Vol.208 Macro Conversations 101 | Chinese New Year Special: China's 2026, 2001 and 2016 (Recorded 2.5)

Summary

• Early 2026 marks the historical inflection point at which China exits its third bout of deflation. China has seen only three three-year periods in more than 40 years when both CPI and PPI declined: 1998-2002, 2012-2016, and Q1 2023 through 2025 or H1 2026. The first two ended when international relations shifted directionally and domestic restructuring cleared its hardest phase; this time, both conditions are being met simultaneously. 峰叔 leaves no room for ambiguity: “For me, I may simply be more certain that this will become an inflection point.”
• The year’s biggest prediction: if Trump visits China in April, the most surprising outcome may be permission for Chinese companies to build factories in the US. The unresolved case is the CATL-Ford joint-venture battery plant. The logic comes from the election theory in The American Predicament: Trump needs manufacturing jobs for Rust Belt blue-collar workers, while US policy toward China has shifted from “there are many things I don’t want you to have” to “at the very least, I need to have what you have.” If it happens, Chinese companies “can go abroad openly and aboveboard,” without routing through Southeast Asia in disguise.
• The wealth code is a high-low rotation. Walmart crossed $1T in market cap for the first time this week—“before this, almost every $1T company was AI.” Even after Google delivered a strong earnings report, AI stocks could not rally. The US itself is going risk-off in high-valuation assets, while A-shares and Hong Kong stocks are broadening from technology into consumption, midstream industries and resources. Moutai is up more than 10% since it was recommended, and the program holds a relatively large position. The analogy is 2001, after the internet bubble burst and “money returned to the rest of the world.”
• Global capital adding China exposure needs answers to three questions: Can the macro economy stabilize? Will policy remain open? Is the floor on the intensity of the China-US contest controllable? The third matters most; in recent years, the situation “even appeared uncontrollable.” The newly issued annual NDS did not mention China or Taiwan even once. A Trump visit to China and an outcome for the tariff agreement expiring in November would be “two enormous steps”; taking even one would materially help establish a controllable floor.
• The same historical mechanism is repeating in three acts: every deflationary episode was triggered by external demand, in some sense each sacrificed Europe, and each had US-related causes, after which China entered a new phase of international relations. The 1999 Kosovo War dragged down the fledgling euro—depreciating it by more than one-quarter—before China entered the China-Germany BBA era and the WTO. After the 2012 eurozone debt crisis came the Port of Piraeus, China-Europe freight trains and the Belt and Road Initiative. This time, a wave of visits to China has followed reciprocal tariff negotiations. The posture has evolved from enduring humiliation, to focusing on itself, to reciprocal negotiation: “If you show me one foot of respect, I’ll show you ten feet.”
• Financial opening is the only lever large enough to move the needle. National competition is like a cream cake: the military, industrial and aggregate-economy layers are broadly comparable between China and the US, while “the best-tasting cream is finance,” where the gap is enormous. Only finance has enough scale to use openness to drive reform. The accompanying policy is to let the renminbi “appreciate moderately while maintaining expectations of appreciation.”
• The long-term variable is investment in people. The 20-point gap between the 67% permanent-resident urbanization rate and the 48% hukou-based rate represents roughly 300M people. Over 5-10 years, China could turn 400M middle-class people into 800M. Social-security coverage is expanding to platform workers in flexible employment, while Shanghai’s Xuhui, Jing’an and Pudong districts are acquiring old, dilapidated housing and converting it into subsidized housing. “It looks like investment in physical assets, but ultimately it is investment in people.”

Deep dive

1. Thesis: only three three-year deflationary episodes in 40 years; 2026 is in dialogue with 2001 and 2016

• 峰叔’s framework: In more than 40 years, China’s economy has had only two deflationary episodes lasting more than three years but less than four, with both CPI and PPI declining—1998-2002 and 2012-2016. The third is the current cycle, from Q1 2023 through 2025 or H1 2026: “Every time, it lasts just a little more than three years.” This episode places all three side by side and responds to the previous three installments’ outlook for 2026 and AI investment logic: “History really is incredibly similar.”
• The sense of scale: growth fell from an average 10-11% to just above 7% in 1998, but “China was still an economy with less than RMB10T of GDP then, so it was nowhere near today’s RMB140T.” A 5% increase on today’s RMB140T would almost equal an entire year’s output back then, which means the old “11 down to 7” may have felt more painful than this cycle’s “7 stepping down to 4-5.”

2. The American Predicament: America has gone from an olive to a tanghulu

• The book’s underlying fact: the US middle class has fallen from more than 60% of the population to 50%, and the remaining middle class has splintered into disconnected groups—tech, Wall Street, small and midsize farmers, manufacturing blue-collar workers and others. 峰叔’s translation: society is neither an olive nor a dumbbell but a tanghulu—a skewer of candied fruit. 李翔 adds: tribalization.
• Old politics targeted the middle of the olive and sought compromise, so Democratic and Republican policies converged. The book’s example: even Hillary could not answer what she liked to eat—beef would offend Indian Americans, pork would offend Muslims, meat would offend vegetarians. Ask Trump and none of that matters: “Hamburgers and Coke. Excellent.”

3. Trump’s electoral math: seven or eight pieces on a skewer, but I only need three

• “I focus only on three pieces of the tanghulu… I don’t want the remaining one.” The three are Rust Belt blue-collar workers, small and midsize farmers and similar groups. The donors are defense, oil and gas, and agricultural states in the middle of the country; this term has added tech heavyweights such as Musk.
• Everything becomes a statement of position: even when confronting Wall Street, Big Pharma or traditional allies, the goal is to give those three pieces of tanghulu a “clear and unmistakable signal.” 峰叔’s takeaway: “In the past, we might have used conspiracy theories to speculate,” but the book closes the loop on Trump, and “the internal consistency is reasonably sound.”

4. Territorial DNA: half of the US was bought, so Greenland is no joke

• The US began with 13 East Coast states, then bought Louisiana from France, Alaska from Russia and Florida in another series of purchases. California, New Mexico and Arizona were “half seized, half bought.” The fixation on Greenland is rooted in a 200-year historical gene.
• 李翔 adds that the principles and values of the international order have changed repeatedly over those two centuries. Before World War I, sending troops to seize Greenland would not have been considered improper. After World War II, even overwhelming military superiority no longer made that acceptable; Russia’s position toward Ukraine follows the same logic.

5. Biggest prediction of the year: if the April China visit happens, Chinese companies can openly build factories in the US

• The timing signal: the afternoon before recording, 习近平 and 普京 held a video call; that evening, 特朗普 spoke by phone with 习近平. If the two events were connected, “it was either Ukraine or Iran”; if not, they were separate conversations.
• 峰叔’s extrapolation: under the tanghulu logic, Trump must deliver manufacturing jobs to the Rust Belt. US policy toward China has shifted from “there are many things I don’t want you to have” to “at the very least, I need to have what you have.” The most surprising outcome could therefore be permission for Chinese companies to build factories in the US, with the CATL-Ford joint-venture battery plant as the classic unresolved case. “My guess is that it should happen. This would also be very important for China.”
• DJI offers supporting evidence. In late December, the US ultimately did not pass a blanket ban, restricting only drones produced in the US and “no longer targeting specific manufacturers.” If this comes through, Chinese companies “can go abroad openly and aboveboard… Before, we still had to route through Southeast Asia and disguise ourselves in one way or another.” 峰叔 had already discussed these conclusions yesterday with one or two “extremely important, enormous companies.”

6. Commonality one: all three deflationary episodes were triggered by external demand

• 1998 brought the Southeast Asian financial crisis; 2012 was partly the eurozone debt crisis; this time it is the US restructuring supply chains, the post-Ukraine-war push to “de-risk China,” and the pandemic-era medical supply shock that made countries alert. “When external demand fluctuates, it clearly affects our entire economic development.”
• The growth steps are also structurally similar: in 2014, China first missed the GDP growth target set at the start of the year, stepping down from the 6-7% platform; this cycle is stepping down from 6-7% to 4-5%.

7. Commonality two: each coincided with China’s own structural adjustment—slower growth is when you can change the wheels

• In 1998-99, SOE restructuring left more than 20M people unemployed; a commitment not to devalue the renminbi produced the first wave of migrant workers returning home; severe flooding hit; and the first financial cleanup began, clearing rural and city commercial banks and transferring the Big Four’s bad debts to the Big Four AMCs.
• In 2014-16, excess capacity followed the RMB4T stimulus, with manufacturing capacity utilization “at one point falling to the 50%-something range,” before returning to above 70% after capacity cuts. Before the “housing is for living, not speculation” policy, the property market was “let go for roughly seven months” from the 2016 Spring Festival through October, carrying the economy through its hardest phase.
• This cycle is replacing property and infrastructure as the pillars with new quality productive forces, alongside a unified national market and greater opening in finance and services. Why restructure during difficult periods? “It is hard to change the wheels when you’re traveling at high speed.” There is historical contingency, but also agency.
• As an aside, 峰叔 follows A Small Town’s Big Story and guesses that the show’s year-plus of business distress corresponds to the order collapse of 1998-99. 李翔 observes that scholars’ places of birth shape their views: northeastern scholars discuss the 1990s reforms with strong criticism, arguing that the SOE burden was shifted to ordinary people, while scholars from Jiangsu and Zhejiang are “wow, extremely optimistic,” repeatedly emphasizing the release of private-sector vitality.

8. 1999: the euro launched, then Kosovo erupted

• Timeline: the European Community spent three years preparing the euro and launched it in January 1999, with expectations pegged at “one-point-something dollars per euro.” At the end of March, the long-delayed Yugoslavia issue suddenly deteriorated into war. A conflict that should have ended quickly dragged on for nearly three months, sending the euro down to 0.8-0.9—“it depreciated by more than one-quarter”—and dragging down the eurozone.
• 峰叔’s own conspiracy theory: after the Soviet collapse, NATO “no longer particularly needed its American father,” while the euro directly challenged the dollar. The US therefore encouraged Europe to remove Yugoslavia, the obstacle on Germany’s route through the Balkans to Middle Eastern energy. But after 米洛舍维奇 signed an agreement, the US stood by as several hundred Russian airborne troops seized a key airport, preventing NATO and Germany from taking the full prize while preserving local balance and instability.

9. The embassy bombing, the “obedience test” and 28 hours for 施罗德

• In early May 1999, US aircraft bombed the Chinese embassy under the NATO banner, killing three journalists. The US ultimately said only that it was a mistake. 峰叔’s wild guess: it was intimidation, “or perhaps what you would call an obedience test.” China endured the humiliation; some people protested at the embassy, but there was no retaliatory action.
• A diplomatic oddity: newly installed German Chancellor 施罗德 was scheduled to visit China in May, but the trip was cut to 28 hours. “No one met him when he got off the plane; there was no red carpet.” What was discussed has never been fully disclosed. But five months later he returned—and in November signed “the largest China-Germany cooperation agreement in history,” beginning the 11-12-year period of BBA dominance and Audi as the official car. After Europe had been battered, it needed a new economic partner, and China weighed the trade-offs and accepted the opening.

10. WTO and SCO: two moves, one short and one long, made in 2001

• Europe was “at least relatively willing to support” China’s WTO accession during the Doha Round. 峰叔 speculates that after weakening Russia, crushing the euro and testing China’s lack of an aggressive reaction, the US became overconfident and believed neoliberal market economics could “convert” China, so it tacitly accepted or supported accession. One faction of US politicians later called this “the biggest mistake Clinton made at the time.”
• The Shanghai Cooperation Organisation was founded in June that year, responding to the power vacuum in Central Asia after the Soviet collapse. The WTO delivered immediate results; the SCO “may not have begun showing its more important long-term strategic role until the episode in 2016.” 峰叔 heard private entrepreneurs in Xiamen the week before last recall that small manufacturers feared WTO entry at first—“even Lenovo was afraid”—but after a year or more realized they could take foreign trade orders.
• 李翔 adds a point from the memoirs of a US ambassador to the former Soviet Union: nothing agreed with the US is ever certain. When officials make commitments, “they are 100% sincere,” but once they return home, interest-group battles consume those commitments. This was a major source of 戈尔巴乔夫’s passivity.

11. The domestic playbook, 1998-2001: housing reform, trade liberalization and three years of falling home prices

• In 1998, China abolished welfare housing allocation and rolled out housing commercialization nationwide. It was meant to prepare the next pillar for structural adjustment, but immediately ran into the hardest period, with home prices falling for nearly three consecutive years from 1999. There have been only two three-year declines in home prices in history: that episode and 2023-25. The first brought property into the system; this time, part of it is being taken out.
• In 1999, the quota-based approval system for foreign-trade rights at central SOE trading companies was extended to all manufacturing companies. 峰叔 believes Beijing may not have been confident about WTO accession then; the move was more about loosening constraints on private companies to respond to the financial crisis and the return of migrant workers. It nevertheless became an opening move for the WTO.

12. The migration of money: unable to invest in emerging markets or Europe, “money all went to the US”

• The Southeast Asian crisis made emerging markets uninvestable, while the Kosovo War created problems for Europe in “national security, industrial-chain security and energy security.” “Money couldn’t go to emerging markets, money couldn’t go to Europe, so it all went to the US.” Even though a US rate hike caused a short-term stock-market wobble in 1999, money still had nowhere else to go, producing the fastest wave of internet listings and valuation expansion in 1999 and 2000.
• After the bubble burst in 2001, global capital rebalanced. “Only then did everyone start developing by showing the capabilities of different countries, rather than relying on huge valuation growth in a single capital market.” 峰叔 explicitly says this is structurally identical to the AI investment logic discussed last time, and he will compare it again with 2014-17.

13. 2012-16: the eurozone debt crisis took over, and Obama turned toward Asia-Pacific

• The US financial crisis exported “toxic assets” around the world. After three and a half rounds of quantitative easing from 2008-12 rescued US institutions, the crisis triggered the eurozone debt crisis across five European countries. The only currency capable of challenging the questioned dollar was still the euro; “China did not have a place in that picture yet.” Europe’s universal welfare state had Cold War roots—it needed to “demonstrate the superiority of its system” over the socialist bloc—and 李翔 points to a system bug: “monetary policy was unified, but fiscal policy was independent in each country.” The result was a fragile structure.
• At the same time, US shale oil and gas achieved self-sufficiency. The policy toward the Middle East shifted from “must control it” to simply “let it become chaotic,” with France’s push for Libya as an example. Obama explicitly shifted the strategic center back to the Asia-Pacific, designated China the primary competitor and raised “T two.” The historical source of today’s 高市早苗 issue was the Japan-US security arrangement with 安倍 at that time.

14. China’s response: shantytown redevelopment, capacity cuts and the painful tuition of its first financial opening

• China used shantytown redevelopment to support the property side, compressed and upgraded manufacturing capacity to complete the four-trillion-yuan stimulus cleanup, and made its first attempt to open finance under the 18th Party Congress report. “The first opening came at a heavy cost”: the 2015 stock-market crash and the subsequent P2P crisis.
• After the final opening was rolled back in October 2016, China firmly maintained “housing is for living, not speculation” through today. The inflection point came in H2 2016: capacity utilization had bottomed, shantytown redevelopment provided a floor, and property was no longer being released. 峰叔 also says China’s property market “should bottom this year, especially in the major cities.”

15. The second leap in internationalization: Piraeus, China-Europe freight trains and the Belt and Road

• Europe’s weakness opened a window for China. When “no one in Europe wanted it at all,” China won operating rights to Greece’s Port of Piraeus, Europe’s fourth-largest port. It was losing money when China took over, but China’s position as a foreign-trade hub turned it into a “quite profitable port” within two or three years. China-Europe freight trains began growing rapidly from 2015, and the Belt and Road Initiative launched in the same context, rebuilding trade and economic ties with Europe, Central Asia and the Middle East.
• The posture differed from the first leap: that time, China endured humiliation to enter the international stage; this time, it was “working to solve its own problems” and used the opportunity to move its international trade and economic position “up one notch.”

16. The bubble’s rhyme: Vision Fund, Uber and every rate hike

• The signature object at the end of the bubble was SoftBank’s announcement in 2016 of a $100B Vision Fund. “That was a major innovation for the VC industry.” In 2019, 孙正义 publicly bowed and apologized. After the Fed’s first rate hike in December 2015, Uber peaked at an $80B private valuation. The program had invested when it was worth more than $40B, and the position is still displayed on the wall. After listing, Uber was “underwater for more than a year” before returning to its pre-IPO valuation.
• The pattern: in 1999, 2015 and 2022, “rate hikes appeared to puncture the bubble in the short term.” A crisis that should have emerged during the easing cycle was delayed by the 2018-19 trade war, Trump’s attacks on Powell, the halt in rate hikes and tax cuts, and then the pandemic. Instead of staggered QE, the US “released $3T in one shot, close to $4T,” creating “a liquidity cycle no one in history had ever seen.”

17. Why did Russia-Ukraine erupt in 2022? Most of the four objectives were achieved

• The conflict began in 2014-15 but erupted in 2022. 峰叔 works through his conspiracy theory point by point: Biden led a government with “relatively weak control” and needed to redirect post-pandemic tensions abroad; after the US became the largest oil and gas producer and exporter, Europe shifted from competitor to “a cake waiting to be divided”—more than one-third of its oil and gas came from Russia, and that share was to be captured; the move also weakened Russia and trapped China in de-risking. “These four political and economic objectives were partly or mostly achieved.”
• Europe got the decision wrong every time. If it had left Kosovo alone in 1999 to focus on the eurozone, and later avoided destabilizing its financial system and getting entangled in Libya, “it would at least be a much better Europe.” 李翔 recalls that 默克尔 also acknowledged in an interview that Europe made a major strategic mistake over Russia-Ukraine. Trump’s line—“If you have no cards in your hand, your cards are the ones I gave you”—is cited as a footnote to the new order: the US now needs Europe only “relatively unstable,” so it can take over its energy and push it to buy weapons for defense autonomy.
• On whether China “took sides,” 李翔 says, “China did take a side; that has to be acknowledged.” 峰叔’s definition is narrower: from the standpoint of national interest, “it simply could not allow Russia to be dragged down by the US.”

18. From the grievance of mask diplomacy to reciprocal negotiation: the evolution of three postures

• In 2021, China controlled roughly 70% of global pandemic-prevention material capacity and more than 90% of anti-inflammatory drug capacity. When countries came asking for help, “China gave what it could,” even as Germany blocked supplies already purchased by other countries. By midyear, China was being accused of “mask diplomacy and shoddy substitutions.” “There was some grievance that time,” followed immediately by Russia-Ukraine, which trapped China in the narrative.
• This time is different: after 7-8 months of reciprocal tariff negotiations, comparing China’s B-style treatment of the world with America’s A-style treatment, a wave of visits to China has followed. The joke is that almost everyone except the US has come; in this episode, everyone except the US and Japan has come, with Germany and others due after the Spring Festival.
• 李翔 points out that 峰叔’s phrase “enduring humiliation” carries emotional weight, “but you have to admit that we gained enormous benefits from both of the first two episodes.” 峰叔’s trilogy: first endure humiliation, second focus on ourselves without making a show of it, and this time respond reciprocally and unmistakably—“If you show me one foot of respect, I’ll show you ten feet,” just as the ancient court returned tributary gifts at two to five times their value.

19. The five-layer cream cake: finance is the widest gap and the only layer that can be pulled up

• National competition is a cream cake. “The most solid layer is the military”; above it are industrial manufacturing capability and aggregate economic size. These three layers are assumed to be “roughly comparable” between China and the US. “The best-tasting cream on top is finance,” where the gap is “enormous.” The cherry is the narrative of values: US Western-democratic soft power versus China’s community with a shared future for humanity and four global development initiatives.
• The implication: at China’s current scale, the only area that can almost be moved through opening to drive reform is finance. This cycle therefore must address opening finance, healthcare, education and other services. The accompanying policy is to “maintain moderate appreciation while preserving expectations of appreciation” for the renminbi—strengthening purchasing and consumption power while keeping foreign capital willing to hold renminbi assets.

20. The wealth code: high-low rotation is not a comeback for “old-man stocks,” but a global risk-off move

• China has seen a clear high-low rotation in recent weeks. Moutai is up more than 10% since it was recommended, and the program has held a large position since then, limiting the examples. In the US, Walmart joined the $1T market-cap club for the first time at the start of this week. “Before this, almost every $1T company was AI.” Even though Google had just reported strong earnings, “basically none of these AI companies could move much.” Money staying in the US is rotating from high-valuation assets into low-valuation assets.
• The parallel is 2001: after the bubble burst, “money returned to the rest of the world, looking for new low-risk or medium-risk growth opportunities.” Over the past two years, all the money went to the US; this time, “it should happen again.” Ignore the noise: January and February data will look poor because of the Spring Festival effect and the export rush during the month and a half after tariff suspensions in November. “Let’s see what happens in March, April, May and June—especially April.”

21. Three questions for global capital adding China, and two major steps

• Global capital adding China exposure needs answers to three questions: Can the macro economy—not just technology—stabilize and improve? Is the policy direction open? Are the floor and intensity of the China-US strategic competition controllable? The third is the most important and the biggest uncertainty because the situation “even appeared uncontrollable” in previous years. Foreign capital fears precisely this kind of large swing.
• The signals are improving. After the NSS, an “upward-looking document” issued once every four years, the annual NDS released a week and a half ago “did not mention China or Taiwan in a single word.” 峰叔 believes this may signal a US strategy of reducing its global military presence and managing its immediate neighborhood. If Trump visits China and reaches an outcome on the one-year tariff agreement expiring in November, perhaps even arranging a visit to the US, “those are certainly two enormous steps. Taking just one would be a huge help in solving the floor problem… taking both would be an immeasurably huge help.” Hong Kong and A-shares have already begun spreading from technology into every direction.

22. The long-term variable: invest in people, 800M middle-class citizens and a Spring Festival reading list

• Micro evidence that structural adjustment has passed its inflection point: China accounted for $135.7B of global innovative-drug pipeline acquisitions last year, which “should exceed 60%” of the $250B global total in 2025. Chip exports reached RMB1.5T, or more than $200B, against imports of more than $400B. Within a global market of more than $700B, China “imported close to 70% and exported one-third.” After years of disruption from the technology and trade wars, the total had nearly doubled from 2019.
• The chain of evidence for investing in people starts with the biggest change in the Third Plenum of the 20th Party Congress: providing urban public services to permanent residents. The State Council executive meeting reiterated in December that the policy would be implemented this year. Social-security cost-sharing pilots for platform riders and couriers now cover more than 20 cities among roughly 40%—“I think”—of flexible workers, and could expand to the entire population this year on a voluntary basis. The gap between a 67% permanent-resident urbanization rate and a 48% hukou-based rate contains roughly 300M people; adding 5 percentage points means another 100M. Over 5-10 years, 400M middle-class citizens—already the world’s largest middle class—could become 800M. Shanghai’s Xuhui, Jing’an and Pudong districts are buying old, dilapidated homes and converting them into public-rental and low-rent housing. “It looks like investment in physical assets, but ultimately it is investment in people.”
• The reading list closes with The American Predicament; 郑永年的 Opportunities in a Great Transformation; Understanding the World Order Through Economics, which is “like online fiction… easy to read, almost like a novel”; 王伟’s A Book About the Geopolitical World series; and the memoirs of the US ambassador to the former Soviet Union mentioned by 李翔. 福山’s The End of History returns once more: “It later proved to be the beginning of a new phase.” The closing line rests on the Beginning of Spring: “We hope this is an inflection point.”