Trump was quiet on Taiwan while in Beijing and there were probably sighs of relief on Capitol Hill as he boarded Air Force One. Yet moments later, Trump told reporters on board that he and Xi had discussed arms sales to Taiwan. Shao Yuqun (邵育群) in our translation below, reads this admission as a break with the Six Assurances that the US privately extended to Taiwan in connection with the August 1982 communiqué—specifically, the assurance that Washington would not hold prior consultations with Beijing over arms sales to Taiwan.

In his Air Force One comments, Trump also added that “the last thing we need right now is a war that’s 9,500 miles away”. He struck the same note in a Fox News interview with Bret Baier, telling him, “we are not looking to have somebody say, ‘Let’s go independent because the United States is backing us’”. Trump insisted that long-standing US policy remained unchanged. Shao, however, draws the opposite conclusion, interpreting his stance on Taiwan’s independence as a “clear policy shift”.

Trump’s post-summit remarks are all the more significant because the Chinese side has sought to bind the tentative US–China détente and the new “stability” framing firmly to Taiwan. This is the position adopted by commentators covered in our post-summit brief and also the official position, with Xi himself stating that if the Taiwan question is “handled properly” the relationship will be stable, and if not, the two countries “will have clashes and even conflicts” (碰撞甚至冲突).

Most Chinese commentators read Trump’s post-summit remarks as broadly favourable to Beijing, but they are split over whether they mark a genuine shift in US policy. The more cautious camp includes commentators like US returnee scholar Cheng Li (李成), who read continuity and argue that the US will not move from strategic ambiguity to strategic clarity.

The other camp, to which Shao Yuqun clearly belongs, reads a genuine shift. Alongside her, the nationalist commentator Jin Canrong (金灿荣) argues that Trump’s 9,500-miles rhetoric is a near-explicit signal that Washington will not intervene should “Taiwan independence” provoke war. Shao makes much the same argument: she reads Trump as explicitly refusing to back “Taiwan independence”, and although she frames this as “a compromise Washington had no choice but to make”, she lands on the same conclusion—that “if war breaks out across the Strait because the Taiwan authorities push for ‘Taiwan independence’, the United States will not send troops to intervene.”

Theirs is a contested reading, but Chinese scholars’ readiness to conclude that the United States would not intervene if Taiwan declared independence can only have deepened the concern already evident in Washington as Trump’s visit began.

—Jacob Mardell

1. Although the new framing of a relationship of “constructive strategic stability” faces substantial opposition within the US, the consensus is historically significant.

2. Beijing has challenged Washington’s strategic narrative by advancing one of its own, demonstrating that, as China’s overall strength grows, so too does its capacity to shape the course of China–US relations.

3. Trump’s unwillingness to back “Taiwan independence” is a compromise Washington had no choice but to make after the balance of economic pressure points forced the US to recognise the limits of its own power.

4. Trump has now stated publicly that he discussed arms sales to Taiwan with the Chinese leader, showing that he has, in effect, abandoned the “Six Assurances” the U.S. made to Taiwan in 1982.

5. Trump has made it clear that he will not back “Taiwan independence”, marking a clear policy shift—if Taiwan authorities push for “Taiwan independence”, the United States will not send troops to intervene.

6. However, the Washington establishment opposes Trump’s posture on Taiwan and will be seeking an opportunity to reassert its agenda: Taiwan remains the issue most likely to upset relations between the US and China.

The Scholar

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Name: Shao Yuqun (邵育群)
Born: 1975 (age: 50/51)
Position: Director, Institute for Taiwan, Hong Kong and Macao Studies, Shanghai Institutes for International Studies (SIIS); Senior Research Fellow, Center for American Studies, SIIS
Previously: Deputy Director, Department of American Studies, SIIS; Director, Department of Research Management & International Exchange, SIIS; Deputy Director, South Asia Research Center, SIIS
Research focus: US foreign policy; US global strategy; China-US relations; US policy towards the Asia-Pacific; Taiwan and cross-Strait relations
Education: BA (Chinese Language and Literature), East China Normal University; MA (International Chinese Studies), East China Normal University; PhD (International Relations), Fudan University (2003)

US TAIWAN STRAIT POLICY UNDER THE NEW FRAMING OF CHINA-US RELATIONS
Shao Yuqun (邵育群)
Published by Shanghai Institutes for International Studies on June 5th
Based on seminar held 28 May
(Lightly edited machine translation)

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During President Trump’s visit to China, the two leaders reached a consensus and committed to building a relationship of “constructive strategic stability” [建设性战略稳定关系]. China explicitly defined this as 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.The US, however, added the words “on the basis of fairness and reciprocity” to the formulation. This shows that, although the two sides agree on a new framing for China–US relations, they differ over what it entails.

Throughout the history of China–US relations, there have been many instances in which the two sides have sought common ground while shelving their differences in the hope of restarting, stabilising or advancing bilateral relations. This time is no exception. There will likely be considerable disagreement and strategic manoeuvring over how to implement the consensus reached at the leaders’ meeting, and the new framing also faces substantial opposition within the US bureaucracy and strategic studies community. Even so, it is of historic significance.

First, after the US began pursuing a strategy of great-power competition with China, Beijing challenged Washington’s strategic narrative by advancing one of its own, grounded in the two sides’ lowest common denominator: “strategic stability”. This shows that, as China’s overall strength continues to grow, so too does its capacity to shape both the current state and future course of China–US relations.

Second, China has expanded what “strategic stability” encompasses. The US conception of the term emerged from the experience of US–Soviet superpower rivalry during the Cold War. Before the two presidents met in Busan last year, Washington repeatedly stressed that it hoped to achieve strategic stability with China—meaning that it wanted China to participate in US–Russia nuclear talks. This time, by bringing artificial intelligence (AI) safety and other issues bearing on world peace and development within the framework of “strategic stability”, Beijing has made a deft move to counter Washington’s Cold War thinking and make clear that it does not want to start a second Cold War.

Third, both sides have made clear that the future of China–US relations lies in peaceful coexistence rather than conflict. Although the Biden administration also stressed the need for “guardrails” in the relationship and said that the United States did not want a military conflict with China, it was never willing to state clearly what the “end state” of China–US strategic competition would be. This time, the US made no mention of “strategic competition”, and Trump explicitly stated that he would not back “Taiwan independence”. In essence, this was a compromise Washington had no choice but to make after the two sides’ recent targeting of each other’s economic chokepoints [互卡脖子] produced “economic mutual assured disruption” and led the US to recognise the limits of its own power.

President Trump’s remarks on Taiwan following his departure from Beijing point to a significant shift in his administration’s policy. First, Trump has, in effect, abandoned the “Six Assurances”. He said that 1982 was a long time ago and that an agreement reached then should not prevent him from discussing arms sales to Taiwan with the Chinese leader. During Trump’s first term, Washington treated the “Six Assurances” privately conveyed to Taiwan by President Reagan as one of the three foundations of official US “one China” policy, alongside the Taiwan Relations Act and the three US–China joint communiqués. Trump has now stated publicly that he discussed arms sales to Taiwan with the Chinese leader, and that the discussion went into considerable detail. This shows that he has, in effect, abandoned the “Six Assurances”.

Second, President Trump has made clear that he will not back “Taiwan independence”. Trump stated explicitly: “We are not looking to have somebody say, ‘Let’s go independent because the United States is backing us.’” This is a major blow to the Democratic Progressive Party (DPP) authorities in Taiwan and to the “deep-green” [深绿] forces within the party. The US establishment opposed Chen Shui-bian’s pursuit of “de jure Taiwan independence” [法理台独], but welcomed Tsai Ing-wen’s “incremental Taiwan independence” [渐进台独]. It regards Lai Ching-te’s policies as provocative towards the mainland and as complicating Washington’s efforts to manage the situation. Yet because the United States is engaged in strategic competition with China, it remains unwilling to criticise Lai publicly. Trump, by contrast, has focused on economics and semiconductors, stating bluntly that he is unwilling to risk war with mainland China in order to back “Taiwan independence”. This marks a clear policy shift.

Third, President Trump has introduced a measure of clarity into the policy of “strategic ambiguity”. Trump said that China’s leader asked him directly whether the United States would intervene if conflict broke out in the Taiwan Strait. He replied: “I don’t want to talk about that.” This is consistent with the position Trump has maintained since taking office: he is unwilling to state whether the United States would intervene in a cross-Strait conflict, which is precisely the traditional US policy of “strategic ambiguity”. Yet given that Trump has also said he is unwilling to back “Taiwan independence”, he has in effect introduced a measure of clarity into the policy: namely, that if war breaks out across the Strait because the Taiwan authorities push for “Taiwan independence”, the United States will not send troops to intervene.

President Trump’s words matter, but the actual policies that follow will matter more, especially US arms-sales policy towards Taiwan. There are powerful forces within the United States opposed to Trump’s postponement of the latest arms sale to Taiwan, and they are waiting for their moment. The strategic contest between China and the United States over Taiwan will continue. Taiwan is also the issue most likely to rupture a relationship of constructive strategic stability between China and the United States.

Amid this, Zheng Yongnian offers a set of diagnoses and recommendations that are noticeably more pointed than his past prescriptions for lighter-touch governance. The core of his argument in this interview is that China now occupies a situation where across a range of sectors, “almost every private enterprise has some connection to local government” and nominally private companies are viewed by the local state as a “lever for promoting local economic development”.

The result is that once sectors like electric vehicles and chipmaking receive attention, the local authorities and the enterprises that they support then come piling in, leading to an over-proliferation of new companies that spreads resources too thin: he raises the examples of China’s plethora of EV companies and the “battle of a hundred models” in Chinese AI. Moreover, he observes that local officials are loath to loosen their controls over society for fear that it will generate instability, suffocating the “social vitality” necessary for genuinely innovative companies to emerge in a bottom-up manner.

However, rather than only employing negative foils, Zheng also raises a positive example of the motorcycle entrepreneur Zhang Xue, whose story of success outside of the gaokao route has made him the darling of opinion leaders critiquing the traditional examination system. He argues that Zhang’s company ZXMOTO is a lesson in how SMEs can benefit from industrial policy without being overwhelmed by it. He is also careful to specify that the target of his criticism is only local governments. The central government, he makes clear, is pursuing the correct course in carrying out “high-standard opening up”.

What Zheng does not interrogate is the degree to which central government policy—the drive to develop domestically a “complete industrial system”, which he praises—may have conditioned the very situation he decries, whereby state-backed capital dominates the private sphere. It is not clear whether he thinks the central government’s current top-down approach to regulating local government excesses will see results.

—James Farquharson

1. Local governments, private enterprises and private capital often “rush in and then scatter” once sectors become high-profile, producing fragmented investment driven more by subjective enthusiasm than by economic laws.

2. Chips, large models and new energy vehicles illustrate this pattern, with the “war of a hundred models” showing how China’s more limited capital base is stretched further by too many competing projects.

3. Behind this proliferation of projects is a local-growth logic in which private enterprises have close ties to the local state, which treats them as a “lever” for launching economic projects and entering high-profile growth industries.

4. Bottlenecks facing private enterprises and SMEs stem from the dominance of state and SOE capital; policy support must be matched by a business environment that better manages capital allocation between large and smaller enterprises.

5. Unleashing private enterprise as a source of social vitality requires balancing a “capable government” and “effective market” with the existence of a “vibrant society”, where the state does not overreach and capital does not become over-extractive.

6. A vibrant society also requires a relaxation of regulation in order to allow room for genuine vitality, but excessive local caution can mean that a focus on stability prevents these reforms from taking place.

7. SMEs are central to China’s private-sector dynamism, with the case of Zhang Xue’s ZXMOTO showing how their capacity for innovative breakthroughs complements the state-backed industrial system.

8. ZXMOTO’s success also suggests that China may be able to break into and potentially surpass the West in traditional manufacturing sectors, like internal combustion vehicles, where Western firms have long held dominance.

9. Promoting further breakthroughs by people outside of the mainstream education system also requires a broader definition of talent, since practical and industrial talent capable of integrating existing technologies is equally important to basic research.

10. At the macro level, China’s development and security must advance in parallel, since a country of 1.4 billion cannot rely entirely on a volatile international market and must pursue self-reliance.

Name: Zheng Yongnian (郑永年)
Year of birth: 1962 (age: 63/64)
Position: Founding Dean and X.Q. Deng Presidential Chair Professor, School of Public Policy, The Chinese University of Hong Kong (CUHK), Shenzhen; Founding Director, Institute for International Affairs, Qianhai (IIA), CUHK, Shenzhen
Previously: Director, East Asian Institute, National University of Singapore (2008–2019); Founding Research Director, China Policy Institute, University of Nottingham (2005–2008); Researcher, East Asian Institute, National University of Singapore (1996–2005)
Research focus: International Relations; Chinese Politics and Society; Nationalism
Education: BA (International Relations), Peking University (1985); MA (Political Theory), Peking University (1988); MA (Political Science), Princeton University (1992); PhD (Political Science), Princeton University (1995)
Experience abroad: Postdoctoral Fellow, Harvard University (1995–1997); University of Nottingham (2005–2008); National University of Singapore (1997–2019)

WHY CHINA NEEDS “ZHANG XUE-STYLE” BREAKTHROUGHS
Zheng Yongnian (郑永年)
Published by Hubei Daily’s Guanyixian on 16 May 2026
Partially adapted from original interview format
Translation and summary by Cherry Yu
(Illustration by ChatGPT)

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The Zhang Xue story has drawn such wide attention for three reasons. [Note: The ZXMOTO 820RR, designed and built by Zhang Xue’s company, has clocked up a series of wins in the World SSP Championship motorcycle racing competition, thus becoming the first Chinese-built vehicle to claim a win in the championship.] The first, and the one on which most people have focused, is personal: he came from an ordinary, even difficult, family background, yet grew into a hero-like figure. The second is the question of how small and medium-sized enterprises (SMEs) can succeed. The third is that his story reflects the overall level of China’s manufacturing. These three dimensions are closely connected and mutually indispensable [缺一不可].

Looking back over China’s journey since reform and opening up, its success stories have been driven primarily by private enterprises, most of which began as SMEs, as Huawei and Tencent once did. Without exception, even the large companies that now occupy leading positions in manufacturing and other sectors all went through an SME stage. The much-discussed “Six Little Dragons of Hangzhou” [“杭州六小龙”] are still SMEs. From the perspective of manufacturing, Zhang Xue’s story can be seen as a successful example with contemporary significance. [Note: The “Six Little Dragons of Hangzhou” [“杭州六小龙”] refers to a group of emerging technology companies based in Hangzhou, including DeepSeek, Game Science, Unitree Robotics, Deep Robotics, BrainCo and Manycore Tech.]

In terms of manufacturing upgrading, ZXMOTO also carries important indicative significance. Take the traditional automotive industry as an example: China has never managed to surpass the West in conventional petrol-powered vehicles. However, in the field of new energy vehicles, it has succeeded in “overtaking by changing lanes” [换道超车] and has surpassed the West. The development path represented by ZXMOTO is particularly interesting in this respect, because it suggests that China could achieve similar breakthroughs in traditional manufacturing sectors that have, until now, been dominated by the West.

Therefore, Zhang Xue’s success was not achieved through personal effort alone, but is inseparable from the continuous improvement of China’s overall manufacturing capabilities. It was against this broader backdrop that his achievement was realised through technological integration [技术集成]. This is not simply the story of a child from a poor family overcoming the odds [逆袭], but one that carries much wider significance. In key areas where China remains constrained by the West, whether among state-owned enterprises (SOEs) or large private enterprises, if we can advocate and practise the “Zhang Xue spirit” [“张雪精神”] and possess the same spirit of exploration that Zhang Xue has demonstrated, we likewise have hope of catching up [迎头赶上] and achieving independent breakthroughs [自主突破].

Releasing the vitality of private enterprises is, in essence, releasing the vitality of society [释放社会活力]. China has a “proactive government” [有为政府] and an “effective market” [有效市场], but I believe we should also add a “vibrant society” [有活力的社会] to this [Note: The idea of a “proactive government” and “effective market” is most associated with Justin Lin Yifu’s theories of New Structural Economics, which is promoted as a key intellectual pillar of China’s modern industrial policy. Zheng’s ideas might differ somewhat from Lin’s.] If the government becomes too proactive, it may end up regulating the economy to the point of rigidity. If capital pursues efficiency to excess and keeps harvesting our society for profit until there is nothing left to take [把我们社会的“韭菜”割得光光的], that too will create problems. In this sense, social vitality is precisely what matters most.

From Zhang Xue’s case, we can see that individual spirit alone is not enough. Without a good business environment [良好的营商环境] and without financial backing from Zhejiang and elsewhere, he would have struggled to achieve what he has today. [Note: In January 2026, ZXMOTO completed a RMB 90 million Series A funding round led by Zhejiang Venture Capital [浙创投], an investment platform with Zhejiang state-capital backing.] In the United States, figures such as Jensen Huang, Elon Musk, Bill Gates in an earlier era and Sam Altman today all represent a form of entrepreneurship. The precondition for releasing that entrepreneurial spirit and translating it into material outcomes is a good business environment.

China does not lack entrepreneurs. Since the 1980s, we have nurtured a large cohort of outstanding entrepreneurs, including Ren Zhengfei, Wang Chuanfu and Pony Ma. The question now is how to enable more entrepreneurs to emerge. We must acknowledge that private enterprises today, especially some SMEs, have indeed encountered certain bottlenecks [瓶颈] in their development. At the level of central policy, the principle of the “two unswerving commitments” [两个毫不动摇] is clear: the Private Economy Promotion Law is now in force and being implemented, and the central authorities have maintained regular engagement with private entrepreneurs. Yet why have private enterprises now run into development bottlenecks? To answer this, we need to look at the business environment. [Note: The “two unswerving commitments” [两个毫不动摇] refer to the policy of unswervingly consolidating and developing the public sector, while unswervingly encouraging, supporting and guiding the development of the non-public sector.]

Realistically speaking, this problem does not exist in the United States because there is no involvement by SOEs or state capital. However, in China, we must properly handle the relationship between SOEs and private enterprises, and between state capital and private capital. If we shy away from this real contradiction, we will make mistakes. Therefore, we need to confront the problem directly, recognise that both SOEs and private enterprises are important and properly handle the relationship between the two.

Judging from the current situation, large enterprises, whether state-owned or private, have absorbed and taken up too much capital. Since the total amount of capital is limited, SMEs will naturally find it difficult to obtain sufficient support if financial resources and services flow in large quantities to big enterprises. Likewise, if most capital is directed towards SOEs, the space for private enterprises to develop will also be squeezed. The key to handling this issue properly lies in building a good business environment.

What is a “vibrant society”? I think the most important point is “allow room for vitality, [and then] govern effectively” [放得活、管得好]. Yet the approach of some local governments today is a preference for not relaxing or loosening controls, on the grounds that grasping things tightly makes for more stable social management, whereas letting go might invite disorder [出乱子]. The problem is that governance premised on refusing to loosen control often ends up in “governing to death” [管死] rather than “governing into existence” [管活]. The precondition must be to allow room for vitality [放得活] before governance can truly be effective [管得好]. At present, there is no problem with the direction of opening up at the national macro level, which is steadily advancing towards high-standard opening up to the outside world. However, at the micro level, problems remain to be addressed, and considerable space remains to be unlocked.

Private enterprises themselves do have problems, and private capital is not without issues either. Aside from this, the role of local governments also cannot be ignored. Whether in chips or in large models, a common phenomenon at present is that some local governments and private investors tend to “rush in and then scatter” [一哄而上、一哄而散], acting less in accordance with economic laws than on the basis of subjective will [主观意愿]. The result is that our investment has become dispersed. At present, AI large models in both China and the US are basically led by private capital, but while the US has very strong capital power and only a limited number of large models, China has already seen a “war of a hundred models” [百模大战] despite having a weaker capital base than America’s, meaning that our already limited capital is being spread even more thinly. A similar situation also exists in the field of new energy vehicles. In the US, Tesla is essentially dominant, whereas China has a huge number of new energy vehicle brands, which objectively reflects a similar pattern of fragmentation.

We have long been influenced by Western economics, especially neoliberal thinking, which holds that the government should not intervene in private capital but should simply issue licences and allow it to compete freely. However, in reality, if you look across different sectors in the West, the number of competitors is limited, whereas in China the number of competitors is almost unlimited, a phenomenon that is admittedly also related to the size of China’s population. Whether in the platform economy, new energy vehicles or any other sector, almost every private enterprise has some connection to the local government. Local governments view private enterprises as a lever [抓手] for pursuing local economic development. As a result, once a sector attracts widespread attention, such as with new energy vehicles, many localities rush to launch their own projects [纷纷上马自己的项目]. Behind this lie underlying assumptions, problems within private enterprises themselves, but also the factor of improper handling of the relationship between government and the market. I think it’s a result of multiple factors working together rather than any single determining factor.

This touches on our understanding of what counts as talent. If measured by traditional standards of talent, Zhang Xue would be excluded. [Note: On the basis that he only has a junior secondary education and trained as an apprentice mechanic, placing him outside China’s mainstream and higher-education-centred conception of talent.] At present, we essentially treat academic talent as the sole benchmark for defining talent. Basic research is undoubtedly very important, as is academic talent. But problems arise if academic talent is treated as the only form of talent, because practical talent capable of turning the results of basic research into applied technologies is equally important.

To give a simple example, the 5G technology that Mr Ren Zhengfei and his team at Huawei developed is now something each of us uses within our phones, but 5G itself began as an academic paper. As an idea, 5G belonged to basic research, which is undoubtedly very important. Yet without people like Ren Zhengfei to turn 5G into an applied technology, it would have remained on paper and could not have been transformed into economic activity. This is why industrial talent is so crucial. The same applies to innovative drugs, where many achievements are also translated into application by industrial talent.

That said, it is worth noting that from a global perspective, basic research in most countries is located in universities, a pattern with its own particular historical background. Before the 1960s, large corporations also carried out basic research, with Bell Labs being the most representative example. Later, in the 1960s and 1970s, as US politics tilted towards left-wing policies and antitrust laws were implemented, the basic research functions of large corporations were moved into universities. [Note: The 1956 “consent decree”, on the basis of anti-trust law, obligated the AT&T-controlled Bell System to license its patents royalty-free. Zheng is probably suggesting that for a time this undermined the monopoly rents which made in-house basic research possible, but it has also been argued that this spurred innovation by other companies.] This produced a pattern in which universities primarily conduct basic research while enterprises are responsible for translating it into applied technologies. This division of labour did not emerge naturally but was the result of antitrust law.

However, the situation has now changed. Today, both universities and large corporations are engaged in basic research. For example, Google has already cultivated several basic research talents whose work is of Nobel Prize calibre. With the arrival of the age of artificial intelligence, more basic research is shifting towards large corporations. Even Professor Li Feifei of Stanford University has voiced concern that top universities such as Stanford now struggle to find talent in artificial intelligence. This is not simply a matter of money, although money is indeed one factor. The more fundamental reason is that basic research in large corporations follows a different path from basic research in universities. University-based basic research, such as Einstein’s work, often stems from scientists’ personal interests, which may or may not ever be translated into applied technology, despite its great importance. Meanwhile, basic research in large corporations is usually problem-driven, pushing research forward from specific practical questions and therefore more likely to be translated into applied technology.

Viewed across the course of human history, many Nobel Prize-winning achievements in basic research may never have been converted into practical applied technologies, but that does not make them unimportant. Without necessarily being directed towards applied technology, some basic research contributes new methodologies, while some of it changes the way people think. By contrast, basic research carried out by large corporations is much more likely to be converted into economic activity and applied technologies. These represent two different paths.

Many Nobel Prizes have emerged from the marketplace of ideas, but applied technology is different in that it can be advanced in a planned way, and many of China’s national projects fall within this category. What Zhang Xue has done is also applied technology. If you were to ask which part of ZXMOTO represents an original idea, the answer would be none. What he has done is combined, fused and integrated different technologies, improved efficiency and made such a product. Therefore, we still need to fully recognise the difference between these situations. Is this not an expression of social vitality?

In the 1980s, we were deeply influenced by Western liberalism and believed that many things, including grain and large aircraft, could be purchased from the international market rather than produced domestically. This may be an option for small countries and small economies, but it is absolutely not viable for an economy on China’s scale. In this respect, the decisions made at the central level have been entirely correct. New energy vehicles are a case in point: in the past, some argued that since the world was not short of energy, there was no need to develop new energy, a view that was also prevalent within the US. Facts have shown that our direction was correct, as are our current efforts to improve the efficiency of traditional energy and coal use. Today, China has the most complete industrial system across the categories used in UN industrial statistics. It’s the right approach.

For a major country of more than 1.4 billion people, relying entirely on the so-called international market would be a grave mistake. Globalisation and international markets exist only under certain conditions, and with geopolitical conflicts and wars now occurring so frequently, those markets could be disrupted at any time. Having drawn profound lessons from China’s history since the War of Resistance against Japan, we will not repeat the same mistakes, which is why we have always emphasised that development and security must advance in parallel [两条腿走路] and be pursued in a coordinated way.

I think what is tragic about humanity today is that we quantify everything and compare only the numbers. Numbers can certainly tell us something, but they cannot tell us everything. In 1820, China still had the world’s largest GDP but was later defeated by Britain, whose share of global GDP was in fact not very high. Similarly, although the United States still has a higher GDP per capita and a larger overall economy than China, we are not worse than the US in certain aspects of quality of life, such as safety and the lives of ordinary people. A fixation on quantitative comparison, much like entrepreneurs judging success solely by the size of their fortunes, overlooks something essential about human society—namely, that many dimensions of human life cannot be quantified.

This requires us to change our way of thinking, because without such a change, anxiety will only continue to grow. The state will certainly take economic issues into account, as reflected in the economic growth target of 4.5 to 5% set at this year’s Two Sessions. The economic base is already very large, so growth does not need to be so fast. Humanity as a whole pursues not only material wellbeing but also spiritual fulfilment, which makes China’s shift from quantity-based growth to quality-based growth especially important. Yet many people’s thinking remains stuck in the logic of quantity-based growth, when what we should really be pursuing is quality-based growth and development that is more coordinated and better integrated.

Since then, Huang has been able to draw on his credibility as an able economic administrator in Chongqing to maintain an active presence across issues such as rural economic reform, the property crisis, and economic rebalancing in favour of promoting consumption. In the following speech, delivered on 19 May at the annual Tsinghua PBCSF Forum, Huang addresses China’s US$1.2 trillion goods surplus in strikingly direct terms. Several of his observations and recommendations stand out.

First, he is unequivocal in his agreement with the analys…

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In this context, May’s policy guidance is being interpreted through the lens of disciplining local-government overreach. Recent official discourse on further developing the “unified national market” is explained by Yang Zhiyong, President of the Chinese Academy of Fiscal Sciences, as aimed at curbing hidden local protectionism and imposing greater budget discipline on localities. Likewise, the success or failure of the current push to develop “future industries” is read by Xu Zheng of the Jiangsu Party School as hinging on whether a growth model based more on “patient capital” than another round of local government-raised debt can be developed.

One culprit blamed by economists for the difficulty of economic reform is China’s indirect financing model, still based largely on bank loans and supply-chain finance. Renmin University’s Wu Xiaoqiu and CUHK’s Zheng Yongnian see the US system of equity finance as demonstrating its advantages for reducing reliance on state-backed finance and supporting a healthier market economy. KPMG China’s Wu Xuchu adds that an economy funded by equity investment would be more resilient to risk contagion in the face of market contraction.

However, the challenges of switching to equity markets are clear. The apparent optimism of last year’s “savings migration” [存款搬家] narrative, in which it was hoped savings might move from real estate to the stock market, is now confronted by what several refer to as an asset shortage: cash is abundant, but a lack of sufficient high-quality assets impedes the entry of large funds. There is also a demand-side dimension to the problem. Financial analyst Wang Jian sees China’s undeveloped equity markets as arising from the developmental-state model reaching its economic limits before citizens have accumulated enough capital to support private investment-led development—a case of “transition before wealth” [未富先转].

This narrower discussion of financing models also feeds into a broader criticism of the role of local governments in the private economy. Both Wu Xiaoqiu and Zheng Yongnian present the broad economic role of local governments and SOEs in many localities as both a constraint on innovation and a misinterpretation of what an “active government” [有为政府] should mean. Zheng’s emphasis on the under-appreciated importance of a “vibrant society” is particularly noteworthy.

Yet trends may be moving in precisely the opposite direction. As local governments face growing fiscal strain, the pressure to develop monetisable assets is increasing. Former urban planning official Zhao Yanjing describes the shift towards managing wealth-generating assets as the only viable pathway for local governments out of indebtedness. Coupled with the need to rescue distressed firms, this could risk making the line between the state and private economy even harder to draw: Liu Xiaoxia and Yang Yuanyuan’s Jiangsu survey of state capital taking stakes in private firms suggests that this phenomenon of “reverse mixed-ownership reform” [反向混改] is spreading for those very reasons.

—James Farquharson

1. Local Government:

   1. Wu Xiaoqiu on the need for local-government and capital-market reform for the age of the surplus economy.

   2. Zheng Yongnian on the need for greater social vitality to achieve entrepreneurial breakthroughs.

   3. Zhao Yanjing on land finance and the new fiscal model for local government.

   4. Liu Xiaoxia & Yang Yuanyuan on the spreading phenomenon of reverse mixed-ownership reform—the injection of state capital into private enterprise.

   5. Wang Qing on national market integration and breaking invisible local protection barriers.

   6. Yang Zhiyong on a proposed national negative list for local government subsidies.

2. Financial Reform:

   1. Wang Jian on how “transition before wealth” has caused underdeveloped capital markets.

   2. Wu Xuchu on why local government-backed indirect financing is ill-suited to riskier industries like AI.

   3. Li Yang on the paradox of plentiful money and scarce capital.

   4. Xu Zheng & Zhan Zhiyong on the challenges posed to the development of “future industries” by overcapacity and weak commercialisation.

3. Trade Surplus:

   1. Huang Qifan on China’s trade surplus and structural adjustment.

   2. Liu Yuanchun on China’s current-account imbalances and the need for demand restructuring.

4. Economic Stimulus and Rebalancing:

   1. Yu Yongding on why the Fifteenth Five-Year Plan is right to prioritise infrastructure stimulus.

   2. Li Xunlei on the limits of counter-cyclical stimulus.

   3. Liu Shijin on weak end-user demand as China’s growth bottleneck and why infrastructure money would be better spent on pensions.

   4. Lu Zhe on how population flows explain the consumption gap between first-tier and lower-tier cities.

1. Local Government

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If a label is needed, Qin is a left-leaning liberal, but his intellectual outlook is shaped above all by a fiercely critical spirit. He does not pull his punches against Western liberals or the left, either. In his account of global imbalances between consumption and labour, he has criticised the parochialism of the Western left’s focus on redistribution as a solution to economic stagnation and …

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Executive Summary

1. Chinese academic commentary on Trump’s Beijing visit is markedly upbeat, portraying the summit as evidence that US-China relations have entered a new phase.

2. Many authors go beyond official caution around a possible “new paradigm”, treating the summit itself as evidence of a paradigmatic shift.

3. The optimism is caveated: authors cite implementation risks, US domestic politics, midterms, future administrations, alliances and wider systemic uncertainty.

4. Some commentary frames the détente as tactical: Beijing gains “time and space”, while Washington gains “breathing space” [喘息之机].

5. Still, only six of 50 authors primarily emphasise fragility. Most frame the thaw as evidence of deeper structural change.

6. Wu Xinbo (吴心伯) is revealing: before the summit he described “fragile stability”; afterwards, he called the new stability “strategic and sustainable”.

7. The core structural claim is that the balance of power has shifted, forcing Washington into a more equal relationship with Beijing.

8. Zh…

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Ahead of our fuller assessment of Chinese reactions to this week’s summit, we turn to a related debate already underway: Chinese engagement with Trump’s revival of the G2 concept. The analysis below draws on a review of around fifty articles (full bibliography here) touching on the idea, from which we have selected six representative articles. Many thanks to Cherry Yu for her help with the review. — Jacob

When Trump framed his October 2025 meeting with Xi Jinping as a meeting of the “G2”, he did more than revive an old phrase. He reactivated a debate that has existed in Chinese policy circles for nearly two decades: how should China respond when Washington recognises it as a peer, but does so through a framework Beijing sees as hegemonic, exclusionary and politically costly?

Beijing has now rejected the G2 framing twice: first in 2009, when the concept was floated under Obama, and again following Trump’s revival of the term. After the Busan summit on 31 October, an MFA spokesperson brushed off the framing by restating China’s commitment to independent foreign policy, multipolarity and the Global South. Wang Yi made the rejection more explicit in March 2026, when he said China does not “subscribe to the logic of great-power co-governance”.

That remains the official line. In the first of the pieces presented below, former official Zhou Li (周力) gives it its sharpest articulation, warning Chinese analysts against taking the concept seriously. For Zhou, G2 is not a neutral description of US-China weight in the international system. It is a world-order frame: one that legitimises great-power monopoly, threatens China’s Global South positioning, and contradicts Beijing’s claim to support an equal, orderly multipolar world.

And yet Chinese scholars have not simply heeded the warning. They repeat the official language on multipolarity and South-South relations, but continue to probe the concept’s possible uses. This is the central tension in the debate: China rejects G2 as a label, but parts of the policy world are implicitly grappling with the structural reality behind it.

One reason is status. American recognition matters less to the more confident China of 2026 than it once did, but Trump’s “G2” language still carries symbolic value. Alongside Washington’s treatment of China as a “near peer”, it signals that the US is no longer able to look down on China in quite the same way.

The dominant workaround is therefore not to embrace G2 outright, but to recode it. Scholars such as Xia Liping (夏立平) reframe it as “coordination” rather than “co-governance”. Xia goes furthest in operationalising this idea, proposing a “China-US Plus” format that would keep US-China coordination embedded in wider regional and multilateral settings. In his hands, G2 becomes less a duopoly than a mechanism China can use: to constrain Washington, reinforce Beijing’s One China principle and check Japan’s strategic ambitions.

Yan Xuetong (阎学通) and Zheng Yongnian (郑永年) approach the question differently, treating G2 less as a policy proposal than as a description of de facto bipolarity. For them, Trump’s language matters because it reflects an emerging structure in which only China and the US qualify as true superpowers. Zheng takes the most explicit step from structural diagnosis to strategic accommodation, arguing that China’s sovereignty claims over Taiwan and the South China Sea need not be incompatible with continued US geopolitical space in the Western Pacific, and going so far as to suggest that, once these sovereignty issues are resolved, China could “welcome” a continued US presence in the region.

Wu Xinbo (武心波) illustrates the same ambivalence from another angle. He begins by laying out the material foundations that might make US-China co-governance plausible — economic complementarity, security weight, technological interdependence and global demand for joint problem-solving — before ultimately dismantling the case. His conclusion is not that coordination is unnecessary, but that formalised co-leadership would be politically and structurally impossible.

Reading across these pieces, Trump’s G2 language appears to be understood less as a settled framework than as a signal of opportunity. For some Chinese analysts, it points once again to a more transactional US president who may be open to bargaining across issues. Taiwan recurs in this context, not always explicitly as a bargaining chip, but as the central sovereignty question around which any imagined grand bargain would turn.

That said, the deeper story is not simply Chinese enthusiasm for a Trumpian G2. It is the unresolved tension between China’s ideological commitment to multipolarity and its practical recognition that US-China coordination is likely to remain the central axis of global politics. Beijing wants the benefits of peer recognition, practical coordination and strategic stability without the costs of an explicit two-power directorate: alienating the Global South, appearing to abandon multipolarity or accepting responsibility for a US-shaped order.

Finally, several authors are aware that the Trump window may be temporary. Jia Qingguo (贾庆国), the sixth author discussed below, focuses on the domestic US politics that make the moment possible. Trump’s China policy is unusually transactional and value-light, and for now his grip on the Republican Party limits open pushback. But the opportunity remains vulnerable to hawks inside the administration, Congress, bureaucratic momentum and allies seeking to pull Washington back towards confrontation.

— Jacob Mardell

1. Despite Beijing’s formal rejection of the G2 concept floated by Trump, Chinese scholars continue to engage with it, treating it as a signal of Trump’s openness to a quid-pro-quo relationship—with Taiwan recurring as a potential bargaining chip.

2. The official line, crystallised by Zhou Li’s December 2025 article, casts G2 as hegemonic in character and incompatible with Beijing’s commitment to multipolarity—not least because it would risk alienating China’s partners in the Global South.

3. Chinese scholars’ dominant workaround is to reframe G2 as “coordination” rather than “governance”. Xia Liping gives this approach institutional form through his proposal for a “China-US Plus”, while also spotting a chance to bind Washington more tightly to Beijing’s One China principle.

4. Yan Xuetong and Zheng Yongnian treat G2 as a description of de facto bipolarity, with Zheng floating sovereignty-versus-geopolitics trade-offs including a “welcomed” US Western Pacific presence post-reunification with Taiwan.

5. Several authors also present Trump’s presidency as a temporary window of opportunity. Jia Qingguo looks to the domestic US politics behind that window, arguing that Trump’s value-free China policy remains unpopular but largely unchallenged within the Republican Party.

Selected Articles

1. Zhou Li

Takeaway: This piece crystallises the Party line rejecting the G2 and warns domestic scholars against entertaining the concept.

Name: Zhou Li (周力）
Position: Former Vice Minister of the International Department of the Central Committee of the Communist Party of China
Source: Xi Jinping Thought on Diplomacy website (24 Dec. 2025)

• Trump’s G2 framing reflects hegemonic thinking and should be rejected. China already formally rejected the concept when it was floated under Obama in November 2009.

• Chinese scholars who now describe the future international order as a US-China ‘bipolar structure’ (两极格局), with everyone else reduced to a ‘vast middle ground’ (广大的中间地带), abandon the principle of sovereign equality and risk separating China from Russia and the Global South. This also betrays Xi’s vision of an equal and orderly multipolar world.

• Chinese leaders since Mao have consistently rejected superpower status. Multipolarity means multiple centres of power, not a two-power arrangement in which the US and China act as co-governors.

Zhou: “After Trump took office for a second term in 2025, certain scholars within China have likewise proposed that the principal axis of international relations going forward will be a US-China ‘bipolar structure,’ with everything else constituting ‘vast middle ground’; some have plainly endorsed ‘G2’ and called for China's foreign policy to be reshaped accordingly.”

2. Xia Liping

Takeaway: China should embrace “G2”, rebranded as “coordination” (中美协调) rather than “co-governance” (中美共治), and weaponise it to constrain the US, lock in the One China principle, and check Japan’s militarist revival.

Name: Xia Liping (夏立平)
Position: Founding Dean, School of Political Science and International Relations, Tongji University
Source: CRNTT (16 Mar. 2026)

• G2 should be understood as ‘China-US coordination’ (中美协调), not ‘China-US co-governance’ (中美共治). Trump’s revival of the term shows that Washington has been forced to ‘look across’ (平视) at China rather than ‘look down’ (俯视). China’s rare-earths and soybean leverage helped blunt Trump’s trade war and pushed Washington into the ‘bargaining’ (讨价还价) stage of accepting China’s rise.

• China should operationalise this through ‘China-US Plus’ (中美+) groupings — China-US+ASEAN, China-US+EU, China-US+AU and China-US+Arab League — keeping G2 compatible with multipolarity rather than turning it into a superpower duopoly.

• US compliance with the One China principle should become a ‘political foundation’ (政治基础) of this arrangement, while the format should also be used to push back against Western criticism on human rights, Taiwan, Hong Kong, Tibet and Xinjiang. G2 should also be used to constrain the US-Japan alliance, highlight Japan’s nuclear ambitions as a threat to the US itself and, if necessary, pursue IAEA inspection of Japanese nuclear facilities through a ‘China-US+EU’ mechanism.

Xia: “China needs to use Trump’s revival of ‘G2’ to build a major-power coordination and cooperation mechanism centred on ‘China-US Plus’ (中美+). The current trend of world multipolarity continues to advance.”

3. Yan Xuetong

Takeaway: Trump may not have had a clear idea of what “G2” means, but the term reflects a bipolar order that was in fact already established in 2019.

Name: Yan Xuetong (阎学通)
Position: Honorary Dean, Institute of International Relations, Tsinghua University
Source: 中国网 (21 Jan. 2026)

• Brexit and the US-China trade war marked the turn towards deglobalisation (逆全球化), a process that is now complete.

• The gap between China and the US and the rest of the world will continue to widen, while the gap between the two superpowers narrows. Quantitative projections show that no other major power can become a superpower within the next decade: their starting points are too low and their growth rates too slow. India is the only partial exception.

• Trump’s “G2” language therefore signals structural recognition rather than a project of co-leadership. What it points to is a “bipolar structure” (两极格局), not joint US-China leadership.

Yan: “China and the US are already considered superpowers by the world; Trump has proposed ‘G2’, and Hegseth has said this is a new era of superpower confrontation. So the international community increasingly regards China and the US as superpowers, and other countries as not.”

4. Zheng Yongnian

Takeaway: We shouldn’t over interpret Trump’s remarks — the fact is that we are already living in a “G2” bipolar world.

Name: Zheng Yongnian (郑永年)
Position: X.Q. Deng Presidential Chair Professor and Dean, School of Public Policy, The Chinese University of Hong Kong (Shenzhen); Director, Institute for International Affairs, Qianhai
Source: GBA Review (1 May 2026; based on remarks at the Boao Forum, 27 Mar. 2026)

• A “de facto G2” (事实上的G2) already exists. On every measurable indicator — economic size, technology and military power — only China and the US qualify as superpowers. Kissinger’s formula of “two superpowers, several major powers” (两超多强) has collapsed into “two superpowers”, as the “several major powers” decline. Multipolarity (多极化) remains an ideal and a goal, not a present reality. After reciprocal tariffs, the world has returned to “power politics” (实力政治), with relations increasingly grounded in strength rather than ideology or alliance blocs.

• East Asia is reading this shift through three anxious lenses: first, that the US is retreating to the Western Hemisphere, making self-reliance necessary; second, that individual states can become America’s regional anchor and use that position for leverage; and third, that China and the US are converging in a way that erases their strategic room for manoeuvre. Japan embodies all three: militarising in response to US retrenchment, trying to become “the Israel of East Asia” (东亚的以色列), and working to obstruct China-US rapprochement. Other East Asian states are “Japanising” to varying degrees.

• For China, Taiwan and the South China Sea are sovereignty issues on which there is no room for compromise; for the US, they are questions of geopolitical space. The mistaken US assumption is that China resolving these issues would mean expelling the US from the Western Pacific. Instead, after reunification, China could “welcome” a continued US presence in the region — even signing long-term contracts allowing US warships to dock at sovereign Chinese ports. South China Sea reefs could also be developed as international public goods.

Zheng: “At the international-politics and diplomacy level, precisely because Taiwan and the South China Sea are sovereignty issues, China has no compromise room. But China's sovereignty issues don't necessarily damage US geopolitical space. Once China resolves the sovereignty issue, everything else can be defused through pragmatic cooperation.”

5. Wu Xinbo

Takeaway: “China-US dual leadership” (中美双领导体制) has real material foundations and global demand, but the structural obstacles are insurmountable—coordination, not co-leadership, is the way forward.

Name: Wu Xinbo (武心波)
Position: Professor, Shanghai International Studies University (SISU).
Source: 海外看世界 (20 Dec. 2025; written 12 Dec. 2025)

• There are material foundations for a “China-US dual-leadership system” (中美双领导体制): economic complementarity, with the US occupying the innovation and pricing end and China the manufacturing and market end; security complementarity, with US alliances and Chinese non-aligned peacekeeping; and technological complementarity, with the US leading in basic research and China stronger in application. There is also global demand for joint leadership, from emissions reduction and pandemic response to the mismatch between IMF voting rights and current economic weight.

• However, four structural obstacles are decisive. First, there is cognitive incompatibility: the US “G2 vision” amounts to hegemonic co-management (霸权共管) aimed at constraining China, which is fundamentally opposed to China’s position of “cooperation but not co-governance, equality but not domination” (合作而不共治、平等而不主导). Second, strategic trust has collapsed under US polarisation and China’s drive for “autonomous controllability”. Third, the Global South — 88% of the world’s population — rejects great-power co-management as an illegitimate monopoly. Fourth, the EU, India and Brazil refuse subordination to either pole.

• The solution is to reject both “hegemonic co-management” and “zero-sum confrontation”, and instead build a model of “coordination rather than dominance, complementarity rather than opposition” (协调而非主导、互补而非对立), with the Global South as the indispensable third leg.

Wu: “The 'G2 vision' advocated by some forces in the US is, in essence, an attempt to use bilateral co-management to maintain hegemonic position and to limit China's technological breakthroughs and industrial upgrading.”

6. Jia Qingguo

Takeaway: Trump 2.0 has unexpectedly opened a rare window for stabilising China-US relations, but the relationship rests on Trump’s personal grip on the Republican Party and remains exposed to multiple complicating factors.

Name: Jia Qingguo (贾庆国)
Position: Standing Committee Member, CPPCC; Professor, School of International Studies, Peking University; Director, Institute for China-Foreign Cultural Exchanges, Peking University
Source: 全球经济治理观察, reposted via WeChat (4 Feb. 2026)

• Trump 2.0’s China policy has four defining features: tariff-centred leverage; interests over values (重利轻义); deliberate avoidance of Taiwan, Xinjiang, Tibet and Hong Kong; and public emphasis on cooperation, including references to “G2”.

• This breaks with Washington’s hardline China consensus, but has faced little open Republican pushback because Trump retains strong support among Republican voters.

• The window for stabilising relations remains fragile. Four factors could still derail it: hawks inside the administration; Congress; bureaucratic momentum below the political level; and allies seeking to pull Washington back towards confrontation in order to relieve pressure on themselves.

• China should build a high-level unofficial (非官方) communication mechanism alongside official channels, so that potential provocations can be clarified before they escalate. Trust should also be rebuilt through concrete cooperation on Russia-Ukraine, non-proliferation, strategic-stability dialogue and AI norms.

Jia: “Although there are now signs of stabilisation in US-China relations, and new opportunities for the future development of the relationship, there remain major variables and risks.”

The World To 2035: Executive Summary

1. US–China bipolarity will become firmly entrenched. The US will maintain an overall lead, dominating cyberspace, services and international influence, whilst China will dominate the physical economy, manufacturing and military scale.

2. Middle powers, including the EU and India, will reject ideological camps in favour of pragmatic, “issue-based alignment” [问题性结盟], navigating between the two superpower ecosystems.

3. Fuelled by populism, trade protectionism and the normalisation of “might makes right”, the current “counter-globalisation order” [逆全球化秩序] will reach its peak during the second Trump administration.

4. By 2035, prolonged political fragmentation and widespread popular dissatisfaction with almost two decades of counter-globalisation will generate global demand for a new international order grounded in basic moral principles.

5. AI-driven excess production and entrenched protectionism will fracture global markets, pushing states towards “club-style” coordina…

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China’s April economic commentary turned on three overlapping questions: whether the apparent Q1 rebound reflected genuine demand recovery or temporary price-shock and policy effects; whether macro policy should still lean on upgraded fixed-asset investment or shift more decisively towards households and workers; and what the Iran conflict means for China’s sectoral opportunities and the prospects for RMB internationalisation.

Guo Kai of the think tank CF40 is an outlier in taking the Q1 figures as a sign of “modest spring recovery” in the property market, advocating on that basis for continued supply-side clearing rather than heavy stimulus. Most of the economists surveyed here are less sanguine, with Wu Ge of Changjiang Securities pointing out that the improvement in the producer price index (PPI) has been mostly driven by commodity prices, and is sceptical that the property market figures represent anything more than a short-term “pulse”.

CASS’s Zhang Bin is the most categorical in articulating the need for bolder stimulus measures—arguing macro policy needs to carry out a “war of annihilation” against deflation—while Yu Yongding, also at CASS, views Keynesian infrastructure stimulus as the most effective way to stimulate private investment and raise economic activity, incomes and expectations in the short term, viewing improvements to social security as effective only in the long term.

The 28 April Politburo meeting readout’s mention of ‘six network’ infrastructure upgrades should be read alongside the broader rollout of additional central funds for fixed-asset investment, pointing to a policy logic closer to Yu’s thinking—even as “strong supply, weak demand” and “investing in people” have been adopted by official discourse. As Renmin University’s Mao Zhenhua points out, a key policy goal is likely to consolidate the Q1 investment rebound after 2025’s rare fall in fixed-asset investment, when weak investor confidence and anti-involution supply reductions weighed on project activity.

Against this, a significant chorus of economists favour rebalancing away from fixed-asset investment and towards greater support for households, workers and consumption. Wang Yiming, former deputy director of the Development Research Centre of the State Council, sees the faster rise in industrial activity relative to demand in Q1 as a sign that rebalancing is moving further in the wrong direction. PKU’s Zhao Bo, while warning of hidden weaknesses in the Q1 labour-market data, makes the case for expanding urban welfare to migrant workers to restart the growth engine of rural-to-urban migration. In their diagnoses of stretched asset valuations and overcapacity, Li Xunlei of Zhongtai Securities and Zhang Weiying of PKU come closest to a broader critique of China’s current economic model.

At the local level, these macro debates become a more immediate question: what growth strategy remains available to weaker cities when the old land-finance and investment-led model is exhausted, but the gains from industrial upgrading remain unevenly distributed? Zhao Yanjing, former head of the Xiamen urban planning department, is notably alarmed about the future prospects of these localities. He warns in a new book that instead of investing in future industries, many local governments are squandering their “last pot of gold” by using “urban renewal” as cover for unsustainable liquidity generation. Tsinghua’s Dong Yu, meanwhile, offers practical pointers to local officials on where to concentrate their economic management efforts during the 15th Five-Year Plan.

The Iran conflict gives the stimulus debate an external dimension. While acknowledging the supply-side squeeze facing some industries, Luo Zhiheng of Yuekai Securities argues that China’s relative energy resilience could also create sectoral openings, including the chance to absorb third-country export orders from Japan and South Korea. Contrary to the electrification narrative, he underlines that a preponderance of coal-powered steel plants gives China an advantage over Japan and South Korea, where electric-arc furnaces are more common and whose plants are more sensitive to energy-price rises.

The same search for openings carries into the financial discussion. Tsinghua’s Cao Yuanzheng and former PBoC officials Sheng Songcheng and Zhou Xiaochuan see opportunities for yuan internationalisation through commodity pricing, offshore safe-asset issuance and China’s outward investment flows. CASS’s Zhang Ming adds the balance-of-payments context: in China’s case, rising non-reserve financial-account outflows helped offset a record goods-trade surplus, but low returns on overseas assets could narrow those outflows and increase upward pressure on the yuan.

— James Farquharson

1. Iran War Impacts:

   1. Luo Zhiheng on sectoral openings for China amidst a global energy-price shock.

   2. Lian Ping on identifying when high oil prices shift from useful inflationary pressure to macro risk.

   3. Guan Tao on energy shocks and China’s fragile reflation.

   4. Guo Kai & Zhu He on the “silver lining” of oil-price inflation as a route out of low-price stagnation.

   5. Cao Yuanzheng on the opportunities for RMB regionalisation amid the energy-price shock.

2. Economic Stimulus and Rebalancing:

   1. Yu Yongding on infrastructure investment as a means to boost expectations and demand.

   2. Luo Zhiheng on the shift in fiscal policy emphasis following the 28 April Politburo meeting.

   3. Zhang Bin on why weak demand requires the policy tools of a “war of annihilation” rather than a “war of attrition”.

   4. Mao Zhenhua on the current window of opportunity for carrying out further fiscal stabilising.

   5. Wang Yiming on China’s worsening “strong-supply, weak-demand” imbalance.

   6. Shen Jianguang on the potential hidden productivity costs of industrial policy.

   7. Zhang Weiying interpreting overcapacity as an innovation deficit.

   8. Zhao Bo on misleading Q1 economic signals and the case for investing in people.

   9. Jiang Zhen on why tax reform may be necessary for economic rebalancing.

3. Overseas Expansion and Yuan Internationalisation:

   1. Long Guoqiang on firms needing to carry out disciplined expansion overseas without leaking China’s industrial and tech advantages.

   2. Sheng Songcheng on Chinese corporate globalisation creating real offshore yuan-asset demand.

   3. Zhou Xiaochuan on why the RMB need not copy the dollar’s path of running a current account deficit.

   4. Zhang Ming on the “one surplus, one deficit” pattern in China’s current account and capital account.

   5. Wang Jinbin on how the dollar’s “exorbitant privilege” continues to be sustained by positive net income generated by the US external asset-liability structure.

   6. Yang Changjiang on de-Treasurisation, stablecoins and the next dollar system.

   7. Yan Zeyang on Hong Kong stablecoins as a regulated digital-finance testbed.

4. Economic Indicators:

   1. Li Xunlei on China’s asset scarcity and stretched valuations amidst weaker growth.

   2. Wu Ge on why China’s strong start to 2026 is highly contingent, rather than based on, a return to strong economic fundamentals.

   3. Zhao Wei on global AI demand fuelling China’s Q1 export surge.

5. Local Government:

   1. Zhao Yanjing on urban renewal as local governments’ last fiscal opening.

   2. Dong Yu on smaller cities finding niches in national industrial upgrading.

   3. Yao Yang on southern Chinese governance culture and local economic management.

6. AI Impacts and Policy:

   1. Cai Fang on AI displacement and the case for universal basic income.

   2. Cao Heping on turning personal data into AI-era income.

   3. Zhang Dandan & Li Jia on AI labour shocks and the uncertain policy window.

1. Iran War Impacts

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Yang Haiyan’s piece offers an interesting comparison between the ways people descend into severe poverty in the US and in China. Its chief focus is those living on the brink of destitution, vulnerable to crossing a “kill line” if hit by a sudden large expense such as illness, job loss, or even a car breakdown.

In the United States, the group closest to this condition is often described as ALICE: Asset Limited, Income Constrained, and Employed. However, these individuals cannot easily be compared to the urban poor in China.

For one thing, Yang refers to Black people in the US, whereas poverty in China is not racially-based. Those in China apt to drop into indigence are also unlikely to be employed or even to possess assets. Instead of being tenants who might be evicted, they live in tiny apartments allocated to them before the 1990s.

Neither are there equivalent shelters and social rehabilitation programmes for people in dire straits in China. Yang mentions the dibao (minimum livelihood guarantee) as a “conventional poverty governance system”, but the numbers of dibao recipients have declined drastically, from 23.5 million urbanites in 2009 down to 6.25 million in 2024. It is no longer directed at the merely poor, but rather the totally needy, such as disabled people and elderly without other support.

That said, what poor people in the cities of the US and China do share is that they live on the edge and can be subject to surveillance. In both countries, social security provision is inadequate to sustain normal living conditions. Yang is also correct to note that those living on the margins in both countries are prone to falling into extreme need.

Yang identifies three groups of urban poor in China: the second generation of urban residents; landless farmers; and the new generation of migrant workers.

This typology is useful, but there are a few inaccuracies in her description of these groups. First of all, she writes that the parents of the first group “secured a foothold in cities through hard work” though urban residents up until the early 1990s were largely assigned jobs by the government. She is right, however, that their children have trouble finding employment, even though they are often better placed than others because their parents have pensions and could afford them reasonably good educations. The problem is that the labour market cannot absorb even all those who graduated from good high schools and colleges.

As for farmers, Yang is correct to say that they “lost their land as a result of urban expansion”, but the compensation they received did not “bring substantial cash income”. Farmers are often undercompensated when land is requisitioned. Instead they are frequently removed into high-rise housing in the city, where they are left at a loss. Returning to the countryside is therefore often not a viable “last-resort fallback”. Nor is it correct to say that rural residents in the past could move to cities only after securing stable urban employment: before the early 1980s, peasants simply could not move into cities without being recruited by a government office for a temporary project.

The offspring of migrant workers are indeed unlikely to find work beyond unstable, low-end service jobs or, at best, in manufacturing. But they are not alone: people in all three of these groups are likely to face similar fates.

Their children, in turn, face dim futures. They are unlikely to be able to afford senior high school (grades 1 through 9 are free) and therefore have little hope of obtaining a higher degree. Even during the earlier, free years of schooling, poor families are at a disadvantage, because they cannot afford the tutors that have become a necessity in China’s highly competitive education system and labour market.

Finally, Yang too lightly dismisses the wave of urban poverty produced by mass SOE lay-offs in the 1990s and early 2000s. Those once referred to as the “new urban poor” should not be so readily disregarded. Up to sixty million workers were laid off from state- and collectively- owned firms from the mid-‘90s to the mid-‘00s. They and their offspring remain among the very poorest in cities, limited to unstable service work and selling goods on the street.

Still, it is striking that the Chinese government has recognised the quandaries of individuals and families perched on the verge of utter impecunity and Yang lays out three new modes of addressing the issue: the “Fengqiao experience”, which entails pluralistic dispute mediation in order to avoid the escalation of conflicts; the sealing of public security violation records, which can prevent minor offenders from being shut out of employment and allow them to begin again with a clean record; and a credit rehabilitation mechanism, which can restore a person’s ability to acquire loans, jobs and children’s education. All of these systems might keep people from falling into poverty-producing circumstances.

Nonetheless, many institutions in Chinese society still predispose people who are nearly abject to becoming more so, such that these intended solutions, even if implemented widely and fairly, may be insufficient to arrest the process of deepening penury. In that sense, there is indeed a fundamental similarity in the difficulty (or perhaps the impossibility) of preventing hardship from transforming into hopelessness in both China and the US.

— Dorothy J. Solinger

1. The viral discussion of America’s “kill line” [斩杀线] in China points to a paradox of modern social governance: systematic social control measures produce unintended consequences that trap individuals in persistent poverty.

2. Illness, unemployment, or unexpected expenses can push individuals below a critical threshold, triggering a chain of institutional consequences—damaged credit, eviction, unemployment—that make recovery almost impossible.

3. Most discussion has focused on economic vulnerability and limited social security, highlighting how economically vulnerable groups face disproportionate exposure to financial shocks.

4. More fundamentally, America’s low fault tolerance means minor missteps are amplified through rigid institutional mechanisms that convert systemic failures into individual responsibility.

5. China has avoided large-scale urban slums thanks to the household registration system and collective rural land ownership, which gave rural migrants a fallback against destitution.

6. With rapid urbanisation, structural transformation, and slowing growth, a “Chinese-style kill line” may be taking shape: distinct from America’s, but similarly rooted in precarity and low fault tolerance

7. The emergence of new cohorts of vulnerable urban residents signals that traditional support mechanisms are loosening, while systemic and structural risks are accumulating.

8. In response, China is exploring preventive and restorative governance policies: resolving disputes before they escalate into legal violations, sealing minor offence records, and enabling credit rehabilitation for small debts

9. Prevailing views in favour of harsh punishment risk undermining these efforts, while the perceived inconsistency of policies could damage government credibility, weakening policy authority and enforceability.

10. Good intentions require solid social consensus: broader public discussion and precise policy communication can clear the cognitive barriers to these necessary governance reforms.

Name: Yang Haiyan (杨海燕)
Position: Omitted at the author’s request
Research focus: Social governance and inequality; comparative social policy; culture and religion; development and governance of border regions
Education: BA (Ethnology), Lanzhou University; MA (Anthropology), Wuhan University; PhD (Sociology), University of Macau

HOW CAN CHINA AVOID THE “KILL LINE”?
Yang Haiyan (杨海燕)
Published by the Institute of Development and Governance (IDG) on 12 January 2026
Translated and annotated by A.H.
(Illustration by ChatGPT)

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Recent heated discussion of the “kill line” [斩杀线], a term borrowed from the language of video games, vividly illustrates the harsh reality of how individuals in American society, under systemic institutional pressure, fall into persistent poverty from which it is extremely difficult to climb out.

Many existing discussions focus primarily on two issues: the economic vulnerability of those who are “killed” and the inadequacies of the US social security system. This article, however, argues that the “kill line” in American society points directly to a paradox of social governance in the modern state—namely, the unintended consequences produced by systematic social control measures. In the US context, this is manifested in the fact that once economically vulnerable groups fall below a certain economic threshold, they are further constrained by the country’s various systems of social control. This makes it difficult for individuals to escape their predicament and causes them to sink ever deeper.

In the Chinese context, although reliance on the distinctive household registration and land systems has enabled us to effectively avoid the emergence of widespread urban poverty since the founding of the PRC, this social governance paradox nonetheless remains latent within our governance system. In particular, as China’s urbanisation deepens further and the prolonged period of high economic growth stalls, this paradox is highly likely to surface and erupt on a large scale, posing new challenges and tests for the transformation of China’s social governance.

In response to this challenge, the state is actively exploring preventive and restorative governance policies, exemplified by diversified dispute mediation under the “Fengqiao experience” [method] [枫桥经验], the “sealing of public security violation records” [regulation] [治安违法记录封存], and the “personal credit rehabilitation” [policy] [个人信用重塑]. These measures aim to loosen structural constraints and to provide individuals who have temporarily fallen into hardship with a buffer zone and an opportunity for a fresh start. [Note: The “Fengqiao model” is a Mao-era approach to grassroots conflict resolution revived under Xi Jinping. Each of these three policies is discussed in greater detail below.]

However, this article also points out that, in the course of their implementation, these policies are confronted with potential challenges such as tensions arising from the public’s intuitive understanding of legal justice, the entrenchment of a “severe punishment doctrine” [重刑主义], and even potential damage to governmental credibility.

The “kill line” is not a rigorous academic term; its popularity originates from a socialised translation of gaming terminology. The term originally refers to a combat mechanic in games such as League of Legends and Honor of Kings, where a character whose health falls below a critical threshold (around 10%) can be killed in a single blow. In late 2025, the US-based blogger “Lao A” (Squishy King) used this concept during a live stream on Bilibili [B站] as a metaphor for American society: once an individual or family experiences a shock—such as illness, unemployment or unexpected bills—that pushes their finances below a certain “critical threshold”, a chain of institutional repercussions is triggered (including damaged credit, eviction, and difficulties in finding employment), leading to a rapid slide from the middle class into long-term poverty or even homelessness.

As the content of “Lao A”’s livestreams continued to circulate and his account’s following grew rapidly (his Bilibili follower count increased from five to over 500,000 within a single month), his identity as an international student and the prevalence of the “kill” phenomenon he described were questioned by many netizens. Nevertheless, the “kill line” in American society attracted considerable attention and discussion from academic institutions and official media. At present, most discussions of the American “kill line” focus on two aspects: the economic vulnerability of certain groups in the United States and the low level of social security provision.

In an article entitled “America’s ‘Death Line’ Goes Viral in China”, published in Newsweek in the United States, Micah McCartney points directly to the fragile financial situation of the American public and the inadequacy of institutional safeguards in basic areas of subsistence, such as healthcare and housing, as the reasons why Americans are so easily “killed”.

In the article, he notes that, according to PNC Bank’s 2025 Financial Wellness Report, approximately 67% of American workers are living paycheck to paycheck. “Living paycheck to paycheck” generally refers to a situation in which basic expenses are hard to cover between paydays and emergency savings are insufficient. It is not synonymous with poverty, but it does imply extreme sensitivity to surprise expenses and income fluctuations. Meanwhile, a 2025 survey by the financial services company Bankrate found that 59% of American respondents said they could not afford a surprise expense of USD 1,000, indirectly corroborating the financial vulnerability affecting more than half of the US population.

In addition, a survey released by the Federal Reserve shows that in 2024 nearly 40% of American adults were unable to cover a USD 400 emergency expense using cash or its equivalent. The group known as ALICE—those who are Asset Limited, Income Constrained, and Employed—are probably the most typical segment of this population. Although their incomes are above the federal poverty line, these households remain economically insecure. It is therefore easy to see why, for groups whose finances are already close to collapse, an accident, a bout of illness, or a single bill can be enough to “kill” them.

Economic vulnerability points to the surface-level factors that make Americans easy to “kill”. But some scholars argue that the fundamental cause lies in a “low fault-tolerant society” [低容错社会] shaped by the operating logic of American-style capitalism.

In a low fault-tolerant society, the absence of accountability on the part of multiple state agencies continuously turns deep-seated structural societal contradictions and public governance failures into personal responsibility. A large body of research on the American poor shows that once individuals fall below the “kill line”, they become primary targets of control of the social governance system. As soon as a person goes slightly astray, they are subjected to layer upon layer of the system’s suppression, making recovery almost impossible.

In his book Evicted: Poverty and Profit in the American City, sociologist Matthew Desmond powerfully exposes the process through which individuals were “killed” and pushed into the rental market by the US subprime mortgage crisis, forcing them into ceaseless mobility and driving them ever closer to the margins under the systemic constraints of housing market regulations, rental laws, and enforcement policies.

For example, a single mother in the book, Arleen, was evicted on roughly five occasions. The first eviction occurred because her son angered a passer-by, who kicked in their door, prompting the landlord to evict the family of three. The second took place when the house she rented was deemed unsafe and she was ordered to move out by the relevant authorities. The third eviction happened because she used her only cash to pay for her deceased sister’s funeral, fell behind on rent, and was evicted by the landlord. The fourth eviction came after her friend (a co-tenant who had been helping her) reported that an upstairs tenant was being abused by her boyfriend. As a result, the property they lived in was classified by government departments as a nuisance and required the landlord to make corrections, after which the landlord evicted them. The fifth time, the landlord unilaterally broke the lease before she had even moved into the newly secured home, on the grounds that she lived with children, who might disturb neighbours and could attract the police, child welfare services, and other authorities.

As a result, tenants with children face severe discrimination in the rental market. The chain reaction triggered by eviction from the housing market thus includes the loss of property, relocation costs, credit ruin, and the reduction of benefits accompanied by penalties. In another form of low-cost housing—the trailer park—owners, in order to prevent closure by city councils, may choose to forcibly evict tenants who are behind on rent or have unstable incomes as a form of rectification plan [整改方案] to secure permission to continue operating.

Eviction not only reinforces the economic vulnerability of these individuals but also makes it more difficult for them to secure new housing, since a record of eviction is one of the key criteria landlords use when screening tenants. Individuals who are evicted repeatedly generally have little chance of recovery: they gradually move from the rental market into shelters and ultimately end up living on the streets, making stable employment and reintegration into society even harder to achieve.

In another work, Alice Goffman’s study of a poor Black community in Philadelphia finds that the tentacles [触角] of the US criminal justice system extend deep into impoverished Black neighbourhoods, fundamentally reshaping the micro-level social environment within these communities.

Her research found that in this community many young men were wanted for minor violations, such as failing to pay court fees, violating curfews, or failing to appear in court. In turn, the highly pervasive surveillance and policing practices of law enforcement agencies—where officers routinely monitor communities by checking databases for outstanding warrants rather than focusing solely on serious offenders—forced these men into a state of perpetual flight.

This condition not only led them to avoid public institutions but also deterred them from seeking formal employment. Even when they were harmed, they were afraid to call the police for assistance or to assert their rights. Such a system of law enforcement surveillance effectively excludes them entirely from normal social life and systems of protection.

In addition, in Down, Out, and Under Arrest: Policing and Everyday Life in Skid Row, Forrest Stuart reveals the relationship between high-density law enforcement practices and poverty governance in American slums. Drawing on the concept of “therapeutic policing”, he shows that police arrests and punishments for misdemeanours among slum residents—such as sitting or lying on the pavement or crossing the road in violation of traffic rules—are not merely aimed at maintaining public order, but are used to govern the poor. Individuals punished for misdemeanours may avoid detention if they choose to enter shelters and participate in social rehabilitation programmes.

The author points out that since the 1990s, US approaches to poverty governance have tended not to treat poverty as an economic condition, but rather as a quasi-medical symptom akin to addiction or dependency. The goal of therapeutic policing is to assist social shelter organisations in transforming residents into productive and self-sufficient citizens [具备生产能力及自我管理能力的公民]. However, frequent stops and arrests often cause slum residents to lose their already unstable jobs and housing.

These three studies powerfully illustrate how, in the US context, once individuals fall into a state of instability, they are progressively “killed” by different systems of social control and left with little or no possibility of recovery. This process thus exposes the paradox that America’s social control system is itself creating more social problems and more poor people.

By contrast, in China, thanks to the historical regulation of population mobility through the household registration system and the “last-resort fallback” [最后退路] provided to farmers by the system of collective ownership of rural land [农村土地集体所有制], the emergence of a large-scale urban poor has largely been avoided over the past several decades. [Note: Under this system, which originates in the process of collectivisation in the 1950s, agricultural land is owned by rural collectives from which individuals or companies can lease land for a limited period, usually 30 years.]

On the one hand, in the past the threshold for population movement between urban and rural areas in China was employment-based: rural residents could move to cities only after securing stable urban employment. As a result, urban registered populations were largely insulated from large-scale poverty.

On the other hand, even after freer movement between urban and rural areas was permitted, rural migrants who moved to cities could still return to the countryside if they lost their jobs. China’s system of collective rural land ownership ensures that mobile populations retain access to land to farm and a roof over their heads, preventing them from becoming a population of impoverished people stranded in cities and from forming urban slums.

But times and circumstances have changed [时移世易]. Rapid urbanisation, economic structural transformation, and the adjustment and slowdown of economic growth mean that China now also faces the latent risk of a systemic “kill line” taking shape. While the specific form of this “kill line” may differ from that of the United States, its essence similarly lies in two aspects: the economic vulnerability of individuals or households, and the low tolerance for individual development embedded in systemic institutional environments.

First, China is highly likely to develop its own ALICE population in the future, composed primarily of three groups.

The first group consists of the hidden poor within the second generation of urban residents. Among the descendants of early urban hukou holders, there is a cohort that has long lacked stable employment in the labour market. A legacy of urbanisation, they bear structural pressures accumulated across generations: while their parents once secured a foothold in cities through hard work, they now find themselves at a disadvantage in an increasingly competitive [environment] due to limitations in education and skill sets.

During my research, I encountered a highly representative [case of a] man born in the 1980s. His father was a primary school teacher in a county town, and his mother was not formally employed; in the early years, the family of three was able to maintain a decent life on just the father’s salary. He himself holds only a junior college degree [大专学历] and is in unstable employment. After getting married, for a time the household relied on his father’s pension to make ends meet. After his father’s death, the combined burden of mortgage payments and childcare costs pushed the family’s finances to the brink of collapse. His wife lamented: “In this day and age, not being able to afford meat should be rare, but in our family, eating meat is a luxury”. This group lacks the rural fallback [option], struggles to secure stable income in cities, and faces soaring housing and childcare costs, leaving them extremely vulnerable to risk. As his father’s death illustrates, any episode of unemployment or serious illness could push them over the “kill line”.

The second group consists of “landless farmers” who lost their land as a result of urban expansion. While compensation for land requisition can bring substantial cash income in the short term and significantly improve housing conditions, numerous studies have found that many landless farmers fall into a predicament in which their resources are squandered [坐吃山空] following intensive consumption (such as purchasing property or vehicles) or attempts at self-employment (such as opening shops), due to a lack of market experience and long-term planning.

More critically, they have completely lost land as a livelihood resource—once the final safety net—becoming wholly dependent on the urban labour market for survival. When compensation funds are gone and they gradually lose competitiveness in the labour market due to ageing and skill deficiency, they fall into a dual dilemma that is being “unable to put down roots in the city, with no way back after losing their land” [进城后难扎根，失地后难回头], potentially becoming the new urban poor. [Note: The term “new urban poor” was originally used to refer to a wave of urban poverty in the 1990s and early 2000s triggered by mass SOE lay-offs as a result of market-oriented reforms. It is now used more broadly to denote urban populations experiencing persistent economic precarity.] Although some provinces, such as Jiangsu, have attempted to replace cash payouts with pension subsidies as a long-term safeguard for landless farmers, the sustainability of such measures still faces real challenges.

The third group consists of the “new-generation migrant workers” [新生代农民工] whose outlook has become fully urbanised and who have no intention of returning to the countryside. They are the classic “generation that cannot go back to rural life”. Unlike their parents, who moved back and forth between town and countryside like migratory birds, they grew up in urban settings, lack an emotional attachment to rural life, and have no traditional farming skills. Some may still have homesteads and farmland in rural areas, but their inclination has clearly shifted to living permanently in the city.

However, constrained by structural barriers such as the household registration system and educational resources, most are confined to low-end and unstable service or manufacturing jobs. For new-generation migrant workers, the threat of the “kill line” is particularly acute: once unemployed, they can neither retreat to the countryside, as their parents once did, to secure a livelihood, nor attain a decent standard of living in the city. Ultimately, they may become a “floating” group [悬浮群体] living on the city margins, having lost both the support of an economic foundation and a sense of social belonging. [Note: 悬浮 literally means “suspended” or “hovering,” describing people unanchored in urban life but unable or unwilling to return to the countryside. Distinct from the more familiar “floating population” (流动人口), which refers broadly to internal migrants.]

These three groups are highly likely to emerge as China’s future ALICE population, signaling that the traditional structures of stability based on household registration and land are loosening, while systemic and structural risks are accumulating. If handled improperly, this will not only make individuals and families highly vulnerable to being “killed”, but also test the resilience of society as a whole.

At the same time, Chinese society is entering an era of governance focused on minor offences and petty crimes. For example, data show that serious violent crime in China declined from 162,000 persons in 1999 to 61,000 persons in 2023, while cases involving minor offences (punishable by less than three years’ imprisonment) increased substantially, with their share rising from 54.4% in 1999 to 82.3% in 2023.

In addition, the number of public security violation cases has continued to rise. Authoritative data show that between 2019 and 2023, China investigated and handled 40.35 million public security cases, averaging 8.07 million per year. At a more granular level, I observed that in a natural village [自然村] in western China with 42 households, almost every household has had a public security violation on record over the past 20 years.. When confronted with the social reality of the continued rise in minor and petty offences, if we continue to handle them according to the traditional social governance principle that every offence must be punished, then China’s judicial system will also become a systemic mechanism for “killing”.

It is, however, particularly fortunate that China’s multifaceted transformations in social governance in recent years have demonstrated a concerted effort to avoid the formation of a society characterised by institutional “killing”. Beyond conventional poverty governance systems and mechanisms, such as the dibao [minimum livelihood guarantee] programme [低保] and policies aimed at preventing large-scale poverty backsliding, China is actively constructing a safety net designed to prevent social “killing” arising from low fault tolerance. The development of this network is driving a shift in China’s governance paradigm from a previously “control-oriented” model focused on ex post punishment towards an “empowerment-oriented” approach that emphasises ex ante prevention, mediation during disputes, and post-event restoration.

One example is the “Fengqiao experience” and the system of pluralistic dispute mediation that have been vigorously promoted in recent years. Originating in Fengqiao, Zhejiang, the “Fengqiao experience” aims to reduce the occurrence of “incidents” at their source. Its core principle is to “mobilise and rely on the masses, prevent conflicts from being escalated up the ranks, and resolve them locally”. In the new era, this experience has been elevated to the level of national governance and developed into a multi-agency, coordinated dispute-resolution system characterised by “early detection, comprehensive intervention, and diligent mediation”, involving procuratorates, public security organs, and other departments. By organically integrating people’s mediation, administrative mediation, and judicial mediation, a large number of civil disputes are resolved before they reach litigation.

Its enormous effectiveness lies, on the one hand, in greatly alleviating pressure on the judicial system. On the other hand—and more importantly—it prevents large numbers of people from acquiring criminal or violation records by going through the court system. A single record can become the final straw that crushes a vulnerable family. Successful mediation means no record, no subsequent employment discrimination, and the preservation of an individual’s social capital and channels for upward mobility. This is both the most economical and the most humane pre-emptive measure against “killing”.

Another widely discussed recent measure is the sealing of public security violation records, which opens a “door to rebirth” for those who have committed minor missteps. If we say that pluralistic dispute mediation mechanisms strive to reduce the occurrence of incidents at their source, then the sealing of records of public security violations is a form of repair for faits accomplis. These records are like moral stains, subjecting individuals to employment discrimination and social judgement. They may even lead them to “self-exile” [自我放逐], choosing to hunker down at home and becoming a negative asset to both their families and society.

The policy of sealing records of public security violations is, in essence, an embodiment of the principle of restorative justice. It recognises that for a large number of minor offences, the social costs of perpetual punishment, such as loss of labour, family breakdown, and potential crimes, may far outweigh its disciplinary benefits. Sealing records aims to break the vicious cycle of “violation—discrimination—difficulty finding employment—reoffending”, giving minor offenders an opportunity to “erase the past and start anew”. It also prevents them from being permanently pushed off the normal track of society and falling below the “kill line” for a single misstep.

The third measure is the personal credit rehabilitation mechanism that the central bank recently announced. In a modern credit-based society, an individual’s credit record is comparable to an “economic identity card”. Once tarnished, it can restrict access to loans, travel, employment, and even children’s education, leaving people with no room to move.

On 22 December, the central bank issued a notice stipulating that for the period from 1 January 2020 to 31 December 2025, a one-off credit repair will be granted to single overdue payments of up to RMB 10,000, provided that they are fully repaid by 31 March 2026. This policy is intended to provide a pathway for restoring credit for those whose defaults were caused not by malice, but by temporary difficulties such as illness or unemployment. It acknowledges that people may encounter adversity, but that society should offer opportunities to restore credit and turn over a new leaf [改过自新]. This is logically consistent with the sealing of public security violation records: both seek to loosen overly rigid structural constraints that, once formed, are difficult to remove, and to provide individuals with a route to escape institutional “killing”.

Together, this series of policies outlines a roadmap for China’s response to new challenges in social governance: shifting from ex post punishment to ex ante prevention and mid-event restoration. It seeks to soften various institutional barriers and to provide greater buffers and second chances for individuals and families on the brink of peril, with the aim of reducing, at a systemic level, the risk that individuals will fall below the “kill line”.

However, as with any profound transformation in governance, it is inevitably accompanied by growing pains and tensions, much like walking along a high-difficulty balance beam. At one end lies the need to prevent systemic structural risks from producing a vast underclass that is unable to recuperate; that is, to avert the formation of a “Chinese-style kill line”. At the other end lies the need, while advancing the modernisation and humanisation of governance paradigms, to properly address clashes with traditional ideas and existing policies in order to safeguard governmental credibility. In the course of their implementation, the aforementioned preventive policies designed to ease restrictions have already been at risk of losing public buy-in and government credibility.

First is the conflict between the public’s “intuitive view of justice” [朴素正义观] and the internalisation of messaging on a “severe punishment doctrine”. Chinese society has long been influenced by a concept of retributive justice—“an eye for an eye” and “what is owed must be repaid” [杀人偿命、欠债还钱]—and past messaging on the rule of law has often stressed the principle that every offence must be punished. This has made [the idea that] “mistakes must be punished” a deeply ingrained consensus among the populace.

When the state promotes measures such as the sealing of violation records and credit rehabilitation, some members of the public regard this as tantamount to “letting offenders off” or “granting mercy outside the law” [“为违法者开脱”、“搞法外开恩”]. Despite official explanations emphasising that sealing records is not the same as erasing them, the more immediate public perception is that “the stain has been covered up”. This mismatch between policy intent and public understanding directly challenges the public’s common-sense belief that “if you do wrong, you must be punished”.

Second is the potential erosion of government credibility caused by a perceived “policy flip flop” [政策摇摆]. Whether it is the sealing of public security violation records or personal credit rehabilitation, the inconsistency of these policies risk damaging credibility. What many members of the public have primarily experienced is that emphasis was previously on “zero tolerance” and “harsh crackdowns”, and now it has turned to “sealing” and “repair”. Even if this shift is well justified in practical terms, it can still easily create the impression that “government policy constantly changes” or that “standards are inconsistent”. If this impression is not addressed through effective communication, it will weaken policy authority and enforceability, and may even lead people to the mistaken belief that the government is no longer trustworthy.

In sum, China’s unique land and household registration systems, together with social security measures such as the dibao programme and policies to prevent large-scale poverty backsliding, can, over a certain period, provide a safety net for economically vulnerable groups and ensure that they do not involuntarily become homeless. Meanwhile, measures such as sealing violation records, the Fengqiao experience, and personal credit rehabilitation signal that China is actively exploring a more resilient and forward-looking path for social governance.

These measures no longer simply attribute problems to individuals; instead, they examine whether the institutional environment has invisibly set too many “traps” that push more people into difficulty. This shift in thinking—from “controlling people” to “optimising the institutional environment”—is an important element of people-centred good governance.

However, good policy intentions must be supported by a solid social consensus. In formulating similar policies in the future, it will be necessary to consider how, through broader public discussion and more precise policy communication, the ideas of “restorative justice” and “empowerment-oriented governance” can be translated into broad public consensus, thereby clearing cognitive barriers to these necessary governance transformations and consolidating a foundation of trust. This path of exploration concerns efficiency, but even more so fairness and justice, and tests the wisdom and creativity of China’s social governance.

This is what makes a recent article published on his WeChat blog, which outlines a strategy for China to “buy out” American “imperial assets”, so intriguing. Usually, establishment scholars bat away the question of what China wants in terms of global power through gnomic references to “strategic patience” or an emphasis on “multipolarity” and “fairness” in the international system. By contrast, Wu explicitly states that China’s core strategic dilemma is how to absorb US “imperial assets”—its financial clou…

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Although it is not yet clear what the blockade will mean in practice, the implicit threat against Chinese shipping is unmistakable. Yet again, questions around Beijing’s red lines—and how it would respond if they were crossed—come to the fore.

Chinese commentary on the blockade has so far been sparse and even popular nationalist commentators like Chairman Rabbit have tended to stress China’s resilience and the fact that the blockade appears to narrowly target Iranian ports, rather than wider commercial shipping through the Strait.

In contrast, today’s piece by Ye Yan offers clear recommendations for how China should handle the Strait, alongside an unusually disapproving view of his country’s drift towards accommodating Iranian tolls.

The piece seems to have been written shortly before Trump announced the blockade. Its title—As the US and Iran Make the Rare Move of “Joining Forces” to Block the Strait of Hormuz, What Should China Do?—now feels especially prescient. Originally the author meant something more specific: the convergence of a US strategy to drain East Asia’s industrial strength with Iran’s own recent unlawful moves against the law of the sea.

The willingness to call out Iran is notable, as is the reading of the war as part of a US strategy directed at China. Hawks in Washington tend to take this view and Chinese commentators are also usually quick to read China-focused strategic intent into everything the United States does, but such narratives have been less prominent in Chinese analyses of the Iran war. Instead, the conflict is more commonly read as a strategic blunder, driven by US domestic politics and Trumpian swagger.

The author’s core conceit is that celebration in China over paying the Iranian toll in RMB constitutes a “fatal strategic misreading”. What matters is not the currency of payment, but China’s acceptance of the precedent of maritime extortion.

Ye Yan is not a major voice in Chinese geopolitical commentary, but he has an interesting profile. A legal academic with experience in China’s state energy sector and in sanctions compliance, he is an establishment-adjacent, policy-facing figure, even if not a particularly senior one.

His recommendations are broadly in line with Beijing’s current posture of “strategic restraint”: he urges China to hold the line, drawing on strategic reserves rather than paying Iran and undermining maritime norms. His more distinctive proposal is that Beijing should try to assemble a buyers’ club of major Asian importers—a move that fits Beijing’s self-image as a responsible, multilateral actor, but may demand more Sino-Japanese co-ordination than the relationship can realistically bear.

— Jacob Mardell

1. Treating RMB settlement of Hormuz transit fees as a breakthrough is a “fatal strategic misreading”: it confuses tactical convenience with strategic gain and overlooks the broader erosion of China’s legal and geopolitical position.

2. The Strait has not returned to free navigation, but has instead entered a state of “controlled passage” [受控通行]: high uncertainty, tight regulation, low traffic, and political screening beneath the surface appearance of a ceasefire.

3. The crisis is not a local aberration but part of a wider U.S. strategy: recasting the Middle East as a “West Asian corridor” within an Indo-Pacific frame and sustaining controlled friction that wears down East Asian manufacturing powers.

4. The current “controlled-passage equilibrium” suits Washington: it keeps pressure on China, Japan and other energy-dependent Asian economies at a low cost to the United States.

5. China’s real challenge is not maximising short-term energy access, but minimising long-term losses from setting a precedent that erodes maritime norms, increases exposure to secondary sanctions and links Hormuz and Malacca risk.

Face-Off: The U.S. vs China is a podcast about the turbulent relationship between the world’s two superpowers, the two men in charge, and the vital issues that affect us all. The show is hosted by Pulitzer-Prize winning journalist Jane Perlez, the former New York Times Beijing bureau chief. Listen here.

6. Energy security and legal principle are foundational interests; sanctions risk and precedent transmission are destructive costs. Any strategy that amplifies the latter risks triggering a cliff-like collapse in China’s net benefit.

7. The spillover effects of this crisis fall overwhelmingly on East Asia. Japan appears especially exposed, while China faces steep freight, insurance and financing costs that could erode manufacturing competitiveness.

8. Plugging China’s Cross-Border Interbank Payment System (CIPS) into an unlawful tolling regime would not create institutional rights for Chinese shipping. It would merely turn payment convenience into sanctions exposure and diplomatic extortion.

9. The legal red line is transit passage. Accepting tolls and political screening in Hormuz could legitimise similar coercion in Malacca or Sunda, creating a future “dual chokepoint dilemma” [双喉管困境] across the sea lanes on which China depends.

10. The recommended response is legal resistance backed by strategic reserves, full use of overland pipelines, and a staged “Asian Consumer Order Alliance” to reject unlawful tolls and reshape the regional order.

Name: Ye Yan (叶研)
Position: Adjunct Professor, School of International Law, Southwest University of Political Science and Law
Other: Expert at China National Petroleum International Exploration and Development Co.; observer expert to UNCITRAL Working Group III via the China Council for the Promotion of International Trade
Research focus: Economic sanctions and counter-sanctions; sovereign immunity; international investment; international dispute resolution
Education: PhD (Law), Peking University Law School (2018)

WHAT SHOULD CHINA DO AS THE US AND IRAN MAKE THE RARE MOVE OF “JOINING FORCES” TO BLOCKADE THE STRAIT OF HORMUZ?
Ye Yan (叶研)
Published by Beijing Cultural Review (BCR), 13 April 2026
Thank you to BCR for granting Sinification permission to share this article
Lightly edited machine translation
(Illustration by ChatGPT)

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The course of history often conceals its sharpest ruptures beneath a seemingly placid surface. As of mid-April 2026, global geopolitics and the order of the law of the sea stand at an intensely deceptive crossroads. On the surface, the United States and Iran have reached a fragile ceasefire in the Gulf, and the smoke hanging over global energy markets appears, for the time being, to be clearing.

According to the relevant ceasefire initiatives and negotiating process, the Strait of Hormuz—this vital artery carrying nearly 20 per cent of global oil consumption and 20 per cent of liquefied natural gas (LNG) trade—has seen a limited resumption of transit. Yet once one strips away the political façade of “ceasefire”, the Strait of Hormuz reveals a chillingly complex contest beneath: far from having returned to a normal state of free navigation, the Strait remains in a controlled operating pattern marked by extreme uncertainty, tight regulation and low traffic volumes.

Within this pattern, Iran is not only insisting on maintaining continued control over the Strait of Hormuz; it has also proposed an unprecedented charging scheme, seeking to levy transit fees of roughly US$1 per barrel of oil, or as much as US$2 million per vessel. This move is expected to bring Iran annual revenues ranging from several billion to tens of billions of US dollars, helping to fill the reconstruction funding gap left by sanctions and the devastation of war.

Catalysed by this geopolitical surface appearance, commentary in China has been awash with excessively optimistic sentiment about RMB settlement. Recently, in ceasefire negotiations, the Iranian side proposed the idea of charging fees to vessels transiting the Strait, and some reports indicated that RMB or cryptocurrency could be considered as alternative means of payment. Combined with the historic milestone reached since March 2026 by the Cross-Border Interbank Payment System (CIPS)—with single-day transaction volume exceeding RMB 1.22 trillion and average daily processed transaction value reaching RMB 920.45 billion—many voices have treated this negotiating proposal, together with the limited transit convenience secured for Chinese vessels through case-by-case co-ordination, as a major breakthrough in RMB internationalisation. Some views have even interpreted it as China having, without bloodshed [兵不血刃], gained strategic leverage in the Middle East’s geopolitical landscape, seeing it not only as a powerful blow against dollar hegemony, but also as a sign of the rise of China’s global financial infrastructure.

It must be stressed that this is a fatal misreading that confuses tactical convenience with strategic gain. From the broader perspective of international legal principle and great-power rivalry, China’s optimal strategy in the Hormuz crisis is not to maximise the limited gains from RMB settlement, but to minimise the long-term, systemic order losses produced by the entrenchment of a bad precedent, exposure to secondary sanctions and the coupling of dual-Strait risks [双海峡风险耦合].

The real victory does not lie in using China’s own currency to pay “protection money” on a shipping lane that has been illegally turned into a checkpoint and subjected to political screening. It lies in holding the line on “free passage” through the world’s sea lanes. This apparent attempt by a regional power to test the rules in fact reflects deeper turbulence in the global maritime order and a concealed shift in US geopolitical strategy. At a moment when international law is shifting irreversibly from “competition over legitimacy within the system” [制度内合法性竞争] to a condition in which “facts change the rules” [事实改变规则], China must see through the lure of localised financial gain and demonstrate the unshakeable steadiness of a major power, using a systematic strategic counterattack to break this carefully designed strategic trap.

To see through the underlying logic of the current crisis, one must build a game theory framework incorporating multiple variables. In this crisis, the United States is trying to wear down its Asian rivals at the lowest possible cost, Iran is trying to turn the Strait into a cash machine, and China, for its part, must find the optimal solution between energy security and international rules. To that end, we construct a “composite utility model” [综合效用模型] for China’s strategic choices.

1. Core Variable Design and the Composite Utility Function

In strategic competition, China’s national interests can be quantified as several core variables. Setting aside the complex subscripts of pure theory, we extract five macro-variables that bear decisively on decision-making:

[Note: The article is slightly encumbered by its game-theory framing. This has been included for fidelity, but is not necessary in order to understand the author’s arguments.]

• E: Energy supply security. This refers to the availability of crude oil and natural gas within China, and the degree of price stability.

• R: Rule integrity. This refers to the extent to which principles of international law such as the right of transit passage under the United Nations Convention on the Law of the Sea (UNCLOS) are upheld.

• A: Substitutive buffer capacity. This refers to China’s ability to use overland pipelines (such as the China–Russia and China–Central Asia pipelines) and strategic reserves to make up for disruptions in maritime transport.

• S: Secondary sanctions risk. This refers to the compliance risk exposure of Chinese financial institutions (such as CIPS nodes) to attack under US long-arm jurisdiction for participating in illegal settlement.

• P: Precedent transmission risk. This refers to the long-term strategic cost whereby, once Hormuz toll-charging is legitimised, other chokepoints such as Malacca may follow suit, creating a “dual chokepoint dilemma” [双喉管困境].

These five variables together constitute China’s composite utility function (U):

U = αE(A) + βR - γS - λP

In this function:

• α and β are extremely high positive weights, representing the fact that energy survival and juridical rules are the foundations of China’s interests. It is worth noting that energy security E is an increasing function of substitutive capacity A. When maritime transport is disrupted, if A is sufficiently large, it can greatly cushion the decline in E.

• γ and λ are extremely large negative penalty weights. Sanctions risk S and precedent cost P are “destructive costs” [毁灭性成本]. If, in pursuit of short-term gains, S and P surge sharply, overall national utility U will suffer a cliff-like collapse.

2. The Dynamic Game Decision Tree and Three Equilibrium Forms

Based on the model outlined above, the decision path and possible equilibrium outcomes of this multi-stage game involving the United States, Iran and China can be projected through the following dynamic game tree structure:

Node One (initial move): Iran’s strategic choice

• Option 1: Fully reopen the Strait (abandon toll-charging).

• Option 2: Implement “controlled passage” [受控通行] (setting up checkpoints and charging fees—the current choice).

• Option 3: Impose a full military blockade of the Strait.

Node Two (response and reaction): the United States’ strategic choice

• In response to Iran’s Option 2, the United States adopts a posture of “acquiescent attrition” [默许消耗]: condemning it on the surface, while in reality refraining from decisive military intervention, with the aim of wearing down East Asian manufacturing states through a prolonged state of high friction.

Node Three (final response): China’s strategic choice

• Strategy H (deep cooperation): Accept the charges and use the CIPS system to provide Iran with an RMB settlement scheme.

• Strategy P (limited cooperation): Conduct private, case-by-case coordination without publicly recognising the legality of the charges, while tacitly allowing some firms to pay.

• Strategy L (legal resistance): Refuse payment categorically, contest the issue through legal and juridical instruments, and at the same time activate China’s own alternative supply networks.

Scenario Projections and Sensitivity Analysis Table:

The results of the projections show clearly that the current situation has been firmly locked into the second form of “controlled-passage equilibrium” [受控通行均衡]. In this high-friction quagmire, if China were rashly to choose “deep cooperation” [深度配合] (Strategy H) in pursuit of short-term energy gains (raising E), the result would inevitably be the triggering of massive S and P penalty terms, causing the country’s overall utility U to collapse completely.

To understand why “controlled-passage equilibrium” [受控通行均衡] can be tolerated and sustained by certain major powers, one must unpack the asymmetrical distribution of crisis costs across the world’s principal economies. The cruel law of geopolitics is this: whoever feels the sharpest pain from supply-chain disruption will be the one placed at a disadvantage when the rules are being remade.

According to data from the US Energy Information Administration (EIA) and other authoritative bodies, between 2024 and 2026 an average of roughly 20 million barrels of crude oil per day passed through the Strait of Hormuz, accounting for one-fifth of global seaborne oil trade; over the same period, around 20 per cent of global LNG trade also had to pass through it. More important than the total volume, however, is the direction of flow: more than 80 per cent of LNG and the overwhelming majority of crude oil were shipped to Asian markets, of which China, India, Japan and South Korea together accounted for a very large share.

[Note: The U.S. Energy Information Administration says oil flow through the Strait of Hormuz averaged 20 million barrels per day in 2024, equivalent to about 20% of global petroleum liquids consumption; it characterises the Strait as carrying more than one-quarter of total global seaborne oil trade.]

To present this asymmetry in the underlying physical structure more intuitively, the table below offers a quantitative comparative assessment of the core energy exposure and structural buffer capacity of China, the United States and Japan in this crisis:

From the data matrix above, one can see clearly that the spillover costs of the crisis are borne almost entirely by East Asia’s industrial powers, while the extra-regional powers that either set the crisis in motion or are content to see it unfold have emerged almost entirely unscathed.

Japan’s position within this structure is close to hopeless. Its dependence on Middle Eastern crude oil is as high as 87 to 95 per cent, and this extreme concentration of imports leaves it with virtually no real room to manoeuvre once the Strait comes under controlled passage. If transit costs through the Strait were to surge or physical disruption were to occur, the Japanese government would be forced to confront extraordinarily heavy economic burdens and the risk of industrial paralysis.

As the largest importer in absolute terms, China, by contrast, has gained a degree of buffer resilience thanks to its sustained efforts in recent years to build out its energy-security network (thereby raising variable A). Yet its vast absolute scale means that the economic friction costs China faces are equally staggering. After the crisis broke out, crude freight rates from the Middle East to Asia (the TD3C index) soared to a six-year high, while single-vessel charter costs shot up into the tens of millions of US dollars. At the same time, multiple marine insurers withdrew war-risk cover for Gulf waters, driving up both insurance premia and financing frictions. These costs will seep through like capillaries, directly eroding the global competitiveness of Chinese manufacturing.

In sharp contrast, the United States has displayed a striking kind of “offshore” immunity. At present, the United States imports only around 400,000 barrels of oil per day directly through Hormuz; its energy exposure is exceptionally low by the standards of the major powers, and it can readily absorb the shock through its vast domestic shale oil and gas production capacity. More ironically, disruption in the Strait has tightened energy supplies in Asia and Europe, driven LNG prices up by more than 80 per cent, and pushed Middle East–Asia crude freight rates (the TD3C index) to a six-year high—yet refineries on the US Gulf Coast have benefited instead, reaping windfall arbitrage profits. This relative insulation has given Washington considerable strategic latitude.

More dramatic, however, is that the Gulf oil-producing states cannot simply pass these transit charges on to global consumers, because they must compete with producers such as the United States that do not face such costs. This means the Gulf states themselves will also come under severe pressure on profit margins. Some economists estimate that they may ultimately bear 80 to 95 per cent of the total charges.

The deadlock in the Strait of Hormuz is not an isolated by-product of a regional conflict, but a direct projection of the transformation of America’s global grand strategy. To fully understand the strategic trap China now faces in this game, it must be examined within the framework of the “West Asia” grand strategy that the United States has in recent years been vigorously promoting.

1. A Profound Shift from “Nation-Building” to “Order-Building”

In his book West Asia: A New American Grand Strategy in the Middle East, the well-known American strategic scholar and Middle East Institute senior fellow Mohammed Soliman systematically sets out this profound shift. The core logic of this theory is that the US Middle East strategy of the late twentieth and early twenty-first centuries, based on direct military intervention and “nation-building”, has already failed completely. Faced with China’s rise, the United States must reconstruct the traditionally fragmented “Middle East” as “West Asia”—a vast intermediate zone and supercontinent linking Europe with the Indo-Pacific.

Within this top-level cognitive framework of “Asia-first”, the Middle East is no longer a geopolitical endpoint requiring the direct commitment of core US military resources for direct control. Instead, it becomes a “load-bearing corridor” [承重走廊] wholly subordinated to Indo-Pacific strategy and used to contain strategic rivals. The United States’ new strategic paradigm thus shifts to “offshore balancing” [离岸平衡]: abandoning large-scale direct military occupation, and instead building alliance networks across three dimensions—geostrategy, hard power and geotechnology—so as to pass the costs and risks of maintaining regional balance on to its allies. This allows Washington to concentrate the core projection of its military and economic resources on the Indo-Pacific in order to confront China comprehensively. One explicit aim of this alliance is to curb the expansion of China’s influence in the Middle East in fields such as 5G networks and artificial intelligence.

2. Weaponising Crisis and Casting a “Tailor-Made Noose”

Under the macro-level guidance of the “West Asia” strategy, the high-friction state of the Strait of Hormuz has become the perfect testing ground for the United States to practise “offshore balancing” [离岸平衡]. So long as no uncontrolled conflict breaks out that drags the United States back into a ground war, this “controlled equilibrium” [受控均衡] can, at extremely low cost to America, impose sustained economic attrition on Asian manufacturing states that are highly dependent on energy transported through this waterway.

More deceptive still was the ambiguous attitude of senior US officials towards Iran’s charging scheme. In April 2026, President Trump publicly sent highly contradictory signals. On the one hand, he warned Iran to stop charging fees; on the other, he suggested that the United States might seek to establish a “joint venture” with Iran to operate the charging system together, even describing it as “a good thing”. This astonishing rhetoric—an attempt to recast an illegal military blockade as a supposedly lawful “commercial joint venture”—lays bare a deeper ambition: to privatise and weaponise the global commons, and thereby impose a “geopolitical tax” [地缘政治税] on the world’s manufacturing powers.

In this contest, if China were to take satisfaction in being able to use RMB to pay this “protection money”, repackaged as a negotiating condition, and mistake that for a breakthrough against dollar hegemony, it would be little different from securing for itself a tailor-made noose in the very war of attrition its rivals would be glad to see. The United States could simply stand by as China and Iran reach some kind of RMB-based charging arrangement, then wait until Chinese financial institutions are deeply entangled before using long-arm jurisdiction to deliver a precise and potentially devastating blow.

Any discussion of China’s policy choices in the Hormuz crisis cannot avoid the recent explosive growth of the Cross-Border Interbank Payment System (CIPS), which has attracted widespread international attention. Some domestic voices advocate adopting the previously outlined “Strategy H (deep cooperation)” and linking the CIPS system to the charging mechanism. In terms of our utility function, this means actively detonating the sanctions-risk variable (S).

1. CIPS’s Counter-Trend Growth and the Strengthening of the RMB’s Role

CIPS has recently achieved what can fairly be called a milestone breakthrough. In March 2026, against a broader geopolitical and macroeconomic backdrop that included the weakening of traditional safe-haven dynamics, CIPS’s average daily processed transaction value reached RMB 920.45 billion, the highest level in nearly a year; single-day processed transaction value also broke through the RMB 1.22 trillion mark for the first time in history. As of the end of March 2026, the CIPS system had, through more than 5,100 incorporated banking institutions, extended its coverage to 191 countries and regions around the world. The share of cross-border trade conducted in RMB has already been marked by a strong upward trend.

2. The convenience of a means of payment is by no means an institutional right.

However, it is an extremely dangerous conceptual confusion to crudely graft a tool grounded in lawful trade onto an unlawful charging mechanism for passage through the Strait. Under conditions of controlled passage, the essence of transit through the Strait is a bundle of “permission, inspection and political screening”. The charging proposal put forward by Iran is, in essence, a bargaining chip in a political game. An RMB-denominated arrangement would be nothing more than an expedient. It would not give Chinese vessels any reliable or institutionalised right of priority passage. So long as the littoral state in fact monopolises the right of access, it can at any moment turn the “convenience” of local-currency settlement into an instrument of diplomatic extortion—using it to apply external pressure and drive up the price on the spot [坐地起价].

3. The “Sword of Damocles” of Secondary Sanctions and the Narrative Trap

Once the RMB settlement system is institutionally bound to a highly controversial charging regime, the resulting compliance exposure risk (variable S) rises in a non-linear surge. The US Treasury Department’s Office of Foreign Assets Control (OFAC) has long treated Iran-related sanctions as a core focus of its enforcement network. Bank of Kunlun [昆仑银行] was previously dealt a heavy blow for assisting with the transfer of Iran-related funds.

Within the highly politicised anti-China strategic narrative advanced in the US Congress and the USCC, China has already been cast as a force helping sanctioned states evade sanctions. Once China’s financial channels are substantively used to support Hormuz’s controlled charging mechanism, the US side will be able with ease to complete the full legal-narrative chain: namely, that China is not merely conducting ordinary energy trade, but is providing “state-level financial infrastructure” to support conduct that tramples on freedom of navigation. This would hand Washington an excellent pretext for deploying secondary sanctions. What China would gain is merely a tactical right of passage, while the price it would pay would be a collapse of the security of global financial compliance.

Returning to our utility model: even more lethal than sanctions risk (S) is the cost of precedent (P). The Hormuz crisis is a systemic challenge to the contemporary international law-of-the-sea order, and the loss of the legal bottom line will trigger disastrous knock-on effects.

1. The Juridical Red Line of Transit Passage Is Not for Bargaining Away

From the standpoint of international legal doctrine, the imposition of a regime of “charging and controlled passage” on an international Strait used for navigation entails a fundamental juridical conflict. According to the core doctrine of “transit passage” in Articles 37 to 44 of the United Nations Convention on the Law of the Sea (UNCLOS), all ships and aircraft enjoy the right of unimpeded transit passage through such straits, and littoral states may not require prior authorisation. In addition, Article 26 of UNCLOS makes clear that, unless specific services are rendered to a ship, no charge may be levied solely on account of its passage through the territorial sea.

Even if some seek to dress this up as a “self-defence” argument under Article 51 of the United Nations Charter, the San Remo Manual on International Law Applicable to Armed Conflicts at Sea, which reflects customary international law, makes clear that a lawful maritime blockade must never be established solely for economic purposes or in order to punish neutral merchant vessels of third states. The International Maritime Organization (IMO) has already explicitly warned that charging vessels for transiting a strait would set an extremely dangerous precedent and fundamentally shake the foundations of global maritime governance.

[Note: The San Remo Manual does not appear to state this in exactly these terms. It does, however, provide that a blockade must not bar access to the ports and coasts of neutral states, must be applied impartially, and is prohibited if its sole purpose is starving the civilian population or denying it objects essential for survival. The IMO spokesperson did warn that charging vessels would set a dangerous precedent, but no quote about “fundamentally shak[ing] the foundations of global maritime governance” has been found.]

2. The Coupling of “Dual Chokepoint” [双喉管] Risks and the Reverse Demonstration Effect of Rules

If China were in effect to acquiesce in this charging model, then in our game theory model the risk of precedent transmission (P) would immediately reach its maximum value. This points directly to the most lethal hidden danger in China’s geopolitical strategy—the “Dual Chokepoint Dilemma”.

Asia’s vital energy arteries do not end at the Persian Gulf. The overwhelming majority of supertankers sailing eastwards, after exiting the Strait of Hormuz, must pass through the Strait of Malacca before reaching East Asia. Data show that in the first half of 2025, the Strait of Malacca carried roughly 23.2 million barrels of oil per day, with China accounting for as much as 48 per cent of crude flows. By virtue of the geopolitical advantage conferred by the Andaman and Nicobar Islands, India would, in an extreme conflict scenario, possess the ability to monitor and exert pressure on this core shipping lane.

The precedent effect in game theory is this: if you tacitly accept someone else doing this today, tomorrow others can do the same to you. If, for the sake of short-term payment convenience, China were to acquiesce in the legality of littoral states setting up toll stations in Hormuz, then once the coastal states of the Strait of Malacca or the Sunda Strait establish similar “charging plus permit” regimes in the future, citing marine pollution or geopolitical security as justification, China would completely lose any solid juridical basis for mounting a defence. Such short-sighted behaviour—in which local gains conceal broader losses—would mean that every tonne of China’s future energy imports could be exposed to endless political extortion.

Faced with America’s strategy of attritional “offshore balancing” [“离岸平衡”] and the geopolitical extortion of regional powers seeking to rewrite the rules, China must not fall into a passive cycle of adaptation in which “whoever feels the pain is forced to compromise” [“谁痛谁妥协”].

According to our decision-making model, China must abandon Strategy H (deep cooperation), which would detonate sanctions risk (S) and precedent cost (P). Instead, it should resolutely implement Strategy L (legal resistance), supplemented by systematic economic and institutional countermeasures, so as to maximise composite utility U.

1.. The Legal Bottom Line: Upholding the Principle of Transit Passage (Maximising Variable R)

In its public diplomacy and juridical characterisation of the issue, China must hold the line: it must never recognise the legality of any unilateral, coercive charging regime imposed on an international strait used for navigation. This is not only a matter of defending China’s own interests, but also of protecting the model’s legal-rules variable (R).

China’s diplomatic and legal departments should actively use multilateral mechanisms such as the United Nations General Assembly and the IMO to push for an authoritative legal interpretation on the question of charging for passage through the Strait. More than that, China should explore the possibility of bringing within the ambit of international responsibility any conduct whereby a state uses waters under its jurisdiction to impose a de facto blockade and thereby causes major economic harm to third countries. At the same time, at the level of domestic financial regulation, it should implement prudent risk ring-fencing, clearly delineate the strict boundary between lawful CIPS settlement and unlawful settlement of Strait transit charges, and resolutely block the spread of secondary sanctions risk (S) into China’s domestic financial infrastructure.

2. Supply-Chain Defence: Trading Space for Time [以空间换时间] (Maximising the Substitutive Buffer Variable A)

In our utility function, U = αE(A) + βR - γS - λP, if China chooses to hold the line, then in the short term seaborne energy volumes will inevitably be disrupted. At that point, the only parameter capable of cushioning the decline in energy security (E) is China’s substitutive buffer capacity (A).

During the period of crisis deadlock, China should decisively and orderly activate its emergency national petroleum reserve plan, releasing supplies in a targeted way into the domestic market in order to smooth price volatility. Even more crucially, it must accelerate the mobilisation and full-load operation of its existing cross-border, non-maritime energy pipeline networks, comprehensively increasing the transmission capacity of the “north-to-south gas transmission” [北气南输] network, the China–Russia crude oil pipeline, the China–Central Asia pipelines, and the China–Myanmar oil and gas pipelines. This strong marginal substitution effect (raising A), combined with the accelerated substitution provided by new energy sources, would be sufficient to extend greatly China’s macro-level tolerance for disruption to seaborne transport. Through this supply-chain defence strategy of “trading space for time” [以空间换时间], China can turn time itself into a strategic ally and frustrate any attempt to extort vast sums of money through coercion in the Strait.

3. Institutional Reconstruction: Building an “Asian Consumer Order Alliance” [亚洲消费者秩序联盟] Through Three-Tier Advancement

While breaking the old controlled state of affairs, China must not passively accept the geopolitical coercion embodied in the US-led, unilaterally assembled “escort coalition” [护航联盟]. The real point of leverage for breaking the deadlock lies in reconstructing the matrix of shared interests among East Asia’s importing states.

Faced with the dual disruption risk posed by these two great “dual chokepoint” [双喉管] arteries, China, Japan, South Korea and India confront a highly convergent systemic crisis. China should adopt a three-stage strategy to reshape the regional energy-security architecture. The first step is to establish an Asian consumer policy coordination platform and forge a united front in rejecting unlawful charging schemes. The second is to promote the creation of a multinational Asian maritime emergency corridor and escort coordination mechanism, while exploring a jointly backed insurance support network to ease shipping frictions. The third is to institutionalise the “Asian Consumer Order Alliance” [亚洲消费者秩序联盟]. Once a bloc representing more than half of global energy purchasing power acts in concert on questions of maritime rules, the institutional weight it generates will fundamentally alter the existing equilibrium of the game. It could even turn passivity into initiative and thereby break America’s offshore-balancing manipulation based on its “West Asia” strategy.

At the highest level of great-power competition, the contest is not over the gains and losses of one city or one place, but over leadership in rule-making and in the operation of systems. In the treacherous and ever-shifting waters of the Strait of Hormuz, the United States is trying to use its grand “West Asia” strategy as a lever to quietly strangle Asia’s manufacturing foundations, while the regional power in question seeks to use the blockage of this vital artery as a bargaining chip in exchange for short-term geopolitical survival and vast reconstruction funding.

At such a sweeping historical juncture, to misread the natural growth of RMB cross-border payment business during a particular period as a pass that can be used to exchange for institutional rights on an unlawful shipping lane is no different from swallowing tactical bait wrapped in geopolitical poison. This would not only expose China’s financial system to the crossfire of secondary sanctions, but would also bring about, by China’s own hand, the destruction of the juridical bottom line that safeguards the unimpeded flow of countless maritime lifelines.

For a resurgent great power like China, whose economic lifeblood is deeply embedded in the global system, the true national core interest must always lie in preserving an international navigation corridor through which “anyone can pass, without obstruction and without political screening”. When international competition unfolds in the concealed form of “offshore attrition” [离岸消耗], China must demonstrate the unshakeable steadiness of a major power. It must hold the red line of international rule of law, rely on strategic depth [战略纵深]—that is, substitutive buffer capacity—to withstand the pain of transition, and join forces with all Asian actors that depend on freedom of navigation. This is not only the right path out of the “dual chokepoint dilemma” [双喉管困境]; it is also the only road by which China can establish its own strategic agency and lead the reconstruction of the global system of public governance in this period of upheaval and change.

But it would be a mistake to read the war with Iran as a straightforward boon for China. The piece below by Peng Shaozong instead lays out a wide range of risks for China in stark detail, arguing that “the commodity price volatility triggered by the escalation of the current US-Iran conflict has had a systemic [系统性] and greater-than-expected [超预期] impact on China’s economy, with [the potential to generate] repeated disruptions [反复性特征].”

The discussion we’ve observed so far has been mixed, reflecting the reality that the war presents China with an ambivalent set of risks and opportunities.

On the “opportunity” side of the ledger are the obvious benefits of a strategic rival being weighed down in a potential quagmire. A number of authors echo the widespread observation that this is America’s “Suez Canal Moment”, that the war might undermine the petrodollar, and that it will lay bare the fragility of the US alliance system. Beyond that are arguments that the war is not merely a setback for the US, but an active opportunity for China—most prominently, the claim that high oil prices act as a de facto carbon tax, benefiting China as the centre of the global green economy.

In a recent Sinification translation of a censored memo by the Chinese think tank Intellisia, the authors argued that a protracted Middle East conflict would not only drain US resources, but also reroute capital, energy flows and supply chains in Beijing’s favour. And in our March digest, we highlighted a piece by Renmin University professor Di Dongsheng arguing that higher energy prices are, on balance, a net gain for China because they improve the relative competitiveness of Chinese manufacturing even as they raise absolute costs.

That argument was made all the more intriguing by the fact that, in a post on the same theme a few days earlier, Di appeared either unable or unwilling to spell it out directly, instead promising an explanation and then conspicuously withholding it. Although the general mood among commentators has hardened into something between consternation and Schadenfreude, there remains persistent sensitivity around discussing the war’s “opportunities”, Beijing preferring to portray China as a neutral mediator and promoter of peace rather than a war profiteer.

There is, of course, also sensitivity around portraying the consequences as too severe, with most commentaries stressing China’s resilience and large energy reserves, which makes it all the more striking to see someone with Peng Shaozong’s institutional standing be so upfront about the risks this conflict poses to his country.

Peng was formerly a senior analyst at the influential National Development and Reform Commission (NDRC) and is now Vice-President of the China Society of Economic Reform, a state-affiliated think tank supervised by the NDRC, so his words carry a certain weight.

Another important piece that captures both sides of the ledger is a recent article by senior economist Lian Ping (连平), which argues that higher oil prices would raise imported inflation, squeeze household consumption, crush margins for oil-intensive midstream and downstream firms, depress investment, and put pressure on China’s trade balance and the renminbi. But Lian does not present the shock as wholly negative: he also argues that sustained high oil prices could ease deflationary pressure, boost upstream energy profits, accelerate the development of new energy industries, encourage energy conservation and industrial upgrading in China, and advance both energy diversification and renminbi internationalisation. Yet he stops short of saying whether, on balance, he thinks the conflict is more likely to benefit his country or harm it.

There is no shortage of worthwhile analysis on the Iran crisis at the moment, much of which we are still working through. But on the fairly binary question of whether the war is “good” or “bad” for China, the answer is the unsatisfying one: both. As ever, the real interest lies in the detail: the conflict presents China with both risks and opportunities, and the balance between them will shift with the war’s duration and trajectory.

— Jacob Mardell

1. Since the escalation of the US-Iran conflict, commodity markets have been driven by war risk, speculation and hoarding, with price shocks cascading from upstream inputs to downstream firms.

2. China’s exposure is acute and highly concentrated: crude oil import dependence stands at 72.7%, while 45-50% of imported crude and 38% of imported natural gas transit the Strait of Hormuz.

3. The baseline scenario is a cycle of “fighting punctuated by talks” [打谈反复], with oil prices fluctuating at $90-130 per barrel for roughly three months and imported pressures intensifying periodically.

4. Iran is both a major oil exporter and a key supplier of chemical inputs, so supply disruption can generate multiplier effects [乘数效应] across chemical, agricultural and textile supply chains.

5. The conflict also exposes a helium bottleneck [卡脖子]: disruption at Ras Laffan (Qatar’s main LNG and helium export hub) cuts over one-third of global supply, worsening vulnerabilities in semiconductors and MRI-related medical equipment.

6. Disruptions in South Korea’s petrochemical chain raise logistics and delivery risks for China, with some closely linked sectors already facing “production halts due to material shortages” [停工待料].

7. The core policy logic is to use the certainty of domestic supply assurance and price stability to offset external geopolitical uncertainty [以国内确定性对冲外部不确定性], combining short-term emergency response, medium-term adjustment and long-term strategic planning.

8. Immediate priorities are tiered emergency measures: reserve releases, import diversification, substitution away from the Middle East and stronger market oversight to curb panic-driven speculation.

9. Medium-term adjustment focuses on containing inflationary pass-through, easing pressure on downstream firms, expanding hedging and credit support, and using stronger domestic circulation to cushion external shocks.

10. Long-term resilience depends on stronger energy reserves, better monitoring and early warning, tighter cross-departmental coordination, diversified import channels and faster energy transition and substitution.

Name: Peng Shaozong (彭绍宗)
Position: Vice President, China Society of Economic Reform
Previously: Deputy Director and First-Level Inspector, Department of Price, National Development and Reform Commission (NDRC)

ENSURING SUPPLY AND STABILISING PRICES FOR BULK COMMODITIES AMID THE MIDDLE EAST CRISIS: SITUATION ASSESSMENT AND TIERED RESPONSE RECOMMENDATIONS
Peng Shaozong (彭绍宗)
Published by China Society of Economic Reform, 27 March 2026
Translated by Cherry Yu
(Illustration by ChatGPT)

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The current geopolitical situation in the Middle East is characterised by sudden outbreaks, repeated escalations and high intensity. The continuing escalation of US-Iran confrontation has triggered sharp turmoil in global energy markets, making supply security and price stability in bulk commodities a critical task for sustaining China’s steady economic performance. Accurately assessing how the situation may evolve and formulating graded and categorised response strategies is of major practical significance for defusing imported risks and ensuring the stability of [China’s] supply chains.

In recent days, international commodity markets have entirely decoupled from traditional supply-demand fundamentals, marked by large price swings, rapid transmission, strong linkage effects, and repeated conflict-driven increases in risk premiums, inflicting a fundamental shock to the global energy supply system.

(A) Core Data: Direct Indicators of Shock Intensity and Key Transmission Channels

1. Dependence on the passage has reached a critical threshold. Roughly 20 million barrels of crude oil pass through the Strait of Hormuz each day, accounting for 30% of global seaborne oil trade and 20% of global oil consumption, with 84% of that volume bound for Asian economies. Around 45%-50% of China’s imported crude oil (4.6 million barrels per day) and 38% of its imported natural gas must transit this route, continuously expanding the risk exposure from dependence on a single shipping lane.

2. External dependence remains high. In 2025, China imported 578 million tons of crude oil, with an external dependency rate of 72.7%; its external dependence on natural gas stood at 40.5%, with Middle Eastern imports accounting for 52% and 38% of crude oil and natural gas respectively. Combined with China’s heavy reliance on Iranian supplies in chemicals and agricultural inputs, the bombing of Kharg Island brought Iranian crude oil and chemical exports to a near standstill, further intensifying supply-side uncertainty. Any renewed escalation in the Middle East will directly impact the supply stability of related domestic industries.

   [Note: U.S. officials said the strikes on Kharg Island targeted military sites rather than oil infrastructure, and Reuters later reported that Iranian oil production and exports continued without interruption after the attack. The extent of disruption to chemical exports is less clear.]

3. Price and logistics volatility has reached record highs. On March 9, West Texas Intermediate (WTI) crude hit an intraday high of $119.48 per barrel, while Brent crude reached $119.50 per barrel, approaching the $120 mark for the first time since 2022. Very Large Crude Carrier (VLCC) freight rates surged to $280,000 per day, their highest level since 2008. Asian spot LNG prices rose by over 50%, basic chemicals such as methanol and ethylene rose 15–30% in tandem and shipping insurance premiums skyrocketed by more than 300%. Damage to transport infrastructure on Kharg Island brought Iranian crude export routes to a complete halt, while tightened controls on the Strait of Hormuz forced frequent global tanker route adjustments, sharply raising both logistics costs and geopolitical risk premiums.

(B) Three-Scenario Forecast: Outlook for the Evolution of the Situation [in Iran] and Price Trends

Based on core variables such as intensity of the conflict, the degree of control over shipping lanes and the recurrence of US-Iran confrontations, the following tiered forecasts are made for the trajectory of the Middle East conflict and international oil prices. Market characteristics and impacts under each scenario are as follows:

1. Baseline scenario (most likely): The US-Iran conflict exhibits a recurring pattern of “fighting punctuated by talks” [打谈反复], with the Trump administration claiming that Iran has been defeated while refusing a deal. Iran continues to permit limited passage through the Strait of Hormuz for vessels not associated with the United States, Israel or Europe, while slow progress in repairs on Kharg Island means Iranian crude exports are unlikely to recover in the near term. OPEC+ maintains its pause in output increases and countries such as Iraq and Kuwait continue production cuts due to insufficient oil storage capacity. Both Japan’s release of petroleum reserves and supply-chain disruptions in South Korea create regional supply disturbances, making it difficult to offset the global crude supply gap effectively. International oil prices will fluctuate at a high level of $90-130 per barrel for around three months. Amid the repeated back-and-forth of geopolitical confrontation, the oil price risk premium remains elevated, global inflation becomes more persistent, and imported pressures on China persist and intensify periodically.

2. Pessimistic scenario (second most likely): The conflict escalates further, with the US intensifying strikes on Iranian energy infrastructure. Iran fully blockades the Strait of Hormuz and broadens the scope of its countermeasures against US and Israeli targets. Energy facilities in oil-producing countries such as Saudi Arabia and the United Arab Emirates are drawn into the conflict, while insufficient oil storage capacity in Iraq and Kuwait leads to deeper production cuts. OPEC+ has no plans for additional output increases, leaving more than 20 million barrels per day of global crude supply disrupted. Once oil prices break above $130 per barrel, they could surge towards $160, and institutions such as Macquarie estimate that the crude market may enter a “phased collapse” [阶段性崩溃] as the supply side contracts across the board. CICC forecasts that if the Strait closure and the interruption of Iranian exports continue into the second quarter, Brent’s central price level will rise above $140 per barrel, raising the risk of global stagflation. In this scenario, China’s chemicals, agriculture, and high-end manufacturing sectors would face across-the-board supply and price shocks, while the spillover effects from disruptions in South Korea’s petrochemical supply chain would further hit China’s own supply chains.

   [Note: CICC warned that a Strait of Hormuz disruption persisting into Q2 would push the Brent oil price centre above $120 per barrel. The $140 figure appears to derive from a separate CICC scenario in which supply disruptions of 6 months or more push oil prices to $140-160 per barrel.]

3. Optimistic scenario (low probability): Under strong international mediation, the United States and Iran reach a phased ceasefire agreement. Iran gradually eases its controls over the Strait of Hormuz, while the United States halts strikes on Iranian energy facilities and allows repairs on Kharg Island to proceed. Countries such as Iraq and Kuwait gradually restore production capacity and OPEC+ resumes increasing output. As the geopolitical risk premium fades, international oil prices fall back to around $80 per barrel or below. Commodity markets return to being driven by underlying supply-and-demand fundamentals, supply systems in Asian countries such as Japan and South Korea gradually recover, and the imported shock on China gradually eases.

The impact of the Middle East situation on China is marked by rapid transmission, broad reach, extended knock-on effects [链条长] and repeated disruptions. Through three main channels—oil, natural gas and key chemical products—these effects are spreading across all sectors of China’s real economy, posing a sustained challenge to the country’s efforts to stabilise growth, prices and employment.

(A) Direct Impact of Energy Prices: Manufacturing Costs Rise Across the Board

The sharp surge in international oil prices has directly driven up domestic procurement costs for refined oil products, chemical feedstocks and industrial fuels. Repeated US-Iran confrontation has continued to push up the oil price risk premium, further amplifying both the scale and persistence of price increases. As a result, overall costs in energy-intensive sectors such as logistics, transport, aviation, shipping, steel and non-ferrous metals have risen by 15-25%, severely squeezing [Chinese] corporate profit margins. At the same time, natural gas prices have also soared, affecting not only residential heating and other basic livelihood needs, but also pushing up the cost of industrial gas use and thermal power generation, thereby intensifying the dual pressure of electricity and energy costs on the manufacturing sector. Some small and micro-manufacturing firms have already fallen into the predicament of “operating at a loss from the outset” [开工即亏损]. The recurring nature of geopolitical tensions has made it far more difficult for firms to predict costs, leading to more conservative production and operating decisions and a marked decline in willingness to expand capacity and invest.

(B) Deep Spillovers Along the Chemical Industry Chain: How a “Drop of Oil” Triggers Multiplier Effects

Iran is not only a major global oil exporter, but also a key supplier of critical chemical products. Disruptions to its supply have a pronounced multiplier effect [乘数效应] on China’s manufacturing sector, affecting both upstream and downstream segments of the industrial chain and setting off a transmission chain of raw material supply disruptions, surging prices, and pressure on downstream end users.

1. Shortages of basic chemical feedstocks are widening. Around 45% of China’s imported methanol and 10% of its imported polyethylene come from Iran. The conflict has led to a sharp drop in operating rates at Iranian chemical plants and a halt in exports, driving methanol and ethylene prices up by 15-30%. This has directly increased the cost of products such as plastics, rubber, coatings and solvents in China, with the effects then passing through to downstream manufacturing sectors including home appliances, automobiles, packaging and furniture.

2. Soaring agricultural input costs are hitting agricultural production. Iran is the world’s second-largest exporter of urea and an important supplier of sulphur. 56% of China’s sulphur imports come from the Middle East. Sharp increases in fertiliser feedstock prices have pushed up the prices of agricultural inputs such as urea and phosphate fertilisers, directly increasing the cost of spring ploughing and cultivation, and threatening China’s food security and the stability of agricultural product prices. The recurring nature of [the current] geopolitical conflict has kept agricultural input prices fluctuating at elevated levels over a prolonged period, continuously intensifying cost pressures on agricultural production and making agricultural input firms more cautious in their production and inventory decisions.

3. The chemical fibre and textile industry chain is under pressure across the board. Products derived from crude oil cracking are core feedstocks for the chemical fibre industry, and rising crude oil and naphtha prices are driving up the rigid production costs of chemical fibre products such as polyester and nylon. This, in turn, is increasing export costs for the textile, apparel and home furnishing sectors, significantly weakening their competitiveness in international markets and compressing profit margins across the industry. Cost volatility is exposing firms’ export orders to the risk of contract breaches, while the East Asian supply-chain ripple effects caused by disruptions in South Korea’s petrochemical industry chain are further increasing logistics and delivery risks in China’s chemical fibre and textile export segment.

(C) The Dual Shock of Critical Raw Materials and Logistics: Intensifying “Bottleneck” Risks in [China’s] Supply Chains

1. Hidden risks in high-end manufacturing are becoming more pronounced. In March 2026, Qatar’s Ras Laffan gas field was forced to suspend operations because of the regional conflict, disrupting more than one-third of global helium supply and triggering supply-chain crises in key industries worldwide, including semiconductors and MRI equipment. This will directly undermine the stability of production in China’s semiconductor and related industrial chains, further intensify “bottleneck” risks in the chip sector and constrain the upgrading of China’s high-end manufacturing industries.

2. Disruptions to [global shipping and] logistics networks are driving up operating costs. Oil tankers and cargo vessels are being forced to reroute around the Cape of Good Hope, increasing voyage distances by 40% and extending shipping times by 10 to 14 days, while marine insurance premiums have surged by more than 300%. At the same time, tanker route planning has been repeatedly adjusted and, in some cases, brought to a complete halt, driving up both logistics and time costs. China’s crude oil shipments not associated with the United States, Israel or Europe are also facing procedural complexities and lower customs-clearance efficiency due to tighter Strait controls. As a result, logistics costs for imported manufacturing inputs and exported finished goods have risen sharply, delivery cycles have lengthened significantly, and some industries closely linked to South Korean supply chains are already at risk of being forced to “halt production due to material shortages” [停工待料]—a development that poses a serious challenge to the stability of [our] supply chains.

(D) Disturbances to Market Expectations: Profit Squeeze Across Industries, Compounded by Speculative Activity

Sharp fluctuations in commodity prices have drawn speculative capital into the market, further amplifying market panic. Some traders have engaged in hoarding, price gouging, and other such practices, further increasing the scale of price volatility and creating a rigid transmission chain in which upstream price increases translate into pressure on the midstream and losses downstream [上游涨价→中游承压→下游亏损]. In particular, small and micro manufacturing firms—which have weaker risk resistance—have been hit the hardest, with some sectors already experiencing situations in which costs exceed selling prices and operating capacity rates remain too low [成本倒挂、开工不足]. As the unpredictability of the geopolitical situation continues to intensify, panic-driven market expectations and pressures on firms’ real-economy operations are reinforcing one another, not only compressing corporate profit margins but also creating a persistent challenge to the security of China’s supply chains.

Against the backdrop of profound uncertainty in the Middle East and sharp volatility in commodity markets, [China’s] core approach should be to use the certainty of domestic supply assurance and price stability to offset the uncertainty of external geopolitical conflict and the extreme risks arising from repeated US–Iran confrontation. The strategy calls for coordinated short-term emergency measures [短期应急], medium-term adjustment [中期调节], and long-term strategic planning [长期布局], supported by precise, tiered and categorised policy measures. It also requires stronger preparedness for extreme geopolitical scenarios, determined efforts to uphold the bottom line of supply security and price stability, effective containment of inflation transmission and the prevention and mitigation of systemic risks.

(A) Short-Term Emergency Response (1-3 months): Rapid Action to Safeguard the Bottom Line of Supply Security

In responding to extreme geopolitical scenarios, policy should focus on filling supply gaps, stabilising market prices and preventing speculative activity. Reserve adjustments, import substitution and market regulation should be deployed promptly to defuse immediate supply and price risks, to give priority to meeting the energy and material needs of households and key sectors, and to stabilise market expectations.

1. Reserves should be mobilised on a tiered basis to smooth price volatility with precision. A three-tier warning system should be triggered according to the scale of oil price increases. Under a blue alert ($100-110 per barrel), 5-8 million tonnes of state strategic petroleum reserves should be released in coordination with commercial reserve releases by Chinese enterprises. Under a yellow alert ($110-130 per barrel), the scale of reserve releases should be increased to 10-15 million tonnes, while state natural gas reserves should also be deployed. Under a red alert (above $130 per barrel), the highest-level emergency reserve release mechanism should be activated, with the release volume appropriately increased to more than 20 million tonnes, in order to safeguard firmly the bottom line on energy supply for basic livelihood needs.

2. Supply sources should be diversified [多元替代] to ensure continued supply-chain stability. By the end of April 2026, the share of crude oil imports from non-Middle Eastern channels—including Russia, Central Asia, Africa and South America—should be raised to above 55%, while cross-border oil and gas pipelines should be run at full capacity and plans for substituting heavy crude should be accelerated. Maritime route planning should also be optimised to avoid the geopolitical risks associated with the Strait of Hormuz, with additional transport capacity allocated to alternative shipping routes and Middle Eastern crude oil rerouted via the Red Sea and the Suez Canal. In response to regional supply gaps caused by disruptions in South Korea’s petrochemical industry chain, contingency plans to ensure domestic chemical supplies should be prepared in advance to prevent regional spillover effects from hitting the domestic market. Imports of methanol, sulphur, urea and other chemical products from non-Middle Eastern sources should also be expanded to reduce dependence on Iranian chemical feedstocks. China should engage African oil-producing countries at an early stage, implement measures to facilitate customs clearance for crude oil imports, seize the policy window created by the entry into force on 1 May of zero tariffs on crude oil from 53 African countries, expand crude imports from Angola, Nigeria, Algeria and other African producers, and simultaneously enhance refinery capacity to process and adapt to African crude.

   [Note: China did announce zero-tariff treatment for imports from 53 African countries from 1 May 2026. However, crude oil (HS 2709) already enters China duty-free under the MFN tariff, including from Africa’s main suppliers.]

3. Market oversight should be strengthened to curb speculative activity resolutely. Round-the-clock price monitoring should be conducted for key commodities including crude oil, refined oil products, chemical products and fertilisers, while enforcement against panic-driven market speculation should be stepped up. Hoarding, price gouging, malicious speculation and similar practices should be dealt with severely, and representative cases should be exposed publicly to create a deterrent [形成震慑]. Risk-control parameters in the futures market should also be adjusted, with margin requirements and transaction fees for relevant contracts raised to restrain excessive speculation, particularly to guard against irrational volatility if oil prices break through $130 per barrel.

(B) Medium-Term Adjustment (3-12 months): Targeted Measures to Cut Off Inflationary Pass-through

Policy should focus on reducing business costs, easing operational difficulties and expanding domestic demand in order to relieve persistent cost pressures. This can be achieved through differentiated price regulation, targeted financial support and smoother domestic economic circulation, thereby easing pressure on downstream firms, containing inflation risks and stabilising the real economy.

1. Prices should be regulated in a differentiated manner to ease pressure on downstream sectors with precision. Temporary price subsidies should be provided in livelihood-related areas such as public transport, taxis, agriculture and residential gas use, with the duration of such support adjusted dynamically in line with both the trajectory of the US–Iran conflict and fluctuations in oil prices in order to address sustained upward price pressures. Targeted energy-cost subsidies should also be provided to logistics firms and small, medium and micro-sized manufacturing enterprises, with particular support directed towards industries that are closely linked to South Korean supply chains and more severely affected by supply disruptions. Minimum fertiliser production targets should be implemented, with priority given to ensuring energy and material inputs required for fertiliser production, so as to stabilise agricultural input prices and fully safeguard spring planting.

2. Financial instruments should be improved to hedge operational risks more effectively. Large refining, foreign-trade and manufacturing companies should be encouraged to use derivatives such as futures, options and swaps to lock in import costs, while bespoke hedging products should be developed to address geopolitical risks such as recurring disruptions to navigation through the Strait of Hormuz and delays in repairs on Kharg Island. Financial institutions should be supported in broadening the coverage of foreign-exchange risk management tools and encouraged to step up credit support for firms involved in ensuring energy supply and stabilising supply chains. Targeted credit relief should also be provided to severely affected small, medium and micro enterprises, with differentiated credit policies [差异化信贷政策] put in place to ensure that loans are not withdrawn, cut off or called in prematurely.

3. Domestic circulation should be kept flowing smoothly, with domestic demand serving as a buffer against external shocks. Tax and fee cuts should be stepped up, while differentiated policies to reduce energy consumption and operating costs should be introduced for energy-intensive industries, alongside support for firms undertaking technological upgrades to improve their energy efficiency. Measures to stabilise consumption should also be implemented to unlock demand for major consumer items [大宗消费] such as automobiles, home appliances and green building materials. In this way, the stability of the domestic economic cycle can be used to cushion the sustained external shocks generated by repeated US-Iran flare-ups, reduce dependence on linked segments of East Asian supply chains and use the stability of the domestic economy to cushion China against imported [inflationary and supply-side] pressures.

(C) Long-Term Strategic Planning (1-3 years): Strengthening Foundations [固本强基] and Enhancing the Security Resilience of [China’s] Industrial Chains

Policy should focus on strengthening resource security, addressing weaknesses in industrial chains and advancing the energy transition [强资源基础、补产业链短板、促能源转型], so as to fundamentally reduce [China’s] dependence on Iran and other geopolitically high-risk parts of the Middle East for critical resources. This will require efforts to diversify imports, strengthen strategic reserves, advance the energy transition and improve self-sufficiency to ensure supply security, thereby reducing China’s external dependence at its root and enhancing both the autonomy and controllability [自主可控能力] of bulk commodity supplies and the resilience of its supply chains.

1. Energy import diversification should be deepened by building a multi-channel, multi-source supply system. Long-term cooperation with major oil-producing countries should be consolidated through the signing and renewal of long-term crude oil and natural gas supply contracts to lock in import volumes and benchmark prices. Cooperation on oil and gas resources in non-Middle Eastern regions—including Central Asia, Latin America, and Africa—should be expanded, with efforts accelerated both to reduce the share of crude imports from the Middle East to below 45% and to lower dependence on Iranian crude oil and chemical feedstocks. Building on the zero-tariff policy for imports from 53 African countries, China should pursue long-term supply, exploration and development agreements with key African producers, lower the overall cost of African crude oil imports, and treat the share of African crude oil in non-Middle Eastern imports as a core metric for assessing progress in supply diversification. Capacity along overland energy corridors should be increased to create a dual-track energy transport system centred on land routes and supported by maritime routes [陆上为主、海上为辅], thereby reducing vulnerability to the geopolitical risks of relying on the Strait of Hormuz as a single maritime chokepoint. Maritime route planning should also be optimised to develop an integrated land-and-sea energy transport network.

2. [China’s] strategic reserve system should be strengthened to reinforce the core line of defence for ensuring supply and stabilising prices. The scale of strategic reserves of oil, natural gas, coal, key chemical products and fertilisers should be expanded with precision, while the minimum level of strategic petroleum reserves should be raised to above 500 million barrels in preparation for extreme geopolitical scenarios such as repeated US–Iran flare-ups, a full closure of the Strait of Hormuz and a complete interruption of Iranian exports. The geographical distribution of reserves should be optimised by accelerating the development of both coastal and inland storage bases and establishing a three-tier reserve system comprising state reserves, corporate commercial reserves and social reserves. China should also adhere to a dynamic adjustment strategy of: restocking at low prices and releasing reserves at high prices [低价补库、高价放储], while clearly specifying the timing, scale and methods of reserve releases under different scenarios, formulating dedicated emergency release plans and strengthening operational capacity in reserve deployment.

3. Energy transition and substitution should be accelerated to reduce dependence on fossil fuels. Clean energy sources—including wind, solar, nuclear and hydropower—should be developed vigorously, while the construction of a new power system should be steadily advanced to raise the share of non-fossil energy in [China’s] overall energy consumption. Support should also be expanded for alternative energy industries such as coal-to-liquids and coal-to-gas, biofuels and hydrogen, while refining and petrochemical enterprises should be encouraged to optimise their processes and strengthen their capacity to process heavier crude grades. At the same time, greater investment should be directed towards domestic technological R&D and industrial-scale production of key raw materials for which Iran is a major supplier, including high-purity neon, methanol and polyethylene. Dedicated national-level technology programmes [国家级技术攻关专项] should be established to secure autonomous and controllable supplies of these critical inputs. Efforts should also be stepped up to strengthen domestic supply security for key materials such as chemical products, chemical fibres and semiconductor materials, thereby helping address weaknesses in [our] industrial chains.

To ensure that tiered and categorised response policies are effectively implemented and that China’s defences for ensuring commodity supply security and price stability are firmly reinforced, a systematic and comprehensive support framework should be built across five areas: monitoring and early warning [监测预警], coordinated response [协同联动], international cooperation [国际协作], capacity building [能力建设] and operational drills [实战演练]. This will strengthen response capabilities, promote more precise and practical implementation across all areas of work, and ensure robust responses [应对有力], orderly handling [处置有序] and effective guarantees [保障有效].

(A) Building a Comprehensive, Round-the-Clock Monitoring and Early Warning System to Improve the Accuracy of Risk Forecasting

1. An integrated monitoring network combining geopolitics, markets and supply chains should be established. Data from multiple departments—including the National Development and Reform Commission, Ministry of Foreign Affairs, Ministry of Commerce, the National Energy Administration and the General Administration of Customs—should be integrated to enable 24/7 real-time monitoring of key indicators such as the progress of repairs on Kharg Island, changes in navigation conditions in the Strait of Hormuz, production-capacity shifts in countries such as Iraq and Kuwait, the pace of Japan’s petroleum reserve releases, the recovery of South Korea’s petrochemical supply chain, OPEC+ production-adjustment plans, international oil prices, shipping indices, domestic refinery operating rates and inventory levels. This should be institutionalised through a regular working mechanism involving daily monitoring, weekly analysis and monthly assessment.

2. [Our] tiered early-warning system and authoritative information-release mechanism should be improved. Clear standards should be established for different warning levels, with additional trigger conditions introduced for extreme geopolitical scenarios. The trigger thresholds, responsible departments and response requirements for each level should be clearly defined. Assessment conclusions and policy guidance should then be communicated in a timely manner to markets, businesses and the public through authoritative channels in order to stabilise expectations and prevent panic buying and irrational speculation.

3. Greater support should be provided through big data and predictive modelling. Macroeconomic models, geopolitical scenario models and price-transmission models should be used to generate quantitative estimates of oil price movements, import costs and inflationary impacts under different conflict scenarios. Model parameters should be adjusted dynamically in light of assessments produced by specialist institutions, so as to provide a sound data basis for activating tiered contingency plans, releasing reserves and making policy adjustments, while enhancing the foresight [前瞻性] and precision [精准性] of decision-making.

(B) Establishing Cross-Departmental and Cross-Regional Coordination Mechanisms to Strengthen the Collective Effort Behind Supply Assurance and Price Stabilisation

1. A dedicated task force on ensuring commodity supply and stabilising prices should be established. Led by the National Development and Reform Commission and bringing together the energy, finance, commerce, market regulation, financial regulation and transport authorities, it should operate through a coordinated working mechanism combining weekly consultations, monthly coordination and emergency activation. A dedicated working group on US-Iran geopolitical developments should also be established to track developments in real time. Work on reserve releases, import adjustment, price supervision and financial support should be coordinated in a unified manner to avoid fragmented policymaking [政策碎片化] and uncoordinated action [行动不同步].

2. Responsibility should be firmly assigned across the three levels of central coordination, local implementation and enterprise-level delivery. At the central level, responsibilities should include the deployment of strategic reserves [战略储备调度], the formulation of macroeconomic policy, international coordination and the development of emergency contingency plans for extreme geopolitical scenarios. Local governments should be responsible for ensuring market supply within their jurisdictions, supervising prices, safeguarding basic livelihoods, supporting distressed firms [企业纾困] and implementing local supply-security measures in response to repeated US–Iran confrontation. China National Petroleum Corporation, Sinopec, China National Offshore Oil Corporation and key refining and trading enterprises should bear primary responsibility for ensuring supply by formulating firm-level contingency plans and maintaining adequate inventories, stable production and uninterrupted supply. The central government, local authorities and enterprises should also regularly review the feasibility of these plans, the degree of interdepartmental coordination and the timeliness of response, so as to identify shortcomings promptly, refine the plans accordingly and strengthen their operational effectiveness.

3. A unified national information platform for ensuring commodity supply security and price stability should be established. The platform should enable real-time data sharing on crude oil imports, inventories, production, sales and transport, thereby breaking down information silos [信息壁垒] across departments, regions and enterprises. It should also include a dedicated section on US–Iran geopolitical risks, with real-time updates on the development of the conflict, progress on repairs at Kharg Island, control measures in the Strait and the status of South Korean supply chains. In the case of emergencies, it should support cross-regional and cross-enterprise mobilisation, with priority given to meeting the energy and material needs of households, agriculture and key manufacturing sectors.

4. Risk screening and corrective action should be strengthened in key areas. Routine risk inspections should be carried out at critical facilities such as coastal refineries, oil and gas storage bases, cross-border energy corridors and major logistics hubs, with particular attention paid to geopolitical risks along maritime oil and gas transport routes, security along overland energy corridors, and supply risks in segments closely linked to South Korean industrial chains. Infrastructure weaknesses and security vulnerabilities should be addressed without delay to ensure that, even under extreme circumstances, China’s energy supply chains remain resilient under strain—without breaking when disrupted and without grinding to a halt when obstructed [断链不中断、受阻不停摆].

(C) Deepening Multi-Level and Multi-Sector International Energy Cooperation to Stabilise External Energy Supply

1. The foundations of long-term oil supply cooperation should be consolidated. China should step up engagement with major oil-producing countries such as Russia, Saudi Arabia, the United Arab Emirates, Iraq, Brazil and Angola, as well as push forward the renewal and signing of long-term crude oil and natural gas supply contracts, locking in annual import volumes and benchmark prices. In particular, cooperation should be deepened with partner countries outside the US-Israeli-European alliance network to reduce the impact of short-term price volatility and geopolitical conflict.

2. Efforts to secure equity interests in overseas oil and gas resources should be expanded. Domestic energy companies should be supported in exploring developing and operating overseas oil and gas fields, with particular emphasis on expanding equity investment in non-Middle Eastern regions such as Africa, Central Asia and South America so as to reduce dependence on resources from the Middle East. The share of independently controlled resources should be increased to enhance the flexibility and stability of China’s energy supply, while priority should be given to establishing alternative overseas supply bases for key raw materials such as high-purity neon and methanol.

3. China should participate more actively in global energy governance. Drawing on multilateral mechanisms such as the G20, BRICS and the Shanghai Cooperation Organisation, China should call on the world’s major oil producers and consumers to strengthen coordination in order to safeguard the stability of global energy markets, oppose the disruption of energy supply chains caused by unilateral sanctions and military conflict, and work with other countries to urge the United States and Iran to resume negotiations and ease tensions, thereby helping build international consensus on safeguarding the security of global energy corridors. China should also establish regular energy-cooperation mechanisms with African oil-producing countries and the African Union, using the zero-tariff policy on crude oil imports as a basis for consultations on transport-route optimisation, improved customs-clearance efficiency and joint refinery projects in order to enhance the stability and controllability of energy imports from Africa.

(D) Strengthening [China’s] Core Capacity for Ensuring Supply and Stabilising Prices to Underpin its Long-Term Economic Security

1. The management of strategic reserves should be strengthened through more precise and effective measures. Mechanisms for reserve release, rotation and storage management should be improved, linkages between state reserves and corporate commercial reserves should be strengthened, and reserve deployment procedures should be further streamlined. In extreme scenarios, emergency deployment procedures should be optimised to improve the efficiency of reserve releases. The layout of reserve bases should also be planned more precisely, with faster development of coastal, inland and border storage facilities and particular emphasis on building reserve bases along overland energy corridors so as to reduce exposure to maritime geopolitical risks. At the same time, current shortcomings in [China’s] reserve infrastructure should be addressed.

2. Domestic capacity for energy production and substitution should be strengthened. Efforts to explore and develop domestic oil and gas resources should be intensified to increase output of unconventional energy sources such as shale oil, shale gas and coalbed methane. Support should also be expanded for R&D and industrial application of core alternative-energy technologies, while industries such as coal-to-liquids, coal-to-gas and biofuels should be promoted on a larger scale. Refining and petrochemical enterprises should be encouraged to undertake technological upgrading to improve their capacity to process heavier and high-sulphur crude oil, with particular emphasis on enhancing their ability to process crude oil imported from Africa. Greater investment should also be directed towards domestic technological development for key raw materials for which Iran is a major supplier, including high-purity neon and methanol. Dedicated national-level technology programmes should also be established to achieve independent domestic production of these inputs.

3. The policy toolkit for price regulation and market supervision should be strengthened. Price-formation mechanisms for refined oil products and natural gas should be improved, while price-linkage and subsidy policies should be further refined. In response to sustained price increases, a dynamic mechanism for adjusting price subsidies should be established, alongside targeted support [精准托底] for livelihood-related sectors and weak links. Coordinated oversight of both spot and futures markets for bulk commodities should also be strengthened, with regulatory rules refined and targeted measures introduced to contain panic-driven speculation triggered by repeated US–Iran flare-ups. At the same time, regulatory effectiveness should be enhanced to resolutely uphold fair competition and orderly market conditions.

The commodity price volatility triggered by the escalation of the current US-Iran conflict has had a systemic [系统性] and greater-than-expected [超预期] impact on China’s economy, with [the potential to generate] repeated disruptions [反复性特征]. It has not only generated direct imported inflationary pressures but also affected the functioning of the real economy through transmission across the entire industrial chain. Ensuring the supply and price stability of bulk commodities is therefore both a tough battle [攻坚战] and a protracted campaign of endurance [持久战].

In the face of a complex and severe international landscape, China must abandon wishful thinking [侥幸心理], adhere to a bottom-line approach [底线思维], prepare for worst-case scenarios [极限思维] and take as its central guiding principle the need to: offset external geopolitical uncertainty through the certainty of domestic supply assurance and price stability [以国内保供稳价确定性对冲外部地缘不确定性]. On this basis, it should establish and improve a three-tier early-warning system and graded response mechanism—blue, yellow and red—while coordinating three categories of policy tools: short-term emergency measures, medium-term adjustment and long-term strategic planning. By building a comprehensive monitoring and early-warning system, a cross-departmental coordination mechanism and a multi-level framework for international cooperation, China can strengthen its capacity to ensure supply and stabilise prices in response to extreme geopolitical risks, tighten accountability at the central, local and enterprise levels, and fundamentally enhance the resilience and security of its energy and supply chains. Only by firmly safeguarding the bottom line of stable bulk commodity supply and prices, and by effectively cutting off the transmission of inflationary pressures, can China prevent and defuse systemic risks, provide solid and reliable support for the steady and healthy functioning of the economy and promote effective qualitative improvement alongside reasonable quantitative growth.

The war in Iran predictably dominates commentary in March.

We covered initial reactions to the US-Israeli strikes in our briefing earlier last month, where we noted that assessments of China’s risk-opportunity balance hinged largely on Trump’s ability to turn action into success. We also featured a censored piece from the Intellisia Institute that pushed this logic further, arguing that a prolonged Middle East war could become a major strategic opportunity for China.

More than a month on, early scepticism about US regime-change prospects in Iran has hardened into a feeling somewhere between consternation and schadenfreude, with most analysts now framing the situation as a quagmire. The dominant motif is Trump’s “tiger-riding predicament” [骑虎难下]—meaning that it is easier to climb on a tiger than to dismount and easier to start a war than to end one.

Which makes it refreshing to read SISU professor Shi Zhan and former Brookings “returnee scholar” Li Cheng urging caution on US failure narratives and dismissing comparisons to the post-9/11 strategic distraction from China. On the more familiar hawkish side we have Wang Jiangyu, who calls this “the last war America can launch with any semblance of dignity”.

Meanwhile, Di Dongsheng argues that high energy prices are a net gain for China—a case he was apparently unable or unwilling to make on his WeChat blog on the same theme a few days earlier, which promised but conspicuously withheld the argument. The economic counter-case comes from Morgan Stanley Chief China Economist Xing Ziqiang, who warns that markets are underpricing the oil shock. His surprisingly stark warning is that $130 oil over a single quarter could drag China’s GDP growth to 3% or below.

Coverage of the Chinese economy is also weightier than usual, driven by the Two Sessions and the new Five-Year Plan. Direct FYP coverage was expectedly boilerplate, but the rural pension question (the FYP’s token increase was arguably the biggest social policy disappointment of the Two Sessions) prompted a more pointed debate. Against the many calls among Chinese economists for significant pension increases, Lü Dewen mounts an eight-point rebuttal, concluding that cash is not what the elderly actually need—and that pension transfers risk producing a “crowding-out effect” [挤出效应] on children’s sense of filial obligation.

Elsewhere, Zhou Tianyong puts a damning number on China’s reform deficit, forecasting an average growth of just 2.4% through 2035 unless institutional change occurs. Jia Qingguo and Wang Yiming both flag what Beijing is reluctant to concede—that the export model is generating resistance it cannot indefinitely absorb. Meanwhile, consumption-driven growth is challenged on three fronts: Zhu Tian argues that low consumption was a key driver of four decades of growth rather than a pathology; Yu Yongding rejects the existence of a coherent “consumption-driven growth” [消费驱动] category; and Lu Di and colleagues dismantle the “flawed arguments” for a consumption pivot. Among others, Wang Xiaolu takes a more consumption-friendly stance, arguing that government expenditure is devoted to investment and bureaucracy at the expense of a “livelihood-oriented fiscal policy”.

Beyond Iran and the economy, several pieces extend these discussions into broader questions of strategy. Wu Xinbo portrays a Beijing that increasingly regards tariffs as a secondary issue and appears prepared to retaliate against US interests in third countries. Zheng Yongnian, in turn, calls for an “Interventionism 2.0”, arguing that the PRC’s traditional non-interference doctrine no longer matches the scale of its global interests. And on Taiwan, Wei Leijie captures the bluntness with which some mainland voices now reject the case for continued delay in “cross-Strait reunification”.

— Jacob Mardell

1. Iran War:

   1. Shi Zhan on why it is too hasty to predict US defeat in Iran without first analysing Washington’s war aims.

   2. Li Cheng on why an Iran quagmire is unlikely to soften Washington’s China policy, and on China’s “many paradoxes and policy choices” over Iran.

   3. Wang Jiangyu on allies having now established a precedent of not following America, making this the last war America can launch with any semblance of dignity.

   4. Di Dongsheng on China profiting from war, as high oil prices improve the relative competitiveness of Chinese manufacturing while stretching Washington and its allies.

   5. Xing Ziqiang on markets severely underpricing the risk of a prolonged oil shock, with oil at US$130 for a quarter potentially dragging China’s growth to around 3% or lower.

   6. Li Fuquan on why the US-Israeli strikes make Iran’s abandonment of its nuclear programme a near-impossibility.

   7. Wu Hailong on why the US-Israeli strike is part of Washington’s broader strategic competition with China and Russia, requiring a coordinated Sino-Russian response.

2. Global Order & US–China Relations:

   1. Zheng Yongnian on China urgently needing an “Interventionism 2.0”—a revised doctrine permitting proactive intervention when overseas interests are threatened.

   2. Jia Qingguo on how China should adjust its model for overseas investment to reduce frictions in the host country.

   3. Zhang Yongle on the viral “kill line” discussion marking a shift in China’s cognitive positioning from “looking up” to “partially looking down” at the US.

   4. Zhao Dingqi on the current far-right wave marking a new “Polanyian moment” in which the United States is already operating a form of “anticipatory fascism”.

   5. Xia Liping on Trump’s revival of the G2 concept as an opening for greater Sino-American coordination on a more equal basis.

   6. Wu Xinbo on Beijing’s growing concern over US interference in its overseas economic interests and the broader agenda it wants to press beyond tariffs.

3. Taiwan:

   1. Chen Xiancai and Su Weibin on the mainland having established “overwhelming advantages” in sovereignty, governance and legitimacy, while identity remains the “deepest and most difficult obstacle”.

   2. Wei Leijie on the urgency of achieving “Taiwan’s recovery” at the earliest opportunity, and on why common arguments for strategic patience are fallacies.

4. Chinese Economy:

   1. Wang Xiaolu i) on government expenditure being devoted to investment and bureaucracy at the expense of a “livelihood-oriented fiscal policy”; and ii) on official income-distribution statistics understating the true extent of state economic control.

   2. Wang Yiming on China’s 30% share of global manufacturing meaning further export expansion risks provoking trade restrictions.

   3. Zhou Tianyong on China’s economy growing at only 2.48% in 2026–2030 without institutional reform—well below the 5% needed to meet the 2035 modernisation target.

   4. Tang Dajie on why significant increases to rural pensions are a necessity from the perspective of both economic stimulus and societal fairness.

   5. Lü Dewen on why increasing rural pensions is ill-suited to short-term stimulus, whereas the real problem for the very elderly is care rather than cash.

   6. Lu Di, Yu Shiwen and Gao Ling on why the case for consumption-driven growth rests on three flawed arguments.

   7. Yu Yongding on “consumption-driven growth” as a macroeconomic red herring, and why China should not treat the 3% deficit ceiling as binding.

   8. Zhu Tian on why China’s low consumption rate was a driver of high-speed growth rather than a structural problem.

5. Artificial Intelligence:

   1. Liang Jianzhang and Wang Ciqiao on AI as a fertility depressant operating through three channels, including competition for reproduction from low-cost entertainment.

   2. Zhuo Xian on AI producing three simultaneous decouplings that collectively undermine the three pillars on which social insurance was built.

   3. Yao Yang on AI as a massive bubble whose collapse may be triggered by a Chinese photonic or optoelectronic chip breakthrough.

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1. Iran War

Shi Zhan (施展): It is premature to predict that the US will lose the war without first analysing its objectives. If Washington’s aim is regime change, it is unlikely to succeed without ground forces; if its aim is only to destroy Iran’s nuclear capability and ability to project influence externally, that objective can probably still be achieved. The claim that a Gulf shock would collapse US AI financing, let alone US financial hegemony, is overstated: petrodollars account for less than 10% of AI financing, and the real transmission mechanism runs through higher oil prices, stickier inflation, tighter financing conditions, and rising electricity costs. Those pressures could still hurt the US economy, but they remain a long way from the disintegration of America’s financial hegemony. — Professor; Director, Research Centre on World Politics, China Foreign Affairs University (施展世界, 4 March)

Li Cheng (李成): The idea that the US being bogged down in Iran may cause it to soften its stance on China does not hold up—this is not the post-9/11 moment, when Bush recognised that the PRC was not the primary adversary. The Iran war itself is not in Beijing’s interests, but China also cannot accept Iran falling under US control or becoming pro-American. China faces “many paradoxes and policy choices” [很多悖论与政策选择] over Iran, and the impact of the war on US–China relations depends above all on the degree and direction of the conflict’s development. — Founding Director, Centre on Contemporary China and the World, University of Hong Kong (CCCW, 26 March)

Wang Jiangyu (王江雨): The refusal of US allies to follow Washington’s lead in the Strait of Hormuz sets a precedent that will make it much harder for America to rally allies in future wars—this may be the last war Washington can launch with any semblance of dignity. Trump is “riding a tiger and unable to get off” [骑虎难下]: he underestimated Iran’s resilience, but Iranian surrender is impossible without a large-scale ground invasion that he does not dare launch. The most likely outcomes are either a US declaration of victory followed by withdrawal, or a drawn-out low-intensity war. China’s tolerance for the damage the war inflicts on the world economy is the strongest, and China’s strategic environment may grow increasingly favourable as distrust of America deepens—including from Russia. — Professor, School of Law; Director, Centre for Chinese and Comparative Law, City University of Hong Kong (IPP Review, 18 March)

Di Dongsheng (翟东升): With the two Cold War superpowers now bogged down in quagmire conflicts, China is following the script the United States played in the early stages of World War One to profit from the war. Among the world’s major net energy importers, China ranks ahead of the United States in energy autonomy, meaning that higher oil prices improve the competitive position of Chinese manufacturing relative to more oil-dependent rivals. High oil prices also transfer wealth from energy-importing core economies towards peripheral ones, boosting purchasing power in Africa and the Middle East precisely where Chinese goods are most competitive, while stretching the fiscal and strategic resources of Washington and its allies. Chinese exports of new energy vehicles, storage, photovoltaics and wind power equipment will accelerate, while the defence industry and dual-use technology sectors stand to profit quietly. — Professor and Vice Dean, School of International Relations, Renmin University of China (Weibo, 30 March)

Xing Ziqiang (邢自强): If oil were to average around US$130 for a quarter—the threshold at which global demand would fall non-linearly—it would lead to both a direct oil shock and a collapse in external demand for China, meaning that real GDP growth could fall to around 3% or lower without policy intervention. Global markets are severely underpricing this risk: even after counting backup pipelines, additional Russian exports and full releases of strategic reserves, only around 7 million of a 20-million-barrel daily shortfall could be covered. Rather than carrying out fiscal tightening going into the shock—which would compound China’s demand problem without fixing the supply-side cause—the correct response is from the 2021 commodity spike playbook: ease credit conditions through reserve requirement cuts and re-lending to keep squeezed firms afloat, while expanding fiscal spending in the second quarter if conditions warrant. — Chief Economist, Morgan Stanley China (爱思想, 27 March)

Li Fuquan (李福泉): The US-Israeli strikes have made clear to Tehran that remaining non-nuclear did not buy security but instead invited catastrophic destruction, making any genuine abandonment of Iran’s nuclear programme increasingly unlikely. The strikes have sent a signal that any state judged to possess nuclear intent and capability—even without actual weapons—may face a military strike by a powerful state, destroying the cornerstone of the international non-proliferation system. Three scenarios could follow: prolonged stalemate; a negotiated compromise—requiring conditions that are almost impossible to satisfy; or the most dangerous possibility—Iran shifting toward a “more covert, dispersed and miniaturised” nuclear programme until it crosses the threshold and shatters the regional balance. — Professor, School of Area and Country Studies, Northwest University (世界知识, 25 March)

Wu Hailong (吴海龙): The US-Israeli strike is part of America’s broader strategic competition with China and Russia. Unwilling to confront either directly, Washington is instead moving against weaker aligned states one by one. This demands a coordinated Sino-Russian response: deeper bilateral strategic coordination, full use of the UN and SCO mechanisms, stronger Global South solidarity, and the building of hard power sufficient to deter American aggression. — Former President, China Public Diplomacy Association (北京对话, March)

2. Global Order & US-China Relations

Zheng Yongnian (郑永年): China urgently needs an “Interventionism 2.0” [干预主义2.0版]—a revised doctrine permitting proactive intervention when overseas interests are threatened by a host state or third party, or when external factors impinge directly on domestic interests. Non-alignment remains principally correct and has so far prevented a Sino-American bloc confrontation from tipping into world war, but China’s traditional non-interference principle must be updated to protect the country’s growing global footprint. — Professor and Dean, School of Public Policy, The Chinese University of Hong Kong, Shenzhen (大湾区评论, 9 March)

Jia Qingguo (贾庆国): As rising Chinese competitiveness drives resistance to Chinese investment abroad, Beijing should respond by shifting its default outbound investment model from wholly-owned to joint-venture structures. Amid geopolitical deterioration and nationalist tendencies, Chinese firms have grown larger and more competitive so that the wholly-owned outbound investment model has begun threatening local enterprises in ways it previously did not. Alongside the shift to joint ventures, China should improve its transparency and relax restrictions on people-to-people exchange, while also improving its institutional management of overseas relations by expanding internal intelligence-sharing among research institutions and diplomatic departments. — Professor, School of International Relations, Peking University; Standing Member, 14th National Committee of the CPPCC (iGCU, 9 March)

Zhang Yongle (章永乐): The viral Chinese internet discussion of the American “kill line”—the threshold below which a minor illness or unpaid bill sends a middle-class family into cascading collapse—marks a shift in Chinese netizens’ cognitive positioning from “looking up” [仰视] to “looking at the same level” [平视] and even “partially looking down” [局部俯视] at the US. Defenders of the American social model are now required to explain why the world’s wealthiest nation leaves its middle class fragile and lacking in a safety net, reversing the long-standing frame in which China had to justify its institutions against an assumed American standard. — Associate Professor, School of Law, Peking University (爱思想, 20 March)

Zhao Dingqi (赵丁琪): The current far-right wave marks a new “Polanyian moment”—a counter-movement against the structural crisis of neoliberal capitalism—but unlike the interwar period, there is no race between communism and fascism: far-right forces are developing with a strength far exceeding that of the left. The United States is already operating what David Hill calls “pre-emptive fascism” [先发制人的法西斯主义]: formal democratic institutions are maintained not out of commitment but because working-class weakness makes it unnecessary to discard them. The cause of the left’s weakness is its abandonment of class politics for identity politics, which in fact became an accomplice and abettor of capital—providing cultural legitimacy to neoliberalism while leaving working-class material interests unaddressed. — Researcher, Chinese Academy of Social Sciences (文化纵横, 16 March)

Xia Liping (夏立平): Trump’s revival of the “G2” concept should not be read as a call for Sino-American co-governance, but as an opening for greater Sino-American coordination on a more equal basis. Unlike earlier formulations, it reflects America’s grudging recognition of China’s strength and a move from denial and anger towards bargaining. China should seize the opportunity to institutionalise leader-level and cross-sector dialogue, secure tangible gains in 2026, and build flexible “China-US+” frameworks with other actors. Properly deployed, the G2 framework can help constrain US containment, increase China’s international weight, and check Japanese militarist revival. — Professor, Tongji University (CRNTT, 16 March)

Wu Xinbo (吴心伯): Beijing is increasingly concerned about US pressure on its overseas economic interests and could retaliate against US interests in third countries where China holds the upper hand. China also feels more confident in confronting the tariff challenge and will not treat it as a major concern at the upcoming Trump–Xi summit in May. Beijing will instead treat tariffs as secondary to technology controls, entity-list removals, investment restrictions, Taiwan—including restraint on future US arms sales—and the restoration of a working mechanism for people-to-people exchanges. — Professor and Executive Director, Centre for American Studies, Fudan University (Brookings, 27 March)

3. Taiwan

Chen Xiancai (陈先才) and Su Weibin (苏炜彬): Taiwan “reunification” is a question of modern state construction in which the mainland already possesses “overwhelming advantages” in sovereignty, governance capacity and legitimacy. The real obstacle is identity: after seventy-five years of separate development, divergent systems, memories and ways of life have been internalised by many Taiwanese as a durable “psychological barrier” [心理屏障]. The answer is a shift away from “blood-transfusion” [输血式] style preferential policies towards a “blood-generating” [造血式] model of “asymmetric integration” [非对称融合]—binding Taiwan into mainland sectors that are hardest to replace, so that decoupling becomes “economically irrational and practically unfeasible”. — Director (Chen); Doctoral Researcher (Su), Taiwan Research Centre, Xiamen University (CRNTT, 11 March)

Wei Leijie (魏磊杰): The case for “recovering Taiwan” [收台] sooner rather than later is a matter of strategic urgency, and the two most common arguments for waiting—that Taiwan will converge democratically with the mainland, or that time will resolve the issue naturally—are both fallacies that function in practice as indefinite delay. The status quo is not stable but rather drifting irreversibly towards de facto independence, while Taiwan’s population, after four centuries without major warfare, lacks the psychological preparation or geographic conditions for prolonged resistance. Beijing should set a concrete recovery timetable to generate a sense of inevitability among Taiwan’s population and foreclose the option of indefinite delay. — Professor, Xiamen University Law School (CRNTT, 6 March)

4. Chinese Economy

Wang Xiaolu (王小鲁): Despite the money supply reaching 2.3 times nominal GDP, consumer demand remains stuck at 37–39% of GDP—because China’s problem is not simply low aggregate demand but a structural imbalance, with government expenditure devoted to investment and bureaucracy at the expense of a “livelihood-oriented fiscal policy” [民生财政]. Public education, healthcare, and social security account for only 13.9% of GDP against an OECD average of 23.5%, while administrative expenditure runs at 9.7%—nearly double the OECD average. Roosevelt’s New Deal succeeded not through Keynesian expansion but through improving people’s livelihoods; China must extend unemployment insurance—currently reaching only 240 million of 470 million urban workers— while simultaneously reducing onerous enterprise contributions. — Deputy Director and Senior Research Fellow, National Economic Research Institute, China Reform Foundation (爱思想, 6 March)

Wang Xiaolu (王小鲁): China’s official income distribution statistics systematically undercount government resource control by excluding land revenues, unrepaid debt, and the effects of monetary expansion—meaning the government now controls over 40% of the economy, exceeding its pre-reform-and-opening-up share. Fiscal and monetary loosening was never withdrawn after the 2008 stimulus, and local governments borrowed massively through shadow financing vehicles, continuously expanding state resource control in ways not reflected in official figures. Households bear the cost: despite controlling a larger share of the economy than comparable governments, China directs only 33% of expenditure to social security, healthcare and education—half the OECD average—meaning expanded government spending has not translated into public welfare but into investment and administration. — Deputy Director and Senior Research Fellow, National Economic Research Institute, China Reform Foundation (爱思想, 8 March)

Wang Yiming (王一鸣): With China’s share of global manufacturing already at 30%, further export expansion will invite trade restrictions from a growing number of countries, making a fundamental shift in the development model unavoidable. At the same time, China is passing through the 60–80% of US GDP “critical threshold” of US-China rivalry even as it faces compounding domestic headwinds: weak productivity growth, an 8.5 trillion yuan hole left by real estate that the “new three” [新三样]—lithium batteries, EVs and solar panels—cannot fill, and the possible early arrival of the post-urbanisation era. — Vice-Chairman, China Centre for International Economic Exchanges; former Vice President, Development Research Centre of the State Council (新华文摘, Issue 4 2026)

Zhou Tianyong (周天勇): Without institutional reform, China’s economy will grow at only 2.48% in 2026–2030 and 2.42% in 2031–2035—well below the 5% needed to meet the 2035 modernisation target. Unlike traditional industries, technologically advanced new-quality productive forces actually reduce inputs of capital and labour—and may therefore hamper economic growth in the absence of redistribution. Misallocation of labour, capital and land—stuck in low-productivity agriculture and non-competitive enterprises—costs the economy approximately 30 trillion yuan annually. Thorough-going reform across the hukou system and rural land marketisation, capital reallocation from SOEs to competitive firms, and sharply raised welfare transfers is therefore needed to maintain the economic growth rate. — Director, National Economic Engineering Laboratory, Dongbei University of Finance and Economics; former Deputy Director, Institute of International Strategic Studies, Central Party School (爱思想, 8 March)

Tang Dajie (唐大杰): The current basic rural pension rate (143 yuan a month, increased to 163 yuan during the Two Sessions) is less than a quarter of the rural Minimum Living Security Standard (equivalent to 574 yuan a month): to consolidate rural poverty alleviation, the aim should be to reach this standard within three to five years. Given the high consumption propensity of rural residents, this adjustment would generate a high pay-off in consumption potential and drive GDP growth. From the perspective of fairness, this could be paid for by halving the annual pension increase rate for civil servants and state-owned enterprise employees and directing it to rural residents. Just as the social security protections of the New Deal helped the US emerge from the Depression, China needs a more ambitious approach. — Guest Researcher, Research Centre for Finance, Tax and Law, Wuhan University (Caixin, 7 March).

Lü Dewen (吕德文): The discussion of rural pensions contains several misconceptions, including ignoring the risk that pension increases may produce a “crowding-out effect” [挤出效应], weakening children’s sense of obligation to care for their parents. Pensions have the quality of “welfare inelasticity” [福利刚性]—once raised, they cannot be lowered—making them unsuitable as short-term demand stimulus. The historical contributions argument is morally understandable but operationally incoherent and what the very elderly actually need is not cash but care—fully dependent elderly need 5,000–6,000 yuan or more, so relying on pension increases alone to resolve elderly care is like “trying to catch fish in a tree” [缘木求鱼]. — Distinguished Research Fellow, Department of Sociology, Wuhan University (爱思想, 18 March)

Lu Di (卢荻), Yu Shiwen (于诗文) and Gao Ling (高岭): The case for shifting to consumption-driven growth [消费驱动] rests on three flawed arguments. Cross-national comparisons merely describe a structural feature of late industrialisation; the demand-constraint claim is empirically falsified by post-2014 data; and the sustainability argument underestimates China’s remaining industrialisation needs and institutional capacity for long-term investment. The debate is at its core a contest between the developmental autonomy of late-developing nations and Western-centric paradigms. The “overcapacity” narrative [产能过剩论] is hence a discursive instrument for constraining China’s capital accumulation. — Professor (Lu Di); Doctoral Candidate (Yu Shiwen); Associate Professor (Gao Ling), Lingnan College, Sun Yat-sen University (东方学刊, 2 March)

Yu Yongding (余永定): “Consumption-driven growth” does not exist in any strict sense: growth rests on savings-funded investment, while consumption can only fill a shortfall in effective demand. Overcapacity is a sector-level problem for market competition, not a macroeconomic policy target, and the 3% deficit ceiling is a European political construct with no relevance to Chinese conditions. With bond yields signalling ample fiscal space, the central government should raise the deficit ratio, issue long-term bonds and absorb infrastructure financing responsibilities from over-indebted local governments. — Academician and Research Fellow, Institute of World Economics and Politics, Chinese Academy of Social Sciences (Tencent Finance, 2 March)

Zhu Tian (朱天): China’s low consumption rate was never a structural problem—it was a key driver of four decades of high-speed growth; the current demand shortfall stems from an acute cyclical downturn triggered by the real estate crisis, not a fundamental structural imbalance requiring long-term reform. Since utilisation rates for infrastructure and productive capacity are already low, government investment cannot find high-return “effective investment” projects; large-scale fiscal stimulus directed at consumption—specifically 4 trillion yuan in consumer vouchers and government purchase of under-construction housing for conversion to welfare—is more direct, efficient and does not generate ineffective excess capacity. Concerns about debt are misplaced: as long as the debt interest rate remains below the sum of the growth rate and asset returns, stimulus is self-correcting. — Vice President and Co-Dean, China Europe International Business School (爱思想, 8 March)

5. Artificial Intelligence

Liang Jianzhang (梁建章) and Wang Ciqiao (王次桥): AI is a fertility depressant operating through three channels: it provides instant, low-cost entertainment whose “dopamine return rate” is more competitive than child-rearing’s delayed rewards; it intensifies the skills arms race, eliminating entry-level positions and forcing continuous upskilling precisely during peak childbearing years; and it drives up the educational arms race for children. A further three structural mismatches prevent market correction—the childbearing window overlaps with peak career pressure; families bear the full cost of raising children while society captures most returns; and 96% of education spending is local while talent flows elsewhere. China’s childcare subsidy at 0.07% of GDP is a fraction of Japan’s 0.99%, and without a major fiscal response, China risks losing the population-scale advantage in data and application scenarios that underpins its AI competitiveness. — Research Professor of Applied Economics, Guanghua School of Management, Peking University (Liang); PhD Candidate in Economics, Chinese University of Hong Kong (Wang) (统梁说, 8 March)

Zhuo Xian (卓贤): AI is producing three simultaneous decouplings—investment from employment, technological progress from human capital, and wages from productivity—that collectively undermine the three pillars on which social insurance was built. As AI-intensive sectors no longer bid for labour, the mechanism that historically transmitted high-sector wage gains across the whole economy has broken down and the “learning-by-doing” ladder through which junior associates become senior experts is being severed. Policy responses include a differential robot tax, exempting “labour-augmenting” technologies, shifting social security financing toward general taxation to capture AI-generated wealth, and treating sovereign AI computing infrastructure as a future financing vehicle analogous to Norway’s oil fund. — Director and Research Fellow, Department of Social and Cultural Development Research, Development Research Centre of the State Council (New Economist, 24 March)

Yao Yang (姚洋): AI is a massive bubble deliberately hyped up by Silicon Valley tech companies—the trigger for its collapse may come from a Chinese photonic or optoelectronic chip breakthrough within two to five years; the government’s most urgent task is not AI but boosting domestic demand. Discussing medium-to-long-term growth targets is meaningless and the “two elephants in the room” obstructing consumption are the real estate market’s sustained negative growth and collapsing local government expenditure. If the problem continues, China will become 90s Japan—everyone repaying debts, economic growth severely dragged down. The solution is the 1990s debt governance model—government capital injection to get triangular debt [三角债] (chains of unsettled arrears) circulating—not structural adjustment, and not infrastructure investment, which has itself already gone into negative growth. — Dean, Dishui Lake Advanced Institute of Finance, Shanghai University of Finance and Economics (经济观察报, 26 March)

He is not the only scholar calling for a recalibration of China’s foreign policy. Last month, we published Jin Canrong’s (金灿荣) argument that China will struggle to win true friends if it cannot offer support beyond economic engagement. We also observed similar calls in both our January and February digests.

These arguments remain heavily qualified, light on substance and notable precisely because they are unusual, but they do appear to be part of a nascent trend.

In the interview below, Zheng defends China’s non-alignment strategy, crediting it with helping to prevent both a new world war and a new Cold War. But he argues that the related doctrine of non-interference has not kept pace with the scale of China’s overseas interests.

He puts forward one of the more developed cases for recalibration that we have seen, providing both a name—“Interventionism 2.0”—and a set of conditions for more active intervention: namely, when host countries infringe on China’s overseas interests, when third countries threaten them, or when overseas factors profoundly affect China’s domestic interests.

— Jacob Mardell

1. The Strait of Hormuz crisis is no longer a regional conflict. It is reshaping global energy markets, supply chains and geopolitical alignments in ways that no major economy can insulate itself from.

2. A 1970s-style oil crisis is unlikely, but short-term shocks—especially for economies with limited supplies—will be severe.

3. Condemning Iran’s “weaponisation” [武器化] of the Strait while ignoring Western weaponisation of semiconductors, supply chains and trade corridors applies a double standard that fails to withstand scrutiny.

4. Iran’s most viable course is not a total shutdown of Hormuz, but a calibrated strategy of selective, step-by-step closure, tightening pressure on adversaries while avoiding the self-inflicted costs of severing its own export lifeline.

5. Diplomatically, Iran may seek to play on tensions among the US, Europe and Japan—a modern echo of Li Hongzhang’s late-Qing strategy of using great-power rivalries to preserve room for manoeuvre under pressure.

Face-Off: The U.S. vs China is a podcast about the turbulent relationship between the world’s two superpowers, the two men in charge, and the vital issues that affect us all. The show is hosted by Pulitzer-Prize winning journalist Jane Perlez, the former New York Times Beijing bureau chief. Listen here.

6. Russia’s consideration of cutting gas supplies to Europe is an act of opportunistic solidarity with Iran, but risks backfiring by pushing Europe toward US energy dependence or direct military involvement against Iran.

7. Today’s world reflects a Hobbesian state of nature in which the strong prey on the weak [弱肉强食] and historical experience suggests that the emergence of a new order will take decades.

8. Chinese traditional non-interference should be updated to “Interventionism 2.0” [干预主义2.0版]: active intervention [积极干预] is warranted when host countries infringe on China’s overseas interests, third countries threaten them, or overseas factors profoundly affect China’s domestic interests.

9. North-South antagonism stems from the West’s practice of “ladder-pulling” [抽梯子] after having reached development itself. China’s Belt and Road offers a countervailing model of open-source [开源式现代化], shared modernisation [共同现代化].

10. China should maintain strategic resolve [战略定力] and great-power responsibility to avoid being drawn into the logic of war, while actively pursuing its legitimate overseas interests through multilateral institutions.

Name: Zheng Yongnian (郑永年)
Year of birth: 1962 (age: 63/64)
Position: Founding Dean and X.Q. Deng Presidential Chair Professor, School of Public Policy, The Chinese University of Hong Kong (CUHK), Shenzhen; Founding Director, Institute for International Affairs, Qianhai (IIA), CUHK, Shenzhen
Formerly: Director, East Asian Institute, National University of Singapore (2008–2019); Founding Research Director, China Policy Institute, University of Nottingham (2005–2008); Researcher, East Asian Institute, National University of Singapore (1996–2005)
Research focus: International relations; Chinese politics and society; Nationalism
Education: BA (International Relations), Peking University (1985); MA (Political Theory), Peking University (1988); MA (Political Science), Princeton University (1992); PhD (Political Science), Princeton University (1995)
Experience Abroad: Postdoctoral Fellow, Harvard University (1995–1997); University of Nottingham (2005–2008); National University of Singapore (1997–2019)

DIALOGUE WITH ZHENG YONGNIAN: AS THE LAW OF THE JUNGLE PREVAILS, CHINA URGENTLY NEEDS A “NON-INTERVENTIONISM 2.0”
Zheng Yongnian (郑永年)
Published by Greater Bay Area Review, 9 March 2026
Translated by Cherry Yu
(Illustration by ChatGPT)

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The fires of war in the Middle East continue to burn. On one side, Iran has announced that Mojtaba Khamenei has been elected as the country’s new Supreme Leader; on the other, US President Donald Trump stated in an interview with ABC that Iran’s newly appointed leader “must get approval from us”, otherwise he “is not going to last long”. As the conflict spills over, oil prices surge, international trade is disrupted, and global energy and shipping markets convulse violently, this is no longer a “localised Middle Eastern” conflict—it is the eye of a storm that is reshaping the global economic and geopolitical landscape.

As the old order collapses and the law of the jungle [丛林法则] prevails, can China afford to stay on the sidelines [置身事外]? How can it build a “firewall” [防火墙] that both withstands external shocks and avoids missing out on opportunities from globalisation due to over-defensiveness? Following up on a previous conversation (see Dialogue with Zheng Yongnian: When War Begins, Who Really Wins?), Greater Bay Area Review once again speaks with Professor Zheng Yongnian.

Interviewer: Following Iran’s blockade of the Strait of Hormuz, Brent crude oil surged more than 8% in a single day, European natural gas futures spiked 40%, and war-risk shipping insurance premiums skyrocketed. Given how the war is developing, could we be looking at a repeat of the 1970s oil crisis? [Note: Sources give varying figures for the single-day spike in European natural gas futures on 2 March 2026, ranging from approximately 20% in early trading to approximately 50% by end of day.]

Zheng Yongnian: Looking at the global energy structure as a whole, the world is not short of oil—the Middle East, Latin America, and Russia are all producing. Although the United States is a major energy consumer, it has itself become an energy powerhouse, and the Trump administration has been actively developing domestic energy resources. Today’s economic structure is very different from the 1970s, so a similar crisis scenario is not necessarily going to recur; in the long term, the impact may not be transformative [颠覆性的]. That said, short-term impacts will certainly be felt, and they will be very significant. In recent days, not only have energy prices in Asia and Europe risen, but gold prices have also fluctuated sharply. There are several factors that deserve attention.

First, how long these changes last depends on the course of the war. If, as Trump suggested, it ends within one to four weeks, a major crisis is unlikely. At the very least, large economies have enough energy reserves to last several weeks or even longer, and once the war ends, oil supply can recover. However, we must also watch whether the US and Israel will strike Iran’s energy infrastructure. If such facilities are destroyed, the situation will deteriorate sharply. Although Trump’s stated targets are military facilities, Iran claims that civilian infrastructure—including desalination plants—has also been bombed. If this escalates into a prolonged war, Iran’s closure of Hormuz would severely disrupt energy supply chains. In that scenario, Trump might then shift strategy to “convoying” [护航] through the Strait, which would be an entirely different situation.

Second, Iran itself is an energy-based economy. For its own survival and development, the Strait of Hormuz will ultimately have to remain open. Blocking the Strait also prevents Iran from exporting oil, which would severely harm its own economy. In practice, Iran has been selectively blocking the Strait, targeting shipments from countries it considers hostile, while allowing others through. The current situation is that Iran’s leader has been “decapitated” [斩首]—Iran is in the heat of anger and will need some time to recover its rationality. Put yourself in their position: if this were to happen to any other country, would it act rationally?

Third, once war breaks out, normal market functioning is disrupted and speculators multiply, which affects economies around the world. Overall, the crisis is not as severe as some media portray it; however, the short-term shocks are inevitable, especially for economies with limited oil reserves, which will be hit hardest.

Interviewer: The Strait of Hormuz is widely seen as Iran’s ultimate trump card [终极王牌]. How do you view Iran’s “weaponisation” [武器化] of the Strait?

Zheng Yongnian: Of course, we do not wish to see energy corridors “weaponised”. But we should assess this objectively. Have not the United States and other Western powers also “weaponised” supply chains? Have they not “weaponised” trade and commerce? Are US chip restrictions not a form of “weaponisation” against China? And have China’s new rare earth regulations not been criticised by the US and some Western countries as “weaponisation”? By the same logic, why should Iran not be able to “weaponise” the Strait?

We should not apply double standards when criticising others. Ideally, people would hope that the rules of the game do not change with every shift in geopolitics. But in a state of war, when Iran faces such a hostile external environment, it is unreasonable to expect it to keep the passage fully open. If an enemy is coming to attack your home, are you supposed to leave the door wide open?

Therefore, the first priority is to stop the war. Without an end to the war, talk of peace is meaningless. Under the logic of war, what matters is hard power and Iran has ample justification to “weaponise” the Strait. The question is whether it has the capacity to sustain this approach. How will the United States respond? How will European countries and Japan react? All of this is unpredictable.

What will Iran do next? It cannot completely block every corridor, but it may impose gradual, selective closures—and to a considerable extent it is already doing so. This is a true test of Iran’s strategic judgement. The diplomacy Iran now needs brings to mind the late Qing statesman Li Hongzhang. Li did not seek a diplomatic breakthrough by going outward; rather, he leveraged the rivalries among foreign powers within China to balance them against each other, preventing China from becoming fully colonised. Iran may adopt a similar approach in dealing with the West—manoeuvring among the competing interests of the US, European countries and Japan. If outward diplomacy is difficult, then it must wage a “war of attrition” [持久战] on its own soil. [Note: Li Hongzhang (1823-1901) was a late-Qing senior statesman, associated with China’s early self-strengthening reforms and with its crisis diplomacy under mounting foreign pressure. He is often linked to the formula “外须和戎，内须变法”—externally, seek accommodation with foreign powers; internally, pursue reform—which captured a broader late-Qing logic of survival under conditions of weakness].

Interviewer: After the outbreak of the Iran war, Russian President Vladimir Putin indicated that he may consider halting natural gas supplies to Europe. How do you view the connection between the US–Israel–Iran conflict and the Russia–Ukraine war? What strategic calculations lie behind Russia’s position?

Zheng Yongnian: Russia has obviously spotted its opportunity. It is deeply mired [深陷泥潭] in the Russia–Ukraine war and has had limited capacity to act elsewhere. Now that Iran is in crisis, Russia hopes to use this situation to advance its own interests.

Before the Russia–Ukraine war, Europe relied heavily on cheap Russian energy to sustain its economic prosperity. Since the war began, Europe’s economy has already suffered severe damage. Should Iran’s energy supply now also be disrupted, it will deal another heavy blow to Europe. In this context, Russia’s consideration of cutting off supplies at this moment can be seen as another way of supporting Iran, which is understandable.

Interviewer: If Russia does indeed cut off supplies to Europe, will European countries become more dependent on US gas, or will they make political and military concessions to Russia?

Zheng Yongnian: From the current perspective, several scenarios are possible. One is that Europe turns to dependence on American energy—perhaps what Trump would prefer. Another is that European countries, when pushed into a corner, may act out of desperation [狗急跳墙] by joining the United States in striking Iran, as evidenced by France’s aircraft carrier already moving into the region. So if Putin misplays this move, his intention to help Iran could backfire and instead push Europe and the United States into a joint military action against Iran. We should not underestimate that possibility.

Interviewer: You previously said that the old order has already collapsed, while a new one has yet to be established. In just the opening months of this year, we have seen the United States carry out decapitation strikes against Iran and Venezuela. Do you think this kind of “anarchy” is becoming the “new normal” [新常态]?

Zheng Yongnian: The old order is continuing to disintegrate and fragment. Countries are increasingly self-centred, seeking to build regional orders that serve their own interests. The establishment of a new global order remains a distant prospect [遥遥无期]. The world today resembles what the British philosopher Thomas Hobbes described as the “state of nature”—a lawless condition of anarchy marked by a ruthless, predatory logic in which the strong devour the weak [弱肉强食].

Historical experience shows that the establishment of a new order often takes decades. How many years did it take to establish the European order? The postwar order after World War II was only established after decades of catastrophe spanning the First and Second World Wars. Humanity has no memory—or rather, memory simply does not matter. Every order is only established after unbearable disasters and losses. Therefore, we must be mentally prepared for the long haul ahead before any new order is consolidated.

Today, in what is a “de facto G2” [事实上G2] world, the interaction between China and the United States is of vital importance. Although the United States is advancing its own vision of order, China’s role remains crucial. If China had, as the US and some Western countries feared, sided entirely with Russia and formed a bloc against America and Europe, a world war might well have broken out easily. It is precisely because China has adhered to a policy of non-alignment [不结盟政策] that this outcome has so far been avoided. The same applies to the current situation in Iran. We must maintain strategic resolve [战略定力] and shoulder the responsibilities of a major power—both to safeguard our own interests and to preserve world peace. We must not fall easily into the logic of war.

Interviewer: Behind this military strike lie surging international energy prices, disrupted supply chains, and soaring shipping insurance costs. These external risks are spreading rapidly across the world through channels such as trade, finance, and market expectations. For China, the question is how to protect its overseas interests while preventing external risks from spilling over into the domestic economy. How can it build a “firewall” that is strong enough to withstand external shocks, yet not so defensive that it causes China to miss the opportunities of globalisation?

Zheng Yongnian: China has extensive interests overseas, including in places such as Venezuela and Iran. As Chinese companies internationalise and economic globalisation deepens, our overseas interests will only continue to grow. In the past, we have consistently adhered to the principles of “non-alignment” [不结盟] and “non-interference” [不干预]. I believe the stance of non-alignment is the right one—this independent foreign policy has helped prevent the world from slipping back [重蹈覆辙] into the full-scale confrontation between two rival blocs that defined the Cold War. If China and the United States were each to rally allies into opposing military alliances, the result could well be a new world war.

That said, I believe [our] traditional doctrine of “non-interference” urgently needs to be reexamined and adjusted. What we need now is a new version of “interventionism 2.0”. We must continue to uphold the basic principle of not interfering in other countries’ internal affairs—we must never behave like the United States by pursuing regime change or inciting so-called colour revolutions. But there are at least three major circumstances in which we need to adopt a strategy of “active intervention” [积极干预] or “positive intervention” [正面干预].

The first is when China’s overseas interests are violated by the host country; the second is when those overseas interests are infringed upon by a third country; the third is when overseas factors significantly affect China’s domestic interests. The first scenario is a common one: some countries, for a variety of reasons—such as regime change or a change in political leadership—often fail to honour the agreements they have signed with China, or they descend into domestic instability and even violence. The second scenario is also becoming increasingly common, as seen in Washington’s coercive attempts to reclaim control over the Panama Canal or [to reassert its position on] narcotics treaties. The third scenario is even more common: for instance, if a country supports separatist forces or terrorist activities directed against China from abroad, then of course we must intervene. Likewise, we must also step in to deal with overseas telecom fraud schemes targeting Chinese citizens.

As Chinese companies continue to “go global” [“走出去”], China’s overseas interests are expanding accordingly. We must absolutely not mimic the American hegemonic practice of arresting foreign heads of state, but we should protect our own legitimate rights and interests through proactive means. This is something that calls for serious rethinking.

Interviewer: At the diplomatic level, China has long advocated active economic engagement while maintaining a limited military footprint. How do you view this approach?

Zheng Yongnian: At the international level, military force is one means of addressing problems, but its application often creates bigger and more numerous problems. We therefore need to look for the root causes of issues and explore whether more effective solutions can be found.

Why has such sharp antagonism emerged between the Global North and the Global South? At its core, this stems from an imbalance in development models and modernisation paths. Once the United States and other Western countries had developed themselves, they pulled away the ladder by which they had climbed, depriving latecomers—particularly countries in the Global South—of the means to follow the same path. As a result, many countries have found it difficult to escape poverty. Where there is exploitation, resistance is bound to follow.

What China advocates is “open-source modernisation” [开源式现代化]. Having achieved development itself, China seeks to extend the ladder outward, allowing and helping other countries to climb as well—through initiatives such as the Belt and Road, which promote infrastructure development and create opportunities for growth in other countries. This is the idea behind “shared modernisation”, that when all countries are able to develop, the international community will naturally become more harmonious. The same holds true within a society: when common prosperity is achieved, social harmony becomes possible, but when extreme wealth for some coexists with extreme poverty for others, any talk of harmony rings hollow. At the international level, we are fully capable of pursuing a model of development that is more sustainable and more peaceful.

At a time when the law of the jungle prevails, how should China play a constructive role [有所作为]? [Note: 有所作为 carries the sense of not merely standing back, but taking purposeful, meaningful action. It also echoes the long-running foreign policy formulation associated with the Deng Xiaoping era, 韬光养晦，有所作为—often rendered as “hide one’s capabilities and bide one’s time, while also accomplishing something”].

Of course, the kind of “hegemonic” [霸权式], “bandit-style” [强盗式] intervention practised by the United States is fundamentally wrong and something we must avoid. But we need to free ourselves from rigid thinking [解放思想] and avoid mechanically insisting on “absolute non-interference” [绝对不干预]. Whenever states interact, they inevitably affect one another.

The “active intervention” or “Interventionism 2.0” I described above is something China has in fact already been putting into practice in certain respects. For instance, combating telecommunications crime through bilateral cooperation to speed up the intervention process is itself a form of active intervention. In Central Asia, we have helped build the Shanghai Cooperation Organisation as a platform for open and legitimate [光明正大] multilateral cooperation, enabling countries to work together in addressing shared threats such as terrorism and extremism—all of which are viable approaches.

The essay below, by senior establishment economist Xia Bin (夏斌), is an unusually candid, systematic articulation of a broader Chinese instinct about finance—that it is inherently unstable, politically consequential, and useful only if bound by the needs of the real economy. It is introduced by Alicia García-Herrero, who makes a sharp case for the opposing view from a liberal-financial perspective. Alicia is the Chief Economist for Asia-Pacific at Natixis. She is also a Senior Fellow at the European think tank Bruegel, a non-resident Research Fellow at the National University of Singapore’s East Asian Institute, and an Adjunct Professor at the Hong Kong University of Science and Technology. In addition, she serves on the Advisory Committee for Economic Affairs of the Spanish Government and advises the Hong Kong Institute for Monetary and Financial Research (HKIMR). We are very grateful to her for her generous contribution to this newsletter. — Jacob

Xia Bin’s call for “full domestic marketisation paired with limited cross-border globalisation” rightly identifies China’s structural vulnerabilities—currency mismatch, RMB non-convertibility, and exposure to dollar hegemony. Yet his analysis rests on a flawed premise: that finance (“the xū”) must remain subordinate to the real economy (“the root”), serving only as a cautious tool to avoid external shocks. This view underestimates finance’s autonomous strategic value. A developed financial system is not just supportive infrastructure; it is a core instrument of national power, sovereignty, and self-reliance—especially by breaking dependence on foreign currencies.

History demonstrates this truth. Britain’s 19th-century financial supremacy and America’s post-1945 “exorbitant privilege” arose from bold monetary internationalisation, not insulation. Dollar dominance grants the United States seigniorage revenue, sanction leverage, and immunity to external monetary shocks—precisely the autonomy Xia Bin seeks for China. By contrast, his strategy of managed floats, phased capital controls, and RMB “regionalisation” (rather than full internationalisation) perpetuates the very “financial weakness” he diagnoses. Gradualism keeps China tethered to dollar liquidity, foreign reserve accumulation, and external pricing power over commodities and energy. True self-reliance requires the opposite: decisive opening that transforms the RMB into a genuine reserve currency, allowing China to finance its growth on its own terms, recycle surpluses globally, and insulate domestic policy from U.S. Federal Reserve decisions.

Xia Bin’s metaphor—“use the xū to strengthen the root”—is elegant but one-sided. A strong financial sector does not merely “support” the real economy; it generates independent power that strengthens the root in turn. Deep, liquid capital markets attract global savings, lower borrowing costs for strategic industries, and create network effects that reinforce geopolitical leverage. Limited globalisation, by design, caps these benefits. It risks locking China into perpetual “lame giant” status—large in output, yet vulnerable to dollar volatility and capital-flow reversals.

China’s rise demands a bolder vision. Full financial internationalisation is not reckless exposure; it is strategic sovereignty. Only by embracing finance as a primary source of national power—rather than a secondary servant—can China achieve genuine self-reliance and reshape the global monetary order in its favor. Cautious incrementalism may feel safe, but it delays the very financial superpower status Xia Bin himself endorses. The real economy thrives when finance leads, not follows.

— Alicia García-Herrero

1. During periods of great-power transition, financial strategy cannot be reduced to economics alone—policy competition between governments, shaped by differing democratic development, demands analysis of the full spectrum of interactions emerging from interstate competition.

2. Strategy need not be adversarial: China should pursue a clear, “harmonious” financial strategy that advances its own interests while sustaining globalisation and inclusive global growth.

3. China’s financial sector faces contradictory demands: economic opportunities require financial globalisation, but external instability means it cannot be rushed. China therefore needs financial globalisation, albeit limited in scope.

4. Despite impressive achievements, China remains a “weak financial power”—a “lame giant” unable to freely convert its currency, price commodities, or shape the dollar-centred system it depends on.

5. The only viable path is full domestic marketisation combined with limited cross-border globalisation—domestic reform being the prerequisite for exchange rate flexibility, capital account opening and RMB internationalisation.

Face-Off: The U.S. vs China is a podcast about the turbulent relationship between the world's two superpowers, the two men in charge, and the vital issues that affect us all. The show is hosted by Pulitzer-Prize winning journalist Jane Perlez, the former New York Times Beijing bureau chief. Listen here.

6. In Traditional Chinese Medicine terms, China’s financial weakness is itself a strategic asset: “using deficiency to ward off harm” shields against external shocks while strengthening the real economy.

7. The real financial world cannot be captured by mainstream Western textbooks: finance is systemic, innately unstable, dynamic and structurally unequal—analysing it issue by issue, in a “bookish” manner, misses the whole.

8. China should adopt a managed floating exchange rate: neither a hard peg nor a free float suits a rising but financially weak major economy, and no existing currency bloc fits China’s scale.

9. Capital account opening must be proactive, gradual and controlled—coordinated with domestic reform, RMB regionalisation and stronger macroprudential regulation, and shifting from administrative to price-based instruments as liberalisation advances.

10. RMB internationalisation is a defensive necessity, not an aggressive ambition—the flawed dollar-dominated system forces China’s hand. The realistic near-term target is regionalisation, using centres such as Hong Kong as the key offshore hub.

Name: Xia Bin (夏斌)
Age: 74 (May 1951)
Position: Chairman, China Chief Economist Forum (CCEF); Honorary Director and Researcher, Financial Research Institute, Development Research Center of the State Council.
Other: Former State Council counsellor.
Previously: Director, Financial Research Institute, Development Research Center of the State Council (2002–2012); Director-General, Non-Bank Financial Institutions Supervision Department, People’s Bank of China; Deputy Director, Policy Research Office, People’s Bank of China
Research focus: Macroeconomic policy, monetary policy, financial regulation and the development of China’s capital markets.
Education: MA, Graduate School of the People’s Bank of China (1984)
Experience abroad: Research fellow, Nomura Securities Research Institute, Japan

SOME QUESTIONS CONCERNING CHINA’S FUTURE FINANCIAL DEVELOPMENT STRATEGY
Xia Bin (夏斌)
Republished by Guancha on 3 February 2026
Translated by Ameerah Arjanee
Illustration by ChatGPT

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When human society finds itself at a protracted historical turning point [漫长历史转折], one marked by the rise and fall of great powers, major shifts in national economic strength can no longer be attributed to only a handful of fundamental economic principles (even if ultimately, economic factors remain decisive). Sporadic incidents and the accumulation of contingent factors become impossible to ignore.

In the face of an uncertain future external environment, policy competition among governments, especially between major powers, will determine the course of history. In addition, differences among countries in the strength of democratic forces and the degree of democratic development increase the uncertainty over whether policies emerging from interstate competition will deviate from basic economic principles.

In this sense, the challenge in studying a country’s financial strategy lies in analysing the full spectrum of complex interactions that may emerge from interstate competition.

It may therefore be argued that, in a period of profound transformation marked by major shifts and reconfigurations in the global balance of power, what is urgently required is not merely the mainstream theories of modern economics, but also a guiding theoretical framework that is capable of adapting to changes in the distribution of global economic power while maintaining the international economic order. What is needed is a political economy framework that reflects the dynamics of the rise and decline of major powers [反映大国兴衰更替的政治经济学].

There is a particular analytical requirement when studying the financial strategy of a major economic power that is both undergoing transition and rising to global prominence. That is, it is especially necessary to address the particularity [特殊性] and the tactical nature [策略性] of its financial strategy—that is, how the country can pursue its national economic interests to the fullest extent while adapting to shifts in the global distribution of economic power, and ensure that the trend of globalisation, which underpins global economic growth, is not interrupted.

A strategy does not have to be adversarial. A strategy is a plan devised to secure certain interests, and it can be realised without fundamentally harming others and in a harmonious way. Historically, Britain and the United States before the 1970s illustrate this point: the economic development of both countries served to advance the wider global economy. Today, at a time when the world harbours considerable "uncertainty" and "unease" about the prospect of China becoming the world's leading power by the mid-21st century, China has all the more reason to set out a clear and harmonious financial strategy [清晰的和谐金融战略] for all to see—one that offers a credible answer to the question of how to sustain economic globalisation and promote inclusive growth across the globe.

China's prospects for future growth rest on four main favourable circumstances: the first is a high savings rate, the second is ongoing industrialisation and urbanisation, the third is globalisation and the fourth is room for institutional reform.

At the same time, the country faces many serious challenges. Broadly speaking, these challenges arise from multiple directions, including geopolitical tension between major powers; issues of territorial integrity and sovereign security; climate change and carbon emissions; domestic income inequality and corruption; issues around democratic reform and soft power; as well as a range of other domestic and international economic, political, and social concerns.

If the analysis is confined solely to the trend in economic growth, the key challenges can be summarised in four aspects: the first is an ageing population, the second is resource and environmental constraints, the third is structural imbalances within the economy, and the fourth is instability accompanying the reconfiguration of the international financial order.

What do these four opportunities and challenges mean for finance? In short, from the perspective of opportunity, the imperative is for China's financial sector to globalise as rapidly as possible. From the perspective of challenge, the imperative is also to accelerate China's financial globalisation. However, in the face of a turbulent and unpredictable future external landscape, China's financial globalisation must under no circumstances be rushed. The country needs to preserve the necessary buffers for “risk insulation” [“风险隔离”] and “shock absorption” [“减震”]. The path towards financial globalisation must be trodden with care.

When all the relevant contextual factors are weighed together, the objective demands on China's financial sector are inevitably contradictory: the sector must globalise, yet that globalisation must remain limited in scope.

An analysis of China’s future financial environment is, in essence, an analysis of demand. What can China’s existing financial system realistically provide? What are its defining characteristics? These may be distilled into two overarching phenomena: “financial lag” [“金融滞后”] and “weak financial power” [“金融弱国”]. While the former is generally accepted, the latter may invite disagreement.

As early as 2007, I introduced the concept of a “weak financial power”, primarily based on the observation that, from an international comparative perspective, a country’s financial system and its operational mechanisms are unable to secure a dominant position [“上风”] in global financial markets and are instead influenced by other countries. On this basis, it is possible to highlight several key phenomena.

The RMB exchange rate is still not permitted to float freely, and the RMB is still far from being a freely convertible international currency—this is a defining feature of a “weak financial power.” This gives rise to a range of weak institutional mechanisms, including the so-called “original sin” [“原罪”] phenomenon, whereby a country’s macroeconomic policy remains subject to external constraints.

At the national level, there is a pronounced “currency mismatch” [“货币错配”]. In terms of pricing power over bulk commodities and energy, China remains a “lame giant” [“跛足巨人”]. The internationalisation of its financial markets, both in depth and breadth, is still at an early stage, and [the authorities] still dare not allow overseas capital to flow freely in and out of the country. When we also consider a series of domestic administrative controls, the seemingly dynamic “financial development” of China and its “impressive results” remain, in practice, at a preliminary and superficial stage—one of mere self-congratulation [自娱自乐].

The preceding analysis covers two dimensions: on the demand side are four major opportunities and challenges, and on the supply side are the realities of China’s “financial lag” [“金融滞后”] and “weak financial power” [“金融弱国”]. Both theory and practical reality point to the conclusion that China has no other alternative. During the strategic transitional phase ahead, the only viable general direction for China’s financial strategy is the full marketisation of its domestic financial system combined with limited globalisation of cross-border finance.

The full marketisation of domestic finance means that, in meeting the challenge of sustaining stable growth, China’s financial system must shift—across market access, capital pricing, micro-level governance and overall financial operations—towards market-driven resource allocation, and it must do so within the shortest feasible timeframe. Limiting the globalisation of cross-border finance means that, on core issues such as the exchange rate, capital management and RMB internationalisation, it may not be possible to adopt the conventions and institutional frameworks of mature, developed economies in a single step. Moving too fast to open up China’s “financial gates” [“金融国门”] and integrate fully into the global financial system would be both strategically wrong and highly dangerous.

More specifically, China's financial strategy has four core components: the RMB exchange rate, capital account management, RMB internationalisation and domestic financial reform.

Among these four elements, domestic reform is the foundation and prerequisite for the other three. Without further domestic financial (including broader economic) reform, it will be difficult to advance any form of financial opening. The full marketisation of the domestic financial system is the fundamental prerequisite for meaningful integration into the global financial system.

The internationalisation of the RMB is a hallmark of a rising economic power and, therefore, is at the heart of China’s financial strategy. It is only by advancing the RMB’s internationalisation in a phased and measured way that greater exchange-rate flexibility and the liberalisation of capital controls can be pursued without losing sight of China’s fundamental economic interests.

RMB internationalisation, however, requires the substantial liberalisation of capital controls as a prerequisite. Capital controls in turn work in coordination with exchange-rate policy, which itself serves a dual role: it is both a lever for driving structural reform and stable development in the domestic economy, and a reflection of the progress made through gradual domestic economic and financial reform. Exchange rate policy is thus a continuously evolving process of adaptation, and it is equally subject to the constraints imposed by the other three elements.

The key to implementing the overall strategy lies in carefully calibrating the pace and sequencing of these core components. For example, advancing the internationalisation of the RMB requires coordination with domestic reforms that allow greater exchange-rate flexibility and liberalise capital controls. At the same time, accelerating RMB internationalisation can reduce the pressure to increase exchange-rate flexibility. A gradual move towards greater exchange rate flexibility requires domestic reform to proceed in tandem, while also easing the pressure to ease capital controls and creating the conditions for further RMB internationalisation, and so on.

“Limited globalisation” [“有限的全球化”] thus refers to an interlocking pattern of development in which exchange rate, capital management, renminbi internationalisation and domestic reform are each advanced gradually and in mutual reinforcement. It is a dynamic process of progressive convergence towards full participation in financial globalisation.

We need to “take one step back” in order to “take two steps forward”. It may be said that “limited globalisation” is an unavoidable choice during the strategic transitional phase. The aim is to maximise opportunity while containing risk, build resilience at home alongside development, lay the groundwork for a strong financial sector, and pave the way for a more ambitious liberalisation in due course.

Borrowing loosely from the language of traditional Chinese medicine, the core intent of the “full marketisation and limited globalisation” [“充分市场化和有限全球化”] strategy may be expressed as follows: “use the xū to ward off harm [与虚避邪]; use the xū to strengthen the root [以虚固本]; strengthen the root to support the xū [固本扶虚]; and use the xū to restraint the xū [以虚制虚].” Here, xū is used primarily as a metaphor for finance, while “the root”, refers primarily to the real economy. [Note: The author is borrowing the traditional Chinese medicine term xū [虚], usually rendered as “deficiency”, and repurposes it as a metaphor for finance or financial weakness. The point is that China’s relative financial weakness can itself serve as a protective buffer against the risks of full financial globalisation.]

Use the xū to ward off harm [与虚避邪]. China is not only a participant and driver of economic globalisation but also a beneficiary. To continue benefiting from economic globalisation, China must participate in financial globalisation. However, under a flawed international monetary system dominated by the US dollar, the global financial system faces multiple risks. As China participates in financial globalisation, it must mitigate the risks and shield itself from the impact of market turbulence on its financial stability. In effect, China’s participation in financial globalisation is a limited, insulated form of participation that is shielded by a “firewall” [“防火墙”].

Use the xū to strengthen the root [以虚固本]. Through limited financial globalisation, China can improve the efficiency of its financial system, support economic restructuring, as well as bolster the strength and competitiveness of its real economy.

Strengthen the root to support the xū [固本扶虚]. Strengthening the capacity and competitiveness of the real economy creates greater demand in the financial sector, which will boost the overall competitiveness of this sector.

Use the xū to restrain the xū [以虚制虚]. Through active participation in financial globalisation to strengthen the real economy, China should improve the systemic competitiveness of its financial sector, deepen financial liberalisation across a wider front, gradually consolidate its position as a “major financial power”, and assume a more proactive role in reforming the international economic and financial order.

Whether viewed from a historical or contemporary perspective, a proper understanding of any financial issue, or of the role of the financial system within the broader economic system, requires a thorough grasp of the following four dimensions.

1. The financial system must be understood as a large, interconnected system.

All financial products derived from money, regardless of how complex their forms or functions, are, at their core, expressions of “trust between people” [“人类之间的一种信任”]. The existence of this trust, and the realisation of its functions, depends first and foremost on a large system of its own. This system has four specific characteristics.

First, it is a four-dimensional system.

Four factors merit consideration to assess the stability and soundness of a financial system: monetary policy, financial regulation, micro-level financial behaviour [微观金融行为] and financial openness (which includes external dimensions such as exchange rates and capital flows). The state of a financial system at any point in time is the product of the interaction between these four factors. Each carries a different weight, and their interaction can give rise to a wide range of complex configurations, which manifest as various forms of financial instability.

Second, the effective functioning of the financial system depends on its proper alignment with the real economy. The following three points warrant attention.

(1) “Financial supression” [“金融抑制”] is harmful, but so is “overdevelopment” [“过度发展”]. Different stages of economic development place markedly different demands on a financial system. For an economy at any given stage of development, the so-called optimal financial model, however widely endorsed, is not necessarily the best fit, nor the only viable one.

(2) Whether a country’s financial system is market-based or bank-based depends partly on its historical path dependency and partly on the structure of its economy at the time. There is no clear winner between the two models. Historically, countries with dominant reserve currencies tended to favour a market-based system, as their financial stability depended on drawing as many other countries as possible into their own market framework. Britain in the 19th century and the United States in the 20th century are prime examples. Germany and Japan, by contrast, despite joining the ranks of developed economies, found themselves locked into the dollar-dominated monetary system and the orbit of the New York financial market, and gravitated instead towards bank-based models.

(3) Likewise, there is no absolute case for or against universal banking [混业经营] versus separate banking [分业经营] [Note: Universal banking, where commercial and investment banking are combined, versus separation of the two.] The appropriate approach depends on the structural equilibrium required across the four financial factors at different stages of economic development, and cyclical shifts in emphasis between the two models may occur over time. The US experience—from the Glass–Steagall Banking Act of 1933, to the Financial Services Modernization Act of 1999, and the Dodd–Frank Act of 2010— stands as a telling refutation of any theoretical bias towards either model, universal banking or separate banking. [Note: The Glass-Steagall Act (1933) separated commercial and investment banking following the 1929 crash; the Financial Services Modernization Act (1999) repealed it; the Dodd-Frank Act (2010) reintroduced significant regulatory restrictions on banks following the 2008 financial crisis.]

The third point is something that mainstream economists are reluctant to acknowledge, yet one that centuries of financial history confirm. It is that the normal functioning of a financial system depends heavily on a country’s political governance framework and the development of democratic forces. The ability of financial policy alone to stabilise economic development must not be overestimated.

Fourth, as a logical extension of this, since the financial system is an organic whole, any signal that emerges within it is a reflection of the whole. Which signals capture the most attention simply varies from one period to the next.

2. Finance is “innately” [“天生的”] unstable and prone to expansion.

There are four reasons for this. First, money has a “public goods” [“公共物品性”] aspect, while its use in finance is “private” [“私人性”]. This combination inevitably leads to the “tragedy of the commons” [“公地悲剧”] and moral hazard. [Note: “Tragedy of the commons” refers to the tendency of individuals to overexploit shared resources for personal gain, ultimately depleting them to everyone’s detriment.] Second, the “public good” character of money and finance rests on a relatively fragile, intangible psychological factor of “generalised trust” [“普通信任”], which results in a fragile risk–return trade-off. Third, asymmetries in responsibility and obligation tend to fuel monetary and financial overexpansion. Fourth, the real economy, the ultimate object of the financial system—is itself subject to inherent cyclical and structural distortions. For these reasons, financial instability and overexpansion are recurring features across different countries and periods.

3. The financial system is a dynamically evolving system.

This is not merely a philosophical observation that “all things are in motion” [一切事物都是运动的], but a judgement grounded in an understanding of the financial system’s “innate” (天生的) instability and expansionary tendency. It is precisely these “innate” characteristics that give rise to economic fluctuations, and it is in response to these that the financial system must be continually reformed and improved.

Recognising this point helps clarify the relationship between systemic reform and established macroeconomic policy. It also serves as a particular reminder to countries in transition that no reform or liberalisation measure starts from a zero point in a nation’s financial history. In pursuing reform and opening up, one must not overlook subtle shifts within the original system—particularly those dimensions undergoing a transition from quantitative to qualitative change [量变到质变]—and the effect these shifts have on the interconnected “essence” [“本质”] of the system as a whole. [Note: The transition from quantitative to qualitative change is a concept from Marxist dialectics, referring to the point at which gradual incremental changes accumulate to produce a fundamental transformation in the nature of a system.]

In other words, the introduction of a new system effectively disrupts the old system’s balance and moves it toward a new equilibrium. It is a way of combining old and new elements. The tendency is to focus on what is new in this “recombination” [“重新组合”] while overlooking whether, and how, the old elements continue to exert influence.

It is also worth noting that reform and opening up are directed by the human mind. Given the inescapability of human cognitive “bias” [认知“偏见”]—or, in the language of George Soros’s “reflexivity theory” [“反射理论”] the way historical facts themselves are coloured by human perception—, all theories to date are at best approximate, imprecise reflections of historical reality and practice. This means that a financial system can only ever be a dynamic, evolving one.

4. Structural inequality is a defining feature of the modern financial system.

Global finance is a world in which multiple currencies and financial systems coexist. Within this overarching system, individual currencies and financial systems occupy different positions and play distinct roles. Because financial systems have self-reinforcing (or self-weakening) features—driven by scale economies, scope economies, or network effects—”core currencies” [“中心货币”] and the financial systems of countries issuing them naturally enjoy a “head-start” [“领先”] and the dominance that comes with being a major power. Such core currencies not only create room for domestic financial expansion beyond their borders, but simultaneously shape the monetary and financial frameworks of countries with “non-core currencies” [“非中心货币”]. This was equally true under the gold standard.

Highlighting this characteristic serves as a warning to countries undergoing economic transition that have a “non-core currency” status. They would do well to proceed with utmost care in formulating external financial liberalisation strategies (mainly exchange rate and capital management policies).

In highlighting these characteristics, the aim is not to lend credence to “conspiracy theories” [“阴谋论”], but to caution well-meaning readers that financial systems and real-world financial issues are complex. It would be naïve to analyse any given financial issue in isolation or in a bookish manner [书呆子式]; a systemic and dynamic perspective is essential. That said, given the limits of human understanding, our grasp of the true nature of finance remains incomplete.

A country’s choice of exchange-rate regime is in effect a search for the optimal currency area boundaries that best serve its own interests. Large and small economies, developed and developing countries alike, will approach this choice from different perspectives, and there is no single theoretically correct answer. Economies of different sizes exert entirely different effects on global supply and demand, and a large economy cannot “free-ride” [“搭便车”] within a currency area.

From a historical perspective, major economies have always confronted choices over exchange rate regimes. At different stages of development, the regime adopted—driven by the need to maintain both internal and external balance—has in practice shaped the defining features of the international monetary system of the time. Whether under the gold standard era, the Bretton Woods system, or the present floating exchange rate regime, major economies have tended to occupy what might be described as a “market-maker” [“坐庄”] position in the provision of monetary stability.

By contrast, due to network and scale effects in currency systems, small countries, especially those with a high degree of openness, have limited flexibility in choosing their exchange rate regime. They are effectively positioned within the international monetary and exchange rate framework established by major powers, and they must choose from a narrow set of regimes that are relatively suited to their circumstances. Moreover, under normal market conditions, both speculative capital and international cooperation tend to reinforce the stability of major powers’ “core currencies”. Hence, small countries with “peripheral currencies” [“外围货币”] face not only difficulty in obtaining monetary cooperation but also the challenge of pro-cyclical speculative pressures.

Therefore, for currencies issued by small economies, additional stabilising mechanisms beyond the exchange rate (such as capital account management) are often required to maintain macroeconomic stability. Compared to developed countries, developing countries are disadvantaged by their position in the international division of labour, their imperfect domestic markets, currency mismatches, and the status of their currencies as “weak currencies” [“弱币”]. These factors further complicate their choice of an exchange rate regime. To complement their exchange-rate system, they often implement some degree of capital account control.

Which exchange-rate regime is preferable: fixed or floating? Historically, Western scholars such as Kindleberger and Friedman have taken opposing views, without reaching a clear consensus. In practice, both approaches have been applied in different countries, each with advantages and disadvantages, and their suitability depends on the specific context. In reality, intermediate exchange-rate regimes—a hybrid of fixed and floating arrangements—are commonly implemented. No current theory of exchange rates denies that a country can adopt a target zone regime with moderate fluctuations, nor can any theory claim that a single regime is suitable for all countries at all times. Williamson’s research also indicates that corner solutions, such as currency boards or fully floating regimes, are likewise unable to fully prevent financial crises. [Note: Kindleberger favoured fixed exchange rates, Friedman floating; their debate is a touchstone in exchange rate economics. “Corner solutions” refers to the two extremes of that spectrum — hard pegs and free floats. Williamson, who coined the term, argued instead for intermediate “target zone” regimes with defined fluctuation bands.]

In the next five to ten years, which exchange-rate regime should China adopt? Fundamentally, it should choose a monetary policy framework suited to a rising major economy capable of maintaining stable economic development. Simply pegging to another currency or adopting a fully floating regime would not serve China’s interests. Pegging to another country’s currency does not align with the strategic requirements of a rising major power.

In the long term, there are almost no countries comparable to China in terms of economic scale and structure, and the renminbi is therefore not suited to fully joining any existing international currency bloc. Since the 1990s, China’s economic cycles have grown increasingly independent, and the influence of external volatility has gradually diminished; using another country’s monetary policy as a nominal anchor for China’s own would be detrimental to economic stability. Moreover, China’s macroeconomic management capacity and level of market maturity do not support a fully floating exchange rate regime.

Meanwhile, a substantial body of international research indicates that, given the depth of trade linkages and similarity of economic cycles among Asian economies, Asia stands to benefit in the medium-to-long term from establishing a distinct regional currency area, within which the RMB could play a pivotal role. At the present stage, however, the conditions for the RMB to serve directly as Asia’s key currency are not yet in place.

Therefore, during the strategic transitional period, adopting a managed floating exchange-rate regime is in China’s best interests.

The first advantage is that, although US monetary policy is far from perfect, the international credibility it commands remains unmatched by any other currency (despite short-term depreciation risks during crisis recovery). By maintaining relative stability against the US dollar (important to note: relative), the RMB can “free-ride” [“搭便车”] on the credibility of the dollar area. This allows China to “import” the dollar’s influence while “borrowing a boat to go to sea” [”借船出海”].[Note: Idiom that means using someone else’s resources for one’s own goals]. This gives the international community the opportunity to become familiar with, and begin using, the RMB. In the process, dependence on the dollar can gradually be reduced, allowing the RMB to emerge as an independent, globally accepted currency.

Second, a managed float helps relieve appreciation pressure on the renminbi in a timely fashion. The regime strikes a balance between “managed” [“有管理”] and “floating” [“浮动”], which reflects the real exchange rate appreciation that China’s still relatively high potential growth rate warrants.

Third, adopting this exchange rate regime would provide appropriate conditions and sufficient time for domestic structural adjustment and economic transformation. For a country such as China, both a major economy and one undergoing a complex transition process, the prudent and gradual selection of an exchange rate regime is all the more important.

Fourth, even with the adoption of this regime, the post-crisis context requires China to maintain a clear understanding of the supporting policies necessary for exchange rate reform and to establish appropriate institutional arrangements in a timely manner.

It should be emphasised that the proposed managed floating exchange rate regime is broadly aligned with current policy, though not identical in certain specific aspects.

First, a central exchange rate [中心汇率] should be established for a defined period, although it need not be publicly disclosed. [Note: The “central rate” is the reference rate set by the central bank around which the currency is permitted to fluctuate within a defined currency band.] One-off adjustments may be made at the authorities’ discretion as and when deemed appropriate.

Second, the composition of the “currency basket” [“一篮子货币”] should initially be heavily weighted towards the US dollar, with the weights adjusted as circumstances evolve. Over time, once these adjustments have been implemented to an appropriate level, the concept of a central exchange rate becomes largely redundant, and the regime gradually converges towards the real effective exchange rate (REER) [实际有效汇率]. [Note: The real effective exchange rate (REER) is the weighted average of a currency’s value against a basket of trading partners’ currencies, adjusted for inflation differentials.]

Third, in operating a central rate regime, the currency band should be widened gradually as conditions allow. By progressively and continuously widening the band, the need for discrete one-off adjustments to the central rate is gradually reduced.

Fourth, these operational steps and technical arrangements must be aligned with the process of RMB regionalisation. Only through such alignment can capital account restrictions be eased more rapidly, thereby creating greater room for exchange-rate flexibility.

Fifth, throughout the process of moving towards a more flexible floating exchange rate regime, the RMB, as a rising “weak” [“弱势”] currency, should maintain a mild appreciation bias, or at the very least sustain broad exchange rate stability.

Many international scholars, often more firmly than their domestic counterparts, hold that capital account liberalisation can indeed promote economic development. This view, however, is conditional. Where the necessary prerequisites are not in place, its effect on economic growth becomes uncertain. The relationship between capital account liberalisation and financial crises is not a simple matter of the former “promoting” [“促进”] or “preventing” [“阻止”] the latter, but liberalisation can act as a catalyst [催化作用] when financial crises do occur.

China must press ahead with capital account liberalisation for several reasons. Economic globalisation requires a corresponding liberalisation of the financial system. The major challenges bearing down on China’s economy and financial sector—resource and environmental constraints, and the need to generate returns on the country’s accumulated household wealth— can only be addressed within the global financial market. RMB internationalisation, too, demands further liberalisation of capital controls. And as markets become more liberal, the effectiveness of those controls will continue to erode, which makes liberalisation an unavoidable choice.

The conditions for full liberalisation of capital accounts in China are not yet in place, and simply advancing market liberalisation will not in itself generate efficiency gains in the domestic market. Without proceeding “on its own terms” [“以我为主”], China risks being forced into other countries’ market structures on unfavourable terms, an outcome that would do nothing to improve domestic market efficiency and could well prove counterproductive.

The core principles governing China's capital account liberalisation are therefore a proactive stance [主动性], a phased approach [渐进性] and the retention of control [可控性]. These find expression in five main areas.

First, a degree of control over inward and outward capital flows should be maintained until the RMB’s exchange rate band has been sufficiently widened and that rate has broadly reached its market-clearing level [Note: The rate at which supply and demand for a currency are in equilibrium without government intervention].

Second, capital account liberalisation must be closely aligned with the pace of domestic market reform—spanning factor price reform [要素价格机制改革], services sector reform, restructuring of government functions, tax reform and the full marketisation of the financial sector—so as to keep the externalities inherent in financial markets, particularly those arising from information asymmetries, within bounds that the market can absorb.

Third, capital account liberalisation should be coordinated with the progress of RMB regionalisation. While capital account liberalisation cannot take RMB regionalisation as its sole objective, the two can advance gradually in tandem, with RMB regionalisation as the guiding thread. In the coming years, capital account liberalisation may unfold in a foreign currency-dominated environment or, alternatively, in one where the RMB is gradually taking on a greater role. This may be what sets China’s approach apart from that of other transition economies. As a general principle, any category of cross-border capital transaction permitted in foreign currency should equally be permitted in RMB.

Fourth, capital account liberalisation must be accompanied by stronger macroprudential supervision and greater flexibility in macroeconomic management. As the process of liberalisation advances, the large-scale cross-border flows and arbitrage pressures that follow tend to erode the effectiveness of the quantitative and administrative controls that have historically underpinned China’s macroeconomic framework. Policymakers must therefore be well prepared for a shift towards price-based and indirect instruments (grounded in incentive-based mechanisms rather than administrative controls).

Fifth, different regulatory approaches are warranted for different types of cross-border capital flows at different stages. Inward and outward flows driven by illegal activity or political considerations, in particular, fall outside the scope of standard capital controls and should instead be addressed through anti-money laundering frameworks.

Were China operating in a world with a stable exchange-rate system and an equitable, well-functioning international monetary order, there would be little need to actively pursue the internationalisation of the RMB as part of its rise to global prominence. The difficulty is that today’s financial world is anything but stable and is beset by problems. In that context, internationalising the RMB is an unavoidable decision in order to shield China’s development from the negative impacts of the modern global financial system.

Of course, achieving full internationalisation of the RMB as a sovereign currency, i.e., making it a major global reserve currency, is a long-term process. Nevertheless, based on long-term trends in domestic and international economic development, starting this process now is an essential move [重要一着棋] for China’s future financial strategic framework. Its significance can be summarised in six points.

First, from China’s perspective, the current pursuit of RMB internationalisation can sustain economic globalisation and safeguard both global and Chinese economic growth.

Stable exchange rates between currencies are a fundamental prerequisite for sustaining economic globalisation. Calls for reform have intensified in response to the deep-seated problems in the US economy and the shortcomings of the international monetary system. Yet under current conditions of dollar dominance, there is no straightforward path to reform. Pursuing a more diversified international reserve system is therefore an unavoidable course for the global economy for a long period to come.

Against this backdrop, it is little wonder that China, as the world’s second-largest economy, commands global attention. Its economy continues to grow rapidly, its trade volumes rank first in the world, and within Asia—a region on its way to becoming the “main driver” [“主要驱动力”] in the global economy—China’s trade has expanded at a remarkable pace. RMB internationalisation would therefore meet a widely felt need among countries that are seeking stable economic development, serve as a boon for the Asian economy, and advance global economic interests at large. This is the primary message China must communicate to the world in pursuing RMB internationalisation.

Second, for China’s economy to maintain balanced and sustained growth, RMB internationalisation is equally necessary.

Since the 1980s, China has been facing capital shortages, which has made an export-oriented strategy and the build-up of foreign exchange reserves essential for the take-off of its economy. What followed was a combination of factors—the euphoria of rising power, inexperience in managing growth, and the sheer momentum of an expanding economy—that drew China, through policy negligence [政策的疏忽] or simple inadvertence, into the global “over-prosperity” [过度繁荣] of the preceding two decades that was the product of misguided US policy. It led to a vast accumulation of dollar reserves, deep structural imbalances and underlying vulnerabilities that would ultimately make growth unsustainable both in China and beyond.

On the other hand, given China’s substantial production capacity and the post-crisis collapse of US consumption, sustaining relatively high growth and realising China’s potential growth rate—thereby contributing more to global economic expansion—will require a measured expansion of the Chinese government’s global policy influence through RMB-denominated foreign investment, buyer’s credit and RMB clearing arrangements [Note: Buyer’s credit refers to loans extended to foreign buyers to purchase Chinese goods and services; RMB clearing arrangements are systems enabling cross-border transactions to be settled directly in RMB]. By channelling excess capacity towards emerging economies in Asia, Africa and beyond, and by nurturing new investment and consumption capacity in these countries, China can help stabilise growth across Asia and the wider world. This is quite similar to the role played by the United States and the dollar economy in the years immediately following the Second World War, and it reflects the needs of global economic development.

Third, pursuing the internationalisation of the RMB can comprehensively improve the efficiency of China’s financial system.

RMB internationalisation requires further opening up of China’s financial sector, which will place strong pressure on this sector to address its current state of “financial lag” and “weak financial power”. History has shown that such pressure can drive reform and opening up in the financial sector, which will lead to improvements in financial efficiency.

Fourth, from the perspective of financial history, the rise of a major power urgently requires the support of an internationalised currency commensurate with its degree of economic openness and international influence.

Historically, the currency of a rising economic power often becomes an international currency. In particular, in the era of fiat money, the rise of a major power is almost impossible to fully achieve without the internationalisation of its own currency.

Fifth, pursuing the internationalisation of the RMB is also essential for managing economic risk.

Against the backdrop of today’s flawed, dollar-dominated international monetary system, the internationalisation of the RMB would help the major economy [that is China] mitigate at least three risks. The first is liquidity risk: the Chinese government is, after all, the “lender of last resort” [“最后贷款人”] for the RMB. The second is the risk of market value swings caused by currency mismatches, because assets denominated in foreign currencies reduce the control of domestic authorities over their own financial markets. The third is pricing power risk [定价权风险]: issuers of currencies whose supply is largely unconstrained enjoy a relative funding advantage and are, in the short term, better able to avoid the risk of pricing power in relevant world-market transactions falling into others’ hands.

Sixth, the internationalisation of the RMB is also a powerful means of addressing the shortcomings of the current international monetary system.

The dollar is currently issued virtually without constraint, and the dollar-dominated international monetary system has serious flaws, which explains the growing worldwide calls for reform. From the perspective of the long-term evolution of the international monetary system, a “supranational currency” [“超主权货币”] would be ideal. However, the road to such a system is likely to be very long. When national self-interest comes into play, it is unclear when—or even whether—such a system might ever be implemented. It may well only remain an ideal, for as Robert Mundell put it: “There is a tendency for the dominant country to reject the world currency. The basic fear is that the global currency represents a threat to the position of its own currency. The counterpart of the conjecture is that actual or potential rivals try to pursue international monetary reform to clip the wings of the dominant power and to redistribute power.”

Therefore, the more realistic choice is to establish multiple international currencies of comparable strength, to create a constrained and balanced system through mutual competition. The RMB has already come to be seen by relevant international organisations and experts around the world as a potential counterweight.

Although RMB internationalisation is both objectively necessary and holds vast potential for development, it cannot be achieved overnight. At present, however, the RMB already meets the basic prerequisites for regionalisation. During the strategic transitional period, the immediate objective of RMB internationalisation should be regionalisation. Regionalisation simply denotes a geographic limitation on the use of an international currency; it does not imply any qualitative difference in the currency’s functions.

How can regionalisation be achieved? In recent years, I have repeatedly stressed that the key lies in implementing three approaches.

First, every possible measure should be taken to channel the RMB into offshore markets, for example through RMB-denominated foreign investment, buyer’s credit, foreign aid, central bank swap agreements, and by raising RMB quotas under Qualified Domestic Institutional Investors (QDIIs) [Note: QDII schemes allow approved domestic institutions to invest client funds in overseas markets.]

Second, as China’s capital account is not yet fully liberalised, the RMB can initially operate offshore like other freely convertible currencies, providing a full suite of services—deposits, loans, payments and settlements, asset management and currency hedging—to build a self-sustaining offshore circulation.

Given that the RMB needs to become regionalised and the capital account remains partially closed, channels between onshore and offshore markets can only be developed gradually and on a limited scale. Strategically, it is therefore feasible to establish an offshore RMB market in locations under Chinese government control, such as Hong Kong, making it a key pillar of the national financial strategy. This is a relatively favourable option, albeit one adopted out of necessity under the framework of “limited globalisation” [“有限全球化”].

Finally, it is equally important to note that, while the internationalisation of the RMB is one measure to address shortcomings in the existing international monetary system, the Chinese government should, from the same strategic perspective, pay full attention to, and support, all other developments conducive to this objective. Such developments include reforms to the International Monetary Fund (IMF), an increase in the RMB’s weighting within the Special Drawing Rights (SDR) basket, efforts in other parts of the world to develop “regional currencies”

What makes this short, memo-like analysis especially striking, however, is not just its argument but its fate: it was swiftly censored after publication. Chinese commentary has often framed US policy mistakes as strategic opportunities for China, but the live war in Iran seems to be more politically delicate terrain. Presumably, any suggestion that a prolonged Middle East war could amount to a strategic opportunity for China sits awkwardly with Beijing’s preferred self-portrait as a neutral mediator and responsible great power.

In past newsletters, we have noted cautious arguments for a more proactive and assertive foreign policy, but the prevailing strategic instinct in the volatile early months of Trump 2.0 has been that “China should keep doing China well” while chaos unfolds elsewhere.

The Intellisia piece pushes that logic a step further, arguing that chaos is not simply something for China to endure, but something from which it can profit.

The article argues, predictably enough, that “a protracted Middle East conflict would systematically drain the military, diplomatic and financial resources of the United States”. But it also advances a more developed case that protracted war in Iran will reroute capital, energy routes, and supply chains in Beijing’s favour.

Its closing prescription is “trading with the sword in hand”: a somewhat harder-edged version of “China doing China well”, even if the “sword” here is not military force but Beijing’s command of new energy and manufacturing.

— Jacob Mardell

1. A protracted Middle East war would be a “period of strategic opportunity” for China—one that drains US resources while pushing global capital, industry and trade routes towards China as the “next best option”.

2. Turmoil at sea leaves US allies—dependent on seaborne energy—vulnerable, expanding demand for alternative land routes and accelerating China’s “revival of continental power”.

3. Capital will initially flee to the US dollar, but as war drags on, it will seek new safe havens. Hong Kong has already emerged as a preferred destination for Middle Eastern money.

4. The war will accelerate the shift towards a global industrial chain resting on US demand, China as the hub, and the rest of the world in supporting roles, handing China pricing power and rule-setting authority.

5. This is a stress test for the petrodollar and US military credibility. The US is signalling that interests take precedence over allied security, while trade settlements are using the renminbi to hedge risk.

Name: Intellisia Institute (海国图智研究院)
Founded: 2015
Founder and President: Chen Dingding (陈定定), Professor of International Relations, Jinan University; Associate Dean, Institute for Belt and Road Initiative and Guangdong–Hong Kong–Macao Greater Bay Area Studies, Jinan University
Research focus: International affairs, especially US–China relations, Chinese foreign policy, risk forecasting, and AI / new technology in international relations
Other: Named after Wei Yuan’s Haiguo Tuzhi (海国图志), a landmark 19th-century work widely regarded as one of China's first serious studies of the Western world and an early call to learn from Western military power. Recent profiles describe the institute as having around 20 full-time researchers.

IF THE MIDDLE EAST WAR LASTS TEN YEARS, IT WILL CREATE CHINA’S GREATEST PERIOD OF STRATEGIC OPPORTUNITY
Intellisia Institute (海国图智研究院)
Published by Intellisia, 17 March 2026
Lightly edited machine translation
(Illustration by ChatGPT)

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As global attention fixes on the smoke of war above the Persian Gulf, a quiet yet profound reconfiguration of global power has already begun. Mainstream narratives portray a protracted Middle East war as nothing but risk and crisis. Yet viewed through the lens of long-term history and geoeconomics, it may instead provide China with a crucial lever with which to prise open the “changes unseen in a century” [百年变局], offering a strategic time window of maximum pressure and long duration.

Our assessment is that the core dynamic is as follows: a protracted Middle East conflict would systematically drain the military, diplomatic and financial resources of the United States as China’s primary strategic competitor, while forcing global capital, industry and trade routes—amid pervasive fear—to seek the “next best option”. China, by virtue of its uniquely vast scale, the completeness of its industrial chain and the rapid transformation of its energy mix, is emerging as the option offering the greatest certainty.

This is not schadenfreude, but a cold structural reality. What follows is our four-dimensional analysis, supplemented by the latest data and case studies since the beginning of 2026.

China’s “Malacca dilemma” still echoes in policy discourse, yet the script is being rewritten. Conflict in the Middle East is driving up the risk premium on maritime shipping and accelerating a route revolution [路径革命] in global energy trade. Two main trajectories are set to become increasingly pronounced:

Opening the north–south land bridge: the multimodal corridor linking the Middle East (the Persian Gulf), Pakistan (Gwadar) and China will shift from conceptual blueprint to an economically urgent lifeline.

Integration of the continental hinterland: the vast pipeline network connecting Russia, Central Asia and China will see its strategic value—and the demand for its expansion—rise sharply.

Key data and case studies:

The vulnerability of Japan and South Korea laid bare: in March 2026, shipping volumes through the Strait of Hormuz fell sharply, leaving more than 40 Japanese oil tankers stranded. [Note: Media report that 40 Japan-linked vessels “including oil tankers” are stranded.]

In response, the Japanese government urgently released 80 million barrels from its strategic petroleum reserves—the largest drawdown since the reserve system was established in 1978. South Korea, meanwhile, was compelled to implement its first “oil price cap mechanism” in nearly three decades. With dependence on Middle Eastern oil reaching 95.1% and over 80% respectively, the two economies were among the first to be hit. [Note: While the figure for Japan is broadly supported, Reuters reports that Korea gets about 70% of its oil from the Middle East, rather than over 80%.]

The Nomura Research Institute forecasts that if oil prices rise to US$140 per barrel, Japan’s economic growth rate could be reduced by 0.65 percentage points, bringing it close to stagnation. [Note: The Japanese analysis goes further, warning that US$140 per barrel would raise the possibility of recession.]

America’s inflation dilemma: according to an analysis by China International Capital Corporation (CICC), if conflict in the Middle East pushes the oil-price baseline higher, US year-on-year CPI inflation in 2026 could rise from 3.1% under the baseline scenario to 3.9%. This would intensify “stagflation” risks and place the Federal Reserve’s monetary policy in a dilemma. [Note: The CICC report treats both 3.1% and 3.9% as post-conflict scenarios at different oil-price levels, rather than a baseline and an upside case.]

Conclusion: while the flames of war burn at sea, they also pour tar on China’s “revival of continental power” [陆权复兴], placing US allies—heavily dependent on seaborne energy—in a precarious position. Energy security is thus shifting from the passive defence of “securing sea lanes” [保航线] to the proactive strategy of “building corridors and controlling hubs” [建走廊、控枢纽]. [Note: The Chinese is ‘浇上了焦油’—literally “poured tar on”. The image inverts the more familiar idiom “pour oil on the fire”: tar burns slowly, clings, and is hard to extinguish, so the metaphor is one of entrenchment.]

In the early stages of a crisis, capital will inevitably flee to the US dollar. But this is only the first act. A protracted war will bring on the second and third acts, and capital flows in the first quarter of 2026 already offer early signs:

Act I (panic): capital flows back to the United States in search of currency safe havens.

Act II (pain): soaring energy and logistics costs steadily erode profit margins in the real economies of Europe and the United States.

Act III (choice and return): capital searches globally for a “port in a storm” [避风港] that combines production stability, cost competitiveness and market depth.

Hong Kong is emerging as a preferred destination for Middle Eastern capital.

Key data and case studies:

Middle Eastern capital stages a forceful return to Hong Kong: since March 2026, enquiries from Middle Eastern clients about investing in Hong Kong equities and establishing family offices in the city have surged by more than 50% month-on-month. Hong Kong media report that nearly 30% of these enquiries come from large Middle Eastern families that had previously relocated to Singapore or Dubai and now plan to reallocate 15–20% of their assets back to Hong Kong. A report by Citigroup likewise notes that geopolitical instability is driving capital rotation towards “neutral” Asian financial centres such as Hong Kong. [Note: The 50%, 30%, and 15–20% figures all originate from unnamed financial industry sources cited in PRC media coverage in March 2026.]

The redefinition of “safe assets”: Hong Kong’s Financial Secretary, Paul Chan Mo-po, has publicly stated that geopolitical tensions are driving capital inflows into Hong Kong as a safe haven, adding that Middle Eastern funds may choose the city in search of a greater sense of security. Behind this lies growing distrust generated by the “weaponisation” of the US dollar, as well as the distinctive advantages Hong Kong enjoys under “one country, two systems”, including the rule of law and the free movement of capital.

Implication: the current withdrawal of certain capital is, in fact, a prelude to a larger and more strategic wave of return in the future. Positioning in Chinese assets is essentially a move to secure a place at the core nodes of the global division of labour in the post-crisis era.

War is the most powerful catalyst for the relocation of supply chains. Two major trends are set to accelerate:

The targeted relocation of “energy-intensive industries”: Europe’s high energy-consumption sectors—such as chemicals and non-ferrous metal smelting—face a dual blow from elevated domestic energy costs and supply chain disruptions. As a result, the pace at which capacity shifts towards lower-energy-cost locations such as China and Central Asia will accelerate dramatically.

The “China market” as the ultimate counterweight to “friend-shoring”: the US-led push for “de-risking” is forcing its allies to seek alternative production capacity in Southeast and South Asia. Yet these alternative production bases remain heavily dependent on China for upstream equipment, key raw materials and even financial services.

Concrete scenarios and data:

European chemicals industry: conflict in the Middle East has led to the suspension of nearly 20% of global liquefied natural gas (LNG) export capacity following attacks on facilities in Qatar, triggering a 70% single-day surge in European natural gas prices. This will compel major firms such as BASF and Lanxess to further assess shifting production capacity towards locations with more stable energy supplies, including China. [Note: Media reporting indicates a roughly 70% increase in European natural gas prices over several days, rather than a single-day surge.]

Japanese and South Korean automotive industries: amid conflict-related concerns, Japan’s stock market saw the Nikkei 225 Index plunge by 3.61% in a single day on 4 March—the steepest decline in a year. The risk of supply chain disruption will draw the sector closer to China’s more complete electric-vehicle supply chain.

Insight: the future global industrial chain will rest on a deeper structure: US demand, China as the hub, and the rest of the world in supporting roles [美国需求、中国枢纽、全球配套]. To control the hub is to control pricing power and rule-setting authority.

Conflict in the Middle East is an extreme stress test for the petrodollar system, as well as a public test of the credibility of the US military security umbrella.

On the monetary front: China’s strategy is clear and pragmatic—it does not challenge dollar hegemony directly, but quietly cultivates alternative options. When Middle Eastern countries increasingly use renminbi in trade and channel investments through Hong Kong’s financial markets, this signals a loosening of the system’s foundations.

On the military front: the United States’ global military deployment is falling into the predicament of “robbing Peter to pay Paul” [拆东墙补西墙]. In March 2026, the US “THAAD” missile defence system stationed in South Korea was urgently redeployed to the Middle East to fill air-defence gaps following Iranian strikes. [Note: THAAD redeployment was reported by the Washington Post on 9 March 2026, citing two unnamed US officials, and corroborated by Korean media. The Pentagon has not confirmed specific asset movements.]

This move clearly signalled to allies such as South Korea that US core interests take precedence over allied security. At the same time, Gulf states including Saudi Arabia and the United Arab Emirates have publicly refused to allow their territory or airspace to be used for attacks on Iran. [Note: Public refusals by Gulf states to allow their airspace or territory to be used for attacks on Iran predated the U.S.-Israeli strikes of 28 February 2026.]

With 27 US bases in the Middle East coming under attack and core command hubs damaged, its military presence has been exposed as a security liability [安全负资产]. [Note: The figure of 27 US military bases comes from Islamic Revolutionary Guard Corps (IRGC) claims rather than US confirmation.]

The principal battlefield for renminbi internationalisation lies not in the trading floors of New York or London, but beside the oil wells and ports of Dhaka, Dubai and Riyadh—in the many thousands of trade settlements that choose the renminbi to hedge risk. This is a bottom-up, pragmatism-driven revolution. The loosening of US military hegemony is meanwhile reducing external resistance to this process.

Conclusion

In an age of great contention [大争之世], the opportunities that shape national fortunes are often concealed beneath turbulent waves. Prolonged conflict in the Middle East constitutes a quagmire that drains US strength, a nightmare on Europe’s doorstep and a direct economic shock to [US] allies such as Japan and South Korea.

But for China, provided it maintains sufficient strategic clarity and resolve, this may well constitute a systemic and structural period of strategic opportunity. It is already creating strong external pressure that forces change [倒逼压力] and a valuable strategic time window [时间窗口] for addressing core strategic priorities such as securing energy transport routes, advancing industrial upgrading and promoting renminbi internationalisation.

At this moment, “trading with the sword in hand” [持剑经商] means holding the “sword” of new energy and manufacturing while doing the “trading” of continental integration and supply-chain hub-building. It means not fretting over the gains and losses in any one place, nor being swayed by the temptations of short-term deals, but ensuring that when the balance of history ultimately tips, we are already standing on the side of greatest weight.