Support enterprises in strengthening brand-building and communications, and cultivate new brand-experience scenarios.

(19) Strengthening Talent Development

Optimize the disciplinary and specialty layout related to the services sector, and support qualified localities in building city-level industry-education consortia and industry-wide industry-education integration communities. Deeply implement the “Skills Illuminate the Future” training initiative, focusing on industries in urgent need and key employment groups, to carry out large-scale vocational-skills training. Broaden the scope of specialized-talent recruitment, and advance the construction of one-stop service platforms for overseas talent.

(20) Strengthening Safety Regulation

Improve cross-departmental and cross-industry approval and regulatory models suited to the integration of business formats, so as to avoid gaps in management and services. Improve the safety-management system for crowded venues such as performance sites, sports-event venues, exhibition halls, and tourist attractions, and implement responsibility for workplace safety. Regulate catering-service operations, and strictly uphold the bottom line on food safety. Resolutely address misconduct such as “overlord clauses” (unfair contract terms) and false advertising, and effectively safeguard consumer rights. Strengthen the protection of the rights and interests of workers in new forms of employment.

All regions and departments shall, under the centralized and unified leadership of the Party Central Committee, implement this Opinion in light of actual conditions, and strive to open up a new chapter in the high-quality development of the services sector. The government performance-evaluation system shall be further improved to fully mobilize the enthusiasm and initiative of all parties. All regions, grounded in their development stage and comparative advantages, shall implement the tasks and measures in a detailed, locally tailored manner. The National Development and Reform Commission shall strengthen overall coordination, monitoring, and evaluation. All departments shall advance work by sector according to their respective responsibilities, strengthen work coordination, enhance publicity and guidance, broadly build social consensus, and foster a favorable atmosphere of whole-of-society participation. Major matters shall be reported in a timely manner to the Party Central Committee and the State Council in accordance with due procedures.

The State Council
April 14, 2026

But what I find most interesting about the piece is something else entirely: it offers details of how the Government Relations (GR) team of a major platform, according to Xinhua, Pinduoduo (PDD), the parent company of Temu, use force to resist a regulatory inspection.

Below are the key passages:

Around 11 p.m. on December 4 last year, while the task force was conducting its investigation, the platform’s head of security suddenly lost his composure. In full view of the police and the investigators, he led a group of people in directly charging the investigation site, shoving and grappling with the enforcement officers — an outright act of violent obstruction of law enforcement. Guo Hui, who had fractured his hand the day before and was still on duty, immediately moved to intervene. A former military officer, he instinctively placed himself at the front of the confrontation — only to be shoved to the ground, his head striking the floor hard. He was rushed to the hospital by ambulance.

One might have expected that after such an egregious incident the platform would promptly hand over the requested data. Instead, after a private conversation between the company’s Chief Technology Officer and the company’s head, the CTO suddenly collapsed and was also taken away by ambulance, forcing the day’s investigation to end. Task force members followed him to the hospital, where doctors confirmed that the CTO’s heart and overall health were perfectly fine.

When local police and regulators later summoned the platform for formal questioning over the violent-obstruction incident, the GR team’s response reached the level of performance art:

In the middle of the interview, one of the platform’s staff members wrote the words “Silence” and “Don’t talk” on a sheet of A4 paper, holding it up to coach the colleague being questioned. He was caught red-handed by the task force — and then came a moment so shocking and so cinematic it felt scripted: the staff member crumpled the A4 paper into a ball and, in front of everyone in the room, ate it.

The absurdity of this script goes beyond anything any compliance law firm or PR agency could ever advise. As a former GR at a Chinese internet platform, I have to admit that my peers’ performance here is eye-opening.

It also lays a structural contradiction that the Chinese internet industry has long ignored, that the staggering sophistication of these companies’ business models coexists with a shockingly primitive understanding of risk management and regulatory compliance. For some practitioners inside these firms, “cooperating with regulators” has become “putting on a show for the boss to prove that you’re defending the company’s interests.” Ironically, it is precisely this kind of theater that tends to push regulators toward harsher penalties. PDD tops the list with a penalty of RMB 1.522 billion. Its legal representative, Zhao Jiazhen, was also personally fined RMB 6.9373 million.

In terms of outcome, this RMB 3.597 billion “epic fine” marks the beginning of a new era in China’s oversight of e-commerce platforms. The regulator’s “one shop, one penalty” approach directly magnifies the consequences of hosting large numbers of problem merchants, increasing the deterrent effect on platforms.

The full article in English follows below:

Sword Strikes “Ghosts,” Iron Fist Protects People’s Livelihoods

A Documentary Record of SAMR’s Investigation into the “Ghost Takeout” Cases Involving 7 E-Commerce Platforms

By Xu Jianhua

A maximum fine of RMB 1.5 billion on a single platform; combined fines and confiscations of RMB 3.597 billion across seven platforms; nearly RMB 20 million in combined fines on legal representatives and food safety directors of these enterprises; suspension of new cake shop registrations for periods ranging from 3 to 9 months… On April 17, the State Administration for Market Regulation (SAMR) announced the administrative penalties imposed in accordance with the law on seven e-commerce platforms — Pinduoduo, Meituan, JD.com, Ele.me (Taobao Shangou), Douyin, Taobao, and Tmall — in the “Ghost Takeout” series of cases.

The total penalty of RMB 3.597 billion is the largest ever issued by regulators since the Food Safety Law came into force. Spanning nearly 10 months, covering all 31 provinces, autonomous regions, and municipalities nationwide, and involving every major e-commerce platform currently operating, what kind of battle of wits and will — a painstaking process of breakthrough and transformation — lies behind this “largest penalty in history”? It all began with a cake order and a forged certificate.

“Ghosts” Appear: Case Elevated for Handling

“This case gravely concerns the safety of what the people put on their tongues — it must be investigated and handled strictly and swiftly.” On September 8, 2025, after SAMR conducted a surprise inspection of an order-transfer platform, SAMR leadership issued these resounding instructions on the handling of the “Ghost Takeout” case. The directive not only reflected SAMR’s confidence in getting to the bottom of the matter, but also demonstrated the firm resolve of market regulators to hold the line on food safety and safeguard the authority of law enforcement.

Let us turn the clock back two months before this directive.

On July 12, 2025, the Beitaipingzhuang Market Regulation Office of the Haidian District Market Regulation Bureau in Beijing received a complaint from a consumer surnamed Liu, who reported that a birthday cake he had purchased from a shop called “Tianyan Qingshu” (Sweet-Face Love Letter) on a certain platform was suspected to pose food safety problems.

Upon receiving the complaint, Haidian District market regulators sprang into action. During the investigation, they unexpectedly discovered that none of the 20-plus “Tianyan Qingshu” shops in the Beijing area had brick-and-mortar premises. Even more shocking to the enforcement officers: all 378 food business licenses held under the “Tianyan Qingshu” chain name turned out to be forgeries.

Following the trail, enforcement officers uncovered a black-market “Ghost Takeout” industry chain with a clear division of labor among e-commerce platforms, order-transfer platforms, and cake shops. On August 6, the Beijing Municipal Market Regulation Bureau reported the “Ghost Takeout” case up to SAMR.

How could a small cake takeout operation forge 378 food business licenses in bulk? The lead immediately drew high-level attention at SAMR. The Bureau of Law Enforcement and Inspection at SAMR concluded after review that this lowest-bidder-wins auction mechanism fully exposed the platforms’ vicious-competition nature — platforms and “ghost shops” reaped the profits, while genuine food operators were trapped in “involutionary” cutthroat competition. Brick-and-mortar shops had no margin to speak of, and food quality and safety could not possibly be guaranteed. Given the broad scope of the case and its pernicious impact, the investigation was to be elevated.

SAMR immediately decided: extend the investigation, get to the bottom of it, follow the “Ghost Takeout” chain to conduct on-site verification, electronic evidence collection, and evidence gathering.

Tracking the “Chain”: Resolutely Drawing the Sword

On August 11, 2025, under SAMR’s deployment, enforcement officers Lou Chao and Wang Fang of the Zhejiang Provincial Market Regulation System led a Zhejiang team to the mountain city of Chongqing to conduct an on-site inspection of Chongqing Zhuandanbao Network Technology Co., Ltd. (hereinafter “Chongqing Zhuandanbao”).

While obtaining key data from Chongqing Zhuandanbao, Lou Chao and his team also uncovered a crucial lead in Chongqing: besides Chongqing Zhuandanbao, Anhui Xunmeng was another — and larger — order-transfer platform. The two order-transfer platforms were interlinked, forming a complete illegal industry chain that provided technical support and a trading venue for “ghost shops” to come online in bulk and for orders to be illicitly transferred.

After grasping the operating model, SAMR immediately directed enforcement officers from Zhejiang and from market regulators in Wuhu, Anhui, to jointly conduct a surprise inspection of Anhui Xunmeng, obtaining a substantial body of evidence.

After the data from both order-transfer platforms were in hand, Wang Fang — SAMR data-analysis expert and director of the Electronic Data Forensics and Analysis Section of the Administrative Enforcement Team of the Longwan District Market Regulation Bureau in Wenzhou, Zhejiang — led a technical team into a rapid offensive, analyzing the data. Wang Fang is an electronic-data expert with rich case-handling experience and formidable technical skill.

Once the Chongqing Zhuandanbao database was actually extracted, tens of millions of records were laid out before Wang Fang — many tables, complex fields, plenty of noise. How to filter out the case-relevant content from this ocean of data was the first obstacle. Rather than spreading out the work all at once, they first seized on the characteristics of order-transfer behavior itself, starting with order flow, account aggregation, and dispatcher-receiver relationships, gradually untangling the logic of order transfers. Their analysis revealed that within Chongqing Zhuandanbao, a single dispatcher account often corresponded to hundreds or even thousands of order-transfer shops on the platform, with platform orders being consolidated and run under a small number of accounts. Zeroing in on this feature, they dug deeper into key orders, cross-correlating IP addresses, login logs, and recipient phone numbers. One by one, they locked in the specifics of more than ten “ghost shops.” Later, when the Longwan District Market Regulation Bureau investigated one of those “ghost” merchants, they further uncovered the collusion among intermediaries, fake-certificate gangs, and internal platform auditors — confirming the earlier data-analysis findings.

Hard work pays off. When the data from the Chongqing Zhuandanbao and Anhui Xunmeng platforms were combined, the total reached hundreds of millions of records. Building on the success with Chongqing Zhuandanbao, Wang Fang and his team quickly achieved a breakthrough, successfully cracking the database and obtaining key evidence.

About half a month later, when SAMR’s Bureau of Law Enforcement and Inspection saw the data analysis results, the numbers far exceeded expectations: the two platforms had illicitly transferred as many as 3.6 million cake orders, involving seven platforms — JD.com, Meituan, Douyin, Pinduoduo, Ele.me (Taobao Shangou), Taobao, and Tmall.

Faced with such a major case, SAMR leadership issued their directive. Subsequently, under the leadership of SAMR and with the nationwide market-regulation system jointly participating, a formal investigation — “drawing the sword” — was launched against the seven leading e-commerce platforms involved.

A blockbuster case, set in motion by a single cake, had truly begun.

National Coordination, Iron-Fist Action

“When I received the SAMR task force’s ‘muster order,’ I felt really excited. In everyday enforcement work I had seen complaints and reports about ‘ghost takeouts,’ but those were all about individual shops. My family and I, too, had harbored similar suspicions when ordering takeout in our daily life.” Recalling his arrival in Beijing in October 2025 to join the task force, Zhang Jie, brigade leader of the Comprehensive Enforcement Bureau of the Nanjing Municipal Market Regulation Bureau in Jiangsu Province, remains deeply impressed to this day.

Like Zhang Jie, over a hundred elite enforcement officers from market regulators in other parts of the country received the “muster order” to come to Beijing — among them Hu Chao, Level-1 Chief Staff Member of the Nanjing Market Regulation Bureau in Jiangsu, who, like Wang Fang, had won the national Electronic Data Forensics Competition; Yu Yan, Deputy Director of the Law Enforcement and Inspection Division of the Zhejiang Provincial Market Regulation Bureau; Li Xin, Director of the Market Regulation Comprehensive Administrative Enforcement Supervision Bureau in Yangzhou, Jiangsu; Zhou Qunbiao, Deputy Director of the Comprehensive Enforcement Bureau of the Xingtai Market Regulation Bureau in Hebei; Zhang Jun, Level-3 Research Fellow at the Law Enforcement and Inspection Bureau of the Hebei Market Regulation Bureau; Zhang Li, Deputy Chief of the Jiangwan Market Regulation Office of the Hongkou District Market Regulation Bureau in Shanghai; Yuan Xiaolong, Captain of Enforcement Team No. 5 of the Haidian District Comprehensive Enforcement Brigade in Beijing; and others.

The 2025 National Day holiday was spent entirely on overtime for this team. They worked intensively to sort through case details and prepare materials. Two or three days before the National Day break, Li Xin had already led the Jiangsu case-handling team on investigations in Yangzhou, Nanjing, and elsewhere.

On October 10, more than a hundred enforcement specialists from the nationwide market-regulation system gathered at No. 9 Madian East Road, Beijing, for a full day of specialized training. SAMR also drew up enforcement manuals, case-handling key points, and investigation checklists, so that this enforcement team drawn from all corners of the country could achieve “uniform actions and uniform objectives” in the shortest possible time — laying a solid foundation for efficiently completing the special mission.

Confronted with what might be the largest case in the history of online catering in China, SAMR attached the highest importance to it. SAMR leadership personally took command and personally drove the effort forward. The entire national market-regulation system operated as a single chessboard, with top-down coordination and joint action:

Based on preliminary investigation, SAMR organized this elite enforcement team into seven task forces, with one technical task force providing technical support. Yu Yan, Zhang Li, Yuan Xiaolong, Li Xin, Zhang Jie, Zhou Qunbiao, Zhang Jun, and Wang Fang each served as team leader, with clear division of labor and close cooperation.

SAMR leadership personally directed the operation and established a unified coordination and command mechanism, dispatching resources in real time as the cases progressed. SAMR’s Bureau of Law Enforcement and Inspection was specifically responsible for handling the cases, while the bureau’s Inspection Division No. 4 coordinated the enforcement process. A dedicated task team was set up to serve the case-handling effort.

In line with the “Ghost Takeout” case’s different “chain” divisions, different handling mechanisms were established: SAMR directly handled the e-commerce platforms; the order-transfer platforms were placed under designated supervision; and “ghost takeouts” were jointly investigated nationwide.

This was an enforcement “elite squad” of the market-regulation system — answering the call at a moment’s notice, ready to fight upon arrival. Every member was a seasoned professional who had handled numerous major cases.

This was an enforcement “army group” of the market-regulation system — skilled in coordination, each with their own strengths — who, under SAMR’s unified deployment, had repeatedly worked together to crack national-level major cases.

Thus, an “iron fist” aimed at “Ghost Takeouts” was tightly clenched.

As the saying goes, true heroes reveal themselves when the torrent sweeps across the sea. October 11, 2025 — a day worth remembering. On that day, the seven task forces set out from Madian in Beijing for the frontlines at the seven e-commerce platforms, to conduct on-site investigation and evidence collection. A full-scale battle — commanded by SAMR and drawing on the combined strength of the entire system — was launched: a breakthrough campaign against e-commerce platform “Ghost Takeouts,” a food-safety defense battle, and a sustained regulatory-for-the-people campaign.

Battles of Wit and Will: Pressing on Despite Difficulties

The hands of the clock had quietly moved past 10 p.m. This “standoff,” which had already gone on for nearly three hours, still showed no signs of producing any common ground.

On one side of the standoff were task-force leader Zhou Qunbiao, team members Wen Lingyan and Lou Sihan — who was running a high fever — and an expert. On the other side were liaison representatives dispatched by a certain platform enterprise. The main disagreement: defining the scope and authority of the investigation, and a key search term for evidence collection.

At 10 a.m. that day, the task force had entered the platform as scheduled to begin the on-site inspection. However, the platform adopted “tai chi tactics” — letting the officers stew, stalling, then refusing — and even threatened to file complaints against the enforcement officers.

Faced with the company’s non-cooperation, Wen Lingyan was moved to tears of frustration. But her back did not bend and she did not yield on her bottom line. Wiping away her tears, she pressed on. Standing firm on the principle that “without legal authorization, nothing may be done; where legal duties are assigned, they must be carried out,” she and her colleagues used the weapons of law to break through the platform’s runaround “tai chi tactics.” Finally, after the task force’s unrelenting efforts, the other side at last provided the relevant data around midnight. By the time the task force completed its evidence collection, it was 3 a.m. the next morning.

From the moment the task force went on-site at the platforms, it became clear that technical evidence collection from the large e-commerce platforms was both the key to breaking the case and the greatest challenge. “The biggest challenges we faced were that data volumes are huge, evidence is hard to collect, hard to preserve, and hard to verify. E-commerce platforms’ business data are not only enormous in volume but also scattered in storage — generally in the cloud,” said Zhang Yuhao, a Level-1 Administrative Enforcement Officer with the Zhumadian Market Regulation Bureau in Henan Province and a task force member. This meant that investigation and evidence collection could not succeed, as in routine enforcement, simply by examining computers and hard drives — instead, the platform’s technical staff had to cooperate on-site to retrieve data from the cloud and hand it over to the task force.

In the course of actual investigation, however, the task force encountered layer upon layer of difficulties in obtaining data and gathering evidence, because the platform companies generally resorted to “soft resistance” to frustrate evidence collection. They refused to provide data on grounds of “system upgrades,” “no data authorization,” or “data not stored locally”; they used “trade secrets” or “insufficient network speed” as pretexts to stall; they arranged for irrelevant personnel to run officers in circles. Some platforms appeared “actively cooperative” on the surface while in fact providing fragmented, chaotically formatted data, attempting to drown out the critical information. What Zhou Qunbiao’s team went through was typical for the task forces. Many times the task force would arrive at a company at 10 a.m. and still have nothing to show for it by 10 p.m. Even when a platform did provide data, it was often only one-third, one-fourth, or even less of the full dataset.

Where evil grows a foot, righteousness grows ten. Facing the platforms’ various “tricks,” the task force engaged in a comprehensive battle of wits — a contest of data.

“Zhang, my phone number’s used up, you register with yours and keep checking…” Exchanges like this were extremely common and frequent among task force members during that period.

As it turned out, in dealing with data from the major platforms, the task force came up with the “dumbest” of approaches: they logged into all seven platforms and verified information and credentials one cake shop at a time; some they even went to the physical premises to inspect further.

But each phone number had a capped number of login views imposed by the platform — hence the daily conversations among team members. Over the course of about two weeks, “burning through” dozens of phone numbers and verifying three to four thousand shops, they chewed through the “hard bone” using “dumb” methods. Combined with the data from Chongqing Zhuandanbao and Anhui Xunmeng, the task force now had its own big database.

When an enterprise first provided the task force with “discounted” data, the officers could compare it against their own database, establishing a working mechanism of “data commonality, data comparison, cross-verification, and traceability-based reverse checking” to spot the irregularities — and then go back to the platform for another round of “dialogue” or “confrontation.”

Facing a task force so well-armed with data evidence, the platforms began to “squeeze the toothpaste” — 20%, 40%, 60% — until finally 100% of the data was provided. “To break the technical impasse, we repeatedly studied the platforms’ data architecture, transaction flows, and algorithmic logic, and finally penetrated the platforms’ data barriers, achieving precise extraction, classified organization, and effective preservation of key electronic data on order flow, credential filings, and order-transfer transactions,” said Ma Zhenduo, a Level-1 Staff Member with the Tianjin Municipal Comprehensive Administrative Enforcement Corps for Market Regulation and a task force member.

When platforms used “soft resistance,” the task force had to match wits; but when a few platforms escalated to “hard resistance,” the task force had to match courage.

At 10 a.m. on December 3, 2025, when task force members from the Jiangsu-Jiangxi team — Zhang Jie, Chen Cao, Hu Chao, Guo Hui, and others — arrived on-site together to begin their inspection, they could not have imagined they were in for a turbulent three days and two nights.

Under the platform’s “tai chi tactics” — letting them stew, stalling, then refusing — by 11 p.m. no substantive progress whatsoever had been made on the investigation. With no other recourse, Guo Hui and several enforcement officers decided to use the access card the company had given them — good only down to the first floor — to walk around and see what they could spot.

Where the mountains loom and waters wind, and no road seems to lie ahead — suddenly, amid dark willows and bright blossoms, another village appears. At this “rush hour” for the platform’s staff clocking in and out, enforcement officers actually tracked the movements of platform employees and identified where they were really working.

Doing everything possible to get into those offices, Guo Hui spotted a suspicious-looking room. Even though he was in enforcement uniform and had identified himself, the other side still forcibly blocked them from entering. In the struggle over control of the door, Guo Hui’s hand was deliberately crushed in the door by a company employee, causing a fracture. Guo Hui gritted his teeth and held on until the person in charge of the company finally relented and agreed to provide data. But the other side then started playing the “delay game” — the initial promise was to hand over the data at 3 a.m., but officers waited until 5 a.m., and then from 5 a.m. until noon; and the data finally handed over were heavily discounted. Having learned from day one’s “surprises,” the task force specifically coordinated with the local public security authorities to conduct the second round of data extraction and evidence collection together, and insisted the Chief Technology Officer operate the systems in person.

Around 11 p.m. on December 4, just as the task force was conducting its investigation, the platform’s head of security suddenly lost control, and in front of the police and the task force, led a group of people in a direct assault on the enforcement scene — shoving and grappling with the enforcement officers in a violent resistance incident. Guo Hui, who had kept working despite the hand fracture from the day before, immediately stepped forward to intervene. As a demobilized military officer, he instinctively threw himself to the forefront of the conflict, but was shoved and knocked to the ground, his head striking the floor hard. A 120 ambulance rushed him to the hospital.

One might have expected that after such an outrageous incident, the platform would promptly hand over the data. Instead, after the company’s Chief Technology Officer held a private conversation with the person in charge, the CTO suddenly collapsed of his own accord and was also taken by 120 ambulance to the hospital. The day’s investigation was forced to end. Enforcement officers from the task force followed them to the hospital, where doctors confirmed that there was nothing wrong with the CTO’s heart or body.

After the violent-resistance incident, SAMR attached the highest importance. Leadership convened a special meeting to study the response, and instructed the Bureau of Law Enforcement and Inspection to immediately dispatch a senior official to the scene to assess the situation. On the evening of December 5, Peng Zengtian, Deputy Director of SAMR’s Bureau of Law Enforcement and Inspection, rushed to the site under orders to handle matters. Only then did the platform provide the relevant data for a second time.

That same day, the task force, together with local public security and market regulators, held a meeting with the platform regarding the violent-resistance incident. Right in the middle of the exchange, a platform employee wrote “stay silent” and “don’t speak” on a piece of A4 paper, signaling to a colleague being questioned. Caught red-handed by the task force, what unfolded next was shocking and as dramatically theatrical as a movie scene: the employee actually balled up the A4 paper and — right in front of everyone in the room — ate it.

When courage meets courage on a narrow path, the bolder prevails. The “Ghost Takeout” investigation was a contest between arrogance and justice, illegality and law enforcement. Confronted with unprecedented resistance — whether “soft” or “hard” — every member of the task force matched wits with wits and courage with courage. With a fighting spirit of “the more perilous the path, the more resolutely we press on,” they cut through every barrier and forged ahead.

Guo Hui, after simple bandaging and treatment, ignored doctors’ advice and returned resolutely to the investigation site. Zhou Qunbiao, after 72 hours of continuous work, suffered a sudden heart attack and was rushed to the hospital. Lying on the emergency-room bed, all he could think about were case-file details and unfinished verification items. Once his condition stabilized, Zhou Qunbiao rushed back from the emergency room to the investigation site: “The case isn’t done; I can’t rest easy.”

Behind these simple words lies a spirit of “exceptional endurance of hardship, exceptional combat capability, and exceptional devotion.” “Day and night, 5+2” had become the norm — no rest on holidays, no standing down for minor injuries. After three rounds of on-site inspections, the task force tore open gaps in the “iron walls” of the seven platforms and nailed down rock-solid evidence on 67,604 “ghost shops,” laying a firm foundation for the successful resolution of the case.

One Shop, One Penalty: Far-Reaching Impact

As the investigation deepened, the evidence of violations became ever clearer — yet a new challenge now confronted the task force: how to structure the administrative penalties for the platforms.

“On the surface we’re handling one big case, but in reality we’re facing more than 60,000 individual cases. Each shop’s situation is different, and we can’t treat them in bulk,” Zhang Li remarked, pinpointing the difficulty of imposing administrative penalties in this case.

At this critical juncture, SAMR once again drew on the task force’s successful experience — pooling forces from all sides to build case-handling synergy:

In the course of the investigation, the task force sent more than 50,000 case-transfer orders to provinces, autonomous regions, and municipalities nationwide, verifying each platform lead the case had uncovered one by one. On matters of major import, SAMR’s Bureau of Law Enforcement and Inspection worked jointly with the General Office, the Department of Laws and Regulations, the Department of Online Transaction Supervision, the Department of Catering and Food Supervision, the Department of News and Publicity, and other departments to resolve issues together.

This time, SAMR extended its inquiry into legal application beyond the system itself to legislative bodies, judicial authorities, and academia, ensuring that the case handling could withstand both legal and historical scrutiny. SAMR leadership led four delegations to consult with legislative and judicial departments, repeatedly soliciting input on core questions such as the determination of platform liability and the calibration of penalty ranges — ensuring that the case was handled according to law and that discretionary power was exercised with prudence.

SAMR also convened a legal-experts symposium, inviting authoritative scholars from administrative law, civil law, e-commerce law, and other fields to delve into key issues such as the identification of offending entities, the boundaries of platforms’ review obligations, and the calculation of illegal gains — producing written expert opinions.

SAMR leadership presided over 24 specialized meetings, examining the platforms’ violations point by point and repeatedly refining the administrative penalty plan to ensure that every company, every violation, and every penalty amount had a firm legal basis.

After fully absorbing the views of legislative bodies, judicial authorities, and academia, a penalty plan gradually took shape — one that embodied the principle of “penalties commensurate with violations,” reflected the “four strictest” requirements, and aligned with public expectations.

SAMR resolved: in accordance with the principle of “penalties commensurate with violations,” to lawfully impose “one shop, one penalty” on the platforms’ failure to perform their review obligations.

Wang Huowang, Director of SAMR’s Bureau of Law Enforcement and Inspection, said that this case was a landmark case in SAMR’s history for safeguarding food safety and regulating platform development. SAMR’s penalties reflect the regulatory orientation of supporting the standardized and healthy development of the platform economy, and of “grasping both development and regulation firmly with both hands.” The fundamental aim is to urge platform enterprises to fulfill the obligations set out in law — to establish and effectively operate food-safety risk prevention and control mechanisms covering credential review, risk monitoring, problem screening, and rapid response — so as to genuinely safeguard food safety and promote the standardized and healthy development of takeout platforms.

Upon receiving SAMR’s administrative penalty decisions, Pinduoduo, Meituan, JD.com, Taobao Shangou (formerly Ele.me), Douyin, Taobao, and Tmall all pledged resolute implementation of regulatory requirements and meaningful protection of takeout food safety.

People regard food as heaven, and food safety comes first. Though the market regulators’ “sword strike against ghost takeouts” has reached its conclusion — and all platform enterprises have, in line with rectification requirements, taken down unreviewed “ghost shops” and ended catering order-transfer cooperation with the relevant transfer platforms — food-safety regulation is a journey without end. The sword of enforcement remains ever poised overhead, ready to be drawn at any moment.

(This article also benefited from contributions by our newspaper’s reporters Peng Xie, He Ke, and Xu Yachen, and intern reporter Wang Yiming.)

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Some observations:

Beijing’s first point centres on the question of identity. The line “differences in social systems are not a pretext for separatism” is a direct rebuttal of Taipei’s argument, which the authorities in Taipei frame as a binary opposition of “democracy vs authoritarianism” based on political system differences. Beijing’s implicit rejoinder is that institutional arrangements are a secondary matter open to discussion; the more fundamental and non-negotiable question is one of identity: are you Chinese or not?

The second point reiterates the mainland’s standing opposition to “Taiwan independence.” The formulation “Taiwan independence is the chief culprit in undermining peace in the Taiwan Strait — we will absolutely not condone or tolerate it,” with its double negative and emphatic register, serves a dual purpose: it is simultaneously a reaffirmation of Beijing’s long-held position. It’s also an effort to bring the KMT to publicly commit to and formally endorse an anti-”Taiwan independence” stance.

Compared to the first two points, the third is notably softer in tone, with an emphasis on people-to-people exchanges. The line “the mainland motherland is blessed with magnificent landscapes and a vast market — Taiwan compatriots are always welcome to come home” carries a clear policy subtext: it is a direct response to the Taipei authorities’ ban on travel agencies in Taiwan operating group tour packages to the mainland. The implicit message is that the mainland welcomes free cross-strait movement, and that the barriers to such movement originate in Taipei, not Beijing.

Other details worth noting:

The phrase “firmly keeping the future of cross-strait relations in the hands of the Chinese people themselves” functions, I would argue, as a warning directed at certain factions within the KMT. At a moment of sustained instability in US-China relations, Beijing is signaling that Taiwan Strait affairs must not be driven by outside forces. By delivering this message through the KMT, Beijing is effectively transmitting a signal to Taiwan’s broader society that external backers are unreliable, and the only viable path forward is for the two sides to negotiate among themselves.

The resonance between the two parties on the figure of Sun Yat-sen reflects two underlying logics. The first is historical: the First United Front between the KMT and the CPC was forged under Sun Yat-sen’s leadership. Sun is at once the spiritual founding father of the KMT and a revolutionary precursor recognized within the PRC’s own official narrative, making him the single most effective historical common ground between the two parties. The second is that, as Chiang Kai-shek’s historical image in Taiwan has grown increasingly negative over time, the KMT has come to rely more heavily on invoking Sun Yat-sen’s vision of “revitalizing China and achieving national reunification” to construct and maintain its own historical legitimacy.

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

General Secretary Xi Jinping Meets with Chinese Kuomintang Chairperson Cheng Li-wun

Wang Huning, Cai Qi and Others Attend the Meeting

Xinhua News Agency, Beijing, April 10 — General Secretary of the Communist Party of China (CPC) Central Committee Xi Jinping met on the morning of April 10 in Beijing with the Chinese Kuomintang (KMT) delegation led by Chairperson Cheng Li-wun.

Xi Jinping extended a welcome to Cheng Li-wun and her delegation. He noted that the meeting between the leaders of the CPC and the KMT — for the first time in ten years — carries significant importance for the development of relations between the two parties and across the Taiwan Strait. People on both sides of the Taiwan Strait belong to the same Chinese nation. The people of all ethnic groups, including Taiwan compatriots, have together founded a unified multi-ethnic state, jointly written a glorious Chinese history, together created a splendid Chinese civilisation, and collectively cultivated a great national spirit. They have also forged the shared conviction that national territory must not be divided, the country must not be thrown into chaos, the nation must not be fragmented, and civilization must not be severed — a conviction that has guided the Chinese nation in its endless self-improvement and ensured the unbroken continuity of Chinese civilization.

Xi Jinping stressed that no matter how the international situation or the situation across the Taiwan Strait may change, the great trend of the rejuvenation of the Chinese nation will not change, nor will the great tide of compatriots on both sides of the strait drawing closer together and uniting. Compatriots on both sides of the strait all hope for peace and stability in the Taiwan Strait, hope for improvement and development in cross-strait relations, and hope for better lives — this is an inescapable responsibility of both the CPC and the KMT, and also the driving force for their joint cooperation. We are willing, on the common political foundation of upholding the “1992 Consensus” and opposing “Taiwan independence,” to work together with political parties, organizations, and people from all walks of life in Taiwan, including the KMT, to strengthen exchanges and dialogue, strive for peace across the strait, promote the well-being of compatriots, and work toward national rejuvenation — firmly keeping the future of cross-strait relations in the hands of the Chinese people themselves.

Xi Jinping put forward four points on the development of cross-strait relations.

First, uphold correct identity to foster a meeting of hearts and minds. Compatriots on both sides of the strait share the same roots and origins, the same culture and ethnicity, and are bound together by blood — they form a community with a shared destiny, united in times of both joy and hardship. Among family members, as long as there is open communication and a willingness to consult on matters together, no differences or disagreements are beyond resolution. Differences in social systems are not a pretext for separatism. The CPC and the KMT, and compatriots on both sides of the strait, must hold firm to their national standpoint, carry forward and promote Chinese culture, strengthen their identification with the Chinese nation, Chinese civilization, and the great motherland, and build the resolve, integrity, and confidence to stand as proud and dignified Chinese people.

Second, uphold peaceful development to safeguard the shared homeland. The mainland and Taiwan both belong to one China; China is the shared homeland of the Chinese nation. For compatriots on both sides of the strait to protect and build this shared homeland, the fundamental requirement is to uphold the “1992 Consensus” and oppose “Taiwan independence,” with the core being the recognition that both sides of the strait belong to one China. When a family lives in harmony, all things prosper. Any proposal that benefits the peaceful development of cross-strait relations is welcome, and anything that serves the peaceful development of cross-strait relations we will make every effort to pursue. “Taiwan independence” is the chief culprit in undermining peace in the Taiwan Strait — we will absolutely not condone or tolerate it. The CPC and the KMT, and compatriots on both sides of the strait, must uphold the greater good of the nation, oppose separatist “Taiwan independence” and foreign interference, promote the peaceful development of cross-strait relations, and steadfastly protect the shared homeland of the Chinese nation.

Third, uphold exchanges and integration to enhance the people’s well-being. The goal of developing cross-strait relations is to enable compatriots on both sides of the strait to live better lives. We will continue to act in the spirit of the principle that people on both sides of the strait are one family, and actively do practical things, good things, and help resolve difficulties for Taiwan compatriots. The mainland motherland is blessed with magnificent landscapes and a vast market — Taiwan compatriots are always welcome to come home, Taiwan youth are welcome to come to the mainland for exchanges and development, and Taiwan agricultural and fishery products and quality goods are welcome into households across the mainland. The CPC and the KMT, and compatriots on both sides of the strait, should jointly expand cross-strait exchanges, interactions, and integration, and enhance the bonds and well-being of compatriots on both sides.

Fourth, uphold unity and determined effort to achieve the great rejuvenation of the Chinese nation. This year marks the 160th anniversary of the birth of Dr. Sun Yat-sen, whose lifelong pursuits were the revitalization of China and national reunification. Today we have successfully forged the path of Chinese-style modernization, and the great rejuvenation of the Chinese nation is an unstoppable tide. We firmly believe that more and more Taiwan compatriots will come to correctly understand the mainland’s social system and development path, and deeply recognize that Taiwan’s future lies with a strong motherland, and that the interests and well-being of Taiwan compatriots are bound to the great rejuvenation of the Chinese nation. This year marks the opening year of the mainland’s 15th Five-Year Plan; we are willing to share development opportunities and achievements with compatriots in Taiwan and together strengthen the economy of the Chinese nation. The CPC and the KMT should consolidate political mutual trust, maintain positive interactions, unite compatriots on both sides of the strait, and work hand in hand to create a bright future of national reunification and national rejuvenation.

Cheng Li-wun stated that people on both sides of the strait are descendants of Yan and Huang, belong to the same Chinese nation, are nurtured by Chinese culture, are all Chinese — one family — and should rightly join hands to advance the revitalization of China as championed by Dr. Sun Yat-sen. The CPC and the KMT should uphold the common political foundation of the “1992 Consensus” and opposition to “Taiwan independence,” strengthen political mutual trust, play their role as a platform for communication, commit to preserving Chinese history and promoting Chinese culture, advance cross-strait exchanges and cooperation across civil society, grassroots, economic and trade, cultural, and other fields, support youth exchanges and development, enhance the common well-being of the people, promote the peaceful development of cross-strait relations, open up a bright future for cross-strait relations, and realize the great rejuvenation of the Chinese nation.

Wang Huning, Cai Qi, and others attended the meeting.

His core argument is that the war is more like an amplifier than a kingmaker, intensifying trends already running against Republicans, mainly through rising gas prices, compounding the affordability crisis voters already feel. He draws on a deep bench of American electoral history, reaching back past the 2002 post-9/11 midterms all the way to the 1898 Spanish-American War to show that even decisive foreign military victories rarely rescue the president's party when domestic economic pain is the real issue.

Where it gets especially interesting to me is the longer-term analysis. The widening rift between Trump and the MAGA base over the war, with Vance caught in between. The rapid shift in American attitudes toward Israel, particularly among young voters and Democrats. The emerging fault line within the Democratic Party is between AIPAC-backed traditionalists and union-backed progressives sympathetic to the Muslim community. These dynamics could reshape both parties well beyond 2026.

As always, the article provides a window into how China’s strategic community is reading American domestic politics in real time. The original article was published on April 1, 2026, in The Paper (澎湃新闻), and thanks to Professor Diao’s authorization, I can provide the English ver of the article:

How Will the Iran War Affect the Midterms and 2028?

On February 28, 2026, the United States and Israel launched a joint military operation against Iran, killing multiple senior Iranian officials, including Supreme Leader Ali Khamenei. The strike provoked Iranian retaliation, and the Strait of Hormuz was promptly closed. The conflict has now dragged on for over a month, far exceeding what Trump initially claimed would be a matter of days, and the risk of a protracted war cannot be ruled out. Global oil prices have surged and fluctuated in response. The prolonged fighting, rising oil prices, growing likelihood of American military casualties, and the pressure of being sucked into yet another quagmire have all deepened anxiety among the American public. Since 2026 is a midterm election year, the Iran conflict has been repeatedly linked to the midterms in both American and international commentary, with the prevailing view that the war is likely to hurt Republican prospects.

To Capitol Hill, via Tehran?

Iran is no stranger to American electoral politics. Forty-six years ago, Republican Ronald Reagan was able to end Democratic President Jimmy Carter’s bid for reelection. Beyond the stagflation dragging down the American economy and deep disunity within the Democratic Party, the 444-day Iran hostage crisis is widely regarded as having provided the crucial backdrop that constantly reminded voters of the sitting president’s “incompetence.” After the failure of the so-called “Operation Eagle Claw” in late April 1980, Reagan’s polling numbers pulled ahead and stayed there until his victory in November. On January 20, 1981, Reagan was formally sworn in as president, and just minutes before his inauguration, the hostages were released, bringing the crisis to an end.

Could such a dramatic arc replay itself in the 2026 midterms? If the conflict does become protracted, this possibility cannot be entirely ruled out, though its effect would likely not be that of a “kingmaker” that fundamentally alters the electoral landscape, but rather an “amplifier” of trends that are already largely set.

On one hand, unlike the incumbency advantage a sitting president enjoys when seeking reelection, midterm elections carry a so-called “curse” that works against the president’s party. In other words, 2026 was already shaping up poorly for Trump’s Republicans. If we consult the historical record, in the 20 midterm elections from 1946 to 2022, when presidential approval exceeded 50%, the president’s party still lost an average of 14 House seats. When approval fell between 40% and 50%, the average loss rose to 34.5 seats. Below 40%, the average jumped to 38 seats. By these historical numbers, even the mildest average loss of 14 seats would be more than enough for Democrats to reclaim the House majority, and Trump’s current approval sits at just 36%.

On the other hand, inflation, healthcare, housing, employment, and other domestic issues that typically dominate midterm elections are in 2026 being framed and consolidated into a single new pain point for the American public: the “affordability” problem. This structural issue is clearly not something the Trump administration can effectively address in the short term. It is a burden of public resentment that the sitting president and his party simply cannot shirk. In fact, even the Democrats, who stand to retake the House majority on the strength of this discontent, would most likely prove equally helpless against it. The Iran war’s effect is obvious: the constantly climbing numbers on gas station price signs are compounding the public’s anxiety over affordability.

With Republicans almost certain to lose their House majority, various analyses currently predict seat losses ranging from 20 to 70. The Iran factor, particularly the prospect of deploying ground troops, is the variable that pushes the number toward the higher end of that range.

Compared to the rigid trend in the House, the Senate presents a more limited battlefield with only 35 seats up for election. Public dissatisfaction with the Republicans as the president’s party, filtered through a cycle in which only slightly more than a third of seats are contested, is not sufficient to simultaneously strip Republicans of their Senate majority. The only scenario in which that happens is if Democrats sweep the competitive seats in Maine, North Carolina, and Michigan, and also perform exceptionally well in Ohio and Alaska, two seats Republicans are fighting hard to defend, flipping the chamber 51 to 49. The specifics in each state, especially these swing states, probably won’t become clear until after the summer. By then, we’ll know whether the Iran factor is still festering.

Was the War Launched for the Midterms?

While the Iran factor has objectively worsened Republican prospects, could Trump’s subjective motivation in launching the strike, or even his fantasy of a “quick and decisive victory,” have actually been aimed at boosting the party’s midterm chances?

This motive is hard to dismiss entirely. The logic runs as follows: if the war could be quick and decisive, a rapid decapitation strike followed by disengagement might bolster a sense of pride among voters, particularly Republican voters, in the spirit of “Making America Great Again.” This could make certain groups feel that the affordability burdens they bear in daily life are somehow “worth it,” potentially helping to consolidate Republican voters and certain conservative-leaning independents. But now, with the war dragging on and the possibility of prolonged conflict, whatever pride the “greatness” narrative once generated has evaporated, replaced by a growing collective unease that extends well beyond the MAGA wing of the Republican camp.

The 2026 strikes on Iran simply cannot be compared to the War on Terror in 2002. Back then, a spirit of national unity still pervaded the country. In the aftermath of 9/11, “crisis president” George W. Bush and his Republican Party managed to gain seats in both chambers of Congress, delivering the best midterm performance for a president’s party since 1934. Today, a majority of Americans (65%) do not believe military action against Iran serves American interests. Most (75%) think the U.S. is too involved in Iran. Only 35% support the strikes. While a majority of Republicans (73%) and even MAGA supporters have continued to stand with Trump since the war began, these same groups within the party still oppose the risky move of deploying ground troops. This twisted, even self-contradictory state of public opinion means that the Iran war was, from the very start, a partisan affair. In contrast to the old adage that “politics stops at the water’s edge,” this conflict has crossed the water with partisanship fully intact. There will be no rally-around-the-flag effect capable of reaching across party lines, or at least of mobilizing swing voters.

Historical comparisons make the extreme exceptionalism of Bush’s post-war midterm victory even more apparent. In the 1950 midterms, Harry Truman and his Democrats lost 5 Senate seats and 28 House seats, barely clinging to their majorities only because they had entered with such large pre-election margins. They then lost both chambers entirely in 1952. The Democratic losses in 1950 had two main causes: fierce conservative opposition to the Truman administration’s “Fair Deal” agenda on education and social welfare, and public discontent with the administration’s decision to send troops into the Korean War in June and July of that year.

Going even further back, 1898 was also a midterm election year. The Spanish-American War, often called the “Hundred Days’ War,” was not only quick and decisive but vaulted the United States into the ranks of a transpacific and Caribbean power, placing it on the stage of global competition. Yet this victory, which can be seen as the starting point of American hegemony, did not deliver a similarly resounding midterm triumph for William McKinley’s Republicans. The party gained 8 Senate seats but lost 19 in the House, while Democrats gained 37 House seats. The reason was that Democrats picked up seats in agriculture-dependent regions across thirteen states along the Atlantic coast, the South, and the West. This was clearly tied to the electoral strategy of Democratic leader William Jennings Bryan, who attracted populist constituencies and amplified agricultural economic issues. In a sense, the Democrats of 1898 were previewing Bill Clinton’s 1992 playbook of “It’s the economy, stupid,” siphoning away from McKinley and his Republicans the glory they had hoped to monopolize through the Spanish-American War.

Impact Beyond 2026

While the Iran war’s likely impact on the 2026 midterms is more a matter of degree than direction, whether this military action’s effects on America’s political ecosystem extend beyond 2026 is worth watching over the long term.

For instance, many commentators have suggested that MAGA supporters, particularly the most deeply disillusioned among them, may have no recourse against the sitting President Trump himself but could redirect their frustration toward Vance. Vance is seen as having been quite passive on the Iran question, and there is a real possibility that he could lose further support within the Republican Party, forfeiting his shot at 2028 and yielding the opening to figures like Rubio. There is no doubt that the Iran strikes have exposed the growing divergence and fracture between Trump and the MAGA base, leaving Vance, who serves as the bridge between them, in an impossible position. But this does not necessarily provide a reliable guide to what will happen in 2028. Faced with the potential quagmire created by Trump’s personal decision-making, Vance may not be able to shape events, but he can still participate in them. On questions like how to end the war, he still has room and opportunity to respond to the MAGA base.

Meanwhile, polling since the war began shows that the share of Americans holding negative views of Israel has risen from 24% in 2023 to 39% in 2026. Among Democrats, this figure jumped from 36% to 57%, while among Republicans it increased only modestly, from 12% to 18%. More specifically, just 17% of Democrats sympathize with Israel, while roughly two-thirds sympathize with Palestine and the broader Arab world. Among Republicans, these figures are nearly a mirror image: 69% and 14%. Among young Americans aged 18 to 34, roughly two-thirds hold negative views of Israel, with only 13% viewing it positively. These attitudinal patterns reveal that Democratic voters, particularly younger ones, are increasingly critical of Israel and more sympathetic to the Arab world, while Republicans are embracing Israel more firmly.

Following this trend, the Iran war could produce mixed consequences for the Democratic Party as well. First, the drift of Muslim voters away from Democrats, driven by dissatisfaction with the Biden administration’s Middle East policy and visible in the 2024 election, may now face a reversal, or at least a pause. This would help Democratic prospects in Midwestern states, particularly the Rust Belt, where Muslim communities are concentrated.

Second, with pro-Israel forces continuing to place long-term bets on both parties by funneling money and shaping elections, the question of how pro-Israel and anti-Israel factions coexist within the Democratic Party will inevitably reshape its internal ecology to some degree. On March 17, in the Illinois Democratic primaries, AIPAC (the American Israel Public Affairs Committee) poured at least twenty million dollars into four House primary races. In the Illinois Senate Democratic primary, some candidates faced attacks for having visited Israel, others publicly distanced themselves from AIPAC despite long-standing partnerships, and still others, normally active on foreign affairs, refused to take any clear position on Israel-related issues. In the AIPAC-targeted House primaries, some races were won by the traditional establishment-leaning Democrats that AIPAC backed, while in others, progressive Democratic candidates defeated AIPAC-supported opponents.

Does this suggest that the long-standing conflict between traditional establishment Democrats and radical progressives is gaining a new dimension because of the Iran war? Wall Street and pro-Israel forces backing traditional Democrats on one side, unions backing pro-Muslim, identity-politics-focused progressive Democrats on the other, both competing for control of the party’s future direction.

It must be recognized that, facing the accelerating transformation of America’s demographic composition, the Democratic Party, which has traditionally excelled at integrating the interests of diverse groups, will inevitably face even greater challenges. Particularly given the reality that America’s Muslim population is projected to surpass its Jewish population around 2035, the reverberations of Middle Eastern affairs on American domestic politics are becoming increasingly unpredictable. How both parties, and especially the Democrats, adapt to these demographic and constituency shifts, and how this in turn shapes the evolution of their Middle East policies, are fascinating questions indeed.

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The article is by Zhuo Xian卓贤, Director and Senior Research Fellow at the Department of Social and Cultural Development Research, Development Research Center of the State Council. The DRC is one of China's most influential government think tanks, reporting directly to the State Council.

In most countries around the world, social insurance systems are built on the foundation of stable employment, and China is no exception. Whether it's unemployment insurance or maternity insurance, these programs were designed to protect workers against the risk of career interruptions. Three pillars keep the system financially sustainable: stable employer-employee relationships, wages that grow in step with productivity, and a favourable demographic structure. Zhuo warns that as AI is deployed at scale, companies no longer need to maintain large formal workforces and are shifting toward a more fragmented gig economy. At the same time, AI learns faster than any individual can, threatening to break the "learning by doing" ladder of human capital accumulation. As entry-level positions shrink, so do the pathways to becoming senior experts.

On the policy front, Zhuo proposes solutions at several levels. In the near term, he advocates for a differentiated “robot tax,” offering tax incentives for AI technologies that augment human capabilities, while withholding tax breaks or imposing modest levies on technologies that purely replace labour. Operationally, he suggests learning Japan’s approach of earmarking consumption tax revenue specifically for social security, so that social insurance funding is no longer entirely dependent on payroll taxes. The logic is that as labor’s share of national income continues to decline, there must be new mechanisms to channel the wealth generated by AI back into a social safety net that benefits ordinary people.

Over the longer term, Zhuo argues that since AI computing power will become a foundational infrastructure, the state should invest in and retain ownership of core computing assets to capture the economic rents that AI generates. He made an analogy to Norway's sovereign oil fund, which helps inject an "AI dividend" into the social security system, shifting the model from "taxing labor" to "sharing in AI's returns."

On the human development side, he believes education should pivot toward cultivating metacognitive abilities and interdisciplinary thinking, rather than betting on specific technical skills that will quickly become obsolete. In the short term, the government should subsidize wages or cover social insurance contributions for young people entering the workforce, reducing employers' costs of hiring junior staff and preventing AI from blocking young people's career on-ramps.

His article reflect-in some way- how China's policy advisors are thinking about AI. Zhuo directly cites language from the 15th Five-Year Plan proposal on "building an employment-friendly development model," which may signal that AI's impact on the job market and the fabric of society has reached the highest level on China's policy agenda. Beijing's consideration treats AI first and foremost as a governance problem, including whether pensions can be paid on time, whether public health insurance funds can remain solvent, and whether young people can still find an upward path into the middle class.

AI, Employment, and Social Security

Zhuo Xian — Director and Research Fellow, Department of Social and Cultural Development Research, Development Research Center of the State Council

The Relationship Between Economic Growth and Employment Is Changing

In the long agrarian era before the Industrial Revolution, low technological progress brought low-speed growth, corresponding to low population growth and low employment growth. Economic growth was virtually synonymous with the growth of agricultural employment.

The Industrial Revolution broke through the constraints of energy and power and the existing combinations of factors of production, greatly expanding the frontiers of human production. Industrialization and urbanization mutually reinforced each other through economies of scale. Industrial product prices fell as productivity rose, while wage levels rose along with productivity. Large-scale production and large-scale consumption formed a positive feedback loop, and blue-collar industrial jobs grew rapidly.

The modern corporate system expanded the scope of social division of labor and collaboration. Numerous production processes that were originally completed within a single enterprise (such as logistics, marketing, and legal consulting) spun off into specialised firms, forming a vast network of intermediate inputs and services. While improving economic efficiency, this also gave rise to a surge in knowledge-based white-collar positions within hierarchical organisational structures. After the widespread adoption of personal computers in the 1980s, information-processing positions such as accountants, secretaries, and analysts grew relatively quickly.

The marketisation of household labour was another important engine of job creation. As women entered the labour market on a large scale, work that had previously been performed unpaid within households was transformed into market-based services in national economic accounting. Jobs in lifestyle service industries such as housekeeping, food services, education, and entertainment were continuously created.

For most of the 20th century, “economic prosperity equals full employment” was a form of social cognition shaped by industrial civilisation, and it became the narrative logic and psychological foundation of many current business models and social institutions.

The several episodes of “jobless growth” experienced by advanced economies around the turn of the 21st century began to challenge this consensus. Initial research attributed “jobless growth” to post-crisis periods, seeing it primarily as a cyclical anomaly resulting from newly established firms increasing equipment investment, rather than a structural change in the relationship between employment and growth. However, subsequent research showed that the disappearance of routine cognitive and manual jobs did not occur gradually but was concentrated during economic recessions. Firms used crises as a concentrated “cleansing mechanism” to permanently eliminate mid-skill positions that could be replaced by automation. When the economy recovered, those jobs did not return. Although the service sector eventually absorbed the majority of the workforce, it did so at the cost of sacrificing wage growth and job stability.

Synthesising recent domestic and international literature on AI’s impact on employment, artificial intelligence has not caused large-scale unemployment. Many studies have even found that while the unemployment rate among workers in industries with high AI exposure is indeed rising, the unemployment rate among workers with lower exposure is rising even faster. One possible explanation is that workers with high AI exposure tend to have higher levels of education and stronger re-employment capabilities, and are therefore less affected. The few studies that do demonstrate higher unemployment among those with high AI exposure primarily use large language models to assess the risk of various occupations being replaced by AI — in other words, “AI tells us that AI is worsening unemployment” — and the statistical significance is not high.

Although the impact on overall employment levels is not obvious, in the current era of artificial intelligence, the relationship between employment and growth has already shown some new trends, which can be summarised as “decoupling” in three areas.

First, employment is decoupling from investment. In the industrial and service economy eras, both infrastructure investment and machinery investment generated considerable direct and indirect employment. In the AI era, technology companies are deepening their capital at unprecedented speed, yet the employment-creation effect is declining. Unlike the previous wave of internet investment, the expansion model of the AI era has shifted from “asset-light, people-heavy” to “capital-heavy, computing-heavy,” relying on high-density investment in physical infrastructure such as data centers and energy networks. The combined capital expenditures of Microsoft, Amazon, Google, and Meta in 2025 are projected to reach $400 billion — a figure exceeding the annual GDP of many medium-sized countries. Yet at the same time, tech companies are implementing human capital austerity strategies, cutting hundreds of thousands of jobs and freezing entry-level hiring for graduates. What is unusual is that these actions are occurring against a backdrop of record-high stock prices and robust revenue growth, reflecting a decision-making logic of cutting labor costs to free up funds for investment in computing infrastructure.

Second, technological progress is decoupling from human capital development. In the past, improvements in labor productivity came both from capital and the technology embodied in machinery, and from the contribution of human capital accumulated through “learning by doing.” In the AI era, labor productivity gains are more likely to come from a decline in the denominator of that metric — i.e., the size of the labor force — and the pace of human capital development falls far behind the speed of AI technological progress.

On the one hand, the path of “learning by doing” for human capital accumulation is narrowing. Previously, college graduates accumulated experience through foundational work and gradually developed into senior talent. Now, AI is increasingly competent at tasks performed by junior analysts, junior programmers, and junior copywriters, and hiring demand for fresh graduates in some positions is declining. For example, the traditional law firm model relied on large numbers of junior lawyers to perform document review, legal research, and similar work. AI can now complete these tasks in seconds, but demand for cases such as divorce proceedings does not increase because of AI — leading law firms to sharply reduce hiring of junior lawyers. This not only contributes to rising youth unemployment but may also sever the long-standing ladder for many types of human capital development. If companies no longer hire junior employees, where will future senior experts come from?

On the other hand, in the race between technology and education, the linear pace of human capital accumulation cannot keep up with the exponential speed of technological evolution. A major prescription for the employment challenges of the AI era is lifelong education. But the transformation of educational models is not a panacea in the face of AI technological advances. For the majority of workers, the pace of human capital accumulation can no longer keep up with the evolution of machine intelligence. For example, by the time a university has just launched a course on “prompt engineering,” the latest models may no longer require prompt optimization.

Third, workers’ wages are decoupling from productivity gains. Research on the U.S. labor market shows that the decoupling of labor productivity and real wages has been ongoing since the 1970s, and the accelerated adoption of AI may widen this gap. In the AI era, AI is routinizing non-routine cognitive tasks such as basic code writing, legal document drafting, and foundational financial analysis. The surplus profits of high-efficiency sectors are increasingly converted into capital gains and salary growth for a small number of core talents. Workers remaining in auxiliary roles within high-efficiency sectors are not only declining in number — because their human capital contribution is less than that of AI — but their wage growth will also not keep pace with the sector’s productivity gains.

The traditional “Baumol-style” productivity-sharing mechanism is breaking down. The “cost disease” theory proposed by Baumol noted that the surplus value created by high-productivity sectors such as manufacturing would spill over — through labor market competition (bidding for scarce labor) or institutional arrangements (union bargaining, minimum wages, etc.) — into sectors with slow productivity growth such as healthcare, caregiving, and entertainment, thereby achieving a general rise in wages across society. This cross-sectoral wage transmission mechanism maintained relative equilibrium in the labor market and served as the primary channel through which workers in low-efficiency sectors shared in prosperity. In the AI era, since high-efficiency sectors no longer need more workers, they do not need to continuously raise wages to maintain their labor force, and therefore cannot pull up society-wide wage levels through a “wage demonstration effect.” When mid-skill workers displaced by AI (such as clerks, translators, and junior coders) flow into service sectors with slower productivity growth (such as ride-hailing, delivery, and basic caregiving), labor supply exceeds demand, and the mechanism by which wages in low-efficiency sectors rise in tandem with those in high-efficiency sectors is severed.

Declining AI costs press down the “hard ceiling” on human wage increases. For a large number of tasks based on rules, logical analysis, information synthesis, and pattern recognition, AI provides a nearly infinite supply, breaking the scarcity of human capital in these areas and pushing down the market price of the relevant skills. AI technology is inherently energy-intensive. If the marginal cost of intelligence ultimately converges to energy costs, and energy costs continue to decline with technological innovations such as controlled nuclear fusion, high-altitude wind power, and space-based solar, then the wage ceiling for humans performing existing tasks faces sustained downward pressure. For example, in a particular task, when the deployment cost of AI drops to $5 per hour, the wage of a worker who performs only that single task can never exceed $5, regardless of how much their productivity has improved.

The Social Insurance System Based on Stable Employment Faces Challenges

Based on different assumptions about the timing, speed, and scope of AI’s employment displacement and creation effects, the “crystal balls” of various institutions diverge widely in their predictions of AI’s impact on future employment. For instance, since 2020, the World Economic Forum has made three consecutive, contradictory judgments on whether AI will increase employment, with a gap of 92 million between its predictions of net job gains and net job losses over the next five years. Compared to changes in overall employment levels, this article is more concerned with the challenges that structural changes in employment in the AI era pose to social security.

The modern social insurance system is a product of the era of large-scale industrialization. Whether public pension and health insurance, or unemployment insurance, work injury insurance, or maternity insurance, their original purpose is the socialized dispersion of “risks of employment interruption for workers.” The design of social security systems is therefore strongly linked to employment contributions, and their continued operation depends on three cornerstones: the growth of employed persons driven by a demographic dividend, the standardization of labor relations formed by large-scale industrial production, and the growth of wage income driven by productivity improvements. It was the historical convergence of these three conditions in the 20th century that made social insurance systems financially viable and politically operable, establishing them as an important institution for states to manage social risk.

The first cornerstone is a favorable demographic structure, which provides the actuarial foundation for social insurance. Under the social insurance system, population growth itself is transformed into a special asset class. Intergenerational transfer payments produce an implicit “biological rate of return” that can even exceed the accumulation of monetary capital. If the sum of an economy’s population growth rate (n) and real wage growth rate (g) exceeds the real market interest rate (r), then introducing a pay-as-you-go social insurance system increases total social welfare. In the decades-long “golden age” after World War II, the baby boom made this “return without capital” a reality. Participating in social insurance was not merely a mandatory burden but an investment superior to private savings. A favourable demographic structure established a social insurance intergenerational contract with social consensus, shifting retirement risk management from dispersed households to centralised social provision.

The second cornerstone is long-term stable employment relationships. Unlike social assistance based on means testing, the modern social security system emphasises the reciprocity of rights and obligations — that is, benefit levels are strictly linked to contribution histories. The original intent of this design is to maintain a dignified life for workers after retirement. Long-term stable employment relationships give workers clear, continuous income streams, ensuring the feasibility of linking “retirement benefits” to “labour contributions.” Highly organised employment relationships not only created a stable middle class but also made workers’ income transparent, calculable, and easy to deduct. This transformed the modern corporate system into an extension of state capacity, turning enterprises into agents of the state’s payroll tax (contribution) collection, improving the administrative efficiency of social security fund collection and expanding its coverage.

The third cornerstone is the synchronous growth of workers’ wages and productivity. The synchronous growth of wages and productivity ensures the endogenous expansion of the social security contribution base. Given a fixed demographic structure and collection mechanism, the improvement of social security benefit levels and the solvency of the fund fundamentally depend on the growth rate of the contribution base. Even if population aging occurs and n declines or turns negative, as long as the real wage growth rate g maintains relatively high growth, social security benefit levels can naturally rise along with total social wealth. In the 30 years after World War II, Western countries experienced a golden period of productivity growth. High unionisation rates ensured that productivity gains were translated into wage growth, forming a virtuous cycle of broadly shared productivity gains. The compound growth from a demographic dividend overlaid with a productivity dividend meant that each generation needed to contribute only a small share of its income to support the previous generation in a life better than what they had in their youth.

The modern social insurance system is an institutional arrangement through which human society, by rational design, harnesses the risks of industrialisation. It successfully internalised three specific macro-historical conditions into the parameters of institutional operation, enhancing social cohesion and improving economic and social stability. However, since the late 20th century, population aging has shaken the actuarial logic of the first cornerstone, and the second and third cornerstones also face challenges amid the leap in artificial intelligence technology.

The impact of population aging on the first cornerstone has been extensively discussed and will not be elaborated here. However, it should be noted that the impact of aging on the social insurance system is gradual and predictable, whereas the progress of artificial intelligence is nonlinear and exponential, potentially posing faster, broader, and larger-scale challenges to the second and third cornerstones of the existing social security model.

First, artificial intelligence will change the production organisation model and enterprise forms of industrial civilisation, fragmenting existing formal employment relationships and shaking the second cornerstone.

On the one hand, AI reduces market transaction costs and drives the gig-ification of knowledge workers. If the market is an efficient mechanism for resource allocation, why do firms exist? Coase’s answer is that market transactions involve search, bargaining, contracting, and monitoring costs. When the organisational costs within a firm are lower than the transaction costs in the external market, firms emerge and expand. As AI technology is applied to labour market platforms, the transaction costs of “hiring by task” become negligible relative to “hiring by job.” The basic unit of work will gradually shift from a “job” — a bundled, long-term, loosely defined set of tasks — to a “task” — a single, clearly defined, short-term deliverable — potentially reaching what has been called the “Coase Singularity.” Under the Coase Singularity, a large number of tasks that previously belonged to the firm’s core can be outsourced, even giving rise to “one-person companies,” as workers previously employed on a long-term, stable basis become outsourced personnel. Financial reports from global freelancing platforms such as Upwork and Fiverr show that large enterprises are systematically replacing full-time employees with highly skilled freelancers. If the “enterprise” — the core node of social security contribution collection — is replaced by a “transaction network” of knowledge-based tasks, the likelihood of more office white-collar positions shifting from permanent employment to gig work increases.

On the other hand, AI reduces coordination costs within enterprises and may lead to “middle-layer collapse.” In traditional enterprises, middle managers’ core functions are information transmission, task allocation, and process monitoring. AI agents are beginning to execute complex workflows without continuous human intervention, completing these coordination tasks at extremely low cost. This may lead to the flattening of organizational structures, where senior leaders can directly oversee more business units, and middle managers responsible for coordination and information processing become dispensable. Gartner predicts that by 2026, 20% of organizations will use AI to flatten their organizational structures, and more than half of middle management positions will no longer be needed.

Both of these trends will cause the gig economy to expand from its current domains of construction, manufacturing, food delivery, and courier services into knowledge-worker-dominated producer services, resulting in a larger scale of non-long-term employment relationships. This will lead to a decline in employers’ social insurance contribution responsibilities and an increase in individual workers’ contribution obligations and risk exposure.

Furthermore, if AI’s ultra-large-scale capital deepening continues in its current manner, the tilt of national income distribution toward capital owners and a small number of highly skilled individuals will shake the third cornerstone.

AI may make it difficult for the wage income of middle-income groups to keep pace with productivity growth. The primary source of funding for the social insurance system is a large middle-income population. Unlike previous industrial revolutions that mainly replaced blue-collar manual labour, generative AI accelerates the routinization of non-routine cognition, turning mid- to high-level cognitive abilities into industrially replicable services. Its primary impact is on the white-collar class — educated workers engaged in cognitive work — a group that has stable employment, relatively high wages, and high compliance rates for contributions.

A declining share of labour compensation leads to a relative decline in the social security tax base. Data from the OECD and the International Labour Organisation both show that in the most digitised industries, the share of labour income in value added is declining at an accelerating pace. This means that the dividends from technological progress are increasingly flowing to capital owners who possess algorithms, data, and computing power. Since high-income earners face caps on contributions to public basic pension insurance, health insurance, and unemployment insurance, further income growth for this group contributes almost nothing to social security funds. If capital deepening in the AI era leads to a reduction in the labor income share — particularly the income share of middle-income groups — the social security tax base as a proportion of overall economic output will decline, and economic growth will fail to translate into commensurate growth of social security funds.

Building an Employment-Friendly Development Model in the Age of Artificial Intelligence

Technology itself is neutral, but technological innovation does not inherently orient toward human well-being. If the purpose of artificial intelligence is to enhance human potential and improve the quality of life rather than “how to replace people with machines,” all the challenges described above could be readily addressed, and the technological dividend could compensate for the disappearance of the demographic dividend. For example, the European medical technology industry association estimates that the widespread application of AI in healthcare could save European healthcare systems between €170 billion and €210 billion annually, with wearable AI devices alone potentially saving approximately €50 billion per year, directly alleviating the pressure on health insurance funds in drug procurement. As another example, an important approach to solving the pension crisis is to extend contribution years. AI technology can eliminate the physiological and cognitive barriers that prevent older people from participating in the labor market, allowing older employees to focus on high-value work requiring judgment, empathy, and complex decision-making, reducing work fatigue, and enabling older workers to opt for a “phased retirement” model — transitioning from full-time to part-time work rather than abruptly cutting off their income source.

However, at least four factors currently steer the direction of AI innovation in ways unfavourable to employment and social security. First is the capital-driven “Turing Trap.” Stanford University’s Erik Brynjolfsson proposed the concept of the “Turing Trap,” pointing out that current AI research and development is excessively focused on “thinking and acting like humans,” developing “human-like intelligence” rather than augmenting human capabilities. This is a result of capital-driven innovation responding to scarcity. Prices, as signals of scarcity, direct the course of technological change, steering innovation toward replacing factors of production that are large in scale and high in price. In advanced economies, this directs innovation toward replacing high-cost labour. Second, geoeconomics promotes a labour-saving innovation pathway. In recent years, under the influence of geoeconomics, advanced economies have pushed for industrial reshoring but face severe shortages of skilled labour. To avoid uncertainties in cross-border investment, immigration policy, and tariff policy, companies are redirecting their technological investment toward “labour-saving” directions. Third, the infinite demand of the digital world exacerbates scarcity in the physical world. AI innovation cannot directly break through the scarcity of atoms. Physical constraints on land, freshwater, lithium, cobalt, and other critical minerals persist, and the scarcity of economic growth shifts to energy, environmental capacity, and key raw materials. From an employment perspective, these are all areas with thin labour demand; accelerating their development may even create a problem of AI competing with human well-being for scarce resources. Fourth, the innovation limitations of AI4Science. A study analysing 67 million papers across six major fields — biology, chemistry, geology, materials science, medicine, and physics — found that while AI tools have improved individual scientists’ output, they have led to a convergence in research topics. Scientists tend to study data-rich areas that AI can easily process, while data-scarce or marginal fields that are difficult for AI to model are neglected. This tendency may narrow the breadth of scientific discovery and reduce the potential for breakthrough innovations that open up new areas of human demand and employment.

Technological progress is path-dependent. Once a certain technological paradigm achieves dominance, society’s engineering capabilities, infrastructure, and cognitive habits are all built around it and become self-reinforcing, “locking in” the development model onto a specific trajectory. The proposal for the 15th Five-Year Plan calls for “building an employment-friendly development model” and explicitly states the need to “improve employment impact assessment and monitoring and early warning” to address “the impact of new technological developments on employment.” This represents the unity of high-quality development and high-quality full employment, and carries great significance for guiding the development direction of AI technology.

Unlike the United States, which bets the bulk of its incremental innovation resources on the training and inference layers of AI, China’s “AI+” action plan emphasises large-scale technological application, distributing innovation resources more evenly across the training, inference, and application layers of AI. This not only shortens the investment return cycle of technological innovation but also facilitates job creation through the development of AI application scenarios across production, consumption, and distribution. Moreover, China’s labour costs are far lower than those of the United States, making the gains from AI replacing labour less substantial and leaving more room for public policy to steer AI development “toward the good.” Beyond the conventional policies already in place, this article proposes several policy directions for discussion.

On the “robot tax.” Because some countries provide tax credits or accelerated depreciation for automation equipment while levying high payroll taxes (including social security contributions) on labour, this effectively subsidises the replacement of human workers with AI technology. Although many studies have proposed a robot tax, no country has yet implemented one. The Korean government, often mistakenly cited as having introduced the “world’s first robot tax,” did not directly tax robots but rather reduced tax credits for corporate investment in automation equipment. In theory, a robot tax could internalise the social costs of AI development (such as unemployment) and slow excessive employment displacement. In practice, however, it faces definitional challenges — for instance, what constitutes a “robot,” and should an Excel spreadsheet improved by AI technology be taxed? A more feasible approach would be to implement differentiated tax rates based on the type of AI technology: granting tax credits for “labour-augmenting” technologies such as exoskeletons and augmented reality glasses that assist workers, while withholding tax incentives or imposing moderate taxes on technologies that purely substitute for labour.

On a “tax-contribution coordinated” approach to social security financing. Unlike the model in continental European countries such as Germany and France, which relies primarily on employer and employee contributions, countries like Denmark have chosen to fund social security mainly through general taxation, with a smaller share of contributions. Japan, one of the world’s most aged societies, raised its consumption tax rate from 8% to 10% in 2019, with the increased revenue explicitly earmarked for social security expenditures, including pensions, healthcare, and long-term care. Although the social security financing structures of Denmark and Japan’s reforms were not originally designed to address AI disruption, a “tax-contribution coordinated” approach to social security financing can channel the wealth dividends created by AI back into the social safety net, mitigating the shocks to the three cornerstones of social security. As for specific tax instruments, based on policy practices in several countries, value-added tax (or consumption tax), environmental taxes, and capital gains taxes are options, and some research institutions have also proposed levying an AI “excess profits tax.”

On sovereign AI infrastructure. If AI computing power, as some researchers suggest, will become the currency of the future, then controlling AI infrastructure means controlling future seigniorage. Building “sovereign AI infrastructure” is not only a national security issue but could also become a new channel for social security financing. Countries such as the United Kingdom, France, Canada, and Singapore are investing in building state-owned “national research clouds” or sovereign AI computing clusters. Through national investment in core computing infrastructure, governments can directly capture the economic rents generated by AI in the future. After the large-scale commercialisation of AI, this “AI dividend” could play a role similar to Norway’s current petroleum fund, directly injecting into the social security system, achieving a shift from “taxing labour” to “sharing in AI dividends,” and allowing the social security system to share in the capital appreciation brought by AI.

On human capital accumulation in the AI era. A study by the European think tank Bruegel found that in AI-related job postings, mentions of university degrees declined by 23%, while mentions of specific skills increased significantly. At the basic and higher education stages, as the half-life of specific professional backgrounds and skills shortens, education must pivot toward cultivating “metacognitive” abilities, critical thinking, and cross-disciplinary systems integration capabilities. On the youth employment front, as AI takes over entry-level work and the “learning by doing” pathway for human capital narrows, new incentive mechanisms for graduate internships and apprenticeships must be designed. One option is for fiscal funds to subsidise the wages or social security contributions of young people entering the workforce, encouraging enterprises to hire young workers and develop human-AI collaboration and co-growth on the job.