Tech Race and AI Ambitions

Here is my summary of a topic discussed by Helen Han on the Prof G Markets Podcast (click here to listen to the entire conversation) regarding how China’s domestic policy is shaping its global competitiveness.

Stimulus as a Lifeline

When economic growth softens, China often responds with fiscal and monetary stimulus—for example, lower interest rates or infrastructure spending—to keep industries humming. This approach has two main goals:

1. Boosting Domestic Demand: Beijing aims to stimulate domestic consumption and investment by making borrowing cheaper and funding public projects.

2. Stabilizing Key Sectors: Sectors like real estate and manufacturing benefit from direct injections of credit or subsidies, which can help offset weak consumer spending.

   
   

According to the International Monetary Fund (IMF), these interventions can temporarily boost GDP growth. However, as Alice pointed out, persistent deflationary pressures and household debt levels continue to limit the impact of such stimulus.

Currency Strategy: A Tool for Trade Wars

Alice noted that currency devaluation is often China’s first line of defense against tariffs. By weakening the renminbi (RMB), Beijing can make exports cheaper overseas, effectively countering new trade barriers.

• During the first round of trade tensions in 2018–2019, China devalued the RMB by around 10%

• The strategy helps exporters remain competitive but raises concerns about capital flight and inflation if taken too far

  
  

For a deeper dive into the mechanics and implications of devaluation, check out Bloomberg’s analysis of China’s currency approach (link below).

Despite economic headwinds, China’s tech sector—ranging from AI to EVs—keeps growing. Alice highlighted DeepSeek, a Chinese AI model claiming to rival leading Western counterparts at a fraction of the cost. While some observers question the exact numbers, the broader point stands: China’s domestic R&D ecosystem is becoming increasingly self-sufficient, particularly as it navigates export controls and chip sanctions.

• BYD and CATL are prime examples of Chinese EV and battery makers outcompeting Western rivals on both cost and scale

• Autonomous vehicles and embodied AI applications are rolling out quickly in cities like Hangzhou, indicating China’s appetite for rapid tech adoption

  
  

For an overview of how Chinese EV makers stack up globally, Morgan Stanley’s research offers in-depth market analysis (see reference below).

Geopolitical Tensions: Tariffs and Trade Diversification

Tariffs remain a central challenge for China’s export-driven economy. As the U.S.-China trade deficit hits new highs (see the U.S. Census Bureau data), Beijing is diversifying its trade relationships:

• Global South Initiative: Building stronger ties with emerging markets to reduce reliance on U.S. and EU demand

• Re-export Hubs: Leveraging countries like Mexico and Vietnam to bypass direct tariffs

  
  

However, Alice pointed out that this “bifurcation” can only do so much. China still needs robust domestic consumption, which is a more complex problem to solve given ongoing deflation and real estate woes.

Quick Comparison of Key Domestic Policies

Below is a simplified table that captures how different Chinese policies aim to strengthen the economy—and the potential ripple effects globally.

Policy	Mechanism	Intended Impact	Potential Risks
Fiscal Stimulus	Government spending on infrastructure & R&D	Spur growth in construction, tech, and jobs	Rising public debt; risk of overcapacity
Monetary Easing	Lower interest rates, more credit availability	Boost consumer spending & business lending	Asset bubbles (e.g., real estate)
Currency Devaluation	Lower RMB value vs. USD/EUR	Makes exports cheaper, offsetting tariffs	Capital flight; inflationary pressure
Tech Sector Incentives	Subsidies, R&D grants, market protection	Strengthen domestic AI, EV, and chip sectors	Trade tensions if seen as protectionism

Looking Ahead

Despite the economic slowdown and geopolitical friction, China remains a key player in global markets, especially in tech, manufacturing, and green energy. As Alice emphasized, writing off China’s market potential would be shortsighted, given its proven track record of scaling innovation and finding workarounds when faced with external pressure.

• For Investors: Monitor the interplay of stimulus policies and currency adjustments. These can create opportunities (e.g., undervalued equities) and risks (e.g., sudden policy shifts).

• For Businesses: It is crucial to balance China’s cost advantages against rising political scrutiny. Companies like Shein and Temu demonstrate how a single regulatory change (the de minimis rule) can disrupt entire business models.

  
  

Ultimately, China’s domestic moves—from stimulus packages to subtle currency shifts—have far-reaching effects on supply chains, consumer prices, and tech competition. Staying informed and adaptable is key for anyone with a stake in global markets.

Have thoughts on China’s evolving policies or want to share your own experiences? Feel free to drop a comment or reach out on social media. And if you’re curious to learn more about specific sectors, check out the links above for deeper insights.

1. IMF’s World Economic Outlook: https://www.imf.org/en/Publications/WEO

2. Bloomberg’s Analysis of China’s Currency Approach: https://www.bloomberg.com/markets/currencies

3. Morgan Stanley Research: https://www.morganstanley.com/what-we-do/research

4. U.S. Census Bureau Data on the U.S.-China Trade Deficit: https://www.census.gov/foreign-trade/balance/c5700.html