Gearing up for 2025: the weekly recap

There were two major China-related developments this week worth highlighting.

First, the Party just concluded its annual Central Economic Work Conference – where senior officials gather to set economic priorities and policies for the year ahead.

Here are our key takeaways from the meeting readout, released just hours ago:

• The main challenges facing the economy are: insufficient domestic demand, production difficulties at some enterprises, pressure on employment and household income growth, risks and hidden dangers.
• But despite the risks, top officials remain confident in the overall economic trajectory, noting that: “China’s economic foundation is stable, with many advantages, strong resilience, and great potential.”
• Concrete signaling that authorities intend to ramp up fiscal and monetary policy support suggests they might finally address the issue of weak demand, head on.
• A big expansion of fiscal spending is coming in 2025: entailing a budget deficit increase, a higher special purpose bond quota, and new issuance of special treasury bonds.
• Monetary policy loosening will accelerate: We expect the key policy rate to fall by at least 50 bps next year.
• Fiscal reform will also accelerate, as officials committed to “coordinating the promotion of fiscal and taxation system reform and increasing local independent financial resources.”

The bottom line: Economic support measures throughout 2024 underwhelmed, but officials are set to ramp up their efforts – specifically aiming to increase domestic demand – in 2025.

The second major development of note this week was China’s market regulator (SAMR) launching an anti-monopoly investigation into Nvidia’s acquisition of Mellanox.

The backstory: Nvidia acquired the computer networking company in 2019 for USD 6.9 billion.

• SAMR approved the deal at the time, subject to seven conditions.
• Five of those conditions were made public, while two were kept confidential.

In short: The publicly known conditions focused on maintaining fair competition in GPU accelerators, networking equipment, high-speed ethernet adapters, and servers.

• The domestic consensus is that Nvidia may have breached part of its original commitments after halting AI accelerator sales to China in response to US export controls.
• But in our view, SAMR’s probe is straight up retaliation for the US attack on China’s chip industry.
• It’s hard to draw any other conclusion, especially as the investigation comes hot on the heels of China’s retaliatory ban on exports of certain dual-use critical minerals and materials to the US.

What to watch: The probe could result in a few potential outcomes for Nvidia.

Scenario #1: An antitrust fine of up to 10% of the company’s annual China revenue.

• China has accounted for 12.7% of Nvidia’s global revenue so far this year, so a maximum 10% fine would equate to roughly 1.27% of global annual revenue.
• However, SAMR can legally raise the fine by up to five times under “special circumstances” – though such a move would be unprecedented.

Scenario #2: SAMR could hold the investigation over Nvidia’s head indefinitely until the company makes additional investments, promises, or mea culpas.

• This is the tactic that China’s cyberspace administration (CAC) has used when leveraging politically motivated cybersecurity probes against Micron and Didi.
• The investigations have effectively caused both Didi and Micron to capitulate to various state demands.

Scenario #3: The forced unwinding of the Mellanox acquisition. 

• This would be the worst-case scenario for Nvidia, and there’s no way the company would entertain such a ruling, as Mellanox is key to Nvidia’s dominance in AI data centers.

The upshot: Nvidia’s explosive growth can easily absorb antitrust fines.

• But if Beijing demands that Nvidia do the impossible, the company could just rip the bandage off and exit the Chinese market altogether.
• After all, Nvidia’s market share in China will erode over time anyway, due to the export controls.

Putting it all together: Using Nvidia as a bargaining chip against the new US administration may not be as effective as Beijing hopes.

Still, it’s clear that Beijing is sending a message to the incoming Trump administration that China is much better prepared for a protracted tech and trade war this time around.

Where that leaves us: The ball is now in team Trump’s court.

• Trump has pledged to increase tariffs on Chinese imports on his first day in office.
• But plenty of analysts – and even folks in Trump’s direct orbit – argue this is just a negotiating tactic.

Like the rest of us, then, Beijing is stuck waiting to see exactly what moves Trump will make – and hoping for the best, while preparing for the worst.

Andrew Polk, Co-founder, Trivium China

What you missed

Tech

Last week, Hainan province released two rules paving the way for international data services in its Free Trade Port.

• The cyberspace administration’s (CAC) March data export regs gave Free Trade Zones (FTZs) the blessing to pilot their own data export “negative list” regimes.
• Beijing, Shanghai, and Tianjin have since launched programs. Hainan will soon be launching a similar program of its own.

Insurance companies have been piling into venture investments.

• In the past few months, about seven LP funds have been launched by different insurance groups, raising an estimated RMB 80 billion.
• Some context: In June, Beijing signaled strong support for the venture capital industry as shrinking IPOs and dried-up fundraising left startups struggling. A key part of the rescue plan was to channel patient capital like insurance funds into the sector.

Econ and finance

China’s domestic passenger car market saw a second consecutive month of notable growth in November, with retail sales rising 16.5% y/y.

• That’s after 11.3% y/y growth in October, up from just 2.2% the month prior.
• The big question: Can NEV companies maintain their sales momentum into the new year? Some brands reportedly aim to boost their odds by shifting their year-end sales to January.

Business environment

Last Thursday, the Ministry of Finance (MoF) released draft standards aimed at boosting the competitiveness of domestic industrial products – ranging from computers to automobiles – over foreign-made competitors in government procurement.

• The implicit goal is to prevent Western countries from reshoring industrial manufacturing away from China.
• Made-in-China industrial products will now be evaluated as though their price is 20% lower during the bidding process. However, if the domestic product wins the bid, the government will pay the full quoted price, not the discounted amount.

Corporates

New energy vehicle (NEV) exports fell flat in November, hitting their lowest volume since June and their lowest share of auto exports in two years.

• Internal combustion engine vehicle (ICE) exports rose 9.3% y/y to 316,000 units – below their 20-40% y/y growth in recent months, but still positive.
• NEV exports fell 10% y/y to just 80,000 units – a major turnaround after consistent y/y growth over the past year, including 15% y/y growth in Q3.

On Tuesday, European-American auto giant Stellantis announced a partnership with Chinese battery behemoth CATL.

• The companies plan to establish a 50/50 joint venture (JV) with an investment of EUR 4.1 billion to build an NEV battery plant in Spain.
• CATL sees the EU as central to its global expansion – the Spanish plant is its third in Europe.

Politics

On Monday, Xi Jinping chaired a Politburo study session on governance and development in China’s border regions.

• Some context: From restive Xinjiang to the disputed Tibetan border with India to Yunnan’s porous boundary with war-torn Myanmar, border issues are a perennial headache for Chinese leaders.
• Xi underscored that national security and social stability are “baseline requirements for governance in border areas” and called for promoting standard Mandarin in these regions. That signals officials’ focus on social control and assimilationism in these areas is here to stay.

China’s defense minister, Dong Jun, reappeared in public last week.

• On Thursday, Xinhua reported that Dong had met with foreign representatives at a forum in Shanghai focused on the security situation in the Gulf of Guinea.
• Some context: On November 27, the Financial Times reported that Dong had been placed under investigation for corruption, citing unnamed US officials. China’s foreign ministry (MoFA) and defense ministry (MoD) both dismissed the report.

Net zero

On Friday, Wang Hongzhi was appointed as the new Party secretary of China’s energy regulator (NEA).

• Wang replaces oil industry veteran Zhang Jianhua, who retired after six years in the role.
• Our take: Wang is a great choice to lead the NEA. With deep experience across every segment of the power system, few are better qualified to drive the grid infrastructure expansions and power market reforms crucial to advancing China’s energy transition.

US-China

Last Thursday, the Ministry of Foreign Affairs announced that China is sanctioning thirteen US companies in retaliation for US arms sales to Taiwan.

• The companies will be placed on the Countermeasures List under China’s Anti-Foreign Sanctions Law.
• Most of the sanctioned companies are involved in producing unmanned vehicles for the military – that means they make drones, sensing technologies, and autonomous ships.

On Wednesday, CBS News reported that in November, US President-elect Donald Trump invited Xi Jinping to attend his January 20 inauguration.

• History lesson: While foreign ambassadors are typically invited to US presidential inaugurations, State Department records dating back to 1874 indicate that no foreign head of state has ever attended. Trump has reportedly broken with precedent by extending invitations to select world leaders.
• Our take: It’s almost unthinkable that Xi would attend the inauguration himself, but he may send a high-ranking subordinate in his stead. Sending a Party-state bigwig would signal that China wants to make nice with the US.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.