Exhibit A: the entire debate over Beijing’s ongoing campaign to internationalize the Renminbi.

“Why” did Beijing make the decision to chart a path to build an alternative USD system?

What is ignored in this debate are the Original Sins, namely the role played by a highly reticent IMF and then the existential threat posed by Washington’s policy response to the Global Financial Crisis.

These two events demonstrated to Beijing the persistent dissonance between the “international rules-based order” rhetoric and the stark realities of America’s self-interests. A disconnect that now lies at the heart of the entire debate over the future of the USD system and the rise of a RMB alternative framework.

IMF Voting and Diplomatic Subterfuge

The immediate instance when this contradiction became undeniable was the International Monetary Fund (IMF) and, specifically, China informally seeking to reform to the body’s voting structure in the aftermath of the Asian Financial Crisis.

The argument made was straight forward and highly rationale. The configuration of voting rights no longer reflected economic reality. At that time, the economies of Japan and China were roughly the same size and yet Japan’s vote share was 6% as compared to China’s 3%. It would take nearly a full decade before action was finally taken.

In 2006 the IMF Executive Board finally acquiesced, but the decision came in the form of a two-year review process. When the review period concluded in 2008, there came a slight change in membership voting sharewith China rising from 2.9% to 3.65%. For context, Japan remained at 6.14%. Even France retained a larger voting share at 4.85%.

The IMF board did, however, agree that there was a need for deeper, far more structural reforms. It was another two year process.

Concluding in 2010, the IMF had finally relented with the Board of Governors agreeing to a doubling of China’s vote share to 6.4% but the entire process made clear to Beijing that working to change the system from within the American-led liberal order system would never generate what it viewed to be reasonable results. Even after the 2010 reforms, the United States retained 16.52 percent of the vote, comfortably preserving its unilateral veto over any structural change, given the 85 percent supermajority requirement.

This wasn’t the end to the entire process though and Beijing’s view of a prejudiced system would be reinforced by further American inaction and delays.

Washington would take five additional years (2015) before the issue would finally be taken up and voted on by Congress which is required when any material change to the IMF voting structure is undertaken. In the end, the entire process spanned nearly two full decades before China was, for lack of a better word, “allowed” to have a greater participatory role in the IMF.

What was demonstrated was another example of the divide in American liberal-internationalist rhetoric and how realpolitik action was administered. China would go on to exemplify that the world of nations should fully adhere to the “international rules-based order” but only so far as doing so retains the status quo orientation of the post-1945 American-led “order”. China was beginning to be viewed as a challenger to that order very much as was anticipated by Beijing all the way back in 1997.

It was during this entire process that China redirected its efforts outward to India, Russia and Brazil where the four had a combined, rather conveniently, vote share of 13.5% and below the 15% supermajority threshold. There were shared grievance given that, other than China, the remaining three still held a voting share below all western European nations and Japan. As a group, there was an incentive to consider other options and the process was already underway.

Even though the obvious bureaucratic subterfuge by the IMF would act to bring the parties together, it wouldn’t be a compelling enough reason for any broad agreement to create a new multilateral body. It would be an additional three years, in the aftermath of the Global Financial Crisis, when the need for a parallel USD system would become unquestionable.

Washington & New York Hypocrisy on Full Display

Throughout the initial decade of the 21st century, Wall Street had made it a point to pursue greater engagement and dialogue with China. The overarching aim was to demonstrate to the Chinese technocrats the gains which could be achieved by shifting to an Anglo-American approach to corporate finance. To allow the markets to fulfill long-term capital needs with the banking system positioned to address working capital needs. Given the burden of capital constraints within China’s banking system, this argument found receptive audiences.

Beijing moved quickly. The banking system was restructured and recapitalized. Major state-owned banks were taken public, the G-share reforms were introduced to overhaul the domestic stock market and plans were developed to expand the fixed income market to allow for more inclusive corporate governance. Wall Street had successfully opened the door.

The Global Financial Crisis, in an instant, shattered this equilibrium.

America’s financial system collapsed taking not only the global economy down, but in Washington’s response telegraphed an unambiguous signal to the entire world in perhaps the loudest possible way: the rules demanded of others would not be required of the United States.

There would be no austerity and there would be no forced restructuring of any part of the financial system. Be it the Mexican peso crisis of 1995, the Asian Financial Crisis of 1997 or the Russian default the following year, in each example those countries affected were pushed to restructure with the IMF acting as the American cudgel.

For the United States the same medicine should have been administered, and yet it was not. With the “exorbitant privilege” of the global reserve currency, the choice made was to paper over, almost literally, the episode. America would bail itself out using the Federal Reserve’s balance sheet to absorb losses. America took the path of currency debasement.

For China, the implications were severe. By 2008, it held an estimated US$1.7trillion in total American sovereign obligations (US Treasuries and GSEs), having increased its exposure more than tenfold over the preceding decade. The crisis and the American policy choices demonstrated that the US was prepared to debase its currency to protect its economy. No consideration was given to bond holders nor to what potential reputational damage might be done to the US treasury market as a global reserve asset. Moreover, Beijing took the position that if such a choice was made once, then it was highly probable Washington would resort to the same practice when the next crisis occurred. The substantial USD holdings of American debt were now a liability.

While it might have been in China’s best interest to simply liquidate all Treasury holdings, doing so was neither feasible nor desirable. The solution settled upon was to cease all future net purchases of American debt. In addition, China would initiate a “run off” program or what would later come to be referred to as “quantitative tightening with Chinese characteristics”. Much like the Federal Reserve, China initiated a program whereby all holdings of American sovereign debt would reach a point of maturity, but no longer would the proceeds of that maturing debt be reinvested.

It should be noted that this “run off” program would take time before it could deliver any meaningful results. China’s FX reserves were simply too large and there wasn’t a suitable, at scale, alternative to deploy the capital. The solution would arrive in 2013 with the Belt and Road Initiative the very same year when China’s position in American sovereign debt peaked.

The behavior of Wall Street further reinforced this lesson as China’s technocrat elite viewed the American bankers as having led them astray with the promotion of the American capital market system. Making matters worse, after successfully soliciting Chinese capital to repair their balance sheets, American banks turned around and began rapidly divesting their stakes in Chinese banks (purchased in a lucrative pre-IPO round), crystallizing gains and exiting relationships that had been presented as strategic. The transactional nature of the American system, and the parties involved, had been put on full display.

The conclusion drawn from the GFC and earlier war in Iraq was that America was willing to subvert the “international order” whenever it suited its domestic imperatives. Here, however, with the response to the Global Financial Crisis, the Chinese adopted the view that the unipolar era had reached a crescendo. Leaders in many other world capitals had begun to reach that very same conclusion. This would then go on to lead to the original four BRIC members to convene in 2009 and formalized their relationships.

For all the heated back and forth over the state and future of the USD there needs to be a willingness to accept that the debate itself is the by-product of serially abusing the “exorbitant privilege”. As a rationale actor, Beijing fully recognized this reality and would go on to take the necessary steps to reduce any future exposure to that system. It was a highly prescient move and, today, there is a credible USD alternative all because of short sighted policy choices out of Washington. As La Fontaine quipped, “A person often meets his destiny on the road he took to avoid it.”

PLA

Last year, at the opening of the US-China trade conflict, the Treasury Secretary confidently dismissed Beijing’s ability to retaliate against Washington. China, he proclaimed, was “playing with a pair of twos.” Within weeks, Beijing would make it very clear that they were playing with a considerably stronger hand and, subsequently, rare earths would come to dominate the conversation over the ensuing year.

Now he is doubling down and making the same mistake again.

Driving Headlong into Irrelevancy

When asked last week on CNBC about the Trump administration’s campaign to economically isolate Iran, Bessent had a simple message for Beijing. “Get with the program.”

Now, there is little question that Washington wields enormous financial power. The USD system remains dominate across finance and commerce globally. America’s position at the center of this international system gives Treasury the capability to extrajudicially punish institutions at any point and for any reason.

But possessing a weapon and being able to repeatedly use that weapon without adversely impacting its efficacy are two very different things.

And in a glorious twist of irony, Bessent made this very point himself just last week.

Discussing Iran’s ability to disrupt shipping through the Strait of Hormuz, Bessent argued that weaponizing the waterway would eventually make the Strait “irrelevant.” Gulf producers are already responding by constructing the necessary infrastructure that would allow energy exports to bypass Hormuz.

Precisely. Beautifully put. Cue the golf clap

If a party weaponize a chokepoint often enough, then affected parties will build around the chokepoint. This exact same logic applies to the American USD financial system.

Again, CIPS is the Killer App

For decades, Washington has enjoyed perhaps the greatest economic chokepoint ever created. Because international banks require access to USD, then means they are dependent on the New York Correspondent banking network. All USD transactions touch those rails. Washington can use that “exorbitant privilege” to compel action by others even if said actions go against a third party’s interests. And if you don’t comply, then risk losing access to the SWIFT network.

But every time Washington exercises that power, it strengthens the economic incentive for building around it.

China learned this lesson a long time ago.

In 2012, the US Treasury targeted the Bank of Kunlun for facilitating transactions with sanctioned Iranian institutions. Washington cut the bank from the SWIFT network and prohibited American banks from maintaining correspondent accounts with the bank. It is important to note that this move came under the Obama administration. My comments here are in no way partisan.

While this wasn’t one of China’s largest banks, say Industrial and Commercial Bank of China, the message to Beijing was very clear.

That same year, the PBoC began building the Cross Border Interbank Payment System. CIPS went live in 2015, creating a Chinese controlled set of alternative rails for the expressed purpose of clearing and settling cross-border RMB transactions.

Contrary to the ongoing and raging debate, China has never intended to deploy CIPS as a replacement to the USD or to undermine Washington’s hegemony. The objective of CIPS is as an alternative to SWIFT and the mitigation of risk that someday the ire of Washington is fully directed towards the Mainland.

Not De-Dollarization ….. its about Hedging

That distinction is critical. The emerging financial system isn’t necessarily one in which countries abandon the USD. It is a geopolitical hedging instrument.

Consider what happened just last week.

Argentina renewed its RMB130 billion swap agreement with the PBoC, extending the arrangement from three years to five. Not exactly the sort of “Donroe Doctrine” aligned behavior we were told to expect.

Days later, Australia renewed its own RMB swap agreement. More remarkably, the facility was expanded from RMB200 billion to RMB220 billion and extended it for another five years.

Australia is one of America’s closest strategic allies. Five Eyes, right? It is yet another example for why the entire “Allied Scale” theory for countering China is dead on arrival.

Neither development means Argentina or Australia is abandoning the USD. The two countries are hedging and expanding their optionality.

And that is exactly why Bessent’s aggressive campaign of secondary sanctions against China risks producing unforetold consequences.

One Outcome, Greater CIPS Adoption

Chinese companies will be targeted, and Beijing will retaliate against American sanctions. Trade flows will be further disrupted. These are all just the first order consequences. The second and third order consequences are far more important.

Every government (particularly in Delhi) is watching the confrontation and is reminded that access to the USD financial system is, ultimately, conditional. The rational response isn’t de-dollarization. It’s diversification.

More RMB invoicing and settlement which arrives through a broadening of CIPS connectivity. Basically, the continued, albeit gradual, expansion in an alternative financial infrastructure capable of operating beyond American jurisdiction.

And the obvious beneficiary is Beijing.

Every time Washington weaponizes its financial chokepoint, it gives the rest of the world another reason to build around it.

The USD isn’t going anywhere. It will survive for a very long time as the reserve currency, the medium of exchange. As a reserve asset? Increasingly in doubt, but that’s a conversation for another day. There will, however, come a time when Washington reaches for its most powerful economic weapon only to discover that it’s been neutered as a critical mass of trading partners have already hedged with the RMB.

P.S. For those interested, I highly recommend the Samuel B. Griffith translation of Sun Tzu’s Art of War.

There was the Financial Times article titled “An American Farewell to China” which chronicled a couple’s decision to leave China after two decades. Then came the passing of former Chinese Premier Zhu Rongji, a man revered throughout the foreign community. Both resulted in a torrent of social media posts lamenting a period of time that is very much in the rearview mirror.

Nothing really new here, but all of the commentary is the perfect demonstration of the prevalent and unshakable China primacy bias which has existed for a number of years. But like the adage goes, “where you stand depends on where you sit.”

A small few are still around from that Zhu Rongji period, but they “sit” in today’s China. Most, however, have long departed and yet these individuals continue to actively participate in today’s China debate from afar. As a group, they “sit” in 2010 holding with a rather iron grip a consensus view; China hasn’t just changed, it has errantly deviated from the very path that allowed for its past successes.

I have found that this perspective isn’t just a pining for the “good ol’ days”. Again, it is a deeply rooted primacy bias, and it has warped the framing of today’s China debate. Of course, this cohort looks back on that period with great fondness. For many, they lived very large lives as an expat in China. Memories are frozen in time. What is required is a fuller telling of just how absurd and untenable that period of time was.

A Point of Inflection

To start, there is no question that the entire environment in China has changed, and I am even in agreement with those making the connection between this change and the rise of Xi Jinping to power. The foreign community faced, for the first time in well over a decade, a fundamental shift and tightening in the rules of engagement. What I have yet to see anywhere is any introspection. Why is it that the previously unwritten societal rules were changed?

For me, the answer can be found in recognizing what life was like as a foreigner living in China in the years leading up to Xi Jinping assuming power. If you happen to be reading this and were around prior to 2012, then you know very well that life as an expat was freewheeling and carefree. Zero guardrails. And if you have even a smidgen of self-awareness, you should also recognize that it was a period of time that was in no way sustainable.

Beneath the surface, the entire social fabric was being torn asunder. The decentralization of power to regional governments that began under Deng Xiaoping had created dozens, if not hundreds, of Party fiefdoms. The mountains truly were high, and the emperor was far away. This would come to be best reflected in the entire Bo Xilai and Wang Lijun episode, which, while unique in its own right, was highly symptomatic of a Party apparatus at risk of collapsing upon itself.

The Glorious Days of Expat Life

No one, me included, truly understood the full extent of the dynamics at play or that everything was about to change. Every single foreigner was oblivious to their surroundings. No one cared. Life was just pure awesomeness.

There were high-paying job opportunities everywhere you turned. Work and social lives blended seamlessly, with your pick of fabulous parties every night of the week. The irony was that hardly anyone was living in China legally. Not a day would go by when someone in your circle was “doing a visa run” to Hong Kong. The majority of foreigners existed on the questionable legality of multiple-entry business visas.

It was also Vice City, and very much in the literal sense.

Drugs were everywhere. Not only was access widespread, but there was little effort to hide it. Dealing and usage were often conducted openly. No longer was it just men on street corners quietly muttering “hashish, hashish”. And when I say everywhere, I mean everywhere. In bars, in offices, although it was the weekend house parties where narcotics were the most prevalent.

The same went for prostitution. The bars in every major hotel catering to business executives were overrun by aggressively solicitous women. Those who were more adventurous would journey out to one of the dozens of establishments openly known to cater to the world’s oldest profession. And let’s not forget the entire KTV ecosystem. If you were doing business in China during this time, then you would regularly find yourself in a neon-lit room, picking a number from a lineup, eating watermelon, and drinking XO mixed with green tea for hours on end.

Relationships with civil servants and beyond, call it corruption, had also become critical to navigating everyday life in China. Once again, if you were a foreigner with any material amount of time spent in the country, this worked very much to your advantage. You would have cultivated key relationships, “a guy,” and probably multiple “guys.” These individuals were your fixers.

Caught in the wrong place at the wrong time? You texted “big brother.” Pulled over for drinking and driving? You texted “PSB guy.” You would have them listed on speed dial on your Nokia phone. There was no WeChat at this time. If you had the right roster of contacts, you felt almost invincible. You can even find certain news articles where foreigners are quoted as having all but said that they were above the law. These very same foreigners, some quite high profile, would ultimately come to learn a very hard lesson: these relationships weren’t just transactional, they were illusory.

So that is the picture of what life was like. Pearl of the Orient meets The Great Gatsby. It makes perfect sense that this period of time would be looked upon with reverie and would lead to today’s primacy bias.

You’ll Never Be More Chinese than the Chinese

Again, what must also be recognized is that this period of time was simply unsustainable. The China of that period was bound to change and did just that.

Foreigners aren’t leaving because China is less open and less welcoming. The environment changed and that required an adjustment. They were unwilling or unable to adapt.

Instead, they clung to a world and a life that no longer existed while making the grave mistake of conflating preferential treatment with personal freedom. This would then, and very unfortunately, result in a follow-on mistake: believing that being wanted was the same as belonging. They never learned, or forgot, that you can never be more Chinese than the Chinese.

Allow me to close with two additional points of context.

First, if you live in China, then you must accept that every day brings with it a series of challenges that were never anticipated. Your world can be thrown completely upside down at a moment’s notice. For me, that’s not a bug; it’s a feature, and very much part of the entire China experience.

Most foreigners living in China understand this point conceptually. For each individual, however, there’s a limit to how much pressure they can withstand. A breaking point will be reached, and the decision is thenmade to leave which leads me to the second point of context.

You are always a guest in this country, and this requires a degree of humility and willingness to understand and accept this as your lot in life. You may spend five years here, maybe thirty. You may speak fluent Chinese, marry a Chinese national, build a business, have relationships that span decades. No matter the circumstances, you are and forever will be a guest.

And perhaps that is the hardest lesson for many foreigners to accept. China does not exist to preserve the version of the country that made you comfortable or “special”. What most foreigners never quite come to genuinely accept is that every particular moment in China’s development is entirely ephemeral.

PLA

The purpose of this hypothetical is exactly that, a hypothetical. It is, however, meant to illustrates a broader point: China has become a source of observable and increasingly consequential tail risks that are beginning to permeate the global economy. These risks have always existed. Until recently, however, they remained largely latent.

Events Demonstrate Risk Models are Broken

For decades, investors and corporate management teams have treated China risk as a standard component of geopolitical analysis. Plug and play. The framework, however, is now in need of fundamental change. Historically, China was assessed using the same analytical models applied to other major markets. There were certain unique variables applied, say Taiwan or the South China Sea. That approach is now dangerously insufficient.

To make my point here, you need only consider the recent development in the oil market over the past two months. An event in which no risk model would have produced. Most macro analysts had originally projected a rather dramatic impairment to the Chinese economy from a shortage in energy on the back of the Iranian conflict. The risk parameters would have centered solely on a reduction of available supply of oil, first from Venezuela and then from Iran.

Not only were these macro analysts wrong, but they were also all forced to make a full 180-degree turn. China is now routinely viewed as gaining from the Iranian conflict.

I am loath to say this, but there has been a genuine paradigm shift. There is now a material disconnect in how “China risk” is being modeled versus a new reality.

The Uniqueness of China Tail Risk

There have been two structural changes which now need to be included into future risk models. Only by making those changes can investors and executives more properly evaluate a truer reflection of the effects on global markets and corporate decision-making.

The first structural shift is best described as value-chain influence.

The recent impact on oil prices by China led many analysts to conclude that there is a greater market influence from the world’s largest marginal buyer of energy than was previously appreciated. While that is certainly correct, this influence now extends well beyond Porter’s “Bargaining Power of Buyers”. Beijing built, and now occupies, a strategic position in the energy market that carries across the entire value chain.

And it goes well beyond energy. This very dynamic carries across the entirety of the global commodity complex. Chinese firms are now deeply embedded in all activities: from extraction to refining to distribution. Chinese banks have likewise become increasingly integral in trade financing activities. China is far more than just a buyer.

Access to critical inputs had been identified years ago as strategic and a national interest. Beijing has worked methodically to reduce vulnerabilities while simultaneously increasing its ability to influence every stage of the process.

This is a material change in a critically important global industry. There is a direct correlation between access to commodities and economic activity. The characteristics of risk have fundamentally changed, and Beijing has the ability to affect multiple touch points throughout the value chain. This will amplify the potential for unexpected market volatility.

The second structural shift is what I describe as asymmetrical objectives.

Simply put, Beijing’s decision-making has a tendency to radically deviate from the linear assumptions applied in traditional risk models. The Chinese state frequently pursues a combination of commercial and non-commercial (geopolitical) objectives simultaneously. There are more times than I can recount when actions that appear irrational economically speaking, at least from a conventional perspective, are in fact rational when viewed through the lens of Beijing’s national interests.

This makes asymmetrical objectives a far more difficult variable to identify and quantify. Not only is it challenging to anticipate the initial decision, but it is even harder to model all possible downstream consequences from that decision. Modern risk-management frameworks aren’t designed for this type of uncertainty. Put bluntly, today’s models possess limited applicability when measuring genuine China tail risk.

The recent developments in the oil market again illustrate the challenge. Why did Beijing sharply reduce oil imports? Was it responding to discussions with President Trump? Was Taiwan part of a broader negotiation? Was China attempting to exercise soft power through the provision of indirect support to regional parties? Or was the decision made solely under the premise of “buy low, sell high”? Numerous explanations have been proposed.

The reality is that no one has a clear idea, at least not with any degree of certainty. Where there is agreement is that some form of quid pro quo would have been present. Beijing operates with a high degree of optionality, particularly when actions taken (or not taken) can achieve multiple goals. In any situation where Beijing views that a decision has real strategic value to a third party, then it will be considered a point of leverage. Reciprocity will be demanded be that explicitly or implicitly communicated.

Then there’s the unique issue of how, exactly, Beijing goes about executing decision making. There is considerable opacity and plausible deniability is always there in the background. Actions that appear straightforward on the surface may, in fact, serve a broader set of aims even if they aren’t immediately clear. There isn’t a single risk model today that can properly incorporate what outsiders would (incorrectly) categorize as “unknown unknowns”

So, we can agree that China has broken everyone’s risk models. Now the question becomes: how should investors and corporate executives respond?

The Solutions are Simple, Just Not Easy (to execute)

From a market perspective, China tail risk has the potential to affect virtually every major asset class. The question is no longer if an asset class will be impacted, it is only the degree of the impact that needs to be determined. A sudden change in domestic policy is where most of the overlooked risk is present. A decision to raise the retirement age or the loosening of the household registration (Hukou/户口) system are two recent examples. Others are certainly to follow and the same with unexpected industrial policies. The Chinese wall of money (flows) can be altered by such policy shifts and, with that, a cascading global impact on everything from interest rates to currencies to equity valuations.

Investors should begin by accepting that current risk models are incomplete. This, in turn, means that all investors are operating, today, with a risk exposure greater than is known. The quants may have developed methods of incorporating feeds from Chinese social media, as example, and this is a good start. It isn’t anywhere near enough. After all, no model had factored in the arrival of DeepSeek 18 months ago and no model properly forecasted the rapid development and adoption of open-source AI substitutes. There are so many shoes that can drop at any point in time.

The solution will need to be a greater emphasis on qualitative variables. Investment teams will need to increase headcount to include individuals having relevant experience with China. These individuals should be tasked with building models that identify blind spots and, in doing so, better incorporate unique, China specific factors. Furthermore, these individuals need to have authority, not just responsibility. The input they provide won’t just better manage risk, but could quite possibly provide a competitive advantage, ie alpha.

Corporate executives face an equally important challenge. They need to expand internal discussions beyond the direct risks associated by China to supply-chains or potential competition from a Chinese company. For there to be true resilience will require an assessment of all second and third order effects and a path forward to address each of those risks. Here, however, the process to address the China tail risk, I firmly believe, is a fiduciary duty and must be led from the very top of the organization.

At a minimum, the board of directors needs to appoint at least one independent director possessing genuine institutional knowledge of China. It is nowhere near enough to simply sit through some periodic China presentation from an external consultant. Companies increasingly require board-level expertise capable of integrating Chinese political, economic, and industrial developments into strategic decision-making.

For those companies looking to make the most effective long-term response, I would advocate for a Chief China Officer. An internal hire with the sole responsibility of assessing, in real time, all relevant China developments and contextualizing the events so as to address the strategic needs of the management team. I personally view this as being the bare minimum but knowing today’s environment I won’t be holding my breath.

Long though this post may be, the objective was to highlight a critical problem and provide some high-level guidance. A comprehensive framework for managing China tail risk would require not only a separate discussion but multiple discussions. For now, the essential conclusion is straightforward. China, as the world’s second-largest economy, now exercises a level of influence capable of producing unexpected and costly market disruptions. Yet investors and corporate leaders continue to rely on analytical frameworks that simply do not incorporate these variables.

I repeat often that China is now bearing down. You either adapt or die. The next generation of risk management must recognize that China is no longer simply another country to model. It has become a distinct and increasingly consequential source of global tail risk.

PLA

The target this time around is Asian chips and, more broadly, technology.

It Always Begins with Low Hanging Fruit

China rarely enters an industry designated as strategic with the goal of becoming a niche player. The objective is almost always scale and, ultimately, market dominance. That pattern is now set to accelerate in one of the most hotly contested segments of the semiconductor industry: dynamic random-access memory (DRAM).

Later this week, China’s largest DRAM producer, ChangXin Memory Technologies (CXMT), is set to go public and is projected to raise as much as RMB34 billion, or approximately $5 billion. The proceeds are to be deployed for the expressed purpose of accelerating an expansion in DRAM manufacturing capacity.

CXMT is not simply another run of the mill semiconductor startup. The company has positioned itself at the center of Beijing’s broader strategy to reduce China’s dependence on foreign technology suppliers. And China has made clear that domestic semiconductor self-sufficiency is a national priority. Memory is just the low hanging fruit.

The speed of CXMT’s progress should not be underestimated. The company only began commercial operations in 2020 yet is already the world’s fourth-largest DRAM producer. Granted, a distant fourth with just 8% market share.

“Only the Paranoid Survive”

Clearly, the company sits well behind the Big Three, Samsung, SK Hynix, and Micron. Do not dismiss out of hand the competitive threat posed by CXMT (or YMTC for that matter). That is the very mistake made that resulted in China Shock 2.0 in the first place. “Chinese companies aren’t a serious concern. Move along”.

The question isn’t whether CXMT can – immediately – match the technological capabilities of the global DRAM leaders. Of course it can’t. It also doesn’t need to, at least in the near term.

The market for DRAM has historically been defined by brutal boom-and-bust cycles.

Today, many investors and industry executives argue that the current cycle is different. They highlight surging demand from AI and the datacenter buildout. There is structural demand that is said to support pricing power for years to come.

However, “this time is different” are the four most dangerous words in investing. I would extend that point and say that these are also the four most dangerous words in today’s world of industrial policy.

No matter the arguments made, memory remains a price-sensitive industry. A new competitor doesn’t need to produce the world’s best technology. It only needs to produce acceptable technology, at scale and at a lower cost.

This is exactly how CXMT can become a massive disruptive force and that process will begin in China’s own home market.

Good Enough is, well, Good Enough

China is already the largest consumer of semiconductors and Chinese technology companies of all stripes consume enormous quantities of memory. If CXMT can provide a reliable domestic alternative, then there’s no need to compete (at least initially) on the global stage with Samsung, SK Hynix, or Micron.

CXMT only needs to reduce the dependence of Chinese companies on foreign suppliers.

The consequences from a move like this on the existing DRAM leaders could be material. A meaningful portion of Chinese demand shifting toward CXMT would remove a major source of demand growth from the Big Three. That would have a direct top and bottom-line adverse impact. Then there would be the secondary shock; global pricing for DRAM.

When China reduces its participation as a buyer, global prices can adjust down and do so rapidly. Memory markets are no different. Even a partial loss of Chinese demand would result in heightened price competition. What I am describing right here is exactly what transpired in the oil market over the past two months.

The Big Three DRAM producers will, of course, argue that they maintain a substantial technological advantage. They have decades of manufacturing experience and leading-edge process technology.

But as China Shock 2.0 is now highlighting, technological superiority alone does not guarantee market dominance. The critical factor is the relationship between performance and price.

This is the exact strategy underway in AI. DeepSeek or Zhipu have proven that models don’t need to outperform the most advanced American frontier models to disrupt the market. They simply need to deliver comparable utility at a significantly lower cost.

It is this very same principal that applies for memory and CXMT now spooling up to deliver far greater supply.

A lower-cost DRAM supplier offering products that are “good enough” will find ample demand. You need only ask Apple. Then there is the direction of travel. Over time, CXMT will increase scale, improve technology, reduce costs further, and – ultimately – expand its market reach into the higher-value segments.

The “Big Three” Need to Move NOW

Make no mistake though. Samsung, SK Hynix and Micro will ultimately be forced to make a very difficult strategic choice. All three would be well advised to begin that process today and there are two routes that can be taken. Neither of which are attractive.

They can accept the rise of CXMT but make the decision to avoid an aggressive competition over price and prioritize profitability. But doing so will allow CXMT to continue expanding. 8% global market share quickly becomes 20%.

Alternatively, they can choose to defend market share by competing aggressively on price. I would again stress here that Chinese buyers of memory are a massive market for these market leaders. Price matters but going this route would directly hit profitability and could result in the exact same boom-bust cycle of the past.

Again, neither option is attractive, but a decision will need to be made regardless. A response is required and it should be done at speed.

There is, to a great many observers, a genuine technological moat protecting the memory market leaders. Perhaps, but then again perhaps not. What if the moat is shallow and narrow? What if there’s no moat at all?

How many instances are required before China’s industrial prowess is taken with the seriousness it deserves. The Europeans didn’t lean from the American experience of offshoring production. Now we have China Shock 2.0. Will the South Koreans (and Japanese and Taiwanese) finally take action or will we look upon this time and truly the emergence of China Shock 3.0?

Here is what must be stated. Strong demand and even a technological advantage has never been shown eliminate the threat from Chinese competition down the road.

At best, all that is achieved is a delay in the inevitable.

All that CXMT need do for the here and now is become a credible, and rapidly growing, number four. A company that is capable of pressuring global prices and taking market share. This is how Chinese companies have demonstrated industrial disruption in the past.

We’ve all seen this movie many times before. Here, once again, is the very same movie. And it is the same ending.

PLA

What is Being Missed?

The conventional thinking centers on demand destruction from a deteriorating Chinese economy, along with the ongoing shift to alternative energy sources. Neither of these variables can fully explain why oil imports would remain at historically depressed levels. The economy does remain soft, but not materially worse off compared to before the conflict began. There also hasn’t been that great a step change in the adoption of new energy sources either. I would submit that the continued refusal to import oil, and the operative word here is “refusal,” is related to some form of strategic optionality now under consideration by Beijing.

To start, there is a growing acknowledgment of China’s influence on the global oil price, the role of price maker. Beijing is fully aware of its position. This is not a new revelation. Leveraging this advantage for the purpose of some, as yet unclear, strategic objective is the more likely rationale for China remaining on the energy sidelines. The conventional thinking noted above is nothing more than projection by the subject matter experts in London and New York. What is needed is a broader understanding of what larger goals Beijing might be looking to attain from this particular, and unique, confluence of forces.

The most obvious answer lies with America injecting instability into the region offering the opportunity to shape how events play out moving forward. This was exactly what occurred in the aftermath of the Iraq war twenty years ago. Look at the environment today. China is not just the largest buyer of Iraqi oil; it dominates the country’s oil production. This was achieved through a willingness to fully separate the politics of a given country from the longer-term economic objectives Beijing seeks to achieve.

A Massive Opening for Beijing

The concept of “all politics being local” is core to how Beijing frames geopolitical engagement, and it is for this very reason that concepts such as sovereignty and territorial integrity carry so much weight. It is not just about Taiwan. Beijing will work with any foreign government irrespective of its political system. In fact, the more autocratic a regime, the greater the willingness to engage commercially. The governments of the Middle East make for a perfect collection of partnerships, and Iran is the next best opportunity.

What we have in this scenario is an Islamic regime that will now do whatever it must to retain control. There is no better partner in securing this outcome than China. It has a turnkey approach already operational in its home market and can be easily deployed into Iran.

What must be anticipated is that the two countries will seek to build an even deeper and wider relationship. I am at a loss to even think what it might mean when the world’s two oldest civilizations, not to mention two highly commercially centric civilizations, begin to align their strategic interests more directly. Toss in for good measure China’s partnership with Russia and 30 years of strategic development across all Central Asia. Do that and you will quickly find that Mackinder’s “World Island Theory” starts to look a great deal more credible.

How Leverage Works

But how does any of this tie in with the oil markets? It is simple, really. With China in the role of price maker comes the power to determine where resources are directed moving forward. If, let us assume, the price of oil was to decline both sharply and quickly in the near term, producers would need to compete more aggressively for China’s demand. Cash flows across the region are already under immense pressure. That is where the leverage resides. It gives Beijing the ability to secure better (dictate?) terms while simultaneously fortifying longer term strategic relationships. So long as the oil flows, the Gulf nations will acquiesce.

Now, allow me to make an important point here. This commentary is by no means an endorsement of the strategic choices being made by Beijing. The purpose of this missive is to provide a very clear example of how Beijing maneuvers geopolitically. There is a brutality in the application of leverage, and Washington, which must assuredly understand this dynamic, needs to do a far better job of countering the influence. Perhaps the single best option would be to contract for oil with as many Gulf nations as possible and do so with immediate effect. The SPR does need to be filled at some point.

There are, of course, a host of other implications that would arise from a move such as this. It could even be the case that the theory laid out here is well off base. What is critical is to fully understand that China isn’t buying oil because demand has softened. Other forces are at play, and, from my experience, those forces are geopolitical. Do we really want to look back in 20 years and find China having successfully expanded dominance from Iraq to across the entire Middle East?

PLA

Thus far, the entirety of focus has been on the deliverables. I’ve yet to see any public commentary regarding the broader contours of the document, more specifically, how the inclusion of certain language quietly serves certain third-party interests. Do that and it should be very clear that there are obvious fingerprints present. If you know what to look for those fingerprints belong to Beijing.

Beijing Knows how to Play

My recommendation is to direct attention to two of the 14 points included in the MOU. Both reach well beyond what the proposed agreement is meant to overtly achieve. Both have also been routinely dismissed out of hand among the supposed geopolitical experts.

Start with the most obvious, Point 2, where the parties agreed that “The United States of America and the Islamic Republic of Iran undertake to respect each other’s sovereignty and territorial integrity and to refrain from interfering in each other’s internal affairs.”

Anyone who has spent time around China — even tangentially — will recognize this immediately. It is, almost word for word, the taxonomy Beijing has advanced for decades. Sovereignty, territorial integrity, non-interference: these constitute the inalienable foundation of Chinese foreign policy, and the very terms are applied whenever Taiwan enters the conversation. To see these words embedded in the American-Iranian agreement is not a coincidence.

Compounding this is Point 14 where the parties agreed that “The final deal will be endorsed by a binding UN Security Council resolution.” It should be concerning to all involved that this provision has drawn so little attention let alone scrutiny. If a final agreement is ultimately reached the provision requiring the Security Council to ratify the deal completely cuts Congress out of the process and removes altogether the checks and balances (a tool for hegemonic power) to whatever agreement might be reached.

This would be a clear objective for Beijing as it has advocated rather aggressively in favor of the United Nations’ leadership role in global governance and opposes the more loosely framed (and American-led) “international rules-based order.” And then there’s the record of strict adherence to such resolutions to consider. Throughout the history of the United Nations there’s been a rather rigid observance of binding resolutions that come out of the Security Council save for a handful of exceptions. It is an enforceable architecture where, once a resolution is passed, it is near impossible to reverse.

Embedding Optionality from the Start

Where Beijing’s longer-term aims are truly served though is in the connectivity of the MOU language of Point 2 and 14. By going down this path, you will have a binding resolution (Point 14) that affirms sovereignty and territorial integrity (Point 2). If these items are codified, then they will act – in tandem – as an instrument of near-universal authority and applied as precedent by other United Nation member states. This would obviously include China where the language could then be applied to service its own claims both in the East and South China Sea. It will also carry even greater heft given that the precedent is being set through a multilateral regime and, in doing so, will greatly reduce the efficacy of any American response in the future to Chinese actions. Beijing not only placed the dots, but it brilliantly navigated the entire process to place those dots in exactly the right position.

There will be those who say I am drawing lines that carry no real consequence. I disagree, and I have even viewed Beijing as playing a greater (albeit unseen) role throughout the entire Middle East conflict. It began the moment Islamabad, among Beijing’s closest partners, was anointed to the role of mediator. That choice was made, you’ll recall, in the final week of March and just days after global markets signaled a resounding rejection of further America escalation. It was at that point when saner minds in the Trump administration knew that an offramp was needed even if begrudgingly so. Beijing would have seen that there was an opening and took full advantage.

Recall as well that the Iranian foreign minister made an official visit to Beijing just days prior to the Trump state visit. Then came Russian President Putin followed quickly thereafter by Pakistani Prime Minister Sharif. Beijing was present throughout — a genuine participant in the process and in the very manner of how Chinese statecraft is executed upon.

When will America Learn?

The larger question is what this conflict does to the rivalry between the United States and China. Much as I alluded to at the start of this missive, the American consensus viewed confrontation as less about Iran and primarily as an indirect maneuver to counter in China. Energy Secretary Christopher Wright even said the quiet part out loud when he stated that “China was about to lose the second of three gas station suppliers”. Clearly that statement didn’t age well. China needs to be taken seriously, literally and as a genuine near peer rival.

Once again, what we have is yet another failure by the American government and its adherents to appreciate Beijing’s ability to maneuver. The language of the MOU is there for all to see quite plainly. It has been structured to address Beijing’s strategic aims. My gravest concern is that the lesson will again be ignored, and – much like in Iraq twenty years ago – America will have expended blood and treasure only to watch China reap the spoils. You can be damn sure that Chinese petroleum engineers are already operating in Iran just like they did in Iraq back in 2006.

PLA

A radical new China strategy isn’t just required, it’s demanded. America must return to its competitive roots and stop hiding behind the pretext of “national security”. The path to success requires an inward gaze and addressing the countless domestic failings of the nation. This is where energies need to be directed if America is to ever effectively rise to the challenges posed by China.

And yet, over the past year there’s been a growing and incessant drumbeat among America’s foreign policy establishment that is an outward-facing solution and one centered on collective action. Assembling a coalition of like-minded, “international rules-based order” aligned partners large enough, together, to match Beijing’s economic (ie manufacturing) weight. A “coalition of the willing” as it were. It doesn’t get any more 20^th Century than that.

As you would expect, this concept has taken on a life of its own throughout the Beltway and the consensus has – in typical fashion – reduced the idea down to a contrived label, “Allied Scale”. I will let former Secretary of State Antony Blinken explain the concept.

“If we’re competing with China one-on-one, that’s a game that we may lose. Their market’s much bigger, their manufacturing’s three times our manufacturing, purchasing power parity’s greater than ours, more papers, more patents, a bigger Navy. You can go down the list. But when we’re aligned with Europe, with Japan, with Korea, with India, with Australia, with Canada, we go from about 25% of world GDP to 50 or 60%, a lot harder for China to ignore.”

“Allied Scale” certainly has a catchy ring to it and makes for a tidy theory. Fantastic, too, for self-aggrandizement and promotion across the podcasts circuit. In reality, what the elevation of the concept does is put on full display just how disconnected those leading this particular charge are in their understanding of how Beijing conducts foreign policy.

No, that’s not correct. Let me rephrase that.

These individuals fully understand the situation, they just haven’t the political courage to publicly admit the scale of the problem, and what is required (shared sacrifice) to solve the problem.

The core underlying argument behind “Allied Scale” ignores, and dangerously so, how China exercises its global reach and influence. Beijing does not compete through blocs and eschews the idea of alliances. There is no “Axis of Autocracies” or CRINKS. These are labels created for the sole purpose of manufacturing outrage.

How Beijing does go about executing foreign policy is entirely through bilateral relationships which are purposefully built to be patient, transactional, and individually tailored. The “Allied Scale” concept centers on the (theoretical) premise of synergistic Great Power competition with the aim of extracting participating countries from China’s orbit. It is nothing more than a Triple Entente refashioned for the current day.

Furthermore, the proposed strategy doesn’t account for Beijing having already established separate agreements with each of these partners. It was done in a way that was purposefully calibrated to each partner’s specific needs, vulnerabilities, and ambitions. The heavy lifting has already been done meaning that a proposed American-led coalition strategy is set up for abject failure. All that will be achieved is more wasted time and providing China space to build increasingly unassailable moats.

The Bilateral Web

For so much of the world, America is viewed as the “you are either with us or with the terrorist” type of partner. It is heavy-handed and leaves little room for discussion. China’s foreign policy machine is ruthlessly impartial and built explicitly around an extensive network of one-on-one bilateral arrangements. These aren’t just relationships that are created and then quickly sidelined either. There is a deliberate focus on not only maintaining those relationships but working incessantly to create and then deepen dependencies. It should be duly noted that this is the very exact strategy successfully applied to America over the past 30-years.

Furthermore, Beijing has made it a point to anchor all bilateral relationships primarily on economic and commercial terms. There is the ever-alluring appeal to access the local Chinese market. Then there’s the investment-led approach where China redirects its FX reserves via the Belt and Road Initiative. Be it ports in Peru or Greece, rail lines in Algeria or pipelines in the UAE. The list of bilaterally agreed to infrastructure projects is as extensive as it is impressive as a foreign policy lever. Look no further than to the recent decision to provide zero tariff imports from nearly all African nations.

To the detractors, this approach by Beijing is seen as nothing more than mercantilist or debt trap diplomacy. Perhaps, but there can be no denying that the strategy has been both successful and has delivered results. For your consideration, I’d suggest looking into the 2019 Oil-for-Reconstruction agreement with the Iraqi government as just one example.

This bilateral approach also gives China a decisive structural advantage in both maintaining and expanding bilateral relationships. When a country faces an economic crisis, China has demonstrated a willingness to provide support if needed (consider Pakistan versus the IMF). When a government seeks a diplomatic realignment, Beijing welcomes the overtures with commercial concessions (consider the recent developments with Canada). None of this is new and yet there has yet to be any response from any American administration.

Then you have the higher-level strategic gains from this web of interlocking relationships. Each node is individually bound to Beijing, even when the nodes share no particular loyalty to one another. In other words, there is the embedded optionality of dividing and conquering whenever the need might arise.

Why Scale Doesn’t Solve This

What of the rationale underlying the entire “Allied scale” concept? It centers entirely on a single variable, size. Much as Sec. Blinken stated, China can win because it is large. All that is required is to build a large enough counter-coalition. But it is grossly naïve to even think that manufacturing dominance can easily be overcome simply by aggregating numbers on a spreadsheet. Or as I am wont to say, “it looks good on paper, now show me how this works in practice.” Let’s also be honest with ourselves here. When it comes to China policy, Washington and the Think Tanks have only demonstrated an ability to talk endlessly, produced countless white papers and convene bias confirming conferences.

Once again, what we find is an American policy prescription that assumes allies and partners operate in a geopolitical vacuum. “Allied Scale” doesn’t take into account any of the current diplomatic or commercial connectivity with China. Obviously these parties will evaluate any American-led coalition on a net assessment basis. I’ve already highlighted the American tendency for applying pressure on partners and that a binary “choice” is required. Tradeoffs will be carefully considered and, bluntly, the scales continue to fall in favor of China.

This is why the “friend-shoring” vision has consistently underdelivered. Vietnam, India, and Mexico are each courted as alternatives to Chinese manufacturing. Yet each of these countries maintains its own carefully managed bilateral relationship with Beijing. In each case these countries have concluded that the smart move is to hedge. China’s bilateral strategy accommodates this hedging. “Allied scale” most certainly does not. Making matters worse, for “Allied Scale” to succeed demands the highly tenuous balancing of alignment and an unwavering commitment of all parties.

The Coordination Problem

Here, however, is what has been truly missed; Beijing would relish the idea of “Allied Scale” in action as it would open up – and very unironically – the opportunity to undermine the coalition from the very start. How long could a commitment by any one member be maintained if a lucrative contract is offered to another member of this alliance? China would go full “Fifth Column” where the seeds of destruction would be sown from within.

The best, and most obvious, example to demonstrate this point is Boeing versus Airbus. Beijing has leveraged the competitive nature of these two groups against each other for decades and yet both sides continue to play the game. And this isn’t even an isolated example. Soybeans? Iron ore? It’s been a dynamic at play across a multitude of industries. All Beijing would need to do is provide certain concessions to a few of the partners and the entire “Allied Scale” edifice would crumble beneath its own weight.

I’ve personally seen this approach in action, multiple times, where global competitors vie for market access. A new opportunity arises and is presented to at least a dozen potential partners. It quickly devolves into an acrimonious fight among the suitors and will, ultimately, involve relevant government officials. In the end, the Chinese side will, quite dispassionately, align with the party that best meets its strategic needs.

The exact same series of moves will be made in response if “Allied Scale” is executed and would require very little effort on the part of Beijing. It only needs each member to calculate, individually, that the cost of full commitment to a coalition is too high. Given Beijing’s meticulous cultivation of individual relationships, that calculation is rarely difficult to tilt.

Allied scale is not a strategy. It is nothing more than the latest attempt to – quite literally – paper over the numerous structural foreign and domestic problems that continue to plague America. We need to do better at home first before any attention is directed outwardly. The entire rare earths episode should have made this point clear.

There’s a reason why I’m raising this point. It aligns with a broader and sharp critique of the entire American think tank community and arose last week when a new American client posed of me what seemed to be an overly obvious question.

“Peter, if you had to strip this Great Power competition between China and the United States down to a single first principle, what would that be?” Being honest, the question put me off balance. It had never been asked of me before, and it was a question I had never quite posed to myself in those terms.

After some thought, I replied with “know thy enemy, know thyself.”

The mere vocalization of the verse forced upon me the need to directly articulate why this particular Sun Tzu quote is so very consequential. For 30 years, China has institutionalized the practice of building maximum depth in understanding the agendas, motivations, and cultural underpinnings of every nation-state it views as a competitor. The United States has done nothing of the sort. The entirety of today’s China commentary is as a reactionary response to immediate events. There’s been scant fundamental inquiry undertaken into how America now finds itself facing a near-peer rival, or what policy prescriptions Washington needs to alter the trajectory.

I then made the following point to this new client; “China has the Central Party School. America has the Think Tank ecosystem. The former operates in complete support of the Chinese government’s national interests. The latter is a group of highly conflicted institutions whose allegiance is to money and power.” The client then nervously laughed as he nodded in agreement over Zoom.

The Central Party School

For the uninitiated, Deng Xiaoping rehabilitated the Central Party School (CPS) in 1978, gutted during the Cultural Revolution, and gave it a new foreign policy raison d’être. There was to be a whole of government approach to studying all rivals on the global stage. It was to be a process conducted in exacting detail. It was to be a platform required of the entire cadre class. And the curriculum was designed to do one thing above all else: understand the adversary on the adversary’s own terms. This is what the Chinese mean when you hear talk of “mutual respect”.

The platform operates as the intellectual spine of the Party’s governance, doubly so for foreign policy. It is competitive at the research level while enforcing coherence at the application level; internal debate is encouraged precisely so that adopted positions have been stress-tested rather than imposed from above.

To best demonstrate how the CPS operates consider that the curriculum includes the required reading of primary source material, read in the original languages — Shakespeare, Twain, Heidegger, and well beyond. I would imagine that not a single individual in America’s foreign policy establishment has read, as just two examples, Romance of the Three Kingdoms or A Madman’s Diary, let alone in Chinese.

Here is the most important point. Where American intelligence centers its activities on asking what an adversary is doing, the CPS begins with why and to what (far in the future) end. What are the structural forces that make a given behavior inevitable, and therefore predictable? The Chinese take an epistemological orientation in which adversarial behavior is treated as structurally determined rather than personality-driven or hostage to short-term political cycles. It is the difference between watching a chess game and understanding the rules that govern the individual pieces.

Think Tanks and Perverse Incentives

There is no commensurate structure within the American political establishment. Worse is how these activities are actually conducted. Rather than a government-led, or even civil service function, the near-entirety of opposition research on China has been outsourced to the Beltway think tank establishment; organizations that are agenda-driven, partisan, and operating under highly questionable incentives given both constituencies and funding. The edifice does not inform legislative and executive decision makers; it delivers confirmation bias to whichever donor is paying the bills or as an exercise to land some assistant secretary position in an administration. The product is not analysis. It is reassurance dressed up as analysis.

Then there is the audience. America runs a balkanized bureaucracy of foreign policy and intelligence agencies, and decision makers within them hibernate inside the think tank community whenever their party is out of power. They emerge four or eight years later with the same priors, the same talking points, and the same gross miscalculations — only now sharpened, monetized, and laundered through a Senior Fellow byline.

Research is funded by interests with a stake in the answer; findings are consumed by an audience that rotates between government and the funders; the output flows back into legislation, sanctions packages, and corporate strategy decks. None of it is touched by anything resembling objectivity or seeking to serve America’s national interests. There isn’t even any debate to speak of. All think tanks operate a silos where “esteemed colleagues” all agree with one another. If it weren’t for this new client of mine, I would have remained oblivious that the very advice I have given corporate clients for years applies unflinchingly to the Beltway: you cannot manage what you do not understand, and you cannot understand what you have outsourced to vendors with a stake in your confusion.

The Asymmetry that Compounds

In returning to Sun Tzu, “Know thy enemy, know thyself” is a precondition. Without both halves, victory in protracted competition is not difficult; it is impossible. Beijing has spent 30 years institutionalizing the study of America. Washington has spent the same 30 years outsourcing the study of China to a Senior Fellow ecosystem conflicted by interests and driven by explicitly conveying to outside groups what they wish to hear and not what those groups need to know.

This asymmetry compounds. Every cycle of Beltway analysis that begins with what Beijing is doing, rather than why or to what end, deepens the gap. Just think back on the “Made in China 2025” strategic plan as the clearest example. Every congressional hearing that imports its assumptions wholesale from a think tank deck deepens the gap. Every C-suite that takes its China read from the same sources deepens the gap. Once again, recall the cacophony over “China is uninvestable”? So long as the United States continues to confuse a partisan, heavily conflicted think tank ecosystem with a national knowledge function, it will keep being surprised by outcomes that were, in Beijing, treated as structurally determined years in advance.

The surprises out of China will continue to be branded “unprecedented.” They will not be. They will simply be unprecedented to American decision makers, because the actual work needed was never done. Half a century after Deng rehabilitated the Central Party School, the question Washington still has not asked itself is the very same one the new client asked me last week. Strip the competition down to a single first principle. Then look at which side has been operating on that principle, and which side has been outsourcing it. The answer is not comfortable. But discomfort, as Sun Tzu would gently remind us, is a great deal cheaper than the alternative.

With regards,

PLA

Why this matters is that the entire world is now having to face head on the ramifications of this contrasting worldview. The Strait of Hormuz remains firmly in the grasp of the Iranian regime and, quite specifically, access to the waterway requires a “toll”. The question now being raised and hotly debated is how, exactly, payment is being made.

A host of different theories have been perpetuated over the past week. The obvious solution to be drawn is payment via the Chinese currency, the Renminbi (RMB), with final settlement in gold.

I will explain the obvious nature of this solution shortly, but we first need to appreciate the path taken that allowed for such a outcome. As with many such developments, it was the Law of Unintended Consequences that played a rather significant role.

The USD isn’t a chokepoint anymore

For more than a decade now, the Beltway consensus held that the USD system operates as a geostrategic chokepoint that can be deployed to alter the behavior of other state actors. Books have literally been written on this very topic, and it may have been true for a moment in time. What has yet to be recognized is that, in present day, a USD chokepoint has, in fact, run up against hard limitations on its efficacy. Nevertheless, denial remains the default state and any assertions of the RMB displacing the USD as a medium of trade will be vehemently, if not irrationally, opposed.

This represents a dangerous disconnect. It is also the very unfortunate outcome of a specific series of decisions made by the Obama administration in 2012 and, specifically, the choice to escalate economic coercion through the threat of blocking access to the SWIFT network. And, as outcomes go this one is dripping with irony, that original threat was first carried out in that very same year against Iran.

Allow me to stress the point given its critical importance. Long before there had been any debate over freedom of navigation and its impact on global trade, the American government weaponized its “exorbitant privilege” and telegraphed quite openly that it was willing to project power via the threat of cutting off access (a different form of navigation) to the global settlement system. Washington considered leveraging the dominance of the USD to be a highly elegant diplomatic solution and, as is typical, there was no thought given to how other parties would respond to said action, especially China.

The American move to nakedly weaponize the USD system was a message received by Beijing with immediate effect. The impact was more acutely felt given that it came at the same moment the Obama administration had begun its “Pivot to Asia” strategic shift. It just so happened to also land right as China was finalizing its once in a decade transfer of power with the elevation of Xi Jinping to General Secretary.

The risk, no matter how remote, of China being blocked access to SWIFT was existential. A solution was required and in that very same year the People’s Bank of China was tasked with finding a workable alternative. In 2015 that task was completed and the Cross-Border Interbank Payment System (CIPS) officially went live.

CIPS is China’s Killer App

CIPS is much more than simply a carbon copy of the SWIFT system. China did what China does best. It took a technology developed in a Western market and made it better.

Where the latter is primarily a messaging network, CIPS conducts all functions (again, via RMB) from messaging to clearing to initial fiat settlement. It also became the first system to seamlessly integrate payment and settlement of the onshore and offshore RMB (CNH and CNY). Perhaps more consequential when it comes to the Great Power competition, CIPS resides fully outside the New York correspondent banking network. The very parties that sought to apply economic coercion for the purpose of “altering unwanted behaviors” are now blind.

Obviously, the introduction of CIPS was meant to directly benefit China. It is now also the case that the network is providing an attractive solution to a host of Global South countries in an era where the Trump administration has ratcheted up the deployment of coercive economic and financial tactics as points of leverage.

There was, however, a far deeper objective behind the launch of CIPS. When it was first introduced, there was a campaign to attract the participation of global banks. Little came from that endeavor with only a dozen or so larger international banks integrating with CIPS over the past decade. Global adoption, however, wasn’t the primary aim. In terms of actual objectives, CIPS was purposefully built to connect the ever-expanding reach of the Chinese banking network. Say, a payment rail for the Tehran branch of a small, fit for purpose, Chinese regionally run bank.

And that brings us to the current day, the specific topic of how Iran is processing payment for those counterparties seeking passage through Hormuz and why it is the RMB is the obvious solution.

To start, let us at least agree that payment isn’t being made using USD rails. Even if the recent move to unsanction Iranian oil would permit the usage of USD for payment, doing so would still provide the American state the ability to monitor all elements of each transaction. It is for this very same reason why the likelihood is low that crypto will be used as payment. American agencies have demonstrated in the past that Bitcoin and USDT transactions can be monitored and, in the case of stablecoins, directly sanctioned.

Directing payment using RMB solves every issue arising from America’s near omnipotent reach across global finance. There is an even a more compelling rationale for why RMB would be the desired option; for Iran, the CIPS system is a known quantity as the network has been deployed for over a decade now in processing most, if not all, China-Iranian cross-border trade. I suggested earlier the role played by small regional Chinese banks. To that end, I’d suggest doing a bit of desk research on the (OFAC sanctioned) Bank of Kunlun.

Plug and play. All the Iranian regime needs to do is expand the current CIPS network access and have whatever payments are required to be conducted in RMB. Detractors to this line of reasoning will, undoubtedly, push back. What is Iran supposed to do with billions of surplus RMB? Well, beyond the reciprocal trade for Chinese goods, surpluses will be, ultimately, settled in gold. Ignored by far too many macro commentators, the role of gold is a fundamental feature of the entire Chinese parallel payment system. It is also yet another reason why RMB makes the obvious choice for payment, both for Iran and far beyond.

Gold Stashed Safely in Shanghai

CIPS is just the payment network. With China’s capital account opened via the gold window, any trading partner holding RMB surpluses can directly convert all fiat balances into physical gold which can be held in the Shanghai vault and well beyond the reach of America’s foreign policy of sanctions and tariffs. All of what is being described here is not all that dissimilar to Britain sending its gold reserves to Canada and America in 1939. It is also worth recalling that some $100million worth of Venezuela gold was reported to have been “repatriated” to the United States.

The entire China gold complex is also being positioned to act as yet another substitute for a critical component of the USD system. In this instance, the Chinese located gold can replace (granted, at the margins) US treasuries in the role of collateral. While not as liquid as an American sovereign fixed income instrument, the usage of gold as collateral is meant to be levered as a mechanism to support a host of cross-border trade activities. In the case of Iran, as example, the RMB that is settled into gold can then be applied as a financial tool for invoicing of any return trade of physical goods.

And here is the final point. The entire gold settlement solution described just above has been operational for the better part of a decade. Beijing has been executing plans for a multitude of outcomes all with the objective of mitigating the inherent risks of America’s leverage over the USD system. And all of this has been done very much in the open. Now go and attempt to broach this topic, or any element included in this missive, with the foreign policy wonks in Washington. What you’ll receive in return is a condescending dress down. The fallibility of the USD global system is there for all to see, just not for the very people responsible for recognizing and addressing the real and credible threat that is the RMB, CIPS and gold system.

Be well,

PLA

And yet, when it comes to the China-American dynamic what I am here to share is that even with these events as a backdrop, the credibility of President Trump had already been eviscerated just over two weeks ago with the social media post just prior to the New York market open.

That post would lead to the famous idiom referencing the King of Zhou from ancient times, (烽火戲諸侯) the title of this morning’s missive, to begin making the rounds here both conversationally and across Chinese social media. The local version of TACO.

This is by no means political commentary. It reflects the singular message conveyed, subtly but clearly, across a multitude of conversations I’ve had here in Shanghai over the past two weeks. It is also not just a reflection of a new reality but a highly consequential new reality.

Getting very much to the point:

The social media post by President Trump on Monday March 23^rd

confirmed to the Chinese that the American bond market was now the

ultimate arbiter in defining the degree of maneuverability provided to

Washington on the global stage.

Allow me to provide some background in how it is that I’ve arrived at this conclusion.

On the morning after President Trump’s social media post, I began my day with far more WeChat messages than is anywhere close to normal. A great many of the messages were from individuals whom I’ve not even engaged with in quite some time. As is typical, the messages were all similar in nature. Genial in tone, but all asking if I had time to meet at some point and with no additional context.

If these were the only messages, I would have been left curious but unaware of the actual intentions. Not all that uncommon when communicating with Chinese contacts electronically.

I had my own ideas about what the agenda might be and that thinking was confirmed by the few messages received that were overtly direct.

“Looks as though the markets are stopping your President from any further adventurism. Just like Liberation Day all over again.” This would end up encapsulating the entirety of every conversation I ended up having over the following two weeks.

Over the past year, more than a few of my interactions with various Chinese parties had referenced the suddenness of the announced 90-day grace period just days after President Trump introduced his new world-wide tariff regime. The price action in the Treasury market looked to be the root cause. None were foolish enough to draw any firm conclusions when correlation versus causation has a single data point. The idea, however, did germinate.

Over the ensuing year there would be a few additional such moments and then there was the decision by President Trump to request a postponement of his trip to Beijing. Each event would go on to increase the conviction among the Chinese that the American bond market was dictating the degree to which President Trump could push his foreign agenda. Based upon many of my recent talks, there was also a growing concern that the American economy may be in a far weaker state than was initially believed. My opinion was solicited and I simply stated “perhaps, but I’d also be careful not to underestimate the raw dynamism of America as a whole.”

Much as I noted at the beginning of this missive, the Trump post must be viewed as a consequential event. In every single recent conversation, the Chinese sitting across the table from me would connect that post to Beijing’s successful countering of the American-led pressure campaign over the past year. While it is agreed and known locally that there are numerous options available to Beijing beyond just refined rare earths, there is now a growing conviction that American fiscal flagrancy is the predominate limitation on any future aggressive posturing towards China.

Very much to the point, Beijing needn’t take any action and if trade tensions were to unilaterally arise out of Washington – irrespective of current or future administrations – then it is expected that the Treasury market will react accordingly. The Great Power calculus has fundamentally changed and Beijing will be intently focused on American interest rates. All the outcome to a single social media post by the American President.

Be well,

PLA

The first point that needs to be stressed is as follows. China does not subscribed to the Anglo-European, centuries-long framework of alliances. For China, foreign policy is centered fully on building and managing bilateral agreements. While there are concepts including BRICS, the SCO or even the Global South, these are groupings meant to promote Beijing’s multitude of bilateral relationships.

Then there’s the critical distinction that China operates at the lowest possible time preference. I make this point often and do so because it represents the singular first principal to be applied whenever any assessment of China is being made. Not only is the application critical to understand how Beijing goes about structuring policies, both domestic and foreign, it is central to the very process of decision making itself. More specifically, the importance lies in a recognition that, for Beijing, action is far more often found in demonstrable restraint.

There are genuine cultural anomalies present. They need to be considered and yet are always absent. Honestly, you’d think this would have been recognized by now given thirty years of observable Chinese behavior. It hasn’t. There isn’t just a cultural gap in America’s expert class when it comes to the topic of China, there is a cultural chasm.

Be it the Taoist concept of Wuwei or the teachings of Lao Tzu, Chinese society is grounded in a willingness to take the path of forbearance. An outward projection of stillness. Consider the character for patience, Ren (忍). It is comprised of two characters, blade (刃) and heart (心). What this means to the Chinese is that patience is a concept that requires a willingness to endure adversity. This very concept underlies the 2023 statement to “eat bitterness” by Xi Jinping.

Be mindful though. Non-action shouldn’t always be taken literally. It is a highly layered construct and quite malleable. Yes, the Chinese default setting is a static state, but every single event is viewed through its own unique lens. If there were to be an extreme event, then the Beijing leadership would most certainly resort to an immediate response. To the Chinese, however, there is rarely ever an occurrence that is truly extreme (ie unexpected) in nature.

Restraint is the consequence of ongoing preparedness present across China. At all levels of society, anxiety is born from uncertainty and the greater the uncertainty the greater the anxiety. And to counter uncertainty means a greater effort to prepare. Again, we only need to look back to last year.

Contrary to all American expectations, the Chinese successfully countered the Trump administration’s escalatory tariff regime. This was achieved through advanced preparation. It was a widely held view in China that tariffs would be deployed and parties across the country simply planned well in advance for that eventuality. Exports were frontloaded and cash hoards were amassed. This provided time and flexibility to negotiate and do so from a position of relative strength.

So too is it the case with events now playing out in the Middle East.

Beijing has well understood, and for decades, America’s motivations and objectives across the Gulf and preparations have been underway for quite some time. Beijing made overtures to create a separate series of regional relationships and did so with success. At the same time, there were various steps taken to mitigate all identified risks from future conflict. There was the aggressive campaign to build three significant rail lines (and pipelines) traversing the entirety of the Heartland. Alternative sources of energy (ex-Gulf partners) were established, from Russia to Indonesia to Africa. Even the domestic agenda of shifting to renewables and EVs can now be seen as having a geopolitical angle. China isn’t at a loss. China is, once again, very well placed if only on a relative basis.

If there is to be a focus, it needs to be on a fundamental realignment in how the American foreign policy and business community goes about undertaking a net assessment of China. This must begin by taking China seriously and literally. Stop miscalculating China’s capabilities. Secretary Bessent famously claimed last year that China was negotiating “with a pair of twos”. He was wrong. Today, Secretary Wright is stating that “China is about to lose the second of three gas station suppliers”. Again, the Secretary will come to learn that he, too, is wrong.

The script must be flipped and, moving forward, it is highly advisable that the expectations incorporate what can no longer be ignored. China gains whenever hegemonic action is taken by America.

Never did I expect such a deluge of interest after my talk with Adam on Thoughtful Money. As you may appreciate, even the mere attempt of sharing non-consensus views on China is typically received with overwhelming hostility.

For the longest time, I made the cognizant choice to refrain from doing any long form interviews. There was no upside. In fact, the positions I typically share on China have directly impaired my business. The clientele is entirely institutional-facing (heavily skewing American) and there would have been far greater revenue generating opportunities if I just went with the crowd and dogpiled on China.

That’s just not how I’m wired.

In addition, and hopefully to state the obvious, I am no China shill. Call me old fashioned, but I begrudgingly came to the realization that I’ve a civic duty owed to the very nation that provided me all the opportunities in the world. What I was seeing were excuses and blame, none of it helpful. It was clear to me for quite some time that China could not be contained. The only solution was for America to accept the world as it is, make the necessary adjustments and compete.

No matter how many donkeys I must ride, or how many windmills I must tilt against, my sole objective is to publicly raise the very issues that are critical to today’s geopolitical competition. If you’ve seen what China has done with the EV market, I can all but guarantee you that the same is now underway with humanoid robotics. This is but one example, and an example that makes me very unpopular.

To that end, I thought you’d all appreciate the following China Afternoon Missive client note which we sent out earlier today. I would also encourage you all to read through the various essay installments which are found throughout my Substack. It is a 30 year history lesson of how we’ve arrived at this particular point in time.

Finally, to the comments on Louis Vincent Gave …. great guy. Have known him for quite some time.

China Afternoon Missive

Taiwan 2027 … A Complete Reversal in Posturing

And there it is. A statement which was widely expected by the small number of people familiar with the actual confines of the China/Taiwan issue. Granted, my outlook was for this message to be conveyed at some point later in the year. It would now appear that the Beltway consensus views deescalation of the long simmering tensions in the East China Sea as the priority.

For the past several years, there has been a barrage of commentary – an ardent conviction really – that planning was underway for China to take direct, kinetic action against Taiwan by 2027. That message was then taken up and aggressively amplified by virtually every single podcast platform focused on geopolitical events. The message was then wedged into every single traditional and social media conversation. And yet, today, we have the following statement.

“The [intelligence community] assesses that Chinese leaders do not currently plan to execute an invasion of Taiwan in 2027, nor do they have a fixed timeline for achieving unification,” according to the 2026 Annual Threat Assessment of the US Intelligence Community, which was released on Wednesday.

I will not speculate as to why, now, there has been a complete reversal in the intelligence communities’ China threat assessment although it does seem that the Takaichi government in Tokyo was blindsided by Washington’s shift in its positioning on Taiwan.

What does need to be communicated, albeit at the risk of being repetitive, is the far more likely scenario when it comes to Beijing’s intentions over Taiwan.

Very much to the point, the strategic aim is to maintain the status quo. Beijing has been seeking for all parties, including the United States, to reaffirm the “One China” policy. Furthermore, it is widely held that Beijing has been seeking to formalize these terms into an expansive Fourth Communique. Included would be the provision that the agreed to framework would hold for a period of 50 years after which the parties would then revisit the issue of reunification.

The thinking on Beijing’s part is very straight forward. Over a long enough time period, reunification would naturally occur, peacefully, so long as the current incentive structures are left to evolve unimpeded. Basically, the calculus is structured where there will come a time when the Taipei leadership, and even the populace, will accept that the net assessment for reunification delivers both economic and political gains.

There are a host of critical paths underling this thinking and much could go wrong. The projections of China’s economy collapsing under the weight of debt or demographics could play out, as example. A future transfer of power in the CCP could go horribly wrong and lead to social instability. 50 years is a long time. What the proposed solution does achieve is a tabling of the issue even if that ends up being temporarily.

There is one final point that I wish to add and that plays to the point just made. With Taiwan almost entirely dependent on imported energy, Beijing is reported to have reached out with an offer to provide energy to the island if the Taipei leadership would consider reunification. Now there is no question that the offer is outright coercion, and the overture will be rebuked by the DPP, the ruling party. But we do now live in a world increasingly driven by second and third order effects and it was under the DPP leadership that the decision was made to decommission all of the island’s nuclear power facilities. This could quite possibly lead to political blowback domestically. And, as we see here, it also provides Beijing with a point of leverage.

Perhaps even more worrisome; there has been no change in these attitudes. China is now closely matching the technical prowess of American competitors. What you hear are excuses. China is now ahead in key industries from robotics to biopharma and beyond. More excuses. China is building an increasingly adopted alternative to the USD system. Distain. Then there’s the ultimate excuse, both pernicious and persistent; the claims of an impending China collapse.

There is no real competitive threat to America given an increasing number of structural issues facing China domestically - that is at least the theory. That the property market weighs heavily on the economy and the historic driver of infrastructure investment is delivering vastly diminished returns. That demographic calamity awaits Beijing in the aftermath of the one child policy and a host of other societal strains. As the saying goes, hope is not a strategy. Hoping for a China crisis to alleviate the pressures faced by America from this rivalry cannot remain a strategy. Too often have such claims been made and just as often has China been underestimated when it comes to tackling structural issues. Could this time be different? Maybe. Is it advisable for Washington to base its policy solely on a collapsing China? Probably not.

Events from this past year go a great distance to show just how capable China is in both its preparations and execution. The current American administration professed ease in bringing China to the negotiating table through embargo-level tariffs. China had been prepared and, to the surprise of far too many, wielded leverage. The bilateral dynamics have fundamentally changed. Containment isn’t an option, in fact, it is counterproductive. Washington needs to alter its engagement policy.

Corporate America must also undertake its own self-reflection. There is no doubt that China has made tremendous achievements in the post-Deng Xiaoping era. Those accomplishments cannot be denied. Those accomplishments would have been far less pernicious to the America economy were it not for highly short-sighted executive decision making. The time preference pendulum needs to begin swinging back in favor of resilience.

America has faced similar competitive pressures in the past. They were met, they were overcome and there is no question that the same can be achieved in this ongoing China rivalry process. But doing so by applying lessons from past periods must be avoided. Bluntness as a response simply won’t work and attempts to leverage an “exorbitant privilege” loses efficacy with each passing day. New thinking is required. New tactics. A smarter taciturn approach. Finally, and perhaps most critically, restraint is required. The base emotional response may be to lash out. That’s already been tried and is construed as desperation.

America is, and will always be, an idea and a brilliant one at that. It’s people, the author of this Essay included, are in possession of a raw dynamism that, when allowed to flourish, can overcome any adversity. Time and again, over a 250-year period, the deeply rooted tenaciousness of America has been brought to bear. China is not the enemy, she is, however, a fierce competitor. It is high time for America to rise to the challenge, remove the ever-burdensome yoke of irrational fear and do what America does better than any other country. Compete aggressively and play to win.

Offshoring by corporate America is certainly highlighted as a critical, even the primary, driving force behind today’s divergent economic outcomes among rivals. Corporate America, it must be noted, was also responsible for one additional, secular trend during this period which would further compound the catastrophic effects from offshoring; the financialization of the American economy.

To begin with, consider the following comparisons. Financial services as a percentage of America’s total economic activity were 8% in the year 2000. Today, that data point is just over 20%. For China, the economic contribution from financial services has remained in a range over that twenty five-year period between 5% and 8%.

The American formalized move towards financialization is often described as beginning with the 1999 passing of “The Citigroup and Travelers Rescue Act” or properly known as the repeal of Glass Steagall. While that Congressional action most certainly accelerated the process, the far more likely point of origin, innocuous though it may seem, came in the form of the Omnibus Budget Reconciliation Act of 1993.

Included in the legislation was a limitation on the tax deductibility of cash compensation set at a threshold of $1.0million. There was an important loophole contained in that legislation. Exempt from the calculated limitation was “non-cash” compensation, ie stock options. Boards of Directors understood what was required, made a quick pivot and went about restructuring all executive pay packages which would – from that point forward – be structured heavily in favor of stock options and grants.

Why is any of this even remotely relevant to an Essay discussing geopolitical rivalries? As is presented below, it is critically relevant. The move to an equity-oriented compensation structure meant that executives were now far more incentivized by the company’s stock performance which, in turn, shifted decision making decidedly in favor of achieving short term, financial goals and, with that, these executives would have far greater alignment to cut costs.

It would be this altered state of incentives that drove the strategy to offshore production (to China). The profit motive was just too alluring. So alluring, in fact, that offshoring to China would rapidly expand beyond just low value-added production. And, as was highlighted earlier, this would be extended to include the production of intermediate goods as well. Basically, if outsourcing to China reduced costs, no matter how immaterial, then that was the decision made. Profits would rise and so would the stock price and, by extension, C-Suite compensation. One could even argue that it was the passage of the Omnibus Act, combined with China’s accession into the WTO, which resulted in the devastating deindustrialization of the American economy.

Corporate America wasn’t done yet, though.

The drive to move supply chains into China carried throughout the entirety of the 2000s. After a decade, the gains to bottom line results from offshoring production began to diminish. Investors, however, continued to demand earnings growth and executives, with their not-yet-vested stock options, were aligned and incentivized to deliver on those demands. Enter the era of the stock buyback and a further financialization of the American economy.

With China assuming the mantel of the “world factory”, American companies began to reassess the need for any meaningful CAPX deployment into manufacturing. Investing for the future via PPE became passe. Corporate America was moving into a new period, an “asset light” balance sheet period. Focus would be redirected into software and services. The SaaS revolution. This would allow for even greater free cash flows which would then be directed towards the absolute reduction of a company’s total shares outstanding, and, if cash wasn’t readily available or adequate, Wall Street would step in and assist corporations with the issuance of bonds where the proceeds would then be deployed for the singular purpose of stock buybacks.

If the first decade of the new millennium was centered on aggressive offshoring to China, then the second decade would be the period defined by the trillions of dollars returned to investors through buybacks. Corporate attention had already become myopically short. Now, attention, and all decisions made, has been reduced to a truncated three-month future window. It just so happens that it was also around this period when other, second and third order effects from a decade of offshoring began to surface and, in particular, the knock-on effects of intellectual property.

Incentivized not “forced” Transfers of Technology

Let us take, for example, Apple. Over the past year there has been considerable attention directed towards the company with a focus on its decades’ long process of investing hundreds of billions of dollars into its Chinese supply chain. The claims made are that this corporate strategy – while most certainly benefiting shareholders (i.e. executives) – acted as a transfer of technology which then saturated the domestic marketplace and, ultimately, led to the rise of Chinese, homegrown competitors. Xiaomi, for example, launched its first iPhone competitor in 2011.

This is, as the concensus argues, an obvious example – just one of thousands – of China stealing intellectual property. Very much so, but contrary to the consensus view, there was nothing “forced” about these technology transfers. For all the publicly expressed consternation, the one conclusion that is never drawn is the culpability of executive management decision making. There was a clear understanding of the risk, even obvious nature, arising from IP theft and yet management teams continued, over and again, to make the very cognizant choice to view that as nothing more than the cost of doing business. Executives were incentivized and gained financially and whatever risks were posed, the very risks that are currently playing out, would be a problem to be addressed by future management teams.

Did Chinese counterparties operate openly and wantonly in the purloining of the most cutting-edge processes and know-how from their American (and European) contracting partners? Yes, and the evidence is rather overwhelming. Then again, the same holds with America two centuries ago and Hamilton’s “Report on Manufacturing and Industrial Policy” or the escapades of Francis Cabot Lowell and the English power loom. The only real question that needs to be asked, confounding really, is why American enterprise allowed such activity to persist. After all, talk of Chinese companies “stealing IP” has persisted for more than 20 years. You would think foreign companies would simply discontinue all commercial activities. They didn’t’ and that is entirely the outcome of a financialized American economy and an incentive structure centered on quarterly earnings reports.

What has played out with Apple is now playing out across a multitude of industries. The very Chinese companies which were the offshoring contracting partner, or at least an associated domestic partner, are now producing local substitute products at lower price points and, arguably, at similar – if not better – quality. China is now directing its full attention to the last remnants of the American “goods” economy.

Taking nothing away from the considerable achievements made by Chinese corporate interests over the past 30 years, it needs to be readily accepted that the aggressive offshoring by corporate America and the subsequent shift towards short-term incentives, directly exacerbated the rise of China into the dominate role of global manufacturing. It isn’t even clear to what extent these decisions will alter the entire competitive global marketplace now that Chinese groups are expanding abroad.

Be it a spend thrift Washington or corporate decision making failing to understand long-term competitive consequences, American high time preference self-interests provided China with numerous levers and China went on to use those levers to move the world.

The fiscal flagrancy of the American government wouldn’t be the only domestic failure allowing for the rise of China into a geostrategic rival. The advent of the unipolar moment had also produced a fundamental reassessment of risk profiles throughout corporate America. There was, as noted earlier, a “Peace Dividend” and, with it, the opportunity to extract profits. The process of extracting those profits would prove to be the second – and far more consequential – domestic failure.

In the years following the end of the Cold War, risk tolerance throughout corporate America were downwardly adjusted and, as a response, corporate priorities shifted in favor of replacing the prior period of resiliency with that of efficiencies. It would be a process which would ultimately lead to the hallowing out of the country’s production base. It would also end up not only impairing America’s (absolute and relative) national fortunes but would result in a series of highly unexpected second and third order effects.

It is important to take note that at the turn of the new millennium, America was the undisputed dominant force in global manufacturing and trade. It’s share of world production stood at roughly 30% and the United States counted nearly every country as its primary trading partner. Just one short year later, China gained approval to enter the World Trade Organization (WTO) and corporate America, with its obsession to chase efficiencies, began a decade long – aggressive – process of moving entire production facilities into the Mainland.

While there was widespread apprehension over permitting China’s WTO accession, President Clinton stated that the deal was a “win-win decision” and that WTO membership would “encourage China to become more open and inclusive”. This perspective was viewed, even then, as highly naïve. There was, however, a widely held view that (1) China posed little in the way of a threat to America’s dominance in global manufacturing and (2) if China did become a threat there was a proven action plan which could be applied to directly address that threat. Here again, policy assessments were made that would later be proven gross miscalculations. China was being underestimated and not for the last time.

The reason for why China wasn’t viewed as a threat came from where it was positioned at the time of WTO accession. The country’s production capabilities centered on labor intensive, low value-added items. Textiles and toys. The sole attribute of China’s attractiveness was cheap labor, and the expectation was for this specific segment to remain at the center of China’s role in global production. The developed economics, which included the United States, would remain centered on the manufacturing of higher value added and more complex goods. Any consideration given to China’s ability to climb the value chain was routinely dismissed. It was said at the time that China possessed no capabilities to scale production. Distribution infrastructure remained antiquated. And, of course, China had serious quality control issues.

To the point, China’s ability to expand production capabilities was grossly underestimated. Not only that, but over a 30-year period excuses continued to be made at every turn even though it had become increasingly clear that whatever obstacles China may have faced were being surmounted. Time and again this was proven to be the case with perhaps the best, most recent, example being the “China 2025” program.

In the end, China was simply able to out-compete America.

The second miscalculation came in the form of containing China, if needed, through an open willingness by America to project power if conditions warranted. Even though there was little in the way of concern that China could somehow grow into a serious competitor in global production, there was confidence that any future risk could be easily addressed. Washington, after all, had demonstrated in the past an aggressive use of its capabilities (leverage) of bringing economic rivals to heel with the 1985 Plaza Accord being the perfect examples. The thinking at the time was that the very same approach would be applied to China is needed.

Where the miscalculation is evident is an incorrect comparison made of the positioning of China in the 2000s to that of Japan and Germany in the 1980s. The latter example reflects trade partners having very limited leverage in which to use when negotiating with the United States. Japan and Germany were uniquely linked America’s hegemony including military commitments. Economic growth for both countries was also heavily reliant on the export of goods manufactured by domestic commercial interests into the American market.

Japan and Germany went into the Plaza Accord talks with the full knowledge that there would be little in the way of optionality when it came to the negotiations, and, most probably, the need to accept whatever terms were dictated by the Reagan administration. On the surface, it is understandable why Washington policy makers would conclude that similar conditions applied in the case of China. They were just, to put it bluntly, wrong.

Somewhat obviously, there aren’t military commitments to be leveraged in the example of applying pressure on China. Exports, however, have been a crucial engine for Chinese economic growth. Surely, the conventional thinking would have concluded, there would be applicable leverage on this front. This perspective, however, degraded the differentiated sourcing that underpinned China’s export engine.

Unlike Japan or Germany, the commercial interests which had been driving exports were American and European. Mainland facilities may have been doing the production, but it was all being done under contract with an agreement for final, end-product production to be exported back to the client’s home market. American Company A was paying Chinese Company A to build products which were then “exported” back into America. This was the entire premise of offshoring. What clearly escaped Washington was that any targeting of Chinese exports would be targeting American corporate interests. This very point was put on glaring display over the past year as events unfolded both in advance of, and following, “Liberation Day”.

This isn’t to say that the Plaza Accord wasn’t precedent setting. It was, but only in terms of what Beijing could anticipate in terms of American behavior when the point was reached where China’s capabilities were finally recognized as a threat. Here, once again, we can now see quite clearly that plans were put in motion long ago to ensure that whatever action was taken by America would have little effect. Dependencies were fostered and moats were created throughout the Chinese economy. This is the very reason why the issue of rare earth minerals has consumed the entire China debate in Washington, and far beyond, over the past year. What has yet to be properly recognized is just how far and widespread those dependencies go.

Focus most certainly remains directed on the overreliance to Chinese supply chains. What has yet to be learned by the rare earth mineral episode is just how deep those dependencies go when it comes to intermediate good. Returning to the point of the American corporate obsession over efficiencies, the original strategic moves towards offshoring were accompanied by an equally rapid rise in the use of subcontractors and those parties, as well, would offshore production work to China. The effects have compounded over time and, today, thousands, if not more, of subcontracted inputs (sourced from China) are now required for all ”American-made” final products.

What is now all too evident is that China ascended into the center of global manufacturing, across the entire value chain, as a direct result of fervid outsourcing of by American corporations. The impact is unmistakable. Today, China is the country with 30% of total global manufacturing. The United States is a distant second at 17%. For those still seeking labels to identify this new evolving global order, take note that the last time there was as dramatic a shift in global production dominance occurred at the beginning of the 20th century with the overtaking of the United Kingdom by Germany.

There is a very specific and important point that needs to be made: the relative (and absolute) gains China was able to achieve, as described up to this point, would have been greatly impeded had it not been for a series of domestic policy miscalculations as well as the deleterious longer-term repercussions from a misalignment of incentives throughout corporate America.

DEBT, DEFICITS AND THE SHARP REVERSAL IN AMERICAN FISCAL FORTUNES

To the point of domestic policy errors, China’s ability to challenge American hegemony would have been greatly reduced were it not for a rapid deterioration in the fiscal position of the United States. Such thinking would have been ridiculed in the year 2000. The Chinese economy was ranked 6th globally and there was negligeable concern over the fiscal health of the United States. At the time, Washington was experiencing the direct benefits of strong economic growth. The budget was balanced and there had been three straight years of surpluses. The national debt was certainly elevated at US$5.7trillion, but on a relative basis total obligations were viewed as easily manageable with debt-to-GDP at 33%.

The “Peace Dividend” was delivering as intended and the Clinton administration even estimated that budget surpluses would continue and allow for the retirement of all publicly held national debt (US$3.4trillion of the US$5.7trillion total) by 2015.

Not only did those claims prove to be errant, over the ensuing 15 years, having engaged in multiple wars as well as in response to periodic financial crises, there would be a sharp reversal in those fortunes. Surpluses would turn into ever increasing deficits and, with that, the national debt would rise at a precipitous rate.

The turning point would come with the policy response by Washington to the Global Financial Crisis as was discussed earlier in this Essay. Surpluses had long since returned to deficits and total sovereign debt broke above US$10trillion by the end of 2008. What remained unclear, at least at that time, was whether the fiscal disconnect was an isolated event or if it might represent a shift in the underlying secular trend of American sovereign finances. Even though total sovereign obligations had risen, debt-to-GDP was still being viewed as more than manageable even if it had doubled to 67%. The servicing of that debt was also far less burdensome than in the past due to the radical market intervention by the Federal Reserve and its move to a zero bound interest rate policy.

At the time, Beijing, with its estimated US$1.5trillion exposure to sovereign American debt (inclusive of Treasuries and a large holding of GSEs), was forced to pay special attention to the situation. While the decision had been made to begin reducing USD-denominated foreign reserve exposure, it was the directionality of America’s fiscal position that would need to be closely monitored. Did the policy response to the Global Financial Crisis represent an anomaly? Would debts and deficits return to their historical trend lines? Or did the response represent a symptom of a much larger problem?

The answer to these questions would arrive sooner than most, including Beijing, would have anticipated. In a short five-year period, to the end of 2013, the American fiscal position would go on to deteriorate at a pace far beyond even the most pessimistic of projections. Total debt surged by over 50% to US$16.7trillion and the ratio to GDP had blown out to 100%.

From a geopolitical rivalry standpoint, China would have concluded, rightly or wrongly, that America was traversing the well-worn path of history and the Great Powers of old. An overextended Empire was reaching, even exceeding, its financial limits. America, as it now could be concluded, was rapidly reaching a point where it could become fiscally and financially boxed in. Without the political will domestically to undertake austerity measures would mean the continued expansion of burdensome debt. This, in turn, meant that the United States – unironically – may have found itself in the very same situation as the Soviet Union in the 1980s: a superpower having lost all control over its finances and, as a result, potentially limiting maneuverability on the global stage.

Events in the lead up to 2014 now need to be critically viewed through the lens of the history.

To start, there was an acute awareness throughout Beijing’s leadership, and across three successive administrations, that the American approach to foreign policy centered on the pretext of the post-Cold War Liberal International Order. It became a highly interventionist foreign policy and, while this would include the raw projection of power, Washington had also decided on expanding the John Connally “our dollar, your problem” doctrine. Washington had come to appreciate the attractiveness of leveraging the USD system and the ability to weaponize that system for coercive purposes, or lethality by indirect means.

Beijing, and Moscow, as will be discussed here, understood world history very well and were early (signing of the 1997 Joint Declaration) in identifying the longer-term trajectory of America’s evolving hegemonic tendencies. For Beijing, the risk of unchecked American power and global reach was of a much deeper concern.

China was well along the path of reengaging economically throughout the world and the speed of this process came as unexpected by all parties. The Chinese economy surpassed that of the major European states in the mid-2000’s and would become the world’s second largest economy by 2010. Conversations began to center on when, not if, China would overtake the American economy with estimates of that happening in less than a decade’s time.

Throughout this period, too, China had begun supplanting America as the primary trading partner for an ever-increasing number of countries including America allied partners. This would be the result of an aggressive move among American and European companies to offshore production, and which will be discussed in greater detail later in the Essay. In addition, there were – and for the first time – an increasing number of domestically manufacturing substitutes entering the global market and taking market share. The best example of this would be shipbuilding. By the year 2010, China had achieved a global market leadership position in this field.

The direction of travel was clear to Beijing. It was also clear, albeit to a lesser degree, within American policy circles. The rapid, unrelenting rise of China would have begun to be viewed as a material threat in Washington. In assessing how events were unfolding, and the rationale proclivities of nation-state actors, the only reasonable conclusion to be made is that on both sides of the Pacific conflict was now viewed as unavoidable. The only unknown variable was that of timing.

It is that very reason why Beijing would have wanted to probe America’s resolve. With the prospect of conflict present, and in classic Sun Tzu fashion, Beijing had worked through the process of preparation and could strike first for the purpose of forcing a response by America.

While not a direct, or too overt, strike, there was a need for action that would be unmistakably construed as a test of the Liberal International Order, its members and – centrally – America’s leadership. In ascertaining whatever response was made would then elicit greater insight into the confines of future conflict. What could produce even greater informational asymmetry, however, is if this strike could be made on multiple fronts with the coordinated efforts of a willing partner.

That partner would be found with Russia.

A BACKDROP TO THE EVENTS OF 2014

Earlier in this Essay the point was made that the Chinese and Russian relationship wasn’t a formal alliance, rather an institutional construct that began with the Jiang Zemin and Boris Yeltsin 1997 “Multipolar” Joint Declaration and evolved thereafter under Hu Jintao. While there were genuine attempts made during the Obama administration at resetting relations with Russia (perhaps the real “Reverse Nixon” strategy), it remained evident that Russia, throughout that period, favored increased engagement with China. Whatever progress may have been made by the Americans, the much sought for entente would collapse fully with the 2012 return of Vladimir Putin as Russian President.

A critical element which has been absent from current day Sino-Russian conversations is a history of the relationship between Xi Jinping and Vladimir Putin. The two men first, formally, met in 2010 with Xi in the role of Vice President (albeit heir apparent) and Putin as Prime Minister. It would be far from the last meeting as the two leaders would go on to convene on a regular basis including on three separate occasions in 2013.

Public readouts of these meetings were predictably vague, emphasizing cooperation and strategic alignment in broad terms. Over time, it became increasingly clear that the focus of the talks centered on three priorities: economics, energy and the military domain. Such frequency of engagement is far from normal for any two heads of state: what required such persistent, direct engagement? Given events that transpired over the following year, a highly rational conclusion to draw is that an agreement was reached for the two countries to coordinate a specific series of actions with the aim to probe the resolve of American hegemony and, in doing so, prompt a response.

THE CRIMEA AND THE SOUTH CHINA SEA MANEUVERS

The first overt move came from Moscow. In late February 2014, Russian forces – initially masked as the now-famous “little green men” – invaded Crimea. The moral righteousness and ethnic claims by Moscow for making the move are of secondary importance. The strategic aims achieved are what matter here. Russia made a highly successful move on Crimea and, within weeks, consolidated all activities.

How is it that the internationally community, specifically America, responded to Russia’s actions?

The response was little more than the typical multilateral rejoinders. There was the issuance of numerous resolutions, recriminations and agreements to follow through with consequential action were made. Essentially the response to the move made by Putin was, quite literally, strongly worded memos with little immediate effect. Unsurprisingly, the Obama White House turned to the standard playbook, a series of highly ineffectual sanctions. Moscow’s move on Crimea confirmed that an American response would be a muted one and that the costs from the actions taken were manageable.

While the international community was distracted by the Russian move on Crimea, China was already in the process of testing American resolve but was taking a very different approach. Rather than a specific and easily identifiable “moment in time” move, Beijing had begun in late 2013 the process of moving beyond the diplomatic assertion of the nine-dash line claims. A large-scale dredging operation was initiated and was aggressively expanded in 2014. Artificial islands, plural, were being constructed directly in the middle of one of the world’s most heavily trafficked maritime corridors.

Beyond just testing America through such action, the decision to build these islands was of critical strategic interest to Beijing. It was also a highly rational act. China’s maritime access was heavily restricted to its east. Through the deployment of various American assets and regional alliances, China had been distinctly contained at the first island chain. The recent Asia Pivot by the Obama administration, including renewed overtures with the Philippines, Vietnam and Indonesia, was taken as a serious threat to China’s maritime access to the south.

ELICITING A HEGEMONIC RESPONSE AND THE CONSEQUENCES

No matter the strategic rationale, the information sought came in the form of how the international community, specifically America, responded to China’s actions. Let’s just say that it was a complex, drawn-out series of responses. Throughout, though, China gained an immense informational advantage.

To start, unlike with Russia, there were no sanctions placed on China. There was, once again, a series of stern declarations in opposition to Beijing’s island building and verbal condemnation by the international community. For the Obama administration, the issue of China’s adventurism in the South China Sea was considered best resolved through the application of the “international rules-based order”. While Xi did publicly state that the islands were for scientific purposes and denied any allegations over militarization, the international community agreed that the dispute should be taken up by the Hague’s Permanent Court of Arbitration.

China, for its part, refused to participate in the proceedings claiming the court had no jurisdiction given that the issue was framed by Beijing on territorial grounds rather than maritime claims. The court nevertheless did rule in 2016 and found China’s actions in the South China Sea had no legal basis under United Nations law. The ruling went even farther though stating that there was no legal basis as well over the sovereignty claims concerning the “nine-dash line”.

Beijing not only decried the ruling, it also ignored the ruling. Dredging and island-making activities continued at pace and by this time it was very clear that these man-made islands were being militarized.

The conclusion of this entire process meant that China was openly willing to violate the international rules-based order. There could be no clearer evidence that a direct challenge had been made against American hegemonic power. How did Washington respond? There were speeches and declarations made from the State Department and calls for all parties to abide by the ruling. Diplomacy over direct action would be the choice made.

Beijing, much like Moscow, had its answer. A direct challenge to American primacy could be made and there’d be little in the way of consequences for doing so. There would be limits though. Just how far could a rival push before there American did, finally, respond? That would become a known quantity when Russia invaded Ukraine in 2022.

In 2014, however, it was evidently clear to Beijing that the time had arrived to press its advantage given the absence of any decisive countermeasures on the part of America. And that is exactly what China went about doing. There were greater efforts made on the bilateral engagement front with non-American aligned nation-states. Simultaneously, positions held with European nations and American Asia allies would harden. Membership across the SCO and BRICS was rapidly expanded. RMB internationalization would continue unabated. There’d be an overt acceleration in the buildout of military capabilities. Very much to the point, the entire “hide and bide” era was over.

Finally, by 2015, with the introduction of the “China 2025” centrally led program, the objective was to take the economic fight directly to America and begin competing directly for technological primacy.

The timing couldn’t have been worse for America. It was at this very point in time when domestic political chaos was about to erupt. China, outside of the original trade conflict in 2017, would have a full eight-year window to operate with little in the way of American interference or opposition.

What American policy makers should take away from the entirety of the analysis presented up to this point is that today’s rivalry with China was the direct result of (1) an American interventionist predisposition throughout the unipolar period and (2) opportunistically disregarding the principles of the international rules-based order. Beijing, for its part, had recognized the distinct likelihood of a more assertive American-led global order and also assessed the type of sovereign risks that this would pose. In response, Beijing set forth, initially, to take remedial action so as to mitigate the risk of such threats. Then, over time, as repeated American actions put on display the utter hypocrisy of the international rules-based order applicability, Beijing’s messaging of the need for an alternative international order gained a very receptive, and ever growing, audience.

There were, however, two additional variables which played into Beijing’s overall calculus. Having closely monitored America’s fiscal position and economic structure, it was becoming increasingly evident that the United States of America may have entered a period of structural decline.

CIPS, SWAPS, AND THE EMBEDDING OF RMB OPTIONALITY

A final settlement mechanism via RMB-to-gold might have been the initial objective, but there remained a secondary objective to pursue; an alternative system for transacting and (critically) settlement in RMB on a cross-border basis. Once again, the Iranian example was fresh in the memories of all non-American-allied nations, witnessing the extent to which pressure could be applied, Beijing took direct action. That very same year, 2012, the People’s Bank of China was directed to begin constructing an alternative clearing and settlement system and, by 2015, had built what would become known as the Cross Border Interbank Payment System (CIPS).

What is typically presented among today’s macro commentariat is one of two diametrically opposed theses. Either the US dollar is on the precipice of being replaced by the RMB or there is no immediate threat to the dominant position of the USD – especially from the RMB. The basis of the former argument (de-dollarization) rests on the premise of an unsustainable American fiscal position and, with it, heightened sovereign risk. The latter will point to global payment market share (BIS data) with the USD the overwhelming choice with over 80% of all transaction throughput compared to the RMB in single digit percentage points.

For China, the focus, and especially in light of advancing a policy which seeks to indirectly challenge American hegemony, was to create an alternative network to the SWIFT system and, central to that objective, the ability to transact outside the surveillance of the New York correspondent banking network.

Here again, we find China operating in a deliberate manner to mitigate the future risk of weaponized finance by Washington. There was, however, far more to be gained from this move. In returning to the ongoing theme of embedding optionality, the creation of an RMB clearing and settlement system would bring with it an opening up to the possibility of expanding into local currency invoicing that could target the entire commodities complex.

The Chinese economy is wholly dependent on the importation of raw materials and contract pricing has, historically, been dominated in USD and only in USD. The creation of CIPS provided Beijing a unique path outside that system and allow for the facilitation of payment in RMB. There would be, obviously, the added benefit that doing so would also disrupt 50 years of USD-commodity fungibility and, with it, reduce overall demand for USD. At the same time, it would diminish further commitments of reserves to the American treasury market.

It has been a decade since CIPS went online. Progress over that time has been steady. In terms of membership, the system operates with a heavy concentration on Chinese banks and their global branch network. Beyond a few larger international banks, there’s yet to be any broad adoption.

What can be concluded, and without question, is that CIPS, on a surface level assessment, has not yet achieved its unofficial aim of offering a replacement to SWIFT. In fact, the entire CIPS network went in the opposite direction through the formation of a strategic collaboration with SWIFT shortly after the network went live. The relationship at present is in place for the purpose of ensuring limited friction in third party transacting. Moreover, the example here provides an example of China seeking to create “alternatives” rather than be viewed as building a direct competitor to the US led system.

Direct participation in CIPS among global banks may have not materialized, but for Chinese banks the system has worked very much as intended. Chinese bank branches across the globe are facilitating RMB-invoiced trade in conjuncture with each bank’s Mainland network. In the span of just a few short years, particularly after the events of early 2022, demand for settlement in RMB has accelerated with an uptake in adoption centered on non-American allied nations.

The best example is found with the ASEAN block of nations. Underpinned by a series of bilateral arrangements – including even with the Philippines – the use of RMB has accelerated quickly over the past five years. Across all ASEAN member states, RMB was used to settle RMB2.0trillion representing 30% of all trade settlement activity as compared to RMB0.7trillion and 15% back in 2020.

There’s also been a marked rise in RMB settlement in South America, though this skews heavily towards Brazil. Over 40% of China’s bilateral trade (soybeans and iron ore), approximately RMB50billion, was settled in RMB throughout 2025. Argentina and Bolivia have also expanded trade settlement via RMB with greater adoption expected in Peru now that the Port of Chancay is fully operational. Granted, the future of RMB denominated trade in Latin America is now highly uncertain after recent, and ongoing American activities in region.

Then there is the Middle East and a region which lies at the very center of whether China can drive RMB adoption and disrupt the dominance of USD global commodity pricing. There have certainly been inroads made and China has already achieved positive outcomes in areas where others have tried but failed.

The best (known) example comes from a 2023 RMB-settled LNG contract with the UAE. That deal, however, may have been a one-off event. Visibility into the entire Gulf-centric RMB trade system is limited. This is found elsewhere across the region including with other bilateral relationships including Iraq and Qatar. There has been dialogue over the application of RMB for trade settlement, but there is no visibility into if any action has been taken. What is known is the degree to which China has been leveraging BRI throughout the Middle East. Multiple USD billions in infrastructure investment have been committed by China. A connection with RMB settlement would be a reasonable conclusion to make.

The opacity is even greater when it comes to the Saudis. China remains the largest buyer of oil out of the Kingdom and there have been publicly announced discussions over payment in RMB. And yet, it remains unclear to what degree, or even if, the two parties have conducted trade in China’s local currency. Even overtures for membership to the SCO and BRICS were, originally, welcomed but, to the latter group, never formally confirmed. Considering the ongoing trends, it should be highly anticipated that RMB settlement for Saudi oil is simply a matter of time if not yet a reality.

All that should be taken away from the discussion here is that China has successfully created, and even began operating, an alternative USD system for payment, clearing and settlement. Adoption, at present, may very well be at the margins. Optionality, however, has been achieved. The moves here, along with those described above, would provide Beijing – and its various partners – the desired strategic flexibility to move forward and, finally, probe America’s resolve and that of the entire international rules-based order.