The piece is authored by Liu Feng刘锋, Chief Economist at the International Institute of Green Finance of the Central University of Finance and Economics.

Liu belives the draft matters because it attempts to do something long overdue — put China's sprawling financial activity under a single, higher-order legal framework. But he is equally clear that a basic law should do more than codify the current system. It should impose discipline on it.

The draft, he argues, still leaves too much blurred: the boundary between "administration" and "supervision," the definition and handling of conflicts of interest, the link between regulation, adjudication, and enforcement, and the rules for licensing increasingly cross-sector, cross-border financial business.

In Liu's telling, a credible financial basic law must not only empower the state to manage risk, but also bind power itself through clearer division of functions, recusal rules, judicial review, procedural safeguards, and more coherent legal hierarchy.

He also places that question in a comparative frame. China's "centralized and unified" model, he argues, is good at mobilizing quickly against systemic risk; the U.S. model of multi-agency checks is better at constraining public power over time. The point is not to copy either wholesale. It is to build a Chinese financial constitution that can keep risk under control without letting regulatory ambiguity, institutional overlap, or legal vagueness become risks in their own right.

The piece was first published on April 20. Please note that the translation below is mine and has not been reviewed by Prof. Liu.

刘锋：关于《金融法》草案（征求意见稿）的观察与思考

Liu Feng: Observations and Reflections on the Financial Law of the People's Republic of China (Draft)

The Financial Law of the People's Republic of China (Draft) (《中华人民共和国金融法（草案）》) is now open for public comment. As the first foundational law in China's financial sector, the Draft establishes an overarching framework of "bringing all financial activities under regulation", and sets out a systematic approach to balancing development and security, strengthening oversight, and preventing risks. It is forward-looking and structurally comprehensive. Its introduction is of landmark significance for building a unified, coordinated, and efficient system of financial rule of law, preventing and defusing systemic financial risks, and promoting high-quality financial development.

That said, the drafting a financial law should not merely codify existing practice. It should also look ahead and construct a modern legal framework for finance that features clearly defined powers and responsibilities, aligned incentives, coherent rules, and compatibility with international standards.

If the Draft is to become a true "basic law" capable of guiding the modernization of financial governance over the coming decades, several of its key mechanisms still warrant further refinement and clarification. Drawing on long-term research into the structure of financial regulation, the governance of conflicts of interest, and legal coordination, as well as observations on the differences between Chinese and U.S. regulatory models, the author offers the following thoughts on the Draft.

I. Clarifying the Functional Boundaries Between "Administration" and "Supervision" to Strengthen Checks and Balances

Chapter VII of the Draft sets out the supervisory and administrative responsibilities of the financial management departments under the State Council. However, it is worth noting that the functional boundaries among different regulatory bodies, as well as those between regulation and administrative management, remain somewhat overlapping and unclear.

Literally, "administration" is more concerned with front-end guidance, such as policy formulation, market-entry approvals, and macro-prudential management.

"Supervision", by contrast, relates more to back-end correction, including conduct monitoring, compliance inspection, and risk disposal. The two serve different purposes and should therefore be clearly distinguished. Ambiguous boundaries may lead to overlapping regulation, inconsistent standards, or even regulatory gaps.

It may therefore be worth adding a dedicated clause in the general provisions or regulatory chapter to provide legislative definitions of "financial administration" and "financial supervision".

Financial administration could be defined as including the formulation of financial policy, industrial policy, rules, and standards; the granting of institutional and business-entry approvals; and the conduct of macro-prudential management. These functions should primarily be undertaken by development and reform, finance, and industry authorities.

Financial supervision, meanwhile, could be defined as the ongoing monitoring, assessment, and inspection of the compliance and risk profile of financial institutions, financial business, financial activities, and market participants; and taking regulatory measures and implementing administrative penalties in accordance with the law.

At the same time, it is necessary to strengthen the independence of regulatory bodies so that they can focus on risk prevention and control, compliance review, and conduct supervision, free from unlawful interference in the performance of their duties. A mechanism should also be established to safeguard the independence of regulatory decision-making. In addition, further clarifying in Article 51 the specific division of labor between the State Council's financial management departments and local financial regulatory bodies with respect to "administration" and "supervision" would help prevent structural overlap in responsibilities.

II. Establishing a Systematic Mechanism for Defining, Avoiding, and Disposing of Conflicts of Interest

The Draft refers several times to concepts such as "benefit transfer" and "improper interests". Articles 28 and 37, among others, set principled requirements for related-party transactions and the due diligence obligations of third-party service providers.

However, the author believes that the Draft still lacks a systematic definition and handling procedure for conflicts of interest. Such conflicts are ubiquitous in financial activities, particularly within mixed operations, financial conglomeration, and the "revolving door" of regulatory personnel. If mishandled, they can seriously undermine market fairness and investor confidence.

A more systematic definition of the types of conflict of interest could therefore be included in the supplementary provisions or relevant chapters, covering, for example, related-party transactions, dual roles, and information advantages through a combination of listed examples and a catch-all clause.

For instance, financial institutions could be required to make their boards of directors ultimately responsible for conflict-of-interest management, and to establish institution-wide policies applicable to all staff. Directors, senior executives, shareholders, and actual controllers could be made subject to mandatory recusal obligations where matters involve major decisions, related-party transactions, or interest allocation, with such situations also brought within the scope of information disclosure.

Internally, an independent compliance department or post should be established to review and supervise conflict-of-interest management and report to the board. Financial regulators should also be granted the authority to investigate, order rectification, and suspend relevant rights where necessary. In addition, in Chapter VII on "financial supervision", it would be worth considering supplementary provisions requiring recusal by regulatory staff in conflict-of-interest situations, together with corresponding internal oversight and disclosure systems.

III. Smoothing the Connection Between Legislation, Judicature, and Law Enforcement to Ensure Procedural Justice

While the Draft touches upon the connection between law enforcement and the judiciary in legal liability and risk disposal, its provisions remain largely principled regarding post-legislative evaluation, the specialization of judicial trials, and the procedures, time limits, and responsible parties for linking regulatory enforcement with criminal justice.

It grants significant power to financial management departments in areas such as legal liability, risk disposal, and regulatory measures, but is relatively weak on judicial review, procedural justice, and rights relief, potentially affecting the fairness and predictability of law enforcement.

It would therefore be advisable to add provisions in the supplementary or general chapters authorizing the State Council's financial management departments to carry out regular evaluations of the implementation of the Financial Law (for example, every five years) and report to the Standing Committee of the National People's Congress, so that the law can be dynamically improved on that basis.

Building on Article 70, the law could go further by promoting the legal establishment of an integrated "three-in-one" mechanism for financial adjudication (civil, administrative, and criminal). Moreover, it could make clear that, under the guidance of the Supreme People's Court, financial courts or financial tribunals should be set up in financially active regions to centralize jurisdiction over major and complex financial cases. A financial expert juror system could also be established.

Judicial oversight of administrative enforcement should also be strengthened through a clear mechanism for judicial review of financial regulatory measures, allowing regulated entities to seek administrative reconsideration or bring administrative litigation against major regulatory decisions.

Article 59 could also be strengthened to improve the link between administrative enforcement and criminal justice, with clear standards, procedures, time limits, and two-way feedback obligations for the transfer of case leads. For major cases suspected of involving crimes, a joint investigation mechanism could be explored. In addition, setting out clear legal liability for regulatory departments and their staff in cases of dereliction of duty or misconduct in office would further strengthen institutional discipline.

IV. Establishing a Unified Qualification and Review Mechanism for Cross-Boundary, Cross-Industry, and Cross-Border Business

Financial business today is increasingly cross-sectoral, cross-industry, and cross-border in nature. Article 3 of the Draft defines financial activity, and Article 26 requires financial institutions to operate within their approved scope.

However, there is still no clear top-level design on which authority, or combination of authorities, should carry out "qualification recognition" for new hybrid businesses that cross sectors and markets, especially when undertaken by financial institutions such as financial holding companies, or on what "review standards" should apply. Entry regulation still largely follows the logic of separate regulation by sector, while the unified regulation of integrated operations remains unclear. This may open the door to regulatory arbitrage and hidden risks.

One possible solution would be to establish a system of "comprehensive operation access". For financial holding companies and integrated business groups, unified qualification standards and review procedures could be introduced. For cross-sector and cross-industry operations, a "Joint Recognition Committee" made up of the relevant State Council financial management departments could be created and coordinated by the Financial Stability and Development Committee under the State Council.

The qualification review framework should be unified and cover matters such as capital adequacy, risk isolation (the "firewall" system), corporate governance, compliance management, information technology security, and anti-money laundering capability. For cross-border business in particular, it should also assess compliance with host-country regulations and home-country cooperation.

The law should make clear that, once a financial institution has obtained the relevant qualification, its parent company or holding company bears the primary responsibility for overall group risk. The licensed regulators of individual business subsidiaries are responsible for micro-prudential supervision. The "Joint Recognition Committee" is responsible for macro-prudential monitoring and coordination of the group's overall cross-sector and cross-industry risks.

Moreover, it is also necessary to improve cross-border regulatory coordination by encouraging information-sharing and enforcement cooperation between Chinese regulators and their overseas counterparts.

V. Strengthening the Connection Between the "Financial Law" and Other Laws, Regulations, and International Rules

As a foundational law, the Financial Law needs a clearer mechanism to lead and coordinate with sector-specific laws such as the Commercial Banking Law, the Securities Law, the Insurance Law, and the Trust Law. Furthermore, as China deepens its financial opening-up, this law must align with universally accepted international rules (such as the Basel Accords, FATF Recommendations, and IOSCO Principles) .

It is advisable that a principled clause could be added to the general provisions establishing the Financial Law is the basic law of the financial sector with priority application. Other financial laws, administrative regulations, and rules should remain consistent with it.

The State Council could be authorized to formulate implementation rules under this law and to coordinate the resolution of any conflicts between it and individual financial sector laws. It would also be worthwhile to introduce a principle of "regulatory consistency", drawing on the standards of international organizations such as the International Monetary Fund, the Financial Stability Board, and the Basel Committee, so as to promote alignment between China's financial regulatory rules and international practice.

A further provision could be added to Chapter IX, "Financial Development and Security", stating that the state shall actively promote the alignment of domestic financial regulatory standards with internationally accepted standards and best practices. When formulating relevant rules and standards, the State Council's financial management departments should study and appropriately incorporate internationally recognized regulatory standards, and steadily advance benchmarking and mutual recognition.

Moreover, the author believes the Draft should also add a dedicated chapter on "cross-border financial regulatory coordination" to address institutional gap. This would cover reciprocal access principles, cross-border regulatory cooperation mechanisms, and graded management of outbound data flows, providing clear legal expectations for institutions "going global."

Furthermore, the law should improve provisions on financial infrastructure by supporting interoperability between CIPS and major international payment and clearing systems, and by encouraging domestic financial infrastructures and their overseas counterparts to establish collateral mutual-recognition mechanisms, thereby providing technical support for the internationalization of Renminbi assets. It should also strengthen cross-border sharing and verification of beneficial ownership information in response to FATF assessment requirements, enhancing the international credibility of China's anti-money laundering regime. In addition, it should clarify the legal status of RMB-denominated assets issued offshore, providing a higher-level legal basis for products such as Panda bonds and offshore central bank bills.

VI. Improving Cross-Border Regulatory Coordination: Drawing on China-US Differences

The core difference between Chinese and U.S. financial regulation lies in their fundamentally different system logic. China follows an administrative, "centralized and unified" model, while the U.S. follows a law-based model of multiple authorities and mutual checks. China places greater emphasis on maintaining financial stability and centralized decision-making, while the U.S. seeks to prevent abuse of regulatory power through decentralization.

This difference is especially visible in cross-border regulation. Through laws such as the Holding Foreign Companies Accountable Act, the U.S. actively shapes cross-border regulatory rules. By contrast, although Article 85 of the Draft establishes a principle of "countering long-arm jurisdiction", it still lacks specifics on the daily coordination of cross-border capital flows, procedures for granting access to on-site inspections by overseas regulators, and approval standards for cross-border data flows.

It is therefore well worth serious consideration to add a dedicated chapter on "cross-border financial regulatory coordination" to the Draft. Such a chapter could include at least the following:

First, a principle of reciprocal market access, under which foreign financial institutions entering the Chinese market would be subject to regulatory treatment equivalent to that applied to Chinese financial institutions in the foreign institutions' home markets.

Second, a cross-border regulatory cooperation mechanism, clearly defining the statutory authority of the People's Bank of China and the State Administration of Foreign Exchange to take the lead in signing regulatory cooperation memoranda with overseas regulatory bodies, and standardizing approval procedures for providing documents and materials abroad.

Third, a graded system for outbound data management, distinguishing among "core," "important," and "general" financial data, with different approval procedures for each category. Such an arrangement would provide financial institutions with clear legal expectations when expanding overseas, avoiding business disruption caused by unclear compliance pathways.

VII. Taking a Long-Term View: Implementation Paths Aligned with International Rules

In the area of international capital flows, moving from "case-by-case approval" to "transparent rules" is a direction worth serious attention.

In the short term, supporting rules could clarify a “whitelist” mechanism for cross-border capital flows, shifting mature channels from approval to filing. In the medium term, revisions to the Foreign Exchange Administration Regulations could replace transaction-by-transaction approval with a dual-pillar framework of "macro-prudential management + micro-level supervision". In the long term, the goal should be capital-account convertibility.

For financial institutions expanding overseas, the broader trend is to move away from "going it alone" and towards “regulatory mutual recognition”. In the short term, the Financial Law could clarify the principle of "reciprocal regulatory mutual recognition", thereby providing a legal basis for launching equivalence negotiations with the European Union, the United Kingdom, Singapore, and others. In the medium term, China could promote bilateral regulatory cooperation memoranda with key Belt and Road partner countries. In the long term, it should actively participate in the formulation of international regulatory standards so that Chinese practice can be incorporated at the rule-making stage.

In anti-money laundering, the internationally accepted path of evolution is from "formal compliance" to a "risk-based" approach. In the short term, the law could clarify the filing, verification, and cross-border sharing of beneficial ownership information, while fully bringing designated non-financial institutions into the anti-money laundering framework. In the medium term, China could formulate Measures for the Administration of Anti-Money Laundering in Virtual Assets. In the long term, it should revise the Anti-Money Laundering Law and establish a differentiated framework for the allocation of compliance resources.

For Renminbi internationalization, the inevitable path is from "policy-driven" to "market-driven". In the short term, the Financial Law could clarify the legal status of offshore RMB-denominated assets. In the medium term, revisions to the Law of the People's Bank of China could formally recognize Renminbi internationalization as a statutory function. In the long term, the aim should be broad capital-account convertibility and the emergence of the Renminbi as the third-largest currency in the SDR basket.

For the internationalization of RMB-denominated assets, an encouraging direction would be to move from a "mainland-led" model to one driven by "offshore interaction". In the short term, the law could explicitly support domestic institutions in setting up RMB clearing centers and custody institutions overseas. In the medium term, China could revise the Securities Law to add a dedicated chapter on the offshore issuance of RMB-denominated securities. In the long term, it could explore an upgraded version of cross-border connectivity mechanisms, enabling continuous trading across multiple time zones.

VIII. Conclusion: The "Financial Law" as the Rule-of-Law Foundation for a "Financial Powerhouse"

The formulation of the "Financial Law" lays the rule-of-law foundation for China's evolution into a "financial powerhouse." The Draft has already made systematic arrangements in areas such as "full-coverage regulation", "risk disposal", and "serving the real economy".

But if it is to become a true "financial constitution" capable of resolving disputes, guiding development, and preventing risks, it still requires more careful institutional "fine-tuning" in key areas such as the boundary of regulatory functions, conflict-of-interest mechanisms, the linkage among legislation, justice, and enforcement, market access for cross-sector business, and alignment with international rules.

From a broader perspective, China's "centralized and unified" model is well suited to building systems quickly and concentrating resources to prevent systemic risk, while the U.S. "multi-agency checks and balances" model places greater weight on preserving market flexibility and maintaining vigilance against public power through long-term institutional contestation.

In drafting the Financial Law, China need not mechanically imitate either model. Instead, on the basis of its own national conditions, it should absorb the reasonable core of internationally accepted rules and organically combine "effective control" with "sufficient flexibility", thereby providing robust legal support for the building of a financial power.

Finally, the author hopes that, during the public comment period, the legislature will fully absorb the practical experience of market participants and translate policy intent and institutional requirements into legal language that is more accurate, concise, and enforceable. That would help make China's financial governance more law-based, professional, and international, and in turn better serve the real economy, contain financial risks, deepen financial reform, and lay a solid institutional foundation for the building of a financial power.

Since the February 28 joint U.S.-Israeli strikes on Tehran, this 54-mile stretch of water has been plunged into high alert. The safety of this route doesn't just sway the energy markets anymore; it holds the fate of a rapidly growing number of Chinese traders deeply invested in the Middle East.

Today's newsletter features a piece from Southern Weekly, a Guangzhou-based newspaper renowned for its investigative reporting, on the 24-day blockade of the Strait of Hormuz, the Chinese seafarers left drifting at sea, and the Chinese exporters forced into paralysis on shore.

The piece below was first published on Southern Weekly's WeChat account on March 23. Please note that the translation below is mine and has not been reviewed.

霍尔木兹海峡“封锁”24日：漂在海上的船员，与被迫停摆的外贸人

24 days into Hormuz closure: Chinese Seafarers adrift, traders at a standstill

Adrift at Sea

In the middle of the night, a white speck streaked across the sky in a long arc towards the horizon. Seconds later, flames erupted on the opposite shore.

Shortly after 1 a.m. local time on March 9, a falling drone struck an oil storage facility at the port of Fujairah in the United Arab Emirates (UAE), setting it on fire. The blast was captured on video by the second officer on watch aboard a Chinese merchant ship, and later posted online by the vessel's captain, Li Yan. At the time, the ship was anchored off Khor Fakkan, outside the Strait of Hormuz, just 10 nautical miles from the explosion.

Li, who works for a shipping company in southeast China's Fujian Province, had set sail from Novorossiysk on Russia's Black Sea coast on February 14, carrying 54,930 tonnes of wheat. The vessel was supposed to pass through the Strait of Hormuz into the Gulf and unload in Iraq on March 5. But on March 3, as it approached Khor Fakkan to refuel and resupply, Li received a message from the shipowner: "Do not enter the Persian Gulf. Wait at anchorage." The assigned anchorage was in the Gulf of Oman, east of the Strait of Hormuz and north of Fujairah, UAE.

In his 16 years at sea, Li Yan has dropped anchor countless times, but he told Southern Weekly this was the most chaotic experience of his career. "There was no GPS signal at the anchorage," he recalled. Dropping anchor blindly in such complicated waters is highly dangerous; snagging an undersea cable can lead to severe consequences, including massive compensation claims and potential legal trouble.

Left with no alternative, Li had his crew continuously scan coastal targets on the radar to calculate their bearings and distance. They had to constantly monitor their spacing from nearby vessels, relying on intermittent BeiDou satellite signals from their cell phones just to confirm their location. It took from 11 p.m. until after 3 a.m. to finally get the ship safely anchored.

Li then waited there for six days. The ship's GPS never returned, and the automatic identification system (AIS) remained down, leaving the crew completely blind to detailed traffic data and the positions of nearby vessels.

"If I can see Chinese characters on a ship, I assume it's Chinese; otherwise, I have no idea," Li said. Aircraft periodically roared overhead, and some crew members reported hearing shelling in the distance.

This bottleneck followed the February 28 launch of major US and Israeli military operations against Iran, which prompted Iran's Islamic Revolutionary Guard Corps to ban all ships from the Strait on March 2. According to The New York Times, at least 16 oil tankers, cargo and other commercial ships have been attacked in the Persian Gulf since the conflict began. Many ships have halted or diverted, and at least hundreds of vessels have been forced to wait outside the Strait.

Between March 1 and 19, only 116 voyages passed through Hormuz, down 95 percent from a year earlier, according to an industry data firm Kpler.

The prolonged wait has left the crew increasingly anxious. Li's primary concern is their freshwater supply. When they first dropped anchor, the vessel had over 130 tonnes of freshwater; that has now dropped to just over 100 tonnes. To conserve it, the crew is using seawater to flush toilets and has shut down the laundry. Because the ship's machinery also requires water, 30 to 40 tonnes must be kept in reserve, leaving only about 80 tonnes available for use. "At two tonnes a day, we can last a month at most," Li noted. "And the longer this drags on, the worse the water quality becomes."

Li reported the looming shortage to the shipowner. However, entering the port is impossible due to the war, and diverting to another port to resupply would burn too much fuel, an expense the owner refuses to cover. For now, the crew's only option is strict water rationing.

Food supplies, meanwhile, are holding steady. "Meals aren't a major issue for the time being," Li said. While fresh vegetables will run out around March 20, the ship has ample reserves of meat, frozen foods, and dry goods, along with long-lasting staples like potatoes, frozen cauliflower, and dried green beans.

On the night of March 10, Li received orders to weigh anchor and steam east to escape the High-Risk Area (HRA). They were instructed to drift in international waters off southern Pakistan and await further instructions. "Staying at anchorage means paying port fees, and the waters we were in are considered dangerous," Li explained. "With still no word on our discharge port, leaving the HRA to drift outside it was the safer option."

By March 21, Li still had no timeline for when the ship could berth and unload. Every day, he posted a short video online, always with the same caption: "Waiting."

Missing Clients and Soaring Freight Rates

"There are frictions in Iran every now and then, but nothing really comes of it over these years. Internet outages usually resolve in a week or two," said Tina, a 12-year veteran of the foreign trade industry. It wasn't until reports of the Iranian Supreme Leader's death that she realized the severity of the situation. "This is the biggest hurdle I've ever faced."

Tina runs a paints and coatings factory in east China's Anhui Province, exporting about 80 percent of her products to the Middle East. She typically communicates with clients via WhatsApp. For nine days after the war broke out, the "last seen" status of several Iranian customers remained frozen on February 28. Beyond the fate of her orders, her primary concern was whether her clients were safe.

On March 9, an Iranian client finally came online. Tina was so overwhelmed she nearly cried. He explained that he was about 30 kilometers outside central Tehran and had avoided the bombings so far, but admitted he "didn't know what would happen next."

In the first 10 days of February, Tina had shipped over 50 containers to the Middle East, five times her usual volume, hoping to get ahead of the Lunar New Year holiday and prevent inventory disruptions for her buyers.

Under normal shipping schedules, the cargo would have reached the UAE by early March. Instead, more than 30 containers are now in limbo. Some are stranded at temporary transit ports outside the Strait, while others are simply drifting at sea.

Days after the conflict broke out, Tina's freight forwarder relayed notices from the shipping lines: cargo stranded at sea would incur war-risk surcharges of USD 2,000 for a small container and USD 3,000 for a large one.

Tina calculated that these surcharges alone would add over 600,000 yuan (about $85,714) to her costs, even before factoring in additional expenses for overland transport.

Because most of her contracts are under CIF (Cost, Insurance, and Freight) terms, meaning the seller covers delivery and insurance to the destination port, this financial burden falls squarely on her. She asked her clients to split the increase, but even long-term customers declined. "Nobody wants to shoulder it," she said.

Freight forwarders are also scrambling. Facing volatile port conditions and fluctuating rates, they are rushing to find alternatives to the Strait of Hormuz for their clients.

Ma Wei, manager of the Guangzhou branch of Shenzhen A&E Container Transportation Co., Ltd, noted that his company primarily serves India, Pakistan, the Middle East, and the Red Sea. "Cargo bound for the Persian Gulf can't berth normally right now," he explained. "The main workaround is to unload at ports outside the Strait, like Khor Fakkan in the UAE and Sohar in Oman, and then wait for shipping lines to arrange inland transport."

Ma added that his company currently has over 2,000 containers drifting at sea. While shipping lines are handling the crisis differently, some have warned that cargo arriving at these transit ports after March 2 will face steep war surcharges ranging from USD 1,500 to 6,000 per container.

Guangzhou Anshida Supply Chain Co., Ltd (Ontask Express) has been operating as a freight forwarder to the Middle East for over a decade, with 90 percent of its business concentrated in Saudi Arabia and the UAE. According to sales director Kevin, the company shipped over 700 containers of household goods, building materials, and other products in January and February. Roughly 200 of those have yet to arrive. "The cargo is worth nearly 100 million yuan," he noted, adding that the delays are expected to generate over 2 million yuan in additional costs.

Faced with soaring expenses and an unpredictable conflict, some traders have paused shipments to wait things out. JCtrans, a major B2B international logistics platform with 770,000 registered users across 181 countries, reported a steep decline in activity. Since March, their big-data tracking has shown a 60 percent drop in global logistics demand to the Middle East compared to the same period in January.

While stranded cargo is a pressing issue, medical device trader Dong Man is far more concerned about the rest of the year. "Our Middle Eastern clients have already confirmed they won't attend the Canton Fair in April or the China International Medical Equipment Fair in Shanghai," she said. Orders generated from these exhibitions typically account for 30 percent of her annual sales. "Even after initial discussions at the fairs, clients still need to visit the factory and inspect the products in person. Online communication simply can't replace that."

Middle East Trade: Opportunities and Risks

Many Chinese exporters have turned to the Middle East in search of untapped potential.

A decade ago, Tina focused primarily on North America. However, recent U.S. and Canadian tariffs on Chinese goods wiped out her price advantage, forcing her to pivot to new markets. She found a wealth of opportunity in the Middle East. Because the region's economies have long relied on oil as their primary economic pillar, their industrial sectors remain relatively undiversified. As a result, they depend heavily on imports for construction materials, electronics, and daily consumer goods.

Tina's company specializes in paints and coatings, a category of engineering materials she describes as an "essential necessity." Even though these products are made from petroleum derivatives and the Middle East is rich in crude oil, the region lacks sufficient processing capacity and faces high labor costs. Consequently, they still need to import these goods in massive volumes.

At the same time, recent technological advances have elevated the quality of Chinese-manufactured goods, which are now often more highly regarded than traditional "Made in Europe" products. Tina considers herself fortunate that Middle Eastern demand has steadily grown over the past decade, "to the point where it can fully replace, and even exceed, the demand we used to see from the U.S. and Canada."

Tina's journey is common among Chinese traders. Over the past three to five years in particular, she has noticed a distinct "gold rush" mentality toward the Middle East. This shift is most evident in the growing number of Chinese travelers at UAE airports and the ubiquitous presence of Chinese contractors on Saudi construction sites.

According to Kevin, Saudi Arabia's "Vision 2030", unveiled in 2016, together with the rise of Middle Eastern e-commerce after 2021, has fueled rapid growth in consumer demand across the region.

"Our business has grown by over 30 percent annually for the past five years," he noted. "While many perceive the Middle East as volatile, the GDPs of Saudi Arabia and the UAE actually rank quite high globally. Rising consumer purchasing power and two decades of general social stability have provided a secure environment for doing business there."

The data backs this up. Consider Saudi Arabia, China's largest Middle Eastern trading partner: in 2025, bilateral goods trade reached USD 108.16 billion, with Chinese exports accounting for USD 53.42 billion. Compared to 2019, when total trade was USD 78.04 billion and exports were USD 23.86 billion, the value of Chinese exports to Saudi Arabia has more than doubled in just six years.

Kevin also emphasized the growing importance of the Strait of Hormuz for trade. "With rising demand and soaring post-pandemic air freight costs, many clients have shifted from air to sea," he explained. "Sea freight is roughly 70 to 80 percent cheaper. Although it takes 20 to 25 days longer, clients compensate by advancing their production schedules and carrying larger inventories."

Meanwhile, Tina constantly refreshes her news feed, terrified of missing any updates on the Strait. "My emotions have been a rollercoaster lately," she admitted, adding that she sometimes jolts awake in the middle of the night. "With everything still up in the air, I simply can't settle down or focus."

Although 20 percent of Tina's business is still in Asia and Russia, the unresolved Middle East cargo crisis has left her too distracted to even quote prices for other clients. "This one issue overshadows everything else right now," she said. "All I can do is wait. There's no point in getting anxious; a geopolitical crisis like this is completely out of any single individual's hands."

(Note: Li Yan and Dong Man are pseudonyms.)

On January 14, the State Administration for Market Regulation (SAMR), China's top market regulator, launched a probe into Trip.com over alleged monopolistic practices involving abuse of market dominance.

And it was in late March that the pace became strikingly concentrated.

• March 23: Regulators summoned and issued administrative guidance to 12 major internet platforms, including Ctrip, JD.com, Taobao Flash Shopping, Meituan, and Douyin, targeting hyper-competitive behaviors that allegedly harm both merchants and consumers.

• March 24: Officials at a national symposium on price supervision and anti-unfair competition signaled that regulators would continue to step up price oversight and intensify the clean-up of "involutionary" competition.

• March 25: The state-run Economic Daily published an unusually blunt commentary titled "It is time to end the food delivery price war 外卖大战该结束了." The piece directly linked the cash-burning subsidy wars of food delivery platforms to China's current sluggish CPI, essentially blaming these predatory price wars for dragging down inflation.

• March 26: SAMR held its first fair competition symposium of the year with corporate representatives, urging Chinese firms to standardize their competitive behavior and "build a healthy competition ecosystem" as they expand overseas.

For many China watchers, this rapid-fire regulatory wave triggers immediate flashbacks to 2021. Is China entering another round of heavy-handed, sweeping crackdown cycle?

Not quite. But something important is shifting. Unlike the storm-like rectification campaign of 2021, the current push against "involution" looks more measured, systemic, and structural. That caution reflects several factors at once.

Part of it stems from a leadership's reassessment of how the last cycle of regulation was handled. In 2021, ministries largely moved on their own track. Antitrust pressure on platform companies came alongside a broader wave of contractionary policies: the "three red lines" in property, the crackdown on private tutoring, and production curbs. The cumulative effect was severe, especially on private-sector confidence and expectations.

That experience appears to have forced a rethink. By 2022, policymakers were already warning against the "fallacy of composition" — the risk that individually rational moves by different departments could, in aggregate, produce macroeconomic damage. From there emerged a stronger emphasis on field research, caution in rolling out tightening measures, and consistency checks on the overall stance of macro policy.

The shift also reflects harder economic constraints. Compared with 2021, growth and expectations today remain far less secure. The central leadership's repeated call to stabilize employment, enterprises, markets, and expectations places real limits on how far regulators can go. Platform companies now serve not only as corporate actors, but also as reservoirs of employment and key consumption channels. A return to the old, blunt style of regulation would carry much higher political and economic risks.

Against this backdrop, an essay published in January this year by Liu Shangxi stands out as especially relevant.

Prof. Liu is the vice-chairman of the Chinese Society of Macroeconomics, and former president of the Chinese Academy of Fiscal Sciences.

In "A Panoramic Perspective and Governance Logic of 'Involutionary' Competition in the Manufacturing Sector", Liu argues that the root of China's involutionary manufacturing competition lies not simply in market saturation, but in the operating logic of local government.

Driven by the imperative to secure tax revenue and political performance, local authorities compete to attract the same kinds of investment at almost any cost. The result is a classic fallacy of composition: locally rational behavior producing nationally excessive capacity.

Liu is also explicit in criticizing China's long-standing mercantilist instincts and export-led inertia. Swapping real resources for larger foreign exchange, while exporting ever more cheaply, is not a sustainable model, he argues.

In his view, Beijing's eventual answer to this impasse is clear: force a shift from scale expansion to efficiency and innovation, and accelerate the export not just of cheap goods, but of industrial and financial capital.

Below is the English translation of Dr. Liu's piece, which has not been reviewed by him.

A Panoramic Perspective and Governance Logic of "Involutionary" Competition in the Manufacturing Sector

制造业“内卷式”竞争的全景透视与治理逻辑

Author: Liu Shangxi

(Ph.D. in Economics, Doctoral Supervisor, Researcher at the Chinese Academy of Fiscal Sciences, Member of the 13th and 14th National Committee of the Chinese People’s Political Consultative Conference)

Abstract: The core characteristics of current manufacturing "involution" manifest in two dimensions: horizontal "price involution" and vertical "supply chain involution." Its root cause lies in the systemic misalignment of macroeconomic structure, industrial organization, and the international division of labor. Specifically, this can be deconstructed into three mechanisms: the convergence of local government behaviors, insufficient industrial concentration, and a lack of internationalization within supply chains. Currently, the central government has integrated "anti-involution" into the core agenda of high-quality development, forming a multi-level governance framework that includes the upgrading of national legislation and regulation, industry self-discipline and structural optimization, local innovative service practices, and globalized layout. Moving forward, for the manufacturing sector to achieve innovation-driven development, it must balance the coupling of policy intervention and market regulation, as well as the synergy between domestic governance and international expansion. Moreover, to enhance the international competitiveness of China's manufacturing sector, in addition to the development of the supply chain itself, it is imperative to promote the export of financial capital to uplift China's position in the global value chain.

I. Introduction

Currently, the problem of "involutionary" competition in the manufacturing sector has extended far beyond the realm of fiscal and tax policy. The decision-making logic behind local governments' investment attraction has fundamentally changed. In the past, introducing projects was about expanding the tax base; now, some localities pursue construction projects at almost any cost. Some not only refund tax revenues and land transfer fees through "collect first, refund later" schemes, but also promise massive subsidies, creating substantial future expenditure obligations. This type of debt snowballs, and some localities have even begun to default.

For a period following the implementation of the tax-sharing system, local governments, acting as independent interest entities, had to continuously develop the economy. Only through continuous growth could they secure more financial resources and tax revenues to spend, with transfer payments serving as a supplement to local financial capacity. However, now that the scale of transfer payments has expanded to 10 trillion RMB, an increasing number of localities have become highly dependent on them, thereby altering their behavioral logic.

China's manufacturing sector is currently facing the severe challenge of "involutionary" competition, a phenomenon that has drawn high-level attention from the central government and has been incorporated into the scope of national strategic governance. The July 2024 Politburo meeting explicitly proposed "preventing 'involutionary' vicious competition" for the first time, a task reiterated in the 2025 Government Work Report. Manufacturing "involution" not only depletes corporate innovation resources and reduces industrial efficiency, but is also highly likely to trigger a public risk where "bad money drives out good" (Gresham's Law).

This article aims to understand the internal logic of "involutionary" competition primarily through industrial policy theory, behavioral response mode theory, and the latest empirical data. In reality, viewed through the lens of the relationship between the government and the market, while "involutionary" competition manifests in the market, its root cause lies in skewed incentive mechanisms. This is the resulting byproduct of the continuous adjustment and evolution of the government-market relationship under China's socialist market economy.

II. Definition and Multi-dimensional Manifestations of "Involution": From Concept to Reality

A. Definition of "Involution"

In the context of manufacturing, "involution" specifically refers to a zero-sum game where enterprises fight for a limited market through homogenized competition and inefficient resource inputs, trapping the manufacturing sector in a vicious cycle of "growth without development."

"Development" and "growth" are conceptually distinct: when GDP grows, but industrial competitiveness, social welfare levels, and residents' employment, income, and consumption levels do not symmetrically improve, development lags behind growth. Such growth is unsustainable. For instance, price cuts in automobiles may appear beneficial to consumers, but if they are caused by "involution" rather than an increase in labor productivity, they are harmful to the auto industry in both the short and long term.

B. Core Characteristics of "Involution"

The core characteristics of "involution" manifest in two dimensions.

The first is horizontal "price involution." Price involution is essentially driven by enterprises' lack of differentiating capabilities based on core technologies. As technology diffuses faster and with lower barriers to entry, companies lacking core technological differentiation can only capture market share through "price wars." The typical manifestations are a continuous decline in corporate profit margins coupled with rising sales costs.

For example, from 2021 to 2024, the manufacturing sales profit margin dropped from 13.24% to 11.87%, a record low; the operating profit margin of the auto manufacturing sector fell from 6%-7% (2018-2021) to 4.2% in 2024, with the average price of new energy vehicles dropping by 6.5% year-on-year. Solar photovoltaic (PV) module prices plummeted by 70% in two years; despite the industry adding 200GW of new installations, it suffered across-the-board losses.

The second is vertical "supply chain involution." Dominant enterprises in the industrial chain leverage their monopolistic momentum to squeeze the profit margins of upstream and downstream partners, resulting in a dynamic of "compressing costs, compressing schedules, and compressing services."

Typical examples include the cement industry, where the profit margin fell to 43.3% in 2024, nearly halving from its 2020 peak; spot glass prices fell from 2,488 RMB/tonne in 2021 to 1,463 RMB/tonne, a drop of nearly 50%; the biopharmaceutical industry also faced capacity constraints due to homogenized R&D (such as the crowding into PD-1 targets). Vertical supply chain involution means that enterprises with market advantage in the chain (i.e., chain leaders) squeeze upstream and downstream profits by shifting costs.

In short, the consequences of "involution" have transcended the economic realm, touching upon sustainable economic development and social employment issues. According to behavioral response mode theory, enterprises exhibit a "survival first" behavioral preference in resource-scarce environments: under "involution," they reduce R&D intensity and pivot toward marketing competition.

For instance, a leading EV manufacturer saw its sales expenses rise from 9% to 14%. This type of "involutionary" competition ultimately leads to a decline in total factor productivity (TFP). Historically, the market share of Chinese motorcycles in Vietnam plummeted from 90% in 2002 to 1% in 2006, serving as stark evidence of how involution triggers quality deterioration and damages international reputation.

III. Deep-seated Generative Mechanisms: Three-Dimensional Structural Contradictions

The root of manufacturing "involution" lies in the systemic misalignment of the macroeconomic structure, industrial organizational formats, and the international division of labor, which can be broken down into three specific mechanisms.

A. Convergence of Local Government Behaviors: Policy Catalyzing Overcapacity

Local governments resonate with the central government; thus, when responding to central decision-making deployments, they are prone to forming "homogenized" behavioral patterns, driving redundant construction through land concessions and tax breaks.

For instance, to attract a leading auto company, a city in a central province offered "move-in ready" incentives—free land, pre-built factories, and even personalized services for worker recruitment and training. As long as the company deployed personnel to initiate production, promised to build a set number of production lines within a specific timeframe, and met the targets, it could receive up to 5 billion RMB (around USD 714 million) in subsidies. Faced with such lucrative terms, it is naturally difficult for companies to refuse.

The photovoltaic industry tells a similar story. Stimulated by local subsidies, the total planned capacity across provinces currently exceeds total global demand. Meanwhile, from 2023 to 2024, new energy vehicle industrial parks were launched simultaneously in 12 provinces, with a planned capacity of 20 million vehicles annually—again, far exceeding domestic demand.

This converged behavior, on one hand, aligns with the "mimetic mechanism" in institutional isomorphism theory, where local governments replicate the successful experiences of other regions to avoid policy risks, leading to regional industrial structure convergence and overcapacity.

On the other hand, it is driven by coercive mechanisms stemming from top-down supervision. In the process of developing the economy, local governments often need to strike a balance between "flexible innovation" and "strict alignment with central directives". Emphasizing localization might lead to accusations of "bending the rules or discounting implementation"; conversely, mechanical, copy-and-paste execution often detaches from reality, becoming "formally compliant but practically unreasonable."

This produces a fallacy of composition—viewed individually, local practices are irreproachable, but the aggregated outcome is unsatisfactory and often contradicts the overall goal.

B. Insufficient Industrial Concentration: The Structural Basis for Inefficient Competition

China has a massive number of manufacturing enterprises, but industrial concentration is low, weakening the industry's capacity for synergy. For example, the market share of the top four biopharmaceutical companies is 18.5%, far below the international average of 40%; the top ten cement companies account for about 57% of capacity, whereas in developed countries, this generally exceeds 80%.

A market with low concentration naturally breeds a "prisoner's dilemma," where enterprises are forced into "price wars" just to maintain market share. Cases where local governments facilitated industry coordination to "reduce production and stabilize prices," successfully pushing regional prices to the forefront nationally, confirm that moderate concentration improves competitive efficiency.

C. Insufficient Supply Chain Internationalization: Weak Outward-Looking Chain Leaders

There are many "inward-looking chain leaders" but few "outward-looking chain leaders" in Chinese manufacturing sector. And its globalization layout lags behind the capacity scale, exacerbating domestic zero-sum competition. Specifically, the average share of overseas revenue for manufacturing enterprises is under 20%, compared to over 50% for German and Japanese companies. Chinese companies' overseas revenue primarily comes from selling goods, while the share of revenue from technical services, patent licensing, and overseas production bases remains low. In the Southeast Asian EV market, Chinese brands account for over 90% of sales, but the local production fulfillment rate is only 30%.

Furthermore, the lack of international capacity synergy leads to "export-oriented inertia," where companies rely on low prices to expand exports—trading price for volume is already quite obvious.

According to related research estimates, the average price reduction for export products has reached as much as 30%, triggering trade frictions. In contrast, "supply chain going global" cases, like BYD's Thailand factory or SAIC Motor's Indonesia base, reduce reliance on domestic capacity through localized production, effectively circumventing "involution." This kind of international capacity coordination will be a critical direction for the future.

Why is it so difficult to reverse export-oriented inertia? Why is the path dependence on external circulation so strong? An underlying mercantilist mindset is a major root cause. Historically, mercantilism was characterized by "government intervention + pursuit of trade surpluses." In the era of metallic currency, a surplus meant the inflow of gold and silver. Today, we still place high value on surpluses, believing that a surplus means we have "profited." However, in the era of sovereign fiat money, a surplus often means exchanging real resources for numbers in foreign currency on a ledger; the true "costs" are frequently concealed.

Moreover, pursuing surpluses is imbued with the significance of stabilizing economic growth. Export surpluses are one of the "troika" growth drivers; the larger the surplus, the more favorable it is for supporting economic growth, and the more likely it is to achieve expected growth targets. Consequently, to achieve target growth rates, various localities and departments reflexively continue to expand exports and enlarge surpluses. Under this mercantilist mentality, once the supply chain truly moves toward international layout, the surplus will subsequently decline, weakening its support for economic growth. Relinquishing this established surplus "dividend" inevitably brings hesitation and reluctance.

Internationally, mercantilism is also widespread. Many countries believe trade deficits equate to "taking a loss," making it an excuse and bargaining chip in international political games. In modern national economic accounting systems, a deficit is unfavorable for economic growth, and countries pursuing growth targets generally prefer surpluses and abhor deficits. This means that, globally, "involution" is also occurring. Especially in manufacturing, global involution is intensifying, government intervention is strengthening, global growth is slowing, and global development is declining even faster.

IV. Anti-Involution Policy System: National Governance and Local Practice

The central government has integrated "anti-involution" into the core agenda of high-quality development, formulating a multi-level governance framework. Existing "anti-involution" policy tools include the revision of the Price Law and anti-dumping determinations at the national legislative level; capacity coordination and payment conventions at the industry self-discipline level; supply-demand platforms and regulatory integration at the local service innovation level; as well as supply chain overseas expansion and international standard co-creation at the globalization layout level. Most notably, for China to resolve current involution, it must go global, seek international capacity cooperation, transfer excess capacity, and expand demand space.

A. National Legislation and Regulatory Upgrades

1. Revision of the Price Law: The July 2025 Draft Amendment to the Pricing Law of the People's Republic of China added "standards for identifying low-price dumping," explicitly prohibiting pricing below cost aimed at squeezing out competitors. This means clarifying whether the motive is to eliminate rivals. Without this judgment criteria, companies pricing below cost or even negatively in special circumstances to mitigate their own risks, which is actually risk-clearing, not dumping, might be misidentified.

2. Dynamic Capacity Regulation: The Ministry of Industry and Information Technology (MIIT) implemented "capacity utilization warning line" management for ten major industries, including steel and non-ferrous metals, mandating production cuts when utilization falls below 75%. While different tools can be applied to different industries, high vigilance is required regarding the risks inherent in administrative measures, particularly their dampening effect on market resource allocation and the survival of the fittest.

3. Optimization of Centralized Procurement Rules: For instance, the National Healthcare Security Administration abolished the "lowest bid wins" rule in its 11th batch of centralized procurement, requiring companies to commit to quoting no lower than cost and to explain the rationale.

B. Industry Self-Discipline and Structural Optimization

1. Led by Leading Enterprises: For example, nearly 20 auto companies signed the Initiative on Standardizing Account Payments for Automotive OEMs and Suppliers, unifying the supply chain payment period to 60 days to alleviate cash flow pressure on small and medium-sized suppliers.

2. Establishing Capacity Synergy Mechanisms: Examples include the PV glass industry collectively cutting production by 30%, and the China Cement Association issuing Opinions on Further Promoting High-Quality Development by Advancing "Anti-Involution" and "Stabilizing Growth" in the Cement Industry. Industry self-discipline issues must be placed on the agenda as early as possible; otherwise, risks to healthy market development will mount. Furthermore, there is an urgent need to promote supply chain integration. For instance, the Wuhu municipal government integrated with the "Provincial Supply and Demand Platform" to facilitate direct supply cooperation for display modules between Tianma and Chery, reducing procurement costs by 15%.

C. Local Innovative Service Practices

Localities are making efforts to respond to the central government's call against "involution." On one hand, they are strengthening government-enterprise synergy. For example, the Shenyang municipal government safeguarded Jinzhong New Materials to implement "production reduction and price stabilization," pushing Liaoning Province's cement prices to the top ranks nationally. On the other hand, they are advancing regulatory reform. Wuhu, for example, rolled out a "comprehensive single-inspection" mechanism for enterprises, integrating multi-departmental inspections and reducing enterprise inspection frequency by 60%.

V. Deep Perspective of Governance Logic: Dialectics of Theory and Reality

A. Systemic Governance under the S-C-P Framework

We can utilize the classic industrial organization model to reveal the formation and resolution pathways of "involution."

Under the S-C-P (Structure-Conduct-Performance) framework: in terms of Structure, shrinking demand (PPI declining for three consecutive years) and oversupply (industrial capacity utilization at 75.0%) lead to market misalignment; in terms of Conduct, enterprises fall into "price involution" (deteriorating gross margin-to-sales expense ratios) and "supply chain involution" (chain leaders suppressing prices); in terms of Performance, it is reflected in declining total factor productivity and the crowding out of innovation inputs.

Current policy focal points aim exactly at reshaping market structure, eliminating regional barriers by building a unified national market, and constructing international capacity cooperation networks via platforms like the China International Supply Chain Expo (CISCE).

B. The Dialectic Between Short-term Pain and Long-term Development

This adjustment process will inevitably be accompanied by short-term pain. Whether adjusting via administrative means or guiding corporate self-correction, reducing capacity inevitably entails significant "adjustment costs," including job losses, increased sunk costs, and asset devaluation.

The current task is to guide benchmark enterprises to shift toward quality and social responsibility evaluation. Society, the industry, and enterprises themselves must engage in evaluation and extend this to other firms, accelerating the paradigm shift from "price competition" to "value competition" to couple growth with development.

C. Institutional Design of a Unified National Market

Breaking "involution" requires institutional innovation. The most crucial aspect is accelerating central-local relations reform, restructuring the incentive mechanisms of the government (including central incentives for localities, and government incentives for the market and society).

Central-local relations are the core of institutional innovation. This involves not only central-local fiscal relations but also harmonizing unified national deployment with local customization. It requires integrating national strategy with differentiated local behavioral responses to achieve incentive compatibility.

Therefore, a "one-size-fits-all" approach nationwide is unworkable, as it prevents local adaptation; conversely, total laissez-faire is equally dangerous, as it risks the fallacy of composition. We must promote regulatory reform, factor mobility, and standardized rules. Ultimately, the core issue of reform is central-local relations, which is the pillar of national governance. Unsmoothed central-local relations lead to severe overreach or absence of action by both central and local governments, which in turn twists the relationship between the government and the market.

VI. Conclusion: Moving Towards a New Ecology of Innovation-Driven Development

The essence of manufacturing "involution" is the growing pain during the transition from "creative destruction" to "destructive creation." It reflects that during the rapid expansion of manufacturing, the "destructive" elements have overall outweighed the "creative" ones. The original expansionary momentum has been "destroyed", sunk costs and marketing costs have skyrocketed, yet differentiated core technologies and business models have not been "established". Competing solely on price leads to rapidly declining operating profits.

Innovation always causes "destruction" during growth, such as business bankruptcies, rising unemployment, and falling incomes. But as long as the "creativity" outweighs the "destruction", such as the proliferation of startups, new jobs, and rising incomes in new sectors, it can offset the social costs and public risks brought by the destruction, gradually forming a new development ecology and enhancing developmental vitality.

Current policy deployments advance on three tracks: "legislative constraints — industry self-discipline — globalized layout." Their underlying logic is to reconstruct the fundamental logic of manufacturing development, shifting from a scale-expansion orientation to an innovation- and efficiency-driven one. Governing "involution" requires balancing three aspects:

First, the coupling of policy intervention and market regulation. We must avoid the "administrative reduction of capacity" from causing new distortions and risks. Anti-involution efforts should encourage mergers and acquisitions through market-oriented and law-based methods. Let the market's mechanism of survival of the fittest determine capacity levels; the government should focus on improving incentive mechanisms and the rule of law.

Second, the synergy of domestic governance and international expansion. The concentration of China's industries is relatively low, and the international competitiveness of domestic leading enterprises is limited. In response, capacity cooperation under the "Belt and Road" initiative should serve as a breakthrough point on the demand side. Industrial policy cannot be confined to our domestic "backyard" but must possess a global vision and achieve internationalization.

Moreover, industrial policy must pivot toward production and supply chain policy, looking globally to build global corporations. Industrial policy should also encompass the service sector, particularly modern finance, intermediary services (accounting, legal, consulting), commercial services, as well as technology and information services. Various digital platforms under the megatrend of the digital revolution must become a focal point of production and supply chain policy.

Third, re-examining the relationship between monopoly and competition. Monopoly and competition will move from opposition to integration, forming "monopolistic competition." The true normality of the future will not be the perfect competition of early industrialization, but monopolistic competition.

Currently, the mainstream understanding of anti-unfair competition and anti-monopoly remains trapped in the framework of early industrialization. Faced with phenomena of increasing industrial concentration, there is a reflexive tendency to suppress it, which stifles market-driven industrial M&A. This is particularly evident in the anti-monopoly crackdowns on platform enterprises. The development of the digital economy brings myriad new situations and phenomena, such as utilizing market "dominant position" to "illegally" acquire data, infringement, unfair competition, and price discrimination, all of which require theoretical redefinition.

If we directly apply the criteria for monopoly judgments from early industrialization without considering the new logic and rules of the digital economy, it will inadvertently severely suppress the development of the digital economy and platform enterprises.

The future competitiveness of the manufacturing sector depends on the market structure's capacity for self-adaptation. Domestically, it is necessary to build an industrial ecology characterized by "differentiated competition—moderate concentration—innovation-driven"; externally, it must propel the leap from "product export" to "industrial capital export" and "financial capital export."

Currently, globally speaking, China's economy is still in the preliminary stage of commodity export. Industrial capital export (such as outward foreign direct investment and setting up factories abroad) has just begun, while financial capital export has not yet been placed on the agenda. This heightens the risks associated with industrial capital export (outbound investment).

In great power competition, finance is the true lifeblood. Being choked off technologically is short-term pain; only when facing a state of war, where the market economy shifts to a wartime economy, will international production and supply chains evolve into the ultimate risk and touch upon national security. The strategic risk focal point of great power games lies in finance, not technology.

China is a major manufacturing, economic, and trading power, yet it remains weak in distribution within the global value chain. Not only has it long hovered at the mid-to-low end of the value chain, but its "value compensation" is insufficient. While supplying the international community with massive quantities of high-quality, inexpensive goods, it has effectively provided immense hidden welfare subsidies to the world.

In the past, this was viewed as a "competitive advantage." In reality, China has mostly competed on scale in the physical realm, but its returns in the value distribution stage do not match the physical scale. Currently, China's financial competitiveness does not match its goods export competitiveness; its finance sector is large but not strong, lacking true discourse power and influence in the international financial arena.

The next breakthrough requires not only accelerating the export of industrial capital but, more importantly, ensuring that the export of financial capital keeps pace, thereby achieving a substantive elevation of China's status in the global value chain. This is what China should aim for, and what must be considered for the global layout of industrial chains. Without the escort of financial capital, the risks faced by the export of industrial capital will be magnified exponentially.

In conclusion, "anti-involution" is not merely a domestic manufacturing issue. It is also a strategic issue regarding how the entire industrial chain and the financial sector accelerate their global layout.

The essay's core argument is that all three parties, the U.S., Israel, and Iran, have misjudged the war's trajectory. It treats the conflict as a war of misjudgement that is drifting towards attrition, shaped less by battlefield tactics than by political endurance, alliance frictions, energy chokepoints, and the failure of regime-change assumptions.

Key takeaways include:

1. The "Triple Misjudgement" Framework: Dr. Lu notes that the U.S., Israel, and Iran are trapped in a protracted war of attrition due to strategic misjudgments on all sides. In analyzing the U.S. position, he highlights a severe strategic overextension: he assesses that American forces entered the conflict logistically under-prepared (citing figures like 50,000 regional troops and only 7–10 days of high-intensity munitions) and hampered by contradictory political objectives across Washington's agencies.

2. The Resilience of a "Civilizational State": Dr. Lu contrasts Iran with the "artificial states" of the Middle East (whose borders were largely drawn by the Sykes-Picot Agreement). He argues that Iran's deep-rooted identity as a "civilizational state" naturally triggers intense national cohesion when faced with foreign attacks. From his perspective, Western assumptions that external military pressure would spark an internal opposition uprising fundamentally misread this inherent historical and demographic resilience.

3. Modeling Extreme Energy Shocks via the Strait of Hormuz: Dr. Lu identifies the Strait of Hormuz as the ultimate center of gravity in this conflict. He models a viable scenario where the Strait remains blockaded for three to six months, effectively weaponizing inflation against the West. By noting that Brent crude could plausibly shatter the $150 to $200 per barrel mark under these conditions, he outlines a stark, worst-case scenario of how geopolitical chokepoints could dictate the outcome of modern asymmetric warfare.

4. U.S. Domestic Politics as the Ultimate "Exit Mechanism": The analysis concludes that the war is unlikely to end via a decisive military victory. Instead, Dr. Lu argues it will conclude only when the economic pain becomes politically unbearable for the U.S.. He links the battlefield timeline to U.S. electoral cycles, projecting that if extreme oil prices persist for over three months, it could inflict lethal damage on the incumbent administration's midterm election prospects. Thus, Washington's political tolerance for economic blowback will ultimately serve as the war's exit mechanism.

Dr. Lu has kindly authorized your host to translate the piece, please find the full English version below.

The U.S., Israel, and Iran have all misjudged the trajectory of the war

其实，美国、以色列和伊朗都误判了这场战争的走向！

The conflict between the U.S., Israel, and Iran has entered its fourth week, spilling over into at least 12 countries and sending economic and political shockwaves across the globe. To date, none of the belligerents have achieved their strategic objectives, yet all claim they can outlast their opponents.

Although the conflict is less than a month old—and compared to the "tug-of-war," "war of attrition," and "protracted war" seen in the Russia-Ukraine conflict, it seems to have just begun—both sides appear to have miscalculated each other's reactions. This has led to continuous escalation with no clear way out in the foreseeable future.

If the conflict devolves into a protracted war of attrition, Russia's passive strategic position will significantly improve. Through soaring oil and gas prices and rapidly increasing export volumes, Russia's petroleum revenues will rise substantially, granting it greater strategic initiative on the Ukrainian battlefield.

Meanwhile, Western economies, Gulf states, and major Asian energy importers like China, India, Japan, and South Korea are already feeling the pain caused by the war's escalation and the blockade of the Strait of Hormuz. In fact, Iran blocked the Strait at the very onset of the war, disrupting approximately one-third of the world's crude oil and one-quarter of its LNG shipments. Brent crude futures for May delivery have remained above $100 over the past week, while Dubai and Oman crude—benchmarks for the Asian market—have soared to an exorbitant $150 per barrel.

The person feeling most discouraged right now is likely Donald Trump. He originally envisioned that the February 28 "decapitation strike" against the Iranian leadership—including the targeted elimination of Supreme Leader Ali Khamenei—would trigger the collapse of the Iranian regime. He hoped to replicate the "Venezuela Model" (the precise capture of Maduro) and experience the feeling of "winning big" once again in Iran.

However, this vision has yet to materialize. Khamenei's hardline son, Mojtaba Khamenei, has taken the reins and vowed revenge. To date, no domestic rebellion challenging the regime has emerged, and the "internal-external coordination" by the Iranian opposition that the West had hoped for has failed to appear.

Despite suffering massive airstrikes, Iran has retained its capability to launch ballistic missiles and drones at U.S. military bases across the Middle East, Israel, and crucially, major cities in U.S. partner nations in the Gulf.

It is safe to say that all three parties—the U.S., Israel, and Iran—have made severe miscalculations regarding this war. Instead of concluding swiftly as all sides desired, the war has descended into a more complex stalemate in its fourth week, bringing far greater global shocks than anticipated.

For the United States, it underestimated Iran's resilience and overestimated its own ability to control events.

First, Trump firmly believed he could win this war quickly and at a low cost, akin to previous military interventions aimed at regime change through a swift "blitz." Furthermore, U.S. pre-war preparation was glaringly inadequate. With only about 50,000 troops deployed in the Middle East and reserves of high-intensity munitions sufficient for only 7–10 days, the U.S. was entirely unprepared for a protracted war.

Second, Trump severely underestimated the survivability and willpower of the Iranian regime. Despite the successful "decapitation" strike early in the war, Iran did not collapse. Instead, it rapidly activated a "mosaic defense," decentralizing command and launching a fiercely unexpected counterattack.

Moreover, the Iranian public did not stage the anticipated "uprising." Unlike many artificially created states in the Middle East (whose modern borders were largely drawn in secret by British and French diplomats Sykes and Picot), Iran is a "civilizational state." When faced with foreign invasion, Iranian national identity and pride are naturally awakened. With Shia Muslims comprising roughly 90% of the population, their sense of identity and cohesion is extraordinarily strong.

Third, Trump's political objectives in this war have been muddled. Washington has oscillated between "regime change" and "merely degrading military capabilities," with contradictory statements emerging from the White House, the State Department, and the Pentagon. "Besides Trump, no one in the White House right now knows exactly what Trump is thinking," commented an expert from a Washington think tank. Trump completely failed to anticipate that Iran would directly blockade the Strait of Hormuz, disrupting roughly 35% of global oil shipments, triggering a global energy crisis and inflation, and ultimately backfiring on the U.S. economy and domestic politics.

For Israel, it overestimated the strategic window and underestimated the limits of its ally's tolerance.

First, Israel assumed that the collapse of the "Axis of Resistance" and Russia being bogged down in Ukraine meant Iran was absolutely isolated and unable to fight back. In reality, once Iran shifted to homeland defense, its combat capabilities far exceeded expectations. Underpinning this is the fact that Iran has largely achieved industrialization through decades of a "resistance economy." It is the only Middle Eastern nation with a comprehensive industrial system—albeit one characterized by "low-level, low-cost, and even low-quality" manufacturing. However, this does not hinder Iran from continuously churning out ballistic missiles and drones.

Second, Israel assumed the U.S. would show unlimited tolerance for its actions. This was Israel's most severe miscalculation. Israel believed the U.S. would unconditionally support any of its military actions. But when Israel insisted on striking Iranian energy facilities and sent oil prices to spiral out of control, the rift between the U.S. and Israel immediately became public. Trump openly said he had not been informed and did not like such actions, shattering Israel's traditional security assumptions.

Third, there is a vast difference in how the U.S. and Israel perceive this conflict. Israel's "maximalist" goal (completely destroying the current Iranian regime) fundamentally conflicts with the U.S.'s "limited war" objective (avoiding the quagmire of an Iranian war and refusing to deploy ground troops on Iranian soil). As the war drags on, voices within the U.S. labeling this "Israel's war" are growing louder, shaking the foundation of U.S. strategic support.

For Iran, it has probably overestimated the deterrence of the Strait of Hormuz and underestimated its opponents' resolve.

First, Iran's attempt to use the closure of the Strait of Hormuz as leverage may yet backfire.Tehran believed blockading the Strait of Hormuz was its trump card to force the international community to pressure the U.S. and Israel. While this move did batter the global economy and compel Trump to seek a quick end to the war for midterm election votes, it paradoxically hardened America's resolve for a direct military solution.

Second, Iran's strategy of "strategic patience" has failed. For a long time, Iran utilized "strategic patience" to avoid direct conflict with the U.S. and Israel (e.g., its restrained response following Qasem Soleimani's assassination) in an attempt to buy survival space. However, this was interpreted by the U.S. and Israel as "weakness," ultimately culminating in the full-scale military strike on February 28.

Third, If the U.S. successfully organizes an escort coalition in the Strait of Hormuz, Iran's strategic passivity will become increasingly evident. Iran underestimated the solidarity of Western nations (such as the UK, France, Germany, Japan, and South Korea) in jointly condemning the attacks and forming a united escort fleet after facing direct assaults. Of course, the effectiveness of this coalition remains to be seen; if Iran's countermeasures are suppressed, the regime's future will be bleak.

This war has made one thing clear: the U.S. misjudged the controllability of the "war switch," plunging into an unwanted war of attrition. Israel misjudged the "margin of error" in the U.S.-Israel relationship, creating a strategic rift with its ally at a critical moment. And Iran, attempting to "hold the world hostage via the Strait of Hormuz," ultimately burned itself.

At this point, we must ask: What is the direction of this war? Will the Strait of Hormuz be blocked long-term (more than three months)?

Given all factors, the war is unlikely to end within the "four weeks" Trump previously boasted. Due to Iran's unexpectedly resilient fighting, the conflict is shifting toward a "protracted war" and a "war of attrition." Consequently, the blockade of the Strait of Hormuz is unlikely to be lifted within three months. The core question is no longer if there will be a long-term blockade, but how long it will last and who can hold out the longest.

A blockade lasting over three months is entirely possible. The primary reason is that major economies heavily reliant on Gulf crude oil imports, mainly Asian countries, have significantly bolstered their strategic petroleum reserves over the past few years. They can weather the "extreme" scenario of a blockade lasting three months or longer. Japan, for instance, has enough strategic reserves to cover 254 days of consumption. India and Southeast Asian nations have more limited reserves, but recent developments show they have secured waivers to resume purchasing Russian oil (which has been under U.S. and European sanctions). In short, within a three-month window, outside nations do not yet possess the absolute, desperate resolve needed to mediate the Strait of Hormuz crisis.

Furthermore, several other factors suggest the blockade could become a long-term reality:

First, Internal assessments by U.S. intelligence, including a recent Defense Intelligence Agency (DIA) report, conclude that Iran has the capability to blockade the strait for 1 to 6 months. Although the White House has publicly downplayed the extreme "6-month" scenario, private intelligence analyses confirm Iran possesses the hard power for such a prolonged blockade.

Second, the U.S. military faces practical operational difficulties. The Strait of Hormuz is nearly 100 miles long, and Iran controls a vast northern coastline from which it can launch attacks at any point, making full-spectrum defense extremely difficult for the U.S. military. While Iran's formal navy has suffered heavy losses, it still retains numerous small speedboats, frogmen, and even jet skis capable of launching suicide attacks or laying mines. Safely escorting a single oil tanker might require multiple U.S. destroyers, making the cost astronomically high.

Third, the blockade is Iran's primary leverage to "bog down the U.S." Iran's strategic goal is clear: use the blockade to drive up oil prices, exert pressure on the U.S. domestic economy and midterm elections, and force Trump back to the negotiating table. As long as U.S. and Israeli military strikes continue, Iran has no incentive to give up this trump card.

Fourth, the chances of a quick resumption of shipping are slim. As of March 21, very few ships, at most 10, have dared to "force their way" through the strait. Even if the U.S. and Israel continue to bomb Iranian energy facilities (like Kharg Island), they cannot completely eradicate Iran's coastal harassment capabilities in the short term. The Chairman of the Joint Chiefs of Staff has frankly admitted there is "no clear solution" to the strait issue.

It appears that whoever controls the Strait of Hormuz holds the decisive marker for victory. Iran is employing a stalling strategy, using the blockade and asymmetric warfare to drag the U.S. and Israel into a high-attrition quagmire, attempting to exhaust their will to fight. Strategic divergences between the U.S. and Israel are widening: Israel continues to pursue the "elimination of the Iranian regime," while the U.S. prefers "limited strikes on nuclear facilities" followed by a quick exit to avoid domestic political blowback from high oil prices.

The longer the strait remains closed, the higher international oil prices will soar. Seeing Brent crude break $150 or even $200 per barrel may become a once-in-a-lifetime reality. These sustained high oil prices are devouring Trump's midterm election prospects. Experts point out that if high oil prices persist for over three months, the probability of Trump losing the midterm elections exceeds 70%.

The outcome of this war will likely not be the total annihilation of one side by the other. Instead, it will depend on when the U.S., facing domestic political pressures (oil prices, anti-war sentiments), is the first to establish an "exit mechanism." As Ray Dalio, founder of Bridgewater Associates, commented on this war: "In war, one's ability to withstand pain is even more important than one's ability to inflict pain."

Currently, whether the U.S. can bear the political and economic costs, whether Israel can endure a long-term war of attrition, and whether Iran can survive the destruction of nearly all its military and state apparatus—all three parties are facing a severe test in this "war of miscalculations."

Key takeaways for international observers include:

In a direct acknowledgment of domestic involutionary competition, Pan confirms that Beijing is actively stepping in. The central government is now prohibiting local municipalities from offering unreasonable tax and land subsidies to attract investment, and the PBoC is actively restricting financing to over-saturated sectors.

Furthermore, addressing fears of a looming currency war amidst trade frictions, Pan explicitly shuts down speculation of a competitive devaluation, saying: "China has no need, nor any intention, to acquire trade competitive advantages through exchange rate depreciation."

Pan also pushes back against the narrative that China's trade surplus is the root of global imbalances, instead pointing to the structural flaws of the US dollar-dominated international monetary system and the weaponization of trade policies.

The following English translation has not been reviewed by Mr. Pan.

中国高质量发展与全球经济再平衡——中国人民银行行长潘功胜在2026中国发展高层论坛上的主题演讲

China's High-Quality Development and Global Economic Rebalancing—Keynote Speech by Pan Gongsheng, Governor of the People's Bank of China, at the China Development Forum 2026

Distinguished guests,

Good afternoon!

It is a great pleasure to attend this year's China Development Forum. I would like to extend sincere thanks to friends from all sectors for your continued interest in and support for China's financial development.

Taking this opportunity, I would like to share three observations under the theme of "China's High-Quality Development and Global Economic Rebalancing".

I. Global Economic Rebalancing and China's Contribution

At present, geopolitical conflict and trade frictions are occurring with increasing frequency. Discussion of global economic imbalances and rebalancing has grown markedly, and the issue has also become an important topic on this year's G20 agenda.

Since the beginning of this century, the global economy has gone through three major phases of dynamic rebalancing. China has been deeply involved in all three and has made positive contributions throughout.

The first phase came between 2001 and 2007, after China joined the WTO. By leveraging its cost advantages, China integrated into the global division of labor, effectively expanding global supply, raising productive efficiency, easing inflationary pressures worldwide, and supporting global growth.

The second phase came between 2008 and 2017, in the aftermath of the global financial crisis. During that period, global demand was generally weak, and the world economy was characterized by "three lows and one high": low growth, low inflation, low interest rates, and high debt.

China responded proactively by significantly expanding domestic demand and imports, helping to support global growth and prevent the world economy from slipping into deflation. China's contribution to global growth has remained at around 30 percent, making it the main engine of world economic growth, and this has continued to the present day.

The third phase has unfolded since the pandemic. Supply shocks and strong stimulus on the demand side, together with the rise of protectionism and de-globalization, once pushed global inflation sharply higher. China's supply chain system remained stable, continuing to make an important contribution to global price stability and overall economic balance.

China's own economy has also undergone profound structural adjustment and dynamic rebalancing. The contribution of consumption to economic growth rose from 37 percent in 2010 to 52 percent in 2025. The current account surplus as a share of GDP has fallen from around 10 percent in 2007 to an average of less than 2 percent over the past decade, which is within a reasonable range.

Here, I would like to briefly discuss two issues.

First, how should we understand the source of China's industrial competitiveness?

The rise in China's industrial competitiveness is first and foremost the result of more than 40 years of reform and opening up. In the course of opening up, China has learned from international partners, including the many outstanding global companies represented here today. China has learned through competition, and grown through learning.

Meanwhile, the following four factors have played a vital role in elevating China's industrial competitiveness:

1. A mega-sized market. Technological innovation can be industrialized, scaled up, commercialized, and iterated rapidly, generating both technological leadership and cost advantages.

2. A complete industrial and supply chain system. Industrial ecosystems, supply networks, R&D institutions, and digital infrastructure are highly clustered in certain regions, facilitating efficient division of labor and synergy.

3. Abundant, high-quality, skilled, and diligent labor resources, especially technical talent. China has over 72 million highly skilled professionals, and its total number of R&D personnel has ranked first in the world for many years, making it the country with the largest and most comprehensive talent pool globally.

4. Technological innovation capabilities driven by sustained R&D investment. Over the past five years, China's R&D expenditure has grown by an average of more than 10% annually. In 2025, China's total R&D expenditure was second only to the United States, ranking second globally; its R&D intensity (R&D expenditure as a percentage of GDP) exceeded the OECD average.

Internationally, there is still a perception that China's industrial competitiveness stems from unreasonable government subsidies. For those who hold such doubts, I encourage you to travel and see more of China, which will help foster a more accurate and comprehensive understanding of Chinese industries.

As Premier Li Qiang emphasized in his speech earlier, China advocates for fair, benign, and healthy competition. Addressing the "involutionary" competition among certain enterprises, the central government has taken measures to regulate local government investment attraction practices, prohibiting unreasonable preferential policies such as tax and land use subsidies, in order to build a unified national market.

China is also strictly enforcing industrial and environmental technical standards to restrict low-level competition. Concurrently, the People's Bank of China (PBOC) is guiding financial institutions to scientifically assess risks, curbing financing for industries plagued by "involutionary" competition from a financial perspective.

These efforts have already yielded positive results. The decline in China's PPI narrowed from -3.6% in July last year to -0.9% in February this year, and corporate operating conditions have also improved.

Second, how should we view and analyze the issue of global economic imbalances?

This is a frequently discussed topic internationally, and I would like to share my perspective.

When analyzing global economic imbalances, we must look at both goods and services trade, as well as both current and financial accounts. China is the largest surplus country in goods trade, but it is also the largest deficit country in services trade. The current account surplus accumulated by China is allocated to different regions and industries globally through outbound investments by enterprises and banks, injecting liquidity into global financial markets and strongly supporting global economic development and financial stability.

We must analyze this not only from a static perspective but also from a dynamic one. From a temporal dimension, the balance of supply and demand is a relative concept. Whether globally or within a single economy, the expansion and contraction of supply-demand gaps are subject to various disturbances.

For instance, recent conflicts in the Middle East caused a supply-side shock to oil, leading to a surge in prices. However, over a longer cycle, market forces will self-adjust to achieve a dynamic equilibrium. Economic development, income growth, changes in consumer preferences, and technological advancements create new forms of supply and demand, thereby creating new markets.

From a spatial dimension, whether between nations or among different regions within a country, building a unified market and engaging in division of labor and trade based on comparative advantages can maximize overall welfare. Thinking back to the 1980s and 1990s when I studied economics at university, a fundamental consensus in the global economic academic community was that a free trade system based on comparative advantage is the foundation of global prosperity and helps enhance global well-being. International trade is not coercive; it is the result of voluntary choices made by hundreds of millions of enterprises and households.

We must pay attention to not only economic factors but also non-economic ones. Last year, tariff and trade wars triggered a "rush to export," and the overstretch of national security concepts led to increased export control measures. These factors have disrupted the expectations of enterprises and households, causing significant disturbances to the global economic balance.

We must analyze not only the international economic and trade system but also the international monetary system. Trade surpluses are the result of the evolution of the global industrial division of labor. Over the past 40 years, the major global surplus countries have generally been those with strong manufacturing competitiveness, such as Japan, Germany, Switzerland, and China, and in recent years, this has gradually shifted to some emerging market economies in Southeast Asia. However, the major deficit countries have remained largely unchanged. This is related to the inherent flaws of the international monetary system.

In an international monetary system dominated by a single sovereign currency, the issuer of the major reserve currency can implement deficit financing over the long term at lower financing costs, exporting its currency through large-scale current account deficits. Meanwhile, sustained capital inflows objectively cause the major reserve currency to be overvalued, which to some extent weakens that country's manufacturing competitiveness.

Currently, stable, rational, and predictable cooperation is particularly precious. Trade fragmentation is undermining the foundation of free trade. We need to more resolutely oppose all forms of trade protectionism, consolidate and develop the rules-based multilateral framework and international economic and trade order with the WTO at its core, and promote inclusive economic globalization.

II. China is Actively Promoting the Transformation of its Economic Growth Model to Enhance Growth Quality and Sustainability

The recently concluded "Two Sessions" in China reviewed and approved the 2026 Government Work Report and the Outline of the "15th Five-Year Plan," clarifying the economic and social development goals and major policies for this year and the next five years. There are five key features that deserve special attention:

1. Setting scientific and reasonable economic growth targets. Mathematically, the economic growth rate is the ratio of the annual GDP increment to the total volume. In 2025, China's total GDP exceeded 140 trillion RMB (around USD 20 trillion); the annual increment is equivalent to the entire annual economic output of a medium-sized economy. China needs to maintain a reasonable economic growth rate, but the quality and sustainability of that growth are even more important. The Government Work Report set this year's economic growth target at 4.5%-5%, leaving greater room for structural adjustment and high-quality development.

2. Focusing on the transformation of the economic growth model. The 15th Five-Year Plan focuses on high-quality development, strengthening the domestic economic circulation, and persisting in domestic demand-led growth. China will implement policies to boost consumption, improve the income distribution system, optimize the social security system, expand investment and consumption in areas such as education, healthcare, and elderly care, and significantly increase the household consumption rate. China will vigorously develop the service sector and promote its reform, innovation, opening up, and cooperation. Building upon its foundation as a global manufacturing powerhouse, China will accelerate its transition into a core global demand market.

3. Emphasizing sci-tech innovation to drive productivity growth. Sci-tech innovation is China's clear and firm long-term strategic choice, which not only aligns with the trend of the global technological revolution but also meets the requirements of China's high-quality development. China will continue to promote the deep integration of sci-tech innovation and industrial innovation, strengthen the protection and application of intellectual property rights, and boost productivity.

4. Accelerating green transition and sustainable development. China has built the world's largest renewable energy system and the most complete new energy industry chain, driving a substantial decline in global wind and solar power costs. China will continue to vigorously develop a green and low-carbon economy, striving to peak carbon emissions before 2030 and achieve carbon neutrality before 2060, while upholding the multilateral climate process and facilitating global green and low-carbon development.

5. Further improving economic governance. China will scientifically manage and balance the boundaries between the government and the market, respecting and leveraging the market's decisive role in resource allocation. China will advance the construction of a unified national market, foster a sound legal environment for the economy, and create a fairer, more dynamic market environment.

The dynamic balancing and structural transformation of the economy require medium- to long-term reform plans and commitments that must be executed resolutely, rather than constantly "flip-flopping" on policies. This year, China will begin implementing its 15th Five-Year Plan. The scientific formulation and sequential implementation of Five-Year Plans is a vital experience in China's reform and development, as well as a significant institutional advantage.

III. Intensifying Financial Support for China's Economic Structural Transformation

The PBoC will maintain a supportive monetary policy stance to create a favorable monetary and financial environment for stable economic growth, high-quality development, and the smooth operation of financial markets.

China will continue to implement a moderately accommodative monetary policy. Currently, China's social financing conditions remain accommodative, and total financial aggregates are growing reasonably. We will balance the relationships between the short term and long term, between supporting real economy growth and maintaining the health of the financial system itself, and between internal and external equilibrium. We will comprehensively utilize various monetary policy tools, such as reserve requirement ratios, policy interest rates, and open market operations, to maintain ample liquidity.

According to the IMF's classification standards, China implements a managed floating exchange rate system. Since the beginning of this year, the RMB exchange rate has appreciated by approximately 1.3% against the US dollar, 3.7% against the Euro, 3.2% against the Japanese Yen, and 2.4% against the British Pound.

China has no need, nor any intention, to acquire trade competitive advantages through exchange rate depreciation. The PBoC's stance has always been clear: we adhere to the decisive role of the market in exchange rate formation, maintain exchange rate flexibility, and simultaneously strengthen expectation guidance to keep the RMB exchange rate basically stable at an adaptive and equilibrium level. The PBoC's expectation guidance, along with the use of transparent macro-prudential management tools that align with international rules and practices, corrects market "herd behavior" and market failures, helping to prevent the destructive equilibria that have repeatedly occurred in international financial history.

China will steadily promote high standard opening up of the financial sector. It will deepen the inter-connectivity of financial markets and cross-border payment systems to facilitate more investors in accessing Chinese financial markets. The scale of China's stock and bond markets both rank second globally, with market depth, resilience, and liquidity continuously improving. By the end of 2025, RMB financial assets—including domestic stocks, bonds, deposits, and loans—held by overseas institutions and individuals exceeded 10 trillion RMB. We welcome overseas investors to participate and invest in China's financial markets.

In recent years, the internationalization of the RMB has made positive progress, providing domestic and foreign entities with more diversified currency choices. Currently, RMB financing costs are relatively low. In 2025, multinational governments, international development institutions, financial institutions, and large enterprises issued Panda bonds exceeding 170 billion RMB, and the scale of offshore RMB bonds issued in Hong Kong was even larger.

China will continuously improve the institutional arrangements and financial infrastructure for the cross-border use of the RMB. It will carry out diversified monetary and financial cooperation, promote the development of the offshore RMB market, and facilitate cross-border trade and investment activities.

China will actively practice the Global Governance Initiative proposed by General Secretary Xi Jinping and actively participate in and promote the reform and improvement of global financial governance. It will strengthen international macroeconomic policy communication and coordination, improve the governance of international financial organizations, and build a diversified and efficient global financial safety net to more effectively maintain global economic and financial stability.

Distinguished guests, against the backdrop of rising global uncertainty, China will, with responsibility and courage, continue to play its role as the main engine of world economic growth, providing strong growth momentum and a stabilizing force to the world. We stand ready to work with all parties to steer the global economy toward a more open, inclusive, and balanced direction.

Thank you!

Given the system's opacity, any glimpse into its inner workings is highly valuable. A recent article from Southern Weekly, the Guangzhou-based newspaper renowned for its investigative reporting, offers a rare, granular look at how the Chinese top legislature handles legislator's proposals after the the "two sessions" wrap up. More importantly, it sheds light on how different government agencies interact behind the scenes.

The piece traces the lifecycle of a social issue. It maps out how a localized problem gets identified, translated into bureaucratic language, flagged as a priority, and navigated through a maze of ministries, Party organs, and the National People's Congress (NPC).

This matters because it complicates two dominant, yet incomplete, narratives: that Chinese policy simply flows unobstructed from the top down, and that institutions like the NPC are purely symbolic.

The reality is far more intricate. The NPC is certainly not a Western-style legislature—you won't see politicians arguing over public complaints in open debates or on the campaign trail—but neither is it irrelevant. Instead, it acts as a highly structured conduit where local concerns are aggregated, filtered, and fed into the bureaucracy.

In many ways, the Southern Weekly report serves as a vivid, real-world case study for a dynamic that Princeton political scientist Rory Truex presciently captured exactly a decade ago. In his 2016 book Making Autocracy Work: Representation and Responsiveness in Modern China, Truex coined the concept of "representation within bounds." As he astutely noted,

meaningful representation can and does arise in an authoritarian setting, in the absence of electoral accountability. It arises not from bottom-up citizen pressure, but from top-down accountability to a regime with informational needs. However, deputy activism on sensitive political issues can engender unwanted citizen attention, so regimes pre fer their deputies to exhibit "representation within bounds."

Seen from this angle, China's government is not quite as unique as it is often portrayed. Like many massive bureaucracies, it runs on compromise, coordination, and competition across departments. And like many others, it does not always deliver. As the article bluntly notes, the NPC system has long struggled with a classic bureaucratic headache: plenty of official replies, but not enough actual follow-through.

The following piece was first published on Southern Weekly's WeChat account on March 12. Please note that the translation below is mine and has not been reviewed.

当一份建议，被划上“重点”之后

When a legislator's proposal is marked "priority"

By Du Maolin, Southern Weekly reporter

One day in September 2025, Meng Hongjuan received an invitation from Beijing. The letterhead read: Department of Elderly Care Services, Ministry of Civil Affairs.

She quickly realized that a proposal she had submitted during the annual session of the National People's Congress (NPC) had been included among the NPC's "priority-supervised" proposals.

Meng is a workshop director at Zhende Medical Co., Ltd. in Zhejiang Province. Her proposal concerned the link between elderly care as a public service and elderly care as an industry. She told Southern Weekly that the letter signaled the start of follow-up communication and consultation. "It was the first time since I was elected as a deputy to the 14th National People's Congress."

Every year during the NPC session, deputies submit thousands of proposals/bills. In 2025, a total of 9,160 were received. Only a small number were ultimately singled out for priority supervision.

In practice, "priority supervision" means that the Standing Committee of the National People's Congress selects certain matters from among deputies' proposals, assigns them to the relevant handling bodies, and has the relevant special committees of the NPC supervise the process.

Deputies' proposals/bills are widely seen as an important channel through which the public can take part in the management of state affairs. Yet for many years, some deputies have criticized handling bodies for "placing more weight on replying than on implementation".

That is why the priority supervision system has been given high expectations: proposals/bills should not stop at a written response. In 2005, the system was formally introduced at the national level. Provincial, municipal, and county-level people's congresses later adopted it in turn.

Now, after twenty years, this mechanism has become part of a broader effort to improve how deputies' proposals are handled. But how, exactly, are proposals "supervised" and "processed"? What happens after a proposal is marked as "priority"?

I. The first "full coverage"

This was not the first time Meng Hongjuan had turned her attention to older people.

In 2024, her second year as a deputy to the current NPC, she submitted a proposal on accident insurance for the elderly. During her research, she heard the same concern again and again: many older people were still doing farm work or taking casual jobs. What they feared was not hardship itself, but the possibility that if an accident occurred, no one would cover the cost of medical treatment and nursing care.

These concrete, small-scale anxieties made Meng realize that advancing elderly care required a full set of supporting safeguards.

By 2025, her focus had widened further. She was already familiar with the production process for medical supplies, and not unfamiliar with the care and rehabilitation needs of older people.

That professional sensitivity allowed her to spot problems in the elderly care service system during field research. In some care institutions and at the primary level, she saw another reality at work: the number of beds was rising, but nursing and rehabilitation staff were still in short supply; facilities were being upgraded, but professional management was lagging behind.

The shortage of trained personnel and the slow pace of professional development were issues she kept recording. Before the 2025 NPC session opened, she turned those observations into five proposals, covering subjects ranging from building talent for integrated medical and elderly care services, to innovation in elderly care finance products, to support for privately run care institutions, and loosening investment restrictions for pension fund management institutions. All of them pointed to the same core goal: to make the connection between elderly care as a public service and elderly care as an industry work more smoothly.

After the session closed, Meng only then realized that her sustained attention over two consecutive years had received a different level of recognition, when she learned that her proposal had been listed as a priority-supervised proposal.

Southern Weekly has learned that Meng's proposal on elderly care was grouped under the broader priority-supervised category of "promoting the integrated development of elderly care as a public service and elderly care as an industry work". In general, priority supervision is divided into several broader categories, each covering multiple proposals from NPC deputies.

Once a priority-supervised proposal is identified, it is assigned to the relevant government departments, the Supreme People's Court and the Supreme People's Procuratorate, or other responsible bodies for handling, while the relevant special committee of the NPC oversees the process.

Take 2024 as an example. That year, for the first time, the topics for priority-supervised proposals were reviewed and approved by the Council of Chairpersons of the NPC Standing Committee. "Previously, topics were discussed and approved at the Secretary-General's office meeting after opinions had been solicited from various sides," one source familiar with the workings of the NPC told Southern Weekly.

According to Xinhua, Chinese state news agency, in 2024 the Council of Chairpersons approved 20 priority-supervised proposal categories, involving 225 individual proposals from deputies. These were supervised by seven special committees, including the NPC Financial and Economic Affairs Committee, and assigned to 19 lead handling units, including the National Development and Reform Commission.

Southern Weekly's review found that the 20 priority-supervised categories mainly fell into six broad groups: developing new quality productive forces, strengthening talent for modernization, improving public well-being, promoting green development, balancing development and security, and advancing the rule of law in China.

"The main idea is to select, as priority-supervised proposals, those that relate to the central tasks of the Party and the state, that deputies have raised in a relatively concentrated way, and that are highly comprehensive and highly visible," the same source explained.

By 2025, the number of priority-supervised proposal categories had risen to 23, with 20 handling units taking the lead. According to the NPC's official website, this marked the first time that all 35 delegations and all 10 special committees were covered.

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II. "Face to face" and "side by side"

Giving priority supervision to one batch of proposals does not mean that other proposals are ignored.

During the 2025 NPC session, more than 9,000 proposals were submitted in total. On March 26 that year, shortly after the session closed, the NPC Standing Committee held a handover meeting and assigned these proposals to 211 handling bodies for study and processing.

"But priority-supervised proposals usually take longer to handle, and the relevant departments will also hold follow-up meetings and discussion sessions," the source said.

Meng Hongjuan's experience bears this out.

About three months before she received the invitation, on June 27, 2025, the Ministry of Civil Affairs had already produced a written reply to her proposal.

Under the Deputies Law, proposals are generally to be answered within three months. If a proposal has a wide scope or is difficult to handle, the deadline can be extended to six months.

The reply Meng received was not drafted by the Ministry of Civil Affairs alone. It was the product of joint research by the Ministry of Civil Affairs together with the Ministry of Education, the Ministry of Human Resources and Social Security, the National Health Commission, and other departments.

After the written exchange came offline communication. On September 18, 2025, Meng travelled from Zhejiang to Beijing. The next morning, the Ministry of Civil Affairs organized a field visit for four NPC deputies, including Meng, to inspect and conduct research at several elderly care institutions in Xicheng and Fengtai districts of Beijing.

That afternoon, at the discussion meeting, copies of a "Collection of Materials" printed by the Department of Elderly Care Services of the Ministry of Civil Affairs were laid out on the table. The participants did not come from just one department. Meng noticed that, in addition to a vice minister from the Ministry of Civil Affairs, officials from the Ministry of Natural Resources, the Ministry of Human Resources and Social Security, and the National Health Commission were also present. The NPC Social Development Affairs Committee, which was responsible for supervision, also sent representatives.

The deputies spoke in turn. As soon as Meng raised the issue of social security for the elderly, an official from the Ministry of Human Resources and Social Security picked up the thread and responded on the spot. She recalled that this was the moment when she truly understood what the word "priority" meant: problems were raised on site, and they were also recorded and answered there and then.

Beyond this "face-to-face" exchange, there was also "side-by-side" fieldwork.

In 2024, Dong Hongtao, an NPC deputy and a mechanic with China Railway Xi'an Group Co., Ltd., submitted a proposal calling for better use of railway transport advantages to lower logistics costs across society. It was listed as a priority-supervised proposal.

Dong told Southern Weekly that just one month after the NPC session closed that year, the Ministry of Transport informed him, by letter and by phone, that his proposal had entered the priority-supervision process. Before that, he had never even heard of the concept.

In May and June 2024, the Ministry of Transport carried out research in Yulin, Shaanxi Province, under the theme of "advancing cost reduction, efficiency gains, and transformation upgrading in transport logistics."

“The ministry chose the research destination itself,” Dong said. He did not ask why Yulin had been selected, but he guessed it was related to the city's fast-growing modern logistics industry and its increasingly important role as a logistics hub at the junction of Shaanxi, Gansu, Ningxia, Inner Mongolia, and Shanxi provinces.

The fieldwork lasted two days. Dong followed the research team as it visited logistics parks and dedicated railway lines used to transport coal and other energy resources, discussing issues along the way.

"At the time I was the only NPC deputy there," he said. As he understood it, the team also visited other places and arranged face-to-face communication with nearby NPC deputies there as well.

In his view, this way of "laying out the problems on site" is more effective than simply sending documents back and forth, because departments can hear directly where the bottlenecks are on the front line.

Southern Weekly has learned that in 2024, in addition to taking part in discussion meetings organized by the handling units, the relevant special committees of the NPC also sent research teams to different parts of the country to learn about the handling of priority-supervised proposals, usually together with other departments.

Among all the departments and institutions involved in the priority supervision system, the deputies affairs committee of the NPC Standing Committee plays an important role. One of the responsibilities of the deputies affairs committee, established in 2023, is to promote the handling of deputies' proposals.

"More specifically, once priority-supervised proposals are identified, they track progress, understand how the work is moving forward, coordinate the different steps, and ensure that the supervision mechanism operates smoothly," Wang Rui, an official with the deputies affairs committee of a district people's congress standing committee under a municipality directly under the central government, told Southern Weekly.

In Wang Rui's view, the system has now moved towards maturity: the Chairpersons' Council (editor's note: at the local level, the Directors' Meeting) reviews and approves the list; the handling units take the lead; the special commissions follow up and press the work forward; and the deputies affairs committee of the standing committee coordinates the overall process.

III. Testing the waters first

This increasingly clear division of labor sketches out the path by which the mechanism has evolved since it was established in 2005.

The year before the system was formally introduced, the NPC Standing Committee carried out a trial run. After the close of the second session of the 10th NPC in 2004, it selected eight priority-supervised areas on a trial basis, involving issues such as student loans for university students, food safety management, and land acquisition compensation, and required the relevant bodies to handle them as priorities.

At the time, the selection criteria were clear: the content had to concern the central work of the Party and the state, major questions of reform, development and stability, or issues of broad public concern.

That trial run was jointly supervised by the General Office of the NPC Standing Committee and the General Office of the State Council. The immediate background was the rapid growth in the number of deputies' proposals. According to the source mentioned earlier, from the 6th NPC (1983-1988) to the 10th NPC (2003-2008), the number of proposals submitted rose from more than 2,000 to over 6,000, making the handling burden "extremely heavy".

As the numbers rose, the quality of handling came under criticism from deputies. There was not enough attention, and the results were often unsatisfactory. Sheng Huaren盛华仁, then vice chairman and secretary-general of the 10th NPC Standing Committee, once described the handling of deputies' proposals vividly: "year after year, the same old pattern; session after session, the same old faces".

China Youth Daily once reported that the standard response from handling departments at the time had become a formula of "three sentences": "Thank you for your excellent proposal; your proposal is under careful study; we hope you will continue to make suggestions on our work."

Against that backdrop, priority supervision was expected to be treated as key cases to drive broader progress: invite deputies to take part directly in the handling process, carry out field investigations at the primary level, provide serious feedback on the results, and shift the focus from mere "replying" to actual "implementation."

In some cases, the results were striking. The magazine of China's NPC once disclosed that in 2004, the proposal on "compensation for landless farmers during land acquisition" involved 27 separate proposals and 119 deputy signatures, and was listed for priority supervision.

During the handling process, the former Ministry of Land and Resources established a monthly reporting system to track the repayment of overdue land acquisition compensation. By the end of 2004, a total of RMB 17.546 billion in unpaid compensation, accumulated nationwide since 1999, had been identified and fully repaid.

After this trial phase, the priority-supervision mechanism for deputies' proposals was formally introduced during the 2005 NPC session, with the first batch covering 10 items.

One of them came from NPC deputies representing arid western regions such as Ningxia, Xinjiang, and Gansu provinces, who proposed "developing water-saving agriculture in the arid western regions".

In this case, the division of supervisory responsibilities became clearer. The Ministry of Water Resources took the lead, the National Development and Reform Commission and the former Ministry of Agriculture acted as assisting bodies, and the NPC Ethnic Affairs Committee carried out supervision. The earlier practice of joint supervision by the General Office of the NPC Standing Committee and the General Office of the State Council came to an end.

In 2005, the handling and implementation of deputies' proposals also went through a series of broader changes.

In April of that year, a special handover meeting was held in Beijing. For the first time, the General Office of the NPC Standing Committee convened a dedicated meeting to assign deputies' proposals in a unified way to 133 handling units in the capital. This high-level, centralized method of handover later became routine.

Then, in June, that practice was written into the Measures for Handling Proposals, Criticisms, and Opinions of Deputies to the National People's Congress (the "Measures"). The Measures made clear that proposals requiring priority handling were to be followed up and supervised by the relevant special commissions of the NPC, working together with the relevant handling bodies to achieve tangible results.

By the end of that year, at a meeting of the NPC Standing Committee, He Yehui, then deputy secretary-general of the NPC Standing Committee, reported on the handling of proposals, criticisms, and opinions submitted during the third session of the 10th NPC. This was the first report of its kind in the history of the NPC Standing Committee.

The mechanism's basic framework was thus established, but the process of refinement did not stop there.

In December 2018, when the Measures were revised, an entire new chapter on the "priority supervision of deputies' proposals, criticisms, and opinions" was added. It further clarified the principles and procedures for identifying priority-supervised proposals, the requirements for supervision, and the mechanisms for rolling handling and follow-up supervision, making the framework more clearly defined.

According to Southern Weekly's count, since 2005 the NPC Standing Committee has identified a total of 336 priority-supervised proposal categories, involving more than 3,600 specific proposals from deputies. More than 60 of these categories have concerned public well-being: 18 on improving services for "the elderly and the very young", 15 on advancing the Healthy China agenda, and 11 on promoting high-quality and fuller employment.

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IV. The attention of the top leader is especially important

As the numbers have accumulated, the priority supervision mechanism has moved from a working-level experiment, to being defined in normative documents, and then to receiving firmer recognition legislatively.

In March 2025, the third session of the 14th NPC reviewed and passed a decision to amend the Deputies Law, which made explicit provisions on deputies' proposals that are designated for priority handling by the Chairpersons' Council or the Directors' Council.

Before the amendment of the Deputies Law, Huang Lansong, deputy director of the Research Center on the People's Congress System at Shandong University, took part in a number of related discussion meetings. In her memory, leaders in the people's congress system, NPC deputies, and scholars all broadly supported elevating the supervision system for deputies' proposals into statutory law.

"That is because the system has been in operation for more than twenty years, and its practices have been continuously improved and refined, gradually reaching maturity," Huang told Southern Weekly. On the other hand, she said, the practical results had also been positive and had won broad recognition from deputies.

Local governments have also experimented in different ways, with different priorities. Southern Weekly has learned that some provinces divide "supervision" more finely into key supervision by members of the Directors' Council and special supervision by special commissions. In some places, the government's "top leader" takes part directly in priority supervision, creating stronger cross-departmental coordination.

Wang Rui has felt this in very concrete terms. In his district, each year the proportion of proposals approved by the Directors' Council of the district people's congress standing committee for priority supervision is around 15% to 20% of all deputies' proposals.

"After the district people's congress session closes, the deputies' proposals have already been assigned," Wang said. The district chief then holds a dedicated handover meeting on deputies' proposals and committee motions, assigning tasks to government departments, with the district people's congress also sending representatives to attend.

Wang explained further that most priority-supervised proposals usually involve multiple ministries or departments, and the areas where responsibilities overlap are often exactly where the real problem lies. Consensus can be reached in a meeting, but when it comes to aligning specific policies or arranging budgets, much more detailed coordination is needed. How to turn "consensus in the meeting room" into "institutional implementation" depends especially on whether the top leader takes it seriously.

With strong leadership attention, the deputies affairs committee where Wang works reports twice a year to the district people's congress standing committee on the progress of supervision over proposals. "The main purpose is to overcome the tendency in practice to value reply over implementation," he said.

An unnamed NPC deputy told Southern Weekly that although priority supervision places emphasis on fieldwork, discussion meetings, and face-to-face communication, whether it can ultimately be translated into policy adjustment and institutional implementation still requires observation over a longer period.

Submitting proposals is both a statutory right of NPC deputies and an important way for them to perform their duties according to law. In Huang Lansong's view, the key to handling proposals lies not only in whether replies are timely, but in whether the process creates sustained momentum for implementation and improvement. She suggested combining the implementation of deputies' proposals with mechanisms such as law enforcement inspections, and using institutionalized follow-up supervision to ensure that "supervision" and "handling" form a closed loop.

*At the interviewee's request, Wang Rui is a pseudonym.

steering general price levels back into positive territory and produce a reasonable, modest rebound in consumer prices

推动价格总水平由负转正、消费价格合理温和回升

Now, with the Iran crisis driving oil sharply higher and Brent moving above $100 a barrel, headline inflation in China could rise with it.

But that would be the wrong read, according to Zhiheng Luo(罗志恒), Chief Economist at Yuekai Securities. A higher CPI driven by oil is not proof that consumption has revived, that deflation is over, or that policy should turn tighter. It may simply mean that demand is still weak while costs are rising first.

That distinction matters. The inflation China needs is the healthy kind: driven by stronger demand, firmer incomes, improving profits, and restored confidence. The inflation it does not need is the kind imported by geopolitics, one that makes petrol dearer, raises logistics costs, squeezes households and firms, and muddies the policy signal without delivering a real recovery underneath.

That is why the upcoming inflation data will need to be read with care. In his latest essay, Luo bluntly warns against confusing the two, and against mistaking an oil shock for the start of a genuine recovery.

His piece was first published on Yuekai Securities's WeChat account on March 12. Please note that the translation below is mine and has not been reviewed by him.

Luo Zhiheng: What China needs is not inflation itself, but the virtuous economic cycle behind it

罗志恒：我们需要的不是通胀本身，而是通胀背后的经济良性循环

Recently, tensions in the Middle East have escalated abruptly, triggering sharp swings in international oil prices. During trading on March 12, Brent crude once again climbed above $100 a barrel.

A surge in oil prices will inevitably feed through into China's domestic PPI and CPI. Based on historical estimates, every 10% year-on-year increase in oil prices may lift China's PPI and CPI by 0.4 and 0.1 percentage points respectively. (For details, see my previous piece "Different Roads, Different Destinations — Can Higher Oil Prices Help Push Prices Back to a Reasonable Recovery?")

At first glance, this may seem to align neatly with the policy direction set out in the 2026 Government Work Report: "to steer general price levels back into positive territory and produce a reasonable, modest rebound in consumer prices."

But one point must be made clear: oil-driven price increases are by no means the same as a "modest rebound in consumer prices." Inflation for its own sake is not the goal. It is essential to weigh the pros and cons, to distinguish between "good inflation" and "bad inflation", and to separate "demand-driven inflation" from "cost-push inflation", while preparing policy responses in advance.

I. The meaning of macro policy targets lies not in the numbers themselves, but in the real conditions of the micro-level actors those numbers represent

The 2026 growth target of 4.5%–5% is not about piling up output through inefficient investment or unwanted inventories. What it seeks is a genuine revival of the economy's internal cycle, in which firms expand investment voluntarily and households are willing to spend more.

By the same logic, the inflation target of around 2% is not about simply pushing prices higher. It is about using mild inflation to break the vicious cycle of "sluggish prices → delayed consumption and investment → weak economic activity", so that improving corporate profits and rising household incomes can become a sustainable norm.

In other words, what is needed is not "inflation" in itself, but the underlying logic of a normally functioning economy that inflation can reflect. The core goal of policy is to rebuild and preserve a complete incentive mechanism in which firms can make profits, households have jobs and income, and society has confidence in the future.

II. The source of inflation matters: "good inflation" and "bad inflation" are fundamentally different

It is necessary to distinguish between different sources of inflation. What China does not need is stagflation driven by supply shortages, runaway inflation caused by excessive money creation, or structural bubbles in which asset prices soar while the real economy remains flat. What is truly desirable is a moderate rise in prices driven by stronger demand.

Prices pushed up by supply contraction are not a sign of economic improvement. More often, the result is stagflation: prices rise, but the economy deteriorates further. Prices driven up by excessive money creation may create the illusion of prosperity in the short term, but in the long run they end in runaway inflation and costly wealth redistribution. Structural bubbles, in which asset prices surge while the real economy stands still, only worsen inequality and build up financial risks.

A moderate, demand-driven rise in prices is entirely different. Stronger demand encourages firms to expand production. Better corporate profitability helps stabilize employment and household incomes. Restored confidence among businesses and households, in turn, supports further consumption and investment. In this virtuous cycle, a moderate rise in prices is not something artificially engineered by policy, but a natural outcome of the economy returning to healthy operation. That is the true meaning of "steering general price levels back into positive territory and produce a reasonable, modest rebound in consumer prices."

An oil-driven rebound in the year-on-year growth rates of PPI and CPI may appear to match the policy objective of "produce a reasonable, modest rebound in consumer prices", but in reality there is a clear mismatch. The current weakness in domestic prices is mainly the result of insufficient effective demand. The type of price recovery policymakers want is "demand-driven inflation", whereas the inflation caused by rising oil prices is "cost-push inflation" or "imported inflation", stemming from a supply shock. Oil-driven price increases would bring four main adverse effects.

First, cost-push inflation raises households' cost of living, with the greatest impact falling on low- and middle-income groups. Even when prices rise in both cases, demand-driven inflation is often accompanied by higher household incomes, which provides some offset to the impact on living standards.

Cost-push inflation, by contrast, directly raises living costs, making the pain felt by households more immediate. Energy and food account for a relatively large share of spending among low-income households. When higher oil prices push up transport costs and food prices (through agricultural inputs and logistics), they erode the real purchasing power of lower-income groups even more sharply.

Second, firms in the midstream and downstream sectors may face a double squeeze from rising input costs and weak final demand, leading to lower profits and weaker expectations. Higher oil prices pass down the industrial chain, raising transport costs, chemical feedstock costs, and agricultural production costs across the board.

Yet against a backdrop of weak end demand, midstream and downstream firms often struggle to pass these higher costs on to consumers. The result is further pressure on profit margins. Even if some of the costs are ultimately passed through to consumers, weak household income expectations and fragile consumer confidence would further suppress demand, which would also hurt corporate revenues and profits.

Third, imported inflation would weaken China's terms of trade, increase pressure on foreign exchange outflows, and work against Renminbi stability. Terms of trade refer to the relative price of a country's exports in terms of imports, measuring how many imports can be obtained per unit of exports and reflecting the overall quality and efficiency of external trade.

China is one of the world's largest crude oil importers, with imports reaching 580 million tonnes in 2025. If oil prices rise and import prices increase, China's terms of trade deteriorate. That means the country must consume more domestic resources and export more goods just to maintain the same level of imports. At the same time, higher oil prices would significantly raise the cost of energy imports, add pressure to the current account, and pose potential challenges to foreign exchange reserves and exchange-rate stability.

Fourth, inflation driven by a supply shock could constrain further monetary easing aimed at supporting growth. The foundations of the current recovery remain fragile, and the economy still needs support from a moderately accommodative monetary policy. Markets have high expectations for further cuts in the reserve requirement ratio and interest rates.

But if higher oil prices push CPI noticeably higher year on year, especially once it moves above 2%, the central bank may face greater public pressure and communication costs when easing policy, as it would also need to demonstrate its commitment to price stability. That would make monetary operations more complex and difficult, and could interfere with the normal functioning of macroeconomic management.

III. Against a backdrop of subdued prices, imported inflation may bring some unintended benefits

In earlier periods, when China's inflation center was relatively high, imported inflation from rising oil prices and similar shocks usually represented an unwelcome negative blow. In particular, once it combined with the "hog cycle", the resonance between hog and oil prices could drive inflation sharply higher. But under current conditions of persistently weak prices, imported inflation may produce some accidental benefits.

First, it may lift inflation expectations and ease the self-reinforcing dynamics of prolonged price weakness. In recent years, prices in China have remained subdued. The GDP deflator has been negative year on year for 11 consecutive quarters, PPI has been negative for 41 consecutive months, and CPI has remained well below the 2% inflation target. As a result, inflation expectations among micro-level actors have stayed low. Once such expectations become entrenched, firms delay investment and consumers postpone purchases, which further suppresses demand and makes it even harder for prices to recover effectively.

Even if the rise in PPI and CPI caused by higher oil prices is not, in essence, a sign of stronger demand, it can still interrupt this self-fulfilling process to some extent and reinforce the policy effect of promoting a reasonable recovery in prices. Japan's emergence from the deflationary malaise that followed the bursting of its early-1990s bubble was, to some extent, also helped by imported inflation pressures generated by pandemic-era global supply-chain tensions and the sharp depreciation of the yen in recent years, which objectively lifted household inflation expectations.

Second, it may improve conditions for upstream firms and reduce real interest rates. Although cost-push inflation may hurt midstream and downstream industries, it can also help upstream sectors such as energy and chemicals stabilize earlier, improving corporate profits and workers' incomes and injecting some momentum into a healthier economic cycle.

In addition, a year-on-year rise in PPI helps lower real interest rates (nominal interest rates minus inflation), easing the debt burden on firms and supporting credit demand and investment.

Third, it may boost fiscal revenues, ease local government debt pressure, and create more room for fiscal policy. On the one hand, tax revenues such as value-added tax and resource tax are closely linked to the price level. A rebound in PPI means a broader tax base in industrial transactions, which can help increase fiscal revenue.

On the other hand, higher prices raise nominal GDP growth, which helps improve local government debt ratio indicators (debt/GDP), easing debt pressure and creating more room for an proactive fiscal policy.

IV. Policy response: do not be misled by surface-level data; act in coordination through supply-side cushioning, relief for micro-level actors, and firm macro policy resolve

First, energy security should be strengthened on the supply side to smooth the domestic impact of volatile international oil prices. One approach is to use strategic petroleum reserves flexibly: increase stockpiling when oil prices are relatively low, and release reserves into the market when prices spike sharply, so as to play a stabilizing role by shaving peaks and filling troughs.

Another is to make full use of the buffering function built into the refined-oil pricing mechanism. China's current pricing system includes arrangements such as a "ceiling price". When international oil prices rise above $130 a barrel, domestic refined-oil prices no longer rise in step. In extreme circumstances, this mechanism can weaken the transmission of global oil prices to domestic end-user prices.

A third is to accelerate diversification of energy import sources and the development of alternative energy. This includes expanding energy cooperation with Russia, Central Asia, Africa, and South America; speeding up the installation of wind and solar capacity and energy storage; and advancing electrification in transport, all of which would reduce the economy's sensitivity to international oil-price shocks.

Second, targeted relief and subsidies should be provided to firms and households in order to stabilize market entities and protect basic living standards. For the hardest-hit midstream and downstream industries and small and medium-sized firms, targeted support should be introduced. Higher oil prices hit sectors such as transport, logistics, downstream chemicals, and agriculture most directly. It would be worth considering temporary tax and fee reductions for these industries, or helping them through periods of elevated costs through special subsidies and interest subsidies on loans, so as to prevent widespread business distress and unemployment.

Low- and middle-income groups should also receive targeted support. Rising energy and food prices have a clearly regressive effect and hit low-income households the hardest. Policymakers could consider raising minimum livelihood support standards in a timely manner and issuing one-off price subsidies or consumption vouchers. This would both protect the social safety net and quickly convert fiscal support into consumer demand through groups with a relatively high marginal propensity to consume.

Finally, macro policy should maintain strategic resolve, pay close attention to core CPI and the output gap, and strengthen expectation management. In the face of supply shocks such as rising oil prices, monetary policy should not respond too early with tightening, so long as the shock is temporary and does not trigger a "wage-price" spiral.

At present, the main contradiction facing China's economy is still insufficient effective demand. The central task of monetary policy therefore remains keeping liquidity ample, ensuring that overall financing costs stay low, and stepping up support for key areas such as expanding domestic demand, technological innovation, and small and micro-sized businesses.

At the same time, the relevant authorities need to strengthen expectation management and prevent markets or the public from misreading the data and policy signals.

For example, when publishing CPI and PPI data, statistical authorities could place greater emphasis on the trend in core CPI to help the market interpret price conditions more accurately. The central bank could also use channels such as monetary policy implementation reports and press conferences to make it clear that "the current recovery in prices is mainly driven by external supply shocks and does not alter the moderately accommodative stance of monetary policy." That would help stabilize expectations and prevent unnecessary suspicion and volatility in financial markets over the policy direction.

In a March 7 post on his personal WeChat account, James Jianzhang Liang, who is the Trip.com Group's co-founder and executive chairman and one of China's best-known public advocates of pro-natal policy, gathered the fertility- and population-related proposals put forward by deputies to the National People's Congress and members of the Chinese People's Political Consultative Conference.

Mr Liang's own conclusion was blunter than the official rhetoric. Beijing now talks of building a "fertility-friendly society", and last year rolled out a national childcare subsidy of 3,600 yuan (around USD 517) a year for children under three. But that still looks more like a gesture than a genuine transfer of risk from households to the state.

China's fertility slump is not simply a crisis of confidence or culture, according to Liang. It is, at heart, a crisis of incentives: families bear most of the money, time, and career cost of raising children, while the country as a whole pockets the future gains in workers, taxpayers, consumers, innovators, and social continuity.

That is why Mr. Liang argues for the simplest, least poetic answer: pay parents properly. In his telling, large-scale cash support for child-rearing families would do two things at once. It would compensate households for producing a public good; and, because such families tend to spend rather than save, it would channel money straight into consumption at a time when China is still struggling with weak domestic demand. On fertility, as on consumption, the diagnosis is no longer the problem. The real shortage is political willingness to spend at the scale the problem requires.

This piece was first published on James Liang's personal WeChat account on March 7. The translation below is mine and has not been reviewed by him.

2026年全国两会有关人口和生育问题的提案汇总

A roundup of proposals on population and fertility issues at the 2026 national "two sessions"

At this year's national "two sessions," deputies to the National People's Congress (NPC) and members of the Chinese People's Political Consultative Conference put forward a wide range of proposals on population and fertility issues. This article offers a summary of those proposals.

One point should be made at the outset: all of the proposals listed here come from publicly available media reports. As far as I know, there were also other proposals on population and fertility that were not covered by the media. So the proposals collected here do not represent the full set of population- and fertility-related proposals submitted during this year's national "two sessions."

Yao Jinbo姚劲波: Fertility support should cover children from age 0 to 18

According to a 4 March report by The Beijing News, Yao Jinbo, an NPC deputy and chairman and CEO of 58.com, the operator of one of the largest online marketplaces in China, said that in recent years China's number of births has kept falling, population aging has deepened, and the inertia of low fertility has become even more apparent.

"In the past, people worried about whether they could afford to have a child. Now they are more concerned about whether they can raise the child well and whether childcare support is available. Fertility support needs to come from systematic policy design, so that families feel able to have children, able to raise them, and properly protected."

In his view, China should build a comprehensive support system covering the full 0-18 growth cycle, supporting every stage from marriage and pregnancy to childbirth and child-rearing, so that families have more confidence and more predictability when making fertility decisions.

To that end, Yao proposed a package of systematic policies to keep improving the fertility support system.

At the top institutional level, he suggested writing the principle of fertility support "regardless of birth order" into national policy documents, removing various hidden barriers, relaxing eligibility requirements for adoptees and those placing children for adoption, scrapping the rule that adoptive parents must be childless, and ensuring that adopted children enjoy the same rights as biological children in household registration, school enrollment, social security, and other areas.

On policy coordination, he proposed setting up a national population development commission and establishing a regular joint-meeting mechanism to coordinate the implementation of fertility support policies and regional population development, creating a more stable and long-term policy framework.

On incentives and funding, Yao proposed creating a population development fund dedicated to fertility subsidies, childcare service development, and related public services, while encouraging local governments to adjust childcare subsidy standards dynamically in line with their economic development, making support policies more sustainable.

At the public-service level, he called for further improvements to support for marriage, pregnancy, childbirth, and parenting, including stronger support for young people's marriage and childbearing, low-interest marriage and childbirth loans for new graduates and newly married families, and housing support.

At the same time, he said China should address the shortfall in childcare services for children aged 0-3, improve maternity medical coverage, include services such as pain relief during childbirth in medical insurance, and expand maternity insurance coverage to provide families with more continuous and accessible support.

"Only when families feel able to have children, able to raise them, and able to raise them well will population development have staying power and society retain its vitality," Yao said. By combining institutional guarantees with better public services, he argued, China can build a stronger foundation for long-term, balanced population development.

Pang Yonghui庞永辉: Raise childcare subsidies substantially

According to a 5 March report by Jimu News, Pang Yonghui, an NPC deputy and a master of Chinese arts and crafts, proposed substantially raising childcare subsidy standards and issuing long-term special government bonds for childcare in order to boost people's willingness to have children. His specific proposals were as follows.

First, raise childcare subsidies and extend them across the whole growth cycle. He suggested adjusting the subsidy policy so that families would receive RMB 1,000 per month for a first child, RMB 3,000 per month for a second child, and RMB 5,000 per month for a third child and above, until the child turns 3. At the same time, families with multiple children should receive reductions in income tax and social security contributions, further easing the financial burden on households and making the subsidy policy genuinely effective as an incentive.

Second, issue long-term special government bonds to fund the subsidies. He proposed bonds with a maturity of around 30 years to raise childcare subsidy funds and achieve inter-generational fairness, so that future taxpayers who will benefit from the additional labor force also share the current cost of child-rearing. Given China's ample productive capacity at present, he argued, distributing childcare subsidies could also help activate idle capacity and expand domestic demand.

Third, improve supporting policies and build a full-chain fertility-friendly system. Alongside higher subsidies, he called for vigorous development of affordable childcare services, a broader rollout of free pre-school education, more effective implementation of initiatives launched to relieve students of excessive burdens from homework and off-campus tutoring, so as to reduce household education spending, and appropriately shorter working hours alongside guaranteed parental leave rights, so as to address families' concern that they "dare not have children because no one is available to help care for them."

Pang said: "Childcare subsidies are not just a welfare measure. They are also a strategic investment in future development momentum. By building a full-chain fertility-friendly system, China can effectively strengthen public confidence in childbearing and build up its talent dividend for long-term national development."

Zhang Yi张翼: Keep the universal subsidy, but add a second layer of supplementary subsidies

According to a 5 March report by China Business Journal, Zhang Yi, an NPC deputy and dean of the School of Sociology and Ethnology at the University of Chinese Academy of Social Sciences, noted that the Central Economic Work Conference had clearly called for efforts to "stabilize the number of new births," and that the core of solving the problem of people "not daring to have children" lies in reducing the cost of raising them.

In his field research, Zhang found that many families do want children, "but worry that the financial pressure is too great" . He noted that the current universal childcare subsidy is RMB 3,600 per year for children aged 0-3, or RMB 300 per month, which is not enough to encourage people to have children.

In his view, the current policy only covers very young children, providing support only for those aged 0-3. In a two-child family, if the first child is already over 3, the household cannot receive support for that child. He also argued that the subsidy level is too low. "For low-income families, RMB 300 a month is just a drop in the bucket; for high-income families, it provides no real incentive. It does not truly ease the pressure of child-rearing."

To address these problems, Zhang proposed a two-tier system of "maintaining the universal subsidy plus adding a supplementary subsidy," with a particular tilt towards low-income and lower-middle-income households.

He suggested that for low-income families with per capita disposable income below 50% of the national average, a first child should receive an extra RMB 800 per month, bringing the total including the universal subsidy to RMB 1,100; a second child should receive an extra RMB 1,600 per month, bringing the total to RMB 1,900; and a third child should receive the same as a second child.

"In other words, if the first child has already aged out of the system, but the second and third children are both within it, a low-income family could receive as much as RMB 3,800 a month."

For lower-middle-income families, defined as those with per capita disposable income between 50% of the national average and the average itself, Zhang proposed an extra RMB 400 per month for a first child, bringing the total to RMB 700 with the universal subsidy, and an extra RMB 800 per month for a second child, bringing the total to RMB 1,100. Together, the first and second child would then bring in RMB 1,800 per month.

"For a low-income family raising both a second and a third child at the same time, RMB 3,800 a month is roughly equal to a migrant worker's monthly income. That can more or less cover one person's wages, and would go a long way towards easing the problem of not being able to afford children," Zhang calculated. "For a lower-middle-income family, RMB 1,800 a month for two children can also cover a meaningful part of the cost of raising them, making them more willing to have a second child."

Tian Xuan田轩: Establish a nationwide unified child development account

According to a 4 March report by The Beijing News, Tian Xuan, an NPC deputy and Boya Distinguished Professor at Peking University, proposed creating a unified child development account across the country under a system of "an account opened at birth."

Each newborn's ID number would serve as the unique identifier and be automatically linked to the household registration system. The central government could inject an initial RMB 1,000-2,000 into each child's account, with higher initial amounts of RMB 3,000-5,000 for special groups such as households receiving the minimum living allowance, disadvantaged children, and left-behind children. A dedicated management system should also be built on the national social security information platform to enable interconnection across multiple systems.

He also proposed building a diversified funding system that allows compound growth over time. The government could provide guiding funds through fiscal budgets and transfers of state-owned capital; families could make voluntary contributions and in return receive higher special additional deductions for individual income tax; companies that contribute to the accounts of employees' children could deduct part of the amount from corporate income tax; and charitable organizations should be encouraged to make targeted donations.

Zheng Gongcheng郑功成: Establish a mothers' pension system

According to a 4 March report by China News Service, NPC deputy Zheng Gongcheng, speaking on how to build a fertility-friendly society, noted that legal and policy tools should be used to address the way childbearing affects women's employment and career opportunities.

Zheng placed particular emphasis on the necessity and importance of creating a mothers' pension system. In practical terms, that would mean treating time spent caring for infants, such as one or two years, as a deemed contribution period, ensuring that women's pension benefits are not reduced because of childcare. As he put it: "This institutional design links the contribution of childbearing to security in old age, and represents a formal recognition of the social value of womens reproductive labor."

Ruan Xiangyan阮祥燕: Three recommendations on fertility protection

According to a 6 March report by Beijing Youth Daily, NPC deputy Ruan Xiangyan, director of the endocrinology department at Beijing Obstetrics and Gynaecology Hospital, made three recommendations on fertility protection.

First, strengthen prevention at the source, standardize diagnosis and treatment, and establish a fertility assessment and protection mechanism so as to minimize avoidable fertility damage.

Second, accelerate the spread of technology so that mature techniques such as ovarian tissue cryopreservation and transplantation become safer, more standardized, more affordable, and more widely accessible.

Third, improve institutional protections by fully integrating fertility protection into whole-life-cycle health services, so that more people can enjoy fair and accessible reproductive health protection.

Zhao Jing赵菁: Build a stronger full-cycle system for protecting reproductive health

According to a 3 March report by 21st Century Business Herald, the current lack of adequate protection for women's fertility, both physically and psychologically, has led some families who "want to have children" to abandon those plans.

Over the longer term, this does not just weaken individuals' willingness to have children; it may also undermine society-wide confidence in childbearing, directly affecting the achievement of the national strategy for high-quality population development.

Zhao Jing, an NPC deputy and vice-chair of Buchang Pharma, proposed building a stronger full-cycle system to protect reproductive health. Her suggestions included deepening public-hospital pay reform to reduce hospitals' financial reliance on invasive treatment; drawing up technical guidelines for organ-preserving treatment involving women's core reproductive organs, and making fertility impact assessment a necessary pre-operative step; establishing a second-opinion system for major surgery; and introducing a special 24-48-hour informed-consent protection period for fertility risks. She also called for a more diversified support system for infertility treatment.

Li Yanfeng李燕锋: Keep bride price below RMB 60,000

According to a 4 March report by Red Star News, this year's No. 1 Central Document, released in February, stated that China should "continue tackling the problem of excessively high bride prices in rural areas, strengthen joint governance in neighboring inter-provincial regions, guide people towards sound views on marriage, childbearing, and family, and foster a simple and civilized marriage culture."

High bride prices add to the cost of getting married and, together with the cost of children's education and other pressures, may create an atmosphere in which young people feel intimidated by marriage and parenthood.

Li Yanfeng, an NPC deputy and director of the library in Guigang, Guangxi Province, proposed setting an upper limit on bride price and offering employment or entrepreneurship incentives to families who marry with a low bride price. Discussion of how to curb "excessively high bride prices" has gone on for years.

In Li's view, the trend can only be stopped with a clear rule. She suggested introducing a unified standard. "Although economic development differs from place to place, I suggest that bride price should not exceed RMB 60,000."

Song Zhaopu宋兆普: Lower the legal marriage age appropriately and encourage earlier marriage and childbirth among people of suitable age

According to a 4 March report by The Beijing News, NPC deputy Song Zhaopu said in an interview that fertility issues remained one of his main concerns this year. He argued that if people delay childbearing too long, age-related declines in sex hormones and ovarian function may affect fertility. He therefore proposed appropriately lowering the legal age of marriage and encouraging people of suitable age to marry and have children earlier.

He also said that some abnormal patterns of miscarriage currently deserve greater attention, and suggested that the state should study and introduce measures as soon as possible to regulate and reduce them.

Yang Yunyan杨云彦: Foster a new culture of marriage and childbearing, and build family-friendly households

According to a 4 March report by China News Service, Yang Yunyan, a member of the CPPCC Standing Committee and deputy director of the Standing Committee of the Hubei Provincial People's Congress, said that population development is a foundational, overarching issue tied to the great rejuvenation of the Chinese nation.

In his view, cultivating a positive outlook on marriage and childbearing requires society as a whole to move in the same direction, with government, society, and families working together. The key lies in deepening understanding, lowering costs, and adopting differentiated policies, so as to create endogenous momentum and a virtuous cycle for high-quality population development.

He therefore proposed fostering a new culture of marriage and childbearing and building family-friendly households in three ways: first, promote a positive outlook on marriage and childbearing; second, build bridges for emotional communication between generations; and third, encourage couples to share childcare responsibilities.

Peng Jing彭静: Make senior high school education free

According to a 4 March report by China Youth Daily, Peng Jing, a member of the CPPCC National Committee and director of Chongqing Jingsheng Law Firm, proposed creating a mechanism for gradually making senior high school education free.

She suggested a three-step approach. The first step would prioritize exempting tuition fees for rural households receiving the minimum living allowance, people in extreme hardship, disabled students, and families with multiple children.

The second would gradually expand the policy to all students with rural household registration. The third would make senior high school education free for all urban and rural students. In places not yet ready for full coverage, tuition fees and textbook fees could be waived first, while service charges would be subject to capped pricing.

Gan Huatian甘华田: Adopt a dual-track policy of tax deductions and childcare subsidies

According to a 5 March report by Sichuan News Network, Gan Huatian, a member of the CPPCC National Committee and professor at West China Hospital of Sichuan University, said that China's number of births has continued to decline in recent years. The Central Economic Work Conference explicitly called for the country to "promote a positive outlook on marriage and childbearing, and strive to stabilize the number of new births."

Although China has already introduced a three-child policy and a series of supporting measures, and the recommendations for the 15th Five-Year Plan also stress the need to effectively reduce the cost of childbirth, child-rearing, and education, many families still face serious difficulties in real life, including heavy financial burdens, weak protection of women's rights, and insufficient policy coordination.

Gan therefore proposed a dual-track approach combining individual income tax deductions with childcare subsidies, with stronger support for multi-child families, rural households, and low-income groups. He also proposed expanding the scope of medical insurance reimbursement so that childbirth and prenatal check-ups become fully free, and bringing assisted reproductive technologies and related medicines into the medical insurance system. At the same time, he called for a better cost-sharing mechanism for childbirth and further optimization of maternity insurance, including fiscal subsidies and tax breaks to reduce the extra cost to employers of hiring women of childbearing age.

He also urged stronger efforts to encourage fathers to participate in childcare and ensure that paternity leave is genuinely implemented. On top of existing maternity leave provisions, he proposed making paternity leave compulsory and gradually extending it, alongside shared parental leave, and including implementation of men's childcare leave in corporate credit evaluation systems. By encouraging men to take on more childcare responsibility, he argued, pressure on women could be reduced.

He further called for tough action against gender discrimination in employment, including stronger labor inspection, smoother complaint channels, and strict legal penalties and public exposure for employers that discriminate against women on the basis of marriage or childbearing status.

Lu Ming陆铭: Shorten working hours and cut unnecessary overtime

According to a 4 March report by Tencent Finance, CPPCC member and economist Lu Ming proposed shortening working hours and reducing unnecessary overtime.

He suggested optimizing the Labor Law provisions on working hours, cumulative overtime hours, and overtime pay; strengthening enforcement; raising the cost of violations; and establishing convenient, confidential reporting channels for workers. He also called for improvements to evidence and arbitration mechanisms, including better rules on what counts as proof of overtime, in order to address the difficulty workers often face in producing evidence.

In addition, he proposed making the definition of "disguised compulsory overtime" clearer in law or judicial interpretation, so that regulators have a more solid basis for enforcement.

At the corporate level, Lu said companies should speed up digital transformation and use technology to reduce unnecessary time costs and manual workloads. Firms should also be guided to adopt more advanced management methods, using outcomes rather than hours spent at work as the core basis for evaluation.

Lyu Guoquan吕国泉: Strengthen implementation of the two-day weekend and protect workers' right to rest

According to a 4 March report by China Newsweek, Lyu Guoquan, a CPPCC member and former director of the General Office of the All-China Federation of Trade Unions, said in an interview that overtime remains widespread in some workplaces, especially in labor-intensive enterprises, public institutions, and major internet companies.

Lyu called for compliance with the Labor Law requirement that weekly working time should not exceed 44 hours. Public institutions, government bodies, and enterprises, he said, should all ensure that working-hour standards are respected so that workers have enough time to rest and maintain their physical and mental health.

He also noted that although the two-day weekend has been in place for many years, its implementation is still far from satisfactory, especially in small and micro enterprises, the service sector, manufacturing, and internet companies, where single-day weekends and alternating single- and double-weekend schedules remain common. He therefore proposed stronger enforcement of the two-day weekend system to ensure workers' right to rest.

Comment from James Jianzhang Liang: Large-scale direct payments to families raising children would be an immediate, high-impact policy with a double benefit

In recent years, China's fertility rate has fallen to around 1.0. Persistently low fertility not only raises the share of elderly people in the population and drains vitality from society; as long as fertility remains below replacement level, the overall population will continue to shrink. The consequences are serious: weaker innovation, slower economic growth, more intense social "involution" , and a marked decline in overall national strength. That is why raising the fertility rate has become a point of broad agreement among many deputies and members at the national "two sessions."

The fundamental reason for the continuing decline in fertility is that the cost of raising children, whether in money, time, or energy, is borne mainly by families, while the enormous value created by those children in the future, as workers, consumers, innovators, taxpayers, and inheritors of culture, language, and group identity, is enjoyed mainly by the state and society. This mismatch between who pays and who benefits needs to be corrected through social compensation on a sufficient scale.

That is why proposals from representatives such as Yao Jinbo, Pang Yonghui, and Zhang Yi to increase fertility subsidies deserve support. There are many possible ways to raise fertility, but large-scale direct payments to families raising children are one of the few measures that can produce visible results quickly while serving two goals at once.

Recent figures released by Statistics Korea show that South Korea recorded 254,500 births in 2025, up by 16,100 from the previous year, an increase of 6.8%, marking a second straight year of growth since 2024.

South Korea had long faced the severe challenge of the world's lowest fertility rate. In 2023, its fertility rate fell to 0.72, a record low. In 2024, the number of births rose for the first time in many years, up by 3.6% year on year, and the total fertility rate edged up to 0.75. In 2025, that positive trend continued, with the total fertility rate rising further to 0.8, the highest level in nearly four years.

There are two main reasons why South Korea's births have risen for two consecutive years. One is that people born during the birth peak of 1991-1995 have gradually entered their prime marriage and childbearing years. The other is that the government introduced stronger pro-natal policies. On 11 January 2024, South Korea's Ministry of Health and Welfare announced a sharp increase in subsidies for parents of children under 2. Under the new policy, parents with babies under 1 receive KRW 1 million per month, roughly RMB 5,000, while parents raising children aged 1 to 2 receive KRW 500,000 per month.

In addition, several local governments in South Korea have gone even further. Incheon, for example, introduced the "1 Billion dream" policy. The program aims to support every baby born in Incheon with life-cycle support worth about KRW 100 million in total, roughly RMB 500,000, from the fetal stage to age 18. South Korea's experience suggests that direct cash support can help raise fertility, but only if the support is large enough.

At present, one of the main problems facing China's economy is that demand in many sectors is not keeping pace with the growth in supply. If China wants to address that problem, the key is to create more demand.

The most direct, effective, and straightforward way to do that is to give money to consumers, especially to families raising children. Because such families tend to spend a high share of what they receive, a large portion of the money would quickly be converted into consumption, helping to stimulate the market and in turn supporting fiscal revenue growth.

For that reason, giving money to families raising children would not only expand consumption and improve people's quality of life and sense of wellbeing. It would also raise the fertility rate, strengthen China's innovative capacity, and boost its overall national strength. It is a policy that can deliver two gains at once.

A message in the World Bank’s 1993 Policy Research Report The East Asian Miracle: Economic Growth and Public Policy was that while most of East Asia’s rapid growth rested largely on market-friendly fundamentals, ranging from macroeconomic stability to rapidly growing human capital, carefully designed government roles also mattered in a few economies, mainly in Northeast Asia.

This message is worth revisiting in 2026, as Beijing is expected to formally adopt the 15th Five-Year Plan (2026-2030). Details are expected to be finalized through the upcoming annual “two sessions” this month.

Beijing views its plans as a framework that ensures policy continuity in the face of geopolitical tensions and economic instability. In Xi Jinping’s words, it will take “three consecutive five-year plans” to basically realize what he calls Chinese modernization by 2035 (到2035年，用3个五年规划期，基本实现社会主义现代化). Xi’s vision, in some respects, echoes the early nation-building drive under Mao Zedong in the 1950s, when the First Five-Year Plan inaugurated an ambitious campaign of rapid industrialization and a long-term effort to close the gap with advanced economies such as the United States, a task Mao suggested could take roughly 15 five-year plans.

BEYOND BINARY CHOICE

Neo-liberals claim that economic planning is a key characteristic of centralized economies and runs counter to the market. So why is the world’s second largest economy, having already pledged to let the market “play a decisive” role, still adopting such a national plan?

China arguably has one of the world’s most institutionalized national planning systems among large market economies. These plans are no longer about dictating what individual enterprises produce or how they price their goods, as they were supposed to be under command economy. Instead, they define broad development priorities, coordinate policies across ministries and regions, and set medium-term reform goals. The market determines operational outcomes, while the plan, as a guide for Chinese regulators, shapes the policy environment.

Seen from this angle, the issue is less a “planning versus markets” binary choice, but rather about the allocation of tasks in national governance: which problems can be left to prices and private decision-making, and which require some form of government action, and how to prevent the latter from expanding too far.

In official Chinese documents, the commitment to “enabling the market to play a decisive role” （使市场在资源配置中起决定性作用）in resource allocation is consistently paired with an emphasis on “enabling the government to better play its role.” （更好发挥政府作用) China is also mulling a national development planning law to serve as a basic law for regulating the formulation of national development plans and ensuring their implementation.

UNDERLYING LOGIC

Critics of economic planning argue that government intervention undermines efficiency. In practice, however, efficiency depends less on choosing one governance model over another. What truly matters is fixing problems. China’s achievement in the wind power sector offers a concrete example of how national coordination works.

In this particular sector, private returns and public goods are closely intertwined. Wind farms need to profit, but they also serve climate and energy-security goals in a way that markets may fail to achieve at the necessary scale and speed. Here, a larger role for collective governance, namely planning, standards and targeted support, can help align private investment with broader objectives.

This case is especially relevant for China, the world’s top carbon dioxide emitter, which is striving to reach peak carbon emissions before 2030 and achieve carbon neutrality before 2060.

Markets should not be treated as infallible. Laissez-faire could generate crises, recessions or inefficiencies. Recognizing this, governments in major market economies are increasingly embracing industrial policies.

The United States does not label its industrial policies a “five-year plan,” but legislation such as the CHIPS and Science Act, large-scale clean-energy incentives and repeated crisis-era rescues, amount to a more assertive government role, one that seeks not merely to regulate markets, but to steer them toward strategic outcomes. The European Union’s Green Deal, its debate over “strategic autonomy” and its growing use of state aid, all point in a similar direction.

Here, the underlying logic is shared: markets alone do not guarantee technological edges, industrial resilience or rapid decarbonization. In practice, markets are excellent at optimizing for the short term and for private returns, but not necessarily for long-term social goals.

Framed this way, the argument for a five-year plan is not that officials are better at picking winners than entrepreneurs. It is that there are some tasks markets will not undertake at the right scale or speed, unless someone sets the direction and builds the scaffolding.

Poorly designed industrial policy can be as damaging as the absence of policy. The Northeast Asian evidence as noted in the World Bank report suggests that, under certain conditions, including disciplined macroeconomic management and openness to competition, a mixed approach can perform reasonably well. As prominent Chinese economist Justin Yifu Lin famously said, a mixed system requires an “effective market” and a “facilitating government” (有效市场，有为政府).

The idea that foresight guards against future risk has long been embedded in China’s political and cultural tradition. Confucius said: “If a man takes no thought about what is distant, he will find sorrow near at hand.” （人无远虑，必有近忧）It is, therefore, not surprising that the concept of the five-year plan, though introduced from the Soviet Union, was readily embraced by China as a structured expression of this enduring preference for long-term thinking.

For international investors and multinational companies, China’s new five-year plan is more than a domestic policy document. It is China’s institutional response to the same structural pressures that are prompting renewed industrial strategy in places like Washington and Brussels. Enditem

Outside the window, the landscape is a blur; inside the carriage, people doze, scroll, unwrap instant noodles, waiting to arrive. Like hundreds of millions of others, I am part of the world's largest annual human migration: Chunyun春运, the Spring Festival travel rush.

I am one of the lucky ones. Thanks to China's high-speed rail, it takes me less than four hours to cross roughly 1,200 kilometers from Beijing back to my hometown. Four hours, a coffee, a nap — and I am home.

But for another group of people, traversing that same distance is an ordeal that spans dozens of hours, sometimes days.

Instead of boarding the sleek, ubiquitous bullet trains, millions of migrant workers choose the slowest options still running: old slow trains, hard-seat carriages, overnight journeys that leave your back aching and your legs numb.

Each of them has a reason for choosing this route. Most of those reasons have to do with children and parents, with saving every possible yuan for the people waiting at home.

For years, high-speed rail has been held up as one of China's proudest achievements. In this piece, I simply hope to turn the spotlight, for a moment, towards the more than 300 million migrant workers whose labor keeps Chinese cities running. We rarely see them in headlines, but no city could function a single day without them.

The video that prompted this reflection was produced by Hong Kong–based Phoenix Weekly, and you can watch it here. What follows is my English translation of the interviews in that film.

归途列车：春运里的硬车慢座返乡人

Homebound Train: Hard-seat travelers on the Spring Festival rush

Narrator 00:21

Spring Festival rush is when people head home. High-speed rail has made "far away" feel closer, but plenty of migrant workers still take the slow trains, sitting on hard seats for tens of hours, to get back. They carry big bags, with tired faces, but also the hope of finally getting home.

High-speed rail is everywhere now, and why do they still choose a slow train, a hard seat? The answer is hidden in their stories.

Mr. Kang, 45, miner

Tangshan, north China's Hebei Province → Ankang, northwest China's Shaanxi Province (hard seat, 24 hours, nearly 1,500 km)

"Going home for New Year is about being with the family"

Reporter 00:51

Where did you get on?

Mr. Kang 00:54

I'm taking it from Tangshan in Hebei to Ankang in Shaanxi. All in all it takes more than 40 hours to actually get home. A hard seat is 198 yuan (roughly USD 28). I buy hard seat to save a bit of money, that's one thing. Another thing is, even if I am willing to spend more and buy a faster train, sometimes I just can't get one. But this trip home for New Year, I still have to make it. I have to go back.

My parents are getting old, and my kid is still small. If I didn't go home, even if nobody said anything, I wouldn't be able to live with my own conscience.

I got into mining because some neighbors and friends took me along to work for a while. Started off just doing hard physical labor. Now if I want to change to something else, like go straight into a factory, the problem is, we're older now, we don't really fit in at the factory, the pay is lower.

To tell the truth, when I think about it I feel pretty bad sometimes. Lots of my workmates going home for New Year, they don't even have money for the trip. Many of them work outside all year and, in the end, still have to ask family back home for money just to afford the ticket.

Mr. Kang 01:46

People hear it on the surface and go, "Oh, mining pay is good, right? You make eight, ten thousand a month?" Yeah, on paper it sounds pretty good.

But they don't think about how this job isn't stable like a factory. In a factory, one has got work every day, every month. In the mines, one might work a month, then be off two months.

Those months with no work, we are living off our savings, eating away what we made before. Then we're on the road again looking for work, spending on train tickets, cheap places to sleep, food on the way… and the money's gone.

This year, how to put it… To be conservative, I just made enough for living expenses, just a few tens of thousands of yuan.

Mr. Kang 02:17

I'm almost 50 now. I got married late, so my kid is only in junior high.

There are lots and lots of workers like me. You know how it is: at our age we've got elderly parents and younger kids. For the sake of the family, we can't just stop working, right? Farming at home isn't an option either, as there isn't much land.

Doing this job… honestly, I'm tired of it. A lot of the guys say the same to me: they've been sick of it for years, but there's no way out. I might be fed up, but my family still has to live. If I don't do it, what else can I do? That's the biggest, most real problem.

When we were young, Spring Festival felt really joyful. We counted the days, just waiting for New Year to come, itching to rush back home, see my kid, see my parents.

Now we're middle-aged, more steady. For people our age, New Year isn't exactly "happy" any more — it's more like making up for something, making up for all the family time we miss during the year.

The old saying is right: rich or poor, we go home for New Year. Get everyone together. Nothing too exciting, just have to adjust your mindset.

陈大哥，40岁，砖厂维修工

黑龙江哈尔滨 -- 四川成都（硬座，51小时，近3000km）

“回家过年那几天是自己最放松的时刻”

Mr. Chen, 40, brick factory maintenance worker

Harbin, northeast China's Heilongjiang Province → Chengdu, southwest China's Sichuan Province (hard seat, 51 hours, nearly 3,000 km)

"Those few days at home for New Year are when I relax the most."

Reporter 03:22

Where did you get on?

Mr. Chen 03:25

Harbin.

Reporter 03:25

And you're riding to where?

Mr. Chen 03:27

To Chengdu. It'll be more than 50 hours, almost 60 hours to get home.

Can't be helped. Right now the train is the only cheap way. The trip home costs about 1,000 yuan.

I do maintenance, machine repair. Normally people doing this kind of work should be making over 10,000 yuan a month, but in the last couple of years it's only 8,000 or 9,000. You just get used to the job.

I've got elderly parents and kids at home. Family expenses are 5,000 to 6,000 a month.

Mr. Chen 04:02

I've only got one child. He's at a vocational school in Panzhihua, Sichuan Province. He's on holiday now, already back home, staying with his grandpa.

I'm divorced. Back then lots of people asked why I didn't let his mom take him. They said, "You're alone. You've got to raise the kid and work." I said, "It's fine. I'll just work harder." If I can't be a good husband, can't I at least be a good father? Right?

I started working away from home really young, sixteen, seventeen. It's mainly for the sake of the elders and the kid. Otherwise I'd have gone abroad already. That's just how life is.

Tired or not, you still have to keep working. Recently back in our hometown there have been lots of "events," weddings, funerals, that sort of thing. And the gifts we give are pretty big.

If you run into a few events in one year, you're in trouble. My yearly spending is 50,000 to 60,000 yuan. Gift money alone is 30,000 to 40,000. Daily living doesn't cost that much. Out here I live on a few hundred yuan a month. The thing I worry about most is the elderly and the kid.

Mr. Chen 05:14

I don't know if it's just me, or if all men are like this. But once I get home, it feels like nothing matters. I can sleep like a rock. After New Year, when I go and pay respects at the graves, I can even fall asleep up there by the graves.

Sometimes sitting here I just think, wow, if only I were at home right now, that'd be so nice. Hahaha. It always feels like once you're back in your own place, the pressure isn't as heavy.

Mr. Zhu, 60, refinery worker

Shenyang, northeast China's Liaoning Province → Hanzhong, northwest China's Shaanxi Province (hard seat, 33 hours, nearly 2,000 km)

"This year I took ten days' leave early, just to be home for New Year."

Mr. Zhu 05:49

I got on the train at three in the morning last night, and I won't arrive until one in the afternoon tomorrow.

I always go back by train, usually hard seat. To be blunt, people like us working outside all just want to save a few money.

High-speed trains are fast, sure, but they cost a lot more. I bought three tubs of instant noodles – eat those, and just now I got some snacks, eat those too.

If I feel sleepy, I just curl up on the seat and get a bit of sleep.

Working outside like this these days… I'd say I don't really make money. In a good year I can just about support the family. In a bad year I can't even do that.

I make six, seven thousand a month, maybe seven, eight thousand. Out of that I send some to the kids, some to my wife, and when I add it up, there's not much left for myself.

The factory does cover meals. They give us a daily food allowance of a dozen yuan or so. It's not great, but at least they're feeding us.

Mr. Zhu 06:58

We work so hard outside all year, and back home my wife works just as hard looking after the kids.

At the end of the year, if my wife and I can sit together and have a proper reunion, that's the best thing I can hope for. Nothing else really.

A few days ago we had a meeting and the company set the holiday to start on the 25th of the last lunar month. I said, if we only get off on the 25th, then the 26th and 27th we're still on the road for two days, so there's hardly any time left at home.

So I took leave. That's what it's like as a migrant worker: if you work today, you get paid today. If you don't work, there's no money.

Every day we work is just for this one family, the elders and the kids, for them to live.

A female, 55, mushroom picker

Taiyuan, north China's Shanxi Province → Hanzhong, northwest China's Shaanxi Province (hard seat, 17 hours, nearly 900 km)

"Working away and going home for New Year — it's all for my child."

Reporter 07:48

You boarded in Shanxi?

The female 07:50

Yes, I got on in Shanxi.

I worked on construction sites for five years, just doing odd jobs, picking up and sorting rebar. The construction work was okay, and those years I could make over 200 yuan a day. Now there's no site work any more.

Now we're picking mushrooms. I don't make much, just a bit over 100 yuan a day.

I've always been working outside on my own. My husband had a car accident, his leg's bad, he can't walk.

I've also got a child in school. He's at a private school and the tuition's high. There's no way around it, and I have to come out to work.

Just his tuition is thirty-seven, thirty-eight thousand. On top of that I have to pay boarding fees, and give him pocket money every month. Altogether it's more than forty thousand a year.

The female 08:45

So I spend as little as I can on myself out here. My employer cover food, so a few hundred yuan is enough — two, three hundred.

I got on the train at 8:56 yesterday. I think it's about 24 hours to get home.

For me, going home is all because of my child. Earning money is for the child too.

We're used to being out working. Going home, I wouldn't even say I'm super happy. Sometimes I feel happier outside. There are lots of workmates out here. Once you get familiar, you’ve got lots of buddies, lots of people around. Back home I'm actually not so used to it, haha.

Reporter 09:23

The Year of the Horse is almost here. What are your hopes for the coming year?

The female 09:28

Ah, just to earn a bit more money and get my kid through school, hahaha. That's all I hope for, nothing else.

Passer-by A 09:34

Find a better job, find a good boss.

Passer-by B 09:36

Do more work, get more shifts.

Mr. Zhu 09:40

For our whole family to be safe and sound, and in good health, that's enough. Whether there's much money or not, that's not such a big deal.

Mr. Chen 09:45

As long as I have food to eat and clothes to wear, I'm fine. A person just has to be content and take joy in what they have.

Mr. Kang 09:51

Work hard and make some money, save up that first pot of gold. Later on I'd like to change trades, get out of the mine.

I want to send my best wishes to all the miners out there like me: you've got to keep going, keep working hard. For a better life, you have to hold on.

And for everyone who doesn't do this kind of work too, I hope you have a good New Year, and that your whole family stays healthy and happy.

Today's piece stays with AI, which highlights the connection between AI and philosophy, and how different philosophical traditions in the West and East have helped shape what AI is built to do.

It is a speech delivered by Dr. Xu Yangsheng, the President of The Chinese University of Hong Kong, Shenzhen, at the Long Feng Science Forum on January 24, 2026.

A member of the Chinese Academy of Engineering, Xu earned his PhD at the University of Pennsylvania, spent years at Carnegie Mellon University, and later joined The Chinese University of Hong Kong.

In the speech, Prof. Xu noted that Western philosophy, with its emphasis on rationality, logic, and the knowability of an objective world, has nudged AI towards dismantling problems into parts, optimizing efficiency, and building "world models" through technical decomposition.

Eastern philosophy, by contrast, places more weight on wholeness and interconnection, intuitive experience, and ethical value. That tradition, Xu suggests, is a reminder that anything resembling real intelligence cannot be separated from emotional attachment and lived experience, and that the destination should be human–machine coexistence rather than mere performance.

He further noted that AI dominated by data and large language models has hard limits, because even its most basic premises — what counts as intelligence, how behaviour should be judged, and which values systems should be aligned — are, in the end, philosophical questions.

Education, Xu argues, therefore needs to pivot towards cultivating genuinely creative people: those who understand human nature, think independently, develop aesthetic sensibility, and build resilience.

This piece was first published on Prof. Xu's personal WeChat public account. Please note the following translation is my own and has not been reviewed by him.

人工智能与东西方哲学思想

Artificial Intelligence and Eastern–Western Philosophical Thought

Adapted from Professor Xu Yangsheng's keynote speech at the Long Feng Science Forum on January 24, 2026

Xu Yangsheng

Good morning, friends. I'm delighted to have the opportunity to share a few thoughts with you today. Over the past 40 years, my research has focused on artificial intelligence (AI) and robotics. Over time, I've come to realize that AI is deeply intertwined with philosophy, and the stark contrast between Eastern and Western philosophical worldviews makes the development of AI especially fascinating.

When I received the invitation to speak at this Forum, I thought it might be meaningful to reflect briefly on these ideas. What I offer here is neither systematic nor exhaustive, and I can't promise that every point I make is entirely accurate. I simply hope to use this occasion for open exchange, and to learn from all of you.

In my view, both Eastern and Western philosophical traditions have valuable insights to offer AI. For instance: How should a model of the world be constructed? What exactly is intelligence? How should it be measured? What constitutes "good" intelligence? Where should we draw the line between AI and human beings? Should AI behave like the ideal "good child" people envision? And ultimately, is the goal truth, or consensus? If we do not address these fundamental questions first, AI may well head in very different directions.

To begin, let us start with philosophy. Roughly speaking, philosophy consists of three parts:

First, ontology: what the world is.

Second, epistemology: how we come to know the world.

Third, axiology/ethics: how to live in the world — in other words, what the relationships are among people, between people and the world, and between people and nature.

Of course, this is a simplified framework. For example, logic can be placed within epistemology; whether aesthetics counts as philosophy is debated; and as for statistics, some of my friends in mathematics never call statistics “mathematics”, while others treat it as part of mathematics. When I studied statistics, it was indeed taught in a maths course.

I largely taught myself philosophy through reading, even earlier than I began doing scientific research, so it has been about 50 years now. Along the way, I encountered two "wonderful" observations:

First, Eastern and Western philosophical traditions seem to have taken shape at roughly the same time. In the West, there were the Socratic tradition and Jewish thought; in the East, thinkers such as Confucius, Laozi, Mencius, and Zhuangzi; and in India, Gautama Buddha. Much of this activity clustered around 500 BCE. It's remarkable that so much foundational thinking emerged within the same historical window.

Second, the two traditions place their emphasis in different places. Western philosophy tends to focus more on epistemology and ontology, whereas Eastern philosophy leans more towards axiology. It discusses epistemology less, and often with less rigor — though Zhuangzi is an exception.

Why mention this first? Because the development of AI touches all three parts of philosophy at once.

Let me briefly share some differences in each part.

Start with ontology. Western ontology tends to emphasize rationality, objectivity, certainty, and knowability. By "knowable", I mean the belief that the world can ultimately be understood and explained clearly. That conviction once gave me enormous encouragement.

Eastern thought, by contrast, is less likely to offer that kind of firm assurance. It places more emphasis on wholeness, dynamism, interconnection, and the idea that all things share a common source. It stresses how parts affect one another: the heart, lungs, stomach, and liver are interconnected; if one room catches fire, the whole house is endangered.

Next, epistemology. At the core of Western epistemology is rational logic. When something happens, it insists on asking "why," and looks for reasons. Eastern approaches to knowledge are often less strict in this respect: they may not feel the same need to argue out why something is so. Among classical Eastern thinkers, Zhuangzi is a notable exception: he still tries, at least in part, to explain why he says what he says.

More broadly, Eastern philosophy places greater weight on intuitive and lived understanding. That kind of understanding matters because, in lived experience, subject and object can meet through resonance and empathy, and emotion is bound up with the "heart-mind." From this perspective, truth is grasped directly: not produced by analysis, not assembled from data, and not dissected by linguistic logic, but experienced.

Take a simple example: imagine I'm a woman, I see a man, and I fall in love. It begins with intuition. There may be no clear logic to it, and it can be hard to explain "why I love him." Language cannot fully account for it.

You may know that the current wave of AI took off with large language models. But what I want to emphasize today is this: language is not all-powerful. Language matters, but it is still a long way from intelligence. What we might call "real truth" is often extraordinarily difficult to put into words. That is one reason mathematics is so important, though you could argue that mathematics is also a kind of language, and it isn't omnipotent either.

My students sometimes say to me, "Sorry, Professor, I may not have explained it clearly." And I reply, "You explained it very clearly. The problem is that you used language, and some things simply aren't meant to be fully captured by language."

Beauty is like that, too. Watch two minutes of mime: not a single word, and yet you still understand. And what's more, each person feels something slightly different. So language is not all-powerful.

Experience is crucial as well, and Eastern philosophy places great weight on experience. This morning, as I walked beside a fishpond, I kept wondering: does a fish know how humans walk? Could it understand the pain and joy of walking? Of course you can't demand that of a fish, because it lacks that kind of experience. In the same way, humans cannot truly experience the pain and joy of birds. People often say that birds sing every day, so they must be"happy", but do we actually know that they are?

If AI never reaches the level of experience, it will not achieve genuine intelligence. That is one of the insights I have drawn from Eastern philosophy.

Finally, let me turn to axiology.

In the Western tradition, questions of "value" often come back to a single core issue: what is the meaning of human life in the world? What are we ultimately pursuing? Western thought tends to place priority on truth. Eastern thought, by contrast, tends to place priority on goodness, aiming at the cultivation and perfection of life itself. These are different perspectives, and together they make up the richness of human intelligence.

Let me illustrate this with a story.

One morning, two young monks are walking through a monastery courtyard when they see a snake swallowing a frog. Monk A drives the snake away, feeling that this is a sin. Monk B objects, arguing that interfering is itself wrong: snakes survive by eating frogs — can you possibly stop them all? Unsure, they ask an elder monk to judge who is right.

The elder monk replies that Monk A is right, because he is compassionate. But Monk B is also right, because he lets go of attachment, respects the laws of nature, and understands that if the snake does not eat frogs, it too will die.

One emphasizes compassion; the other emphasizes letting go. Buddhism tends to value the former, while Daoism tends to value the latter. One reflects the beauty of purposeful action (有为); the other reveals the insight of non-action (无为). Zen brings these two together at their point of intersection, and this is characteristic of Eastern philosophy.

From a more typical Western philosophical perspective, such ambiguity is harder to accept: if Monk A is right, then Monk B must be wrong; if Monk B is right, then Monk A must be wrong.

Friends, standards of right and wrong, good and bad differ, and that has a great deal to do with the direction of AI, large language models, and world models.

Broadly speaking, Western thought tends to approach the world as a collection of things. Many chemists are here today, and chemistry is a good example: it often treats everything as an object composed of molecules and atoms. A wooden table has a chemical structure that can be analyzed and quantified. The human body, too, can be examined in the same way. Anything material can be studied through this lens.

In the Eastern view, the world is approached more as "persons": objects can have “heart”, and emotion is taken seriously.

To put it another way: from a Western philosophical perspective, "things" exist and operate according to certain laws. Humans are living organisms; we must eat to survive; digestion requires a stomach. Pigs are living organisms as well, so they also have stomachs. In that sense, a pig's stomach and a human stomach serve the same basic function. The same logic can be extended to cats, rabbits, snakes, and so on. Western thinking often seeks a single, unified framework that can explain all phenomena.

From an Eastern philosophical perspective, by contrast, heaven and humanity form a unity, and each thing is understood to have its own "heart." When winter comes and the wind turns cold, leaves fall because the tree "feels" the cold. If fruit "feels" the cold, it may fail to ripen.

There is a line from Zhuangzi庄子 that I especially like: "物物而不物于物，念念而不念于念." As I understand it, to deal with things does not mean treating material objects as cold, lifeless "things," which misses part of their reality. And to attend to thoughts does not mean clinging to thoughts as fixed objects, otherwise the task becomes impossible.

In other words, "应无所住，而生其心": when the mind becomes fixated, effort turns forced, and that very fixation becomes the obstacle. This is a distinctly Eastern way of thinking.

A moment ago, I mentioned the Eastern idea that "objects have heart". But where, exactly, is this "heart"? I wrestled with this question for many years — about thirteen, in fact — while spending long hours in old bookshops in Hong Kong.

Let's begin with the formation of Chinese characters. Around the Shang dynasty, roughly 1300 BCE, many characters referring to body parts were written with the radical 月, which originally meant "flesh." This includes characters for the liver肝, gallbladder胆, stomach胃, abdomen腹, foot脚, and so on. There is only one notable exception: the character 心, the heart.

I study calligraphy, and I know that when the character 心 was first created, it did not contain the radical 月. Over time, its script evolved into the shape we recognize today, with two dots.

This raises an intriguing question: after more than 3,300 years, what do these two dots in 心 represent? The inner dot presumably refers to the biological heart inside the body, but where is the outer dot?

Now consider a group of characters related to 心: 愛 (love), 恨 (hate), 思 (think), 怨 (resent), 性 (nature or disposition). You may notice that characters containing 心 often suggest two "endpoints." When these characters are used as verbs, they are frequently transitive: to love or to hate, you must love or hate something.

Consider another example. Suppose there is only one mobile phone in the entire world, and it happens to be in your hand, no one else has a phone. Would your phone be useful? It couldn't reach anyone, so in that sense it would be useless. Friends, the "heart" is similar: it requires a second party. Only when there is another endpoint can the heart form a connection. That is what I mean by the "outer dot" in 心.

In this sense, the heart is a connector of all things, and is a basic idea in Eastern philosophy. It is much like the phones we carry today: a phone is a node in a network that connects people to one another.

Eastern and Western philosophies will have a profound influence on the future of AI, as AI contains deep philosophical questions. Philosophers will have plenty to do in the years ahead, provided they are philosophers who genuinely think.

Now let me pose a philosophical question about AI: what is "intelligence"?

From a Western philosophical perspective, "intelligence" is often understood as the technical decomposition and reconstruction. Today's pursuit of artificial general intelligence (AGI) aims to exceed human rational capacity and expand the range of problems that can be solved. In my view, much of this effort is ultimately about improving efficiency.

Take the game of Go as an example. If you can systematically break down your opponent's strategies and possible moves, it becomes easier to defeat them. What once required hundreds or even thousands of hours of practice can now be achieved much more quickly with the help of AI. This approach reflects a Western philosophical tradition that emphasizes decomposition, efficiency, and rational analysis.

In Eastern philosophy, by contrast, intelligence remains closely tied to human nature. Human beings possess inner life and spirituality, and machines should not take "surpassing humans" as their central goal. Instead, humans and machines should coexist. AI, from this perspective, ought to help humans deepen, refine, and enrich lived experience.

So, friends, there is no single, absolute answer to this question. Different perspectives can both be valid. Think of a bottle of water: one person says it is transparent and clear; another says it is cold. Both descriptions are true. This is how Eastern and Western philosophies differ: distinct angles and ways of thinking give rise to different world models.

And AI, at its core, is precisely about building world models.

Twenty years ago, I wrote a book titled Human Behaviour Learning and Transformer. In it, I argued that AI is, in a sense, about recording human behavior and then discovering the intelligence embedded within that behavior. That is roughly the route current AI is taking.

This brings us to two pointed philosophical questions.

First, what kind of intelligence are we actually trying to extract? Skills? Strategies? Memory? Intuition? Logic? Different answers will push AI in completely different directions.

Second, what kind of behavior counts as "good"? Imagine three students — A, B, and C — practicing driving, each taking a turn behind the wheel for ten minutes. An instructor can rank them quickly, but there's an underlying problem: standards vary. Different people use different criteria for "good driving."

In AI, that difference becomes a serious challenge. In a domain like Go, where constraints are tight, boundaries are clear, "good" is easy to define: winning is good, and the rules are explicit. But once you move to broader, more abstract forms of behavior, it becomes hard to set a single standard.

Therefore, if an AI system is built for a narrow domain, many of these issues can be ignored; once you aim for a large-scale world model, you cannot avoid them.

What people call value alignment is, at bottom, an attempt to align standards for what counts as "good." For example, different instructors judging "good driving" may reach very different conclusions. This is not because one is right and the other is wrong, but because their value scales, focal points, and weighting of criteria differ. This is the most common source of disagreement when value alignment is not achieved.

Let me give another example. One many of you will recognize: the Transformer. Suppose I hand you a 100-page report at 10 p.m. and tell you I need a summary tomorrow. Finishing it overnight might be difficult. But if someone has already used colored pens to highlight the key points, your job becomes much easier: you can concentrate on what matters most. That is, in essence, an attention model.

Attention is central to Transformers, and the same idea is now widely used across fields, including autonomous driving, computer vision, speech and language, text processing, and more.

In Eastern philosophy, attention is closely tied to a person's spirit神 and intent意. One's spirit神 is meant to dwell in the heart-mind. When it is present, you can sense your heartbeat and your breathing, and you feel fully alive. When your attention drifts, what pulls it away is sometimes described, in traditional terms, as a "demon" — a demon of the heart.

And when the spirit is no longer "at home," when it has left the body, that is called death. That is why I put up signs on campus that read, "Please don't look at your phone while walking."

So in the age of AI, given the differences between Eastern and Western philosophies, will continued AI development lead to different "sciences"? That may sound a little mysterious. My own view is: science is science. Scientific methods, standards of verification, and underlying logic do not change with region or culture. Many chemists are here today, and I think you would agree: chemistry is chemistry, and there is no such thing as "Shenzhen chemistry" or "Longgang chemistry." (Longgang is a district in the Shenzhen City)

The real issue is this: under different philosophical traditions and value systems, the AI people train may end up looking very different. If AI systems diverge in this way without proper value alignment, the consequences could be very serious.

I know many young people are listening today, so I hope you'll think carefully about this: in the next ten years, social structures, including families, schools, even the shape of work, may change in truly dramatic ways. A friend said to me yesterday that companies today often employ thousands of people, but in the future, "one-person companies" may become common, with teams of only two or three at most. If that happens, families and schools may also be reshaped, and entirely new forms of both may emerge.

The next generation may face questions that are not mainly about careers, income, fame, status, or rank. Many parents ask me what job their child should do, how much they will earn, whether they will become well known, and whether they can keep climbing. But it may be that these are no longer the things young people care about most.

And if those concerns fade, where does the meaning of life come from? Will human beings still have desire? That is an even more fundamental issue.

When I first arrived in the United States, I went to a Ningbo restaurant in Lower Manhattan. The owner asked, "What would you like to eat?" I blurted out, "Ribbonfish." Even I couldn't have explained why I said it. He asked, "How should I cook it?" I answered, "Steamed."

A few days ago, I invited some classmates from Zhejiang to my home. I asked them the same question: "What would you like to eat?" They replied, "Anything."

I was surprised: did they have no desire? If someone is unwilling to make even that kind of choice, with no clear preference, it suggests their sense of desire is weakening. And once humans lose desire, that is not a small matter.

So I suspect a new philosophy will emerge in the future: one that no longer revolves around "success studies" or traditional upward mobility, but instead guides humanity towards new pursuits.

That is why it is even more necessary to cultivate creative talent for the future — not people who only follow standard answers, but people who can raise questions, make choices, and create new goals.

Many people ask me: what will AI replace?

My view is that the most disruptive innovation will be hard for AI to replace. I divide people roughly into three layers.

The top 15 percent are pioneers. AI will not produce an Einstein; when it sees an apple fall, it will not suddenly arrive at the laws of mechanics.

At the other end, the bottom 15% often work in strongly physical, real-world settings, who AI cannot replace either.

The group that AI can most readily replace is the middle 70 percent.

The real problem is that our current education system is training exactly this middle 70 percent.

So the focus of education must shift towards cultivating truly creative people. I would describe creative talent in four dimensions.

First, the ability to understand the world and human nature.

To see how the world operates, and to understand human motives, emotions, and behavioral logic. At present, education that builds this ability is widely lacking around the world.

Second, rationality and independent critical thinking.

To reason from evidence, to raise questions, and to form one's own judgement. This is extremely important, but the current education's emphasis on it today is perhaps only 20%, far from enough.

Third, artistic and aesthetic ability.

Schools teach art not to turn every child into an artist, but to raise aesthetic capacity. I have visited a hundred secondary schools. Only about a quarter truly do a decent job with art classes; most essentially do not teach it.

Without aesthetic capacity, life loses an essential support. What ultimately supports a person in life? I think at least two things: beauty — because the world contains so much of it; and love — because there are people who love me, and people whom I love. Both are related to art. If you do not understand art, it can be difficult to understand beauty and love, and the emotional world can easily become hollow.

Fourth, courage and resilience.

If a student always gets an A and then receives a B one day, they may collapse, even develop extreme thoughts. That would be tragic. Life is a long process, and setbacks are inevitable. Without resilience, you lose another crucial support, and a single failure can feel like the end of everything.

Friends, many educators today grew up in a highly "rational" world. They teach in rational ways, and as a result, they often underweight the cultivation of these deeper, more foundational capacities.

In my view, the final direction of AI is a "science of man".

If AI is compared to a script, I would roughly divide it into two episodes:

Right now, we are still in the first episode, themed "the scientific human". Under the guidance of Western philosophy, humans are treated as objects that can be decomposed, measured, and modeled. "Rational" and "scientific" methods are used to break down the "human": what is the structure of a hand? what functions does it have? what cells is it made of? where is its power source? can a hand be built to resemble a human hand? Other organs are approached the same way, using what we regard as "scientific" methods to study the human as a material object.

In the end, I believe the second episode will arrive. Under the combined guidance of Eastern and Western philosophies, the theme will move towards "a science of man". In other words, humans are not merely objects of study; humans themselves become the core of science.

This is not something I am inventing out of thin air. As early as 180 years ago, Karl Marx, in his 1844 Economic and Philosophy Manuscripts, put forward a remarkably forward-looking idea: Natural science will in time incorporate into itself the science of man, just as the science of man will incorporate into itself natural science, there will be one science.

I believe AI will ultimately move in this direction: from "treating humans as objects" to "truly understanding what humans are". Only then can AI go genuinely deeper. Enditem

In a compact, hard-edged set of policy recommendations, Dong Yu董煜 argues that primary-level planning still has plenty of room for improvement.

A veteran "scholar-official" with two decades inside China's state apparatus and direct experience drafting recent Five-Year Plans, Dong previously served at the National Development and Reform Commission and later at the Office of the Central Financial and Economic Affairs Commission, and is now executive vice-president of Tsinghua University's China Institute for Development Planning.

This is a serious policy memo intended for the authority. For the rest of us, it requires reading between the lines. In Chinese policy discourse, advice is often a mirror of reality. And a useful way for China watchers to read policy advice like this is to read it "backwards."

For example, when Dong writes,

Where funds are being sought through different sectoral channels but will ultimately be used for multiple projects within the same area, stronger overall coordination is needed to raise the efficiency of fund use.

he is signalling that the funding is fragmented and inefficient;

When he says,

In terms of language, planners can use wording that is closer to everyday speech — plain, warm, and easy to understand — and cut back on stiff, formulaic phrasing.

he is implying official reports remain plagued by hollow, formulaic bureaucratese.

This piece was first published on Prof. Dong's personal WeChat public account. Please note the following translation is my own and has not been reviewed by him.

基层五年规划如何做出新意

How can primary-level Five-Year Plans bring something new?

Over the years, governments at every level have worked to improve how they draft provincial, municipal, and county plans, building up a substantial body of practical experience. Yet many long-recognized problems in the planning field remain unresolved, and changing development conditions have set higher standards for how plans are prepared. Based on long-term observation and first-hand involvement in Five-Year Plan work, this article offers thoughts and recommendations for strengthening Five-Year Plans at the primary level.

I. Problems in Primary-level Five-Year Plans

After the nationwide drafting of the 14th Five-Year Plans (2021–2025) was completed, we conducted a systematic comparative review of local planning documents, with particular attention to problems in the formulation and implementation of county-level plans.

From the texts themselves, "matryoshka" (nesting-doll) plans are still common. While local governments are placing increasing emphasis on Five-Year Plans — so much so that too many plans has become a problem in its own right — many individual plans still end up as little more than exercises in writing.

Standard templates are recycled, genuine breakthroughs are rare, and homogenization is widespread. This is especially pronounced at the primary level, where copying and pasting from higher-level plans is commonplace. A cross-county comparison reveals striking similarities: it is easy to pull out large numbers of interchangeable phrases, many of them lofty slogans untethered from local realities — impressive-sounding, but thin on substance.

Because many plans follow the same top-down structure and broad framing, they may run to many pages while offering little that is truly place-specific. The number of "hard facts" one can extract is limited, and to the public these documents can look less like practical roadmaps for action than ornate, word-built "bonsai" meant for display.

From the perspective of planning targets, indicator systems have become more rational, but their overall design still needs work. Compared with earlier Five-Year Plans, most localities took a more cautious approach in setting economic growth targets for the 14th Five-Year Plan period, and the previous tendency for targets to be successively "ratcheted up" at each level (层层加码) has eased.

Local governments have also put more effort into updating their indicator systems — for example, by adding new categories and specific metrics. Structurally, however, most adjustments are still concentrated in indicators related to economic development and innovation. Indicators on people's well-being, the environment, and safety and security account for a smaller share than in the national outline, and many are simply carried over from the national plan without localization. Overall, there is still a lack of deep, systematic research into the internal logic of planning assumptions and baseline conditions, and into how goals, tasks, and policy measures interact and reinforce one another.

From the perspective of planning tasks, coverage is generally comprehensive, but there is little that feels new. Plans tend to present tasks in a plain, narrative style, with limited emphasis on key priorities, distinctive features, or innovative initiatives.

Project lists, meanwhile, often fall into the trap of creating "special sections" simply for the sake of having them. In some cases, these boxed project columns even overpower the main text, leaving the core document thin and hollow.

In most places, project lists are compiled and "balanced" by the planning department and then inserted into the plan. Yet key details, such as investment focus, funding shares, and project siting, are still largely arranged according to established routines, rather than being closely anchored to the plan's own demand forecasts.

This misalignment is especially evident for projects aimed at securing support from higher-level authorities: the projects proposed often do not match the most pressing needs on the ground. As for spatial layout, many plans continue to rely on pre-existing spatial planning maps. They may look tidy and polished at first glance, but shifting economic conditions have made some of them unrealistic, and others still need careful scrutiny to determine whether they truly reflect current industrial patterns and development priorities.

From the perspective of implementation, weak support from key enabling factors has become a major bottleneck. The old saying in the planning community — "Plans on the wall, just drawings and that's all" — is still frequently heard among primary-level officials today, suggesting that the challenge of turning plans into reality has yet to be fundamentally resolved.

One reason is that, during drafting, the links between planned tasks and the conditions needed to deliver them are often not rigorously demonstrated. As implementation gets underway, these gaps quickly surface. In recent years, as some localities have come under mounting fiscal pressure and faced rising debt risks, the difficulty of financing planned projects has become even more acute.

In some places, mid-term assessments of the 14th Five-Year Plan (2021–2025) found that nearly half of the projects listed needed to be revised. Leadership changes and the resulting shifts in policy priorities also continue to reshape the "key tasks" set out in plans. When major elements are abruptly rewritten, it inevitably erodes the authority of the plan.

II. Key priorities for innovating county-level Five-Year Plans

Within China's planning system, local plans are formally divided into two tiers: provincial plans and municipal/county plans. In practice, however, drafting is still typically organized around three levels — province, city, and county — and coordination across tiers remains uneven.

A more workable approach is to follow the logic of "provincial-level overall coordination, municipal-level guidance, and county-level implementation." Under this framework, the province should focus on setting overall direction and providing clearer guidance for county-level plan preparation; municipalities should concentrate on coordinating, balancing, and allocating resources; and counties should put the emphasis on strengthening planning innovation.

First, refine functional zoning and strengthen fine-grained governance.
To make planning genuinely refined, it is essential to strengthen differentiated guidance and zone-specific policies, with more granular planning that improves the precision and effectiveness of policy measures.

In advancing the main functional zones strategy, we recommend that, alongside clarifying the macro-level spatial layout of productive forces, equal attention be given to micro-level governance needs.

One practical option is to establish a two-tier classification system for main functional zones at the county and township levels. More detailed functional divisions at the township level can help compensate for the limited policy precision of county-level classifications, allowing main functions to be defined more accurately across spatial scales.

This approach helps concentrate resources and sharpen priorities while avoiding a one-size-fits-all model. It also makes it easier to bridge top-down requirements with bottom-up needs, and is highly workable in practice.

Building on this foundation, plans can develop differentiated indicator systems for different types of areas, using category-specific targets and metrics to steer localities toward "staggered development" that leverages their respective strengths.

Second, planning tasks should speak to shared concerns and respond to what people actually experience. Structurally, plans do not have to follow a single standardized template. Priorities can be arranged in line with a county's basic conditions and its designated main functions. Whatever the chapter or section, the plan should keep returning to the issues that matter most to residents.

In terms of language, planners can use wording that is closer to everyday speech — plain, warm, and easy to understand — and cut back on stiff, formulaic phrasing.

For example, in one county-level plan we advised against using conventional headings such as "Develop health services" in the chapter on people's well-being. Instead, we suggested more people-centered headings like "Let every child receive a better education," "Let patients stop worrying about access to care," "Let older people be well cared for," and "Let residents live more comfortably," paired with opening lines such as: "Put an end to the days when County XX had no tertiary hospital."

Third, strengthen the link between planning and investment, and spell out practical levers for implementation. This has long been a hard problem, one that affects both how well plans are carried out and how rational investment decisions are.

When drafting Five-Year Plans, more attention should be given to building a coherent "project portfolio" so as to improve alignment between planning and investment. Counties should be encouraged to focus on the strategic priorities and core tasks laid out in their Five-Year Plans, and to develop a package of key investment projects with clear timelines and roadmaps. This helps translate development tasks into specific actions and improves both precision and executability.

The allocation of funding and other critical inputs for major county-level investment projects should also be further optimized. For projects seeking support from higher-level authorities, decisions on site selection, service capacity, and catchment areas should closely match the spatial layout and development priorities set out in the Five-Year Plan, so that funding needs can be assessed on a more rigorous basis.

Where funds are being sought through different sectoral channels but will ultimately be used for multiple projects within the same area, stronger overall coordination is needed to raise the efficiency of fund use. For counties that shoulder major responsibilities in areas such as population inflows, ecological protection, key agricultural production, or emerging industrial chains, it may be appropriate to give greater weight to their needs when allocating resources for major national strategies and capacity building in key areas, including, where applicable, through ultra-long-term special Treasury bonds.

Fourth, strengthen coordination between development planning and spatial planning so that plans can be implemented more effectively. The county level is where development plans and spatial plans converge in practice. County governments therefore need to both reaffirm the leading role of development planning within the overall system and fully leverage national territorial spatial planning as the basic framework and platform.

The key is to align economic and social development with spatial governance, and to promote integrated progress on both fronts. To that end, procedures for linking the two sets of plans should be clarified and standardized, and a whole-process coordination mechanism should be established and strengthened, covering drafting, review and approval, and implementation.

During Five-Year Plan preparation, a cross-department joint working mechanism should be set up to address spatial layout issues. Major matters, including spatial development strategy, key target indicators, spatial structure optimization, the placement of major productive forces, and the siting of major projects, should be fully deliberated and agreed upon, then incorporated into the plan to ensure smooth, consistent linkages.

National territorial spatial planning, in turn, should coordinate and balance the land-use needs of various sectoral plans. In light of new requirements for comprehensive land consolidation and local conditions, it should further optimize and refine permanent basic cropland. On the premise of safeguarding food security, it should also promote more integrated optimization and consolidation of spatial resources across the county.

Fifth, planning should break out of its traditional boundaries and become more inclusive. In how plans are presented, local governments can be encouraged to experiment with layered, youth-friendly formats that make planning more vivid and multi-dimensional.

For example, conventional development plans can be enriched with spatial information, so that economic and social goals are not just words on paper but are anchored in a concrete territorial layout, giving the plan a real footprint in space. Plans can also anticipate technological change by incorporating tools such as artificial intelligence and cloud computing to overcome physical constraints, support industrial upgrading, and add a new technology-driven dimension to planning.

Throughout the drafting process, greater emphasis should be placed on systems thinking and cross-sector collaboration, breaking down professional and departmental silos.

At the same time, plans need a sense of "stagecraft": the goal is something close to a holographic plan. When people read a plan, they do not want to wade through a dry document; they also want to see a story unfold visually, and even feel a sense of rhythm in it.

Different systems have their own symbolic languages, and those symbols should be designed so that different audiences can understand them. Drafting a plan should be more like conducting a symphony, with different sections and "instruments" working in harmony. And planning must stay grounded: it should be attentive to the needs of front-line actors and everyday residents, consciously identifying and addressing the obstacles different groups face, so that everyone can genuinely feel the plan is connected to daily life.

III. Strengthening national-level guidance for local planning

For localities to truly innovate in their Five-Year Plans, stronger national-level guidance is essential. This means encouraging proactive experimentation by local governments, promptly summarizing and scaling up effective practices, and systematically raising the overall quality of local plan drafting.

First, encourage localities to develop their own planning guidelines. Many longstanding problems in local development planning stem from weak planning capacity at the primary level and the absence of standardized procedures. As local governments increasingly value both the substance of plans and the process of preparing them, standardization is steadily moving to the forefront of the agenda.

During the drafting of Five-Year Plans, it would be helpful for the national level to provide reference templates while allowing each locality to formulate detailed drafting rules suited to its own circumstances. In this way, the content and procedures of plan preparation, from the central level down through provinces to cities and counties, can be improved through a coordinated, top-down approach. Greater standardization along these lines will help improve the quality of plans across the board.

Second, strengthen guidance that is tailored to local conditions. In local Five-Year Plans, "new quality productive forces" are likely to become a key theme that requires early coordination. But not every locality is well placed to pursue the newest or most cutting-edge sectors. While guiding all regions to accelerate high-quality development, it is just as important to prevent everyone from rushing into the same tracks, leading to duplicated projects, redundant capacity, or even performative showboating and destructive competition.

At the national level, it would be useful to organize model demonstrations of different types of county-level development plans, emphasizing diversity of approaches rather than promoting one or two standard templates. Demonstration areas could also be encouraged to experiment boldly with more innovative planning language, formats, and communication methods, reinforcing the idea that "explaining and communicating the plan is as important as drafting it." This would extend planning work beyond writing into implementation and public outreach, and help raise public awareness of, and confidence in, the plans.

Third, systematically study what local governments need from national plans. In the past, plan preparation largely followed a one-way, top-down logic: lower-level plans existed mainly to implement higher-level ones. Going forward, the underlying philosophy and methods need to evolve. Local governments should be treated as key actors on the "demand side," and new plans should be drafted with a clearer demand orientation, strengthening two-way communication and feedback between the national and local levels.

That means taking a comprehensive view of local needs: Which parts of the plan matter most to them? Which formulations are they most sensitive to? Where do trade-offs need to be better balanced? Where should regional layouts be reinforced? Bringing these questions into the planning process offers a fresh perspective, reduces top-down assumptions, and pushes planners to think from the standpoint of those who must implement, and live with, the plan. Ultimately, this can help achieve a more dynamic, higher-level balance between the "supply" and "demand" sides of planning. Enditem

Today, she became a sensation on the Chinese internet.

A vlogger who goes by "I am Si Yang" (我是四羊) posted a video inviting Ms. Zhang to take on a college entrance exam essay challenge. She drew the prompt titled "The Last Lesson Before Graduation", and wrote about her life after three decades in the classroom: how she took on debt to devote herself to rescuing stray animals.

At the end of the video, the vlogger leveraged his influence to secure sponsorship from Chinese electrical appliance manufacturer Midea that cleared Ms Zhang's debts, and replaced long-broken air conditioners, refrigerators, and heaters at the rescue shelter.

Within four hours of being posted, the video had racked up more than 100,000 likes. Netizens were moved by the surging love beneath Zhang's simple, unadorned prose, and they applauded the tangible good the video achieved.

"This is what corporate responsibility looks like: from the people and for the people. Well done, Midea," a netizen commented under the appliance sponsor's account.

This represents a new form of philanthropy in the short-video era: influencers leverage the traffic they generate to attract money and sponsorship, helping those in need. They then turn these acts into content, which the broader public supports with likes and praise, feeding back into the influencer's success.

The warmth of countless strangers converges through the power of influencers, and then travels outward again, carried to faraway corners.

One long comment under the video captured the mood:

"Ms. Zhang Xiaoqiu, I will remember this name. This last lesson before graduation hits harder than 53-degree liquor. While I was awed by your writing, I also felt the difficulty of the present, the reluctance to let go of the past, the bitterness of bowing to life’s hardships, and your worry for the children. From educating people to nurturing animals, you have spent your life burning yourself to illuminate others. Thank you to this internet platform for letting me see you, a distant candle flame, and allowing me to be your student for these brief few minutes. Thank you to the teacher, the creator, and Midea. I think this is what the internet is supposed to show us. I wish you all the best and good health."

Another reason I am sharing this story is that Ms. Zhang's essay moved me deeply. I have humbly translated her Chinese into English so more people can understand her message, though I am fully aware that my hasty translation can hardly capture the full grace and purity of her original words.

Therefore, I have included both the Chinese and English versions below for your reference.

《毕业前的最后一课》

The Last Lesson Before Graduation

章小秋Zhang Xiaoqiu

那个小伙子又来看我了，他说要给我礼物，但前提是要写一篇作文，已经很多年不曾拿起笔了，今天我就写我的《毕业前的最后一课》。

That young man came to see me again. He said he wanted to give me a gift, but only if I wrote an essay. It has been many years since I last picked up a pen, yet today I am writing my "Last Lesson Before Graduation".

我叫小秋，是一位退休的小学语文老师，前半生教书育人，让孩子们接受启蒙教育，在书本的课堂里，我常常可以领略生命的真谛。

My name is Xiaoqiu. I am a retired primary-school Chinese teacher. In the first half of my life, I taught and guided children as they took their first steps in learning. In those quiet classrooms, among pages and chalk-dust, I often glimpsed the marrow of life.

刚退休时，机缘巧合，我收养了一只小流浪猫。于是救助毛孩子们的路就一去不复返了。在生命的课堂里，我已学习了 82 年之久。

Right after I retired, by a stroke of fate, I adopted a little stray cat. From that moment on, there was no turning back. In the great classroom of life, I have now been a student for eighty-two years.

我年轻时曾想过我的晚年该如何度过，出去旅游，给闺女照顾孩子，在公园里跳跳舞等。可真没想到，最后我租了个院子，养上了一群咿咿呀呀的孩子。开始我还以为我的退休工资能养活它们，但现在是欠了好多钱啊，我想这个院子或许就是我毕业前的最后一间教室了吧！最后一间教室里的最后一课该讲什么呢？也许该讲讲告别的写法了。

When I was young, I pictured my later years: traveling, helping my daughters with their children, dancing in the park. I never imagined that, in the end, I would rent a small courtyard and fill it with a whole crowd of babbling little ones. At first I thought my pension could hold them all. But now I owe so much money. And I cannot help thinking: perhaps this courtyard is my last classroom before graduation. If so, what should the last lesson be? Perhaps it is time to teach how to say goodbye.

我这辈子教过很多学生，但这些毛孩子，是我教得最久也最放心不下的一届。第一次见它们每一个的样子，我都历历在目，在路边发抖的，在雨里淋透的，还有被鲜血糊了一身的……把它们一个个带回来，是我做过的最不后悔的决定。我伤感与它们的别离，我唯一能做的事就是借此机会为我的女儿立下遗嘱。

I have taught many students in my life. But these furry children are the ones I have taught the longest, and the ones I cannot bear to leave. I can still see the first time I met each of them, as if it were yesterday: the ones shivering by the roadside, the ones drenched through in rain, the one plastered in blood… Bringing them home, one by one, is the choice I have never once regretted. I grieve for our coming separation, and the only thing I can do now is take this opportunity to set out my last will for my daughters.

我咨询了一些相关人士，按目前的标准，有二十六年教龄的我，走后的安葬和抚恤费大概有六七万块钱。我要求女儿们把我的后事最大从简，把剩余的钱全部留给基地的毛孩子们，以解决我毕业后基地资金的严重短缺问题。我相信我的女儿们会理解妈妈的。

I have consulted with the relevant people. By today's rules, with my twenty-six years of teaching, the money set aside for my burial and bereavement payment would be about sixty to seventy thousand yuan. I have told my daughters to keep my funeral as simple as it can be, and to leave all that remains to the furry children at the rescue base, to ease the sharp shortage of funds that will come when I am gone. I believe my daughters will understand their mother.

我还能陪它们多久呢，我脑海中想过很多次。不知哪天，就是没有预告的终场篇，而那天或许就是这 300 多个毛孩子的毕业礼—我从人间这所大学校提前离席，而它们永恒的课程还尚未结束。请继续学习信任，学习在失去我的怀抱后，继续信任下一双伸来的手。

How much longer will I be able to stay with them? I have turned that question over in my mind so many times. One day, without warning, the final page will arrive. And that day may become a graduation ceremony for more than three hundred small lives: I will graduate early from this great school called life, while their course has not yet reached the end. Please, keep learning trust. Learn, after my arms are no longer there, to trust the next hands that reach for you.

爱你们这件事—我，永远不会毕业。

Loving you, this is one thing I will never graduate from.

Lu is a Distinguished Professor of Economics, Director of the Shanghai Institute for National Economy (SHINE), and a research fellow at Shanghai Jiao Tong University's China Institute of Urban Governance. His work focuses on China's economy, urban–rural dynamics, and regional development.

To be frank, most of the arguments below are familiar, well-worn calls that surface again and again. But policy has inertia, and that is why these points bear, and indeed require, constant repetition.

Professor Lu offers a few particularly thought-provoking insights on the logic of "involution" and global trade:

• The Self-Sufficiency Paradox: If China achieves self-sufficiency across all industries while its global export share climbs, other nations will eventually lose the income-earning capacity required to purchase Chinese goods.

• A Clash of Lifestyles: If Chinese competitiveness is derived not just from technology but from extreme overtime, global trade becomes a "competition of lifestyles." Other nations face a dilemma: join the "involution" and abandon their way of life, or accept trade deficits and social instability.

• The Root of Involution: Put simply, China's manufacturing sector involutes because it produces too much, while the service sector involutes because it produces too little.

• The Tariff Trade-off: Rather than allowing foreign governments to capture value through tariffs, China would be better served by proactively raising domestic labor costs. This would improve worker welfare and stimulate the internal demand needed to break the cycle.

This piece was originally published on December 29, 2025, on the WeChat account of Tencent Finance. Please note the following translation is my own and has not been reviewed by the author.

陆铭：告别内卷陷阱，少加班、多消费事关中国经济下一程

Lu Ming: Saying Goodbye to the Involution Trap — Less Overtime, More Consumption, and China's Next Leg of Growth

This is not a feel-good New Year essay. It is closer to a field guide to what China's economy requires as it moves into its next stage.

The Two Faces of a Trillion-Dollar Trade Surplus

Let's first take stock of where China's economy stands today. China's manufacturing sector now accounts for roughly one-third of global output, and in 2024 its exports reached 14.2 percent of the world market.

In 2025, China's trade surplus hit a new record, topping US$1 trillion. At the same time, many other countries increasingly feel that they have little left to sell to China. Rapid technological progress and powerful supply chains are steadily raising the international competitiveness of Chinese products. In just a few years, China's automobile exports overtook Japan's, making China the world's largest car exporter. In more and more sectors, domestic production in China is also replacing imports from other countries, including agricultural products such as coffee and macadamia nuts, and even caviar has become something China exports.

On the positive side, strong technological progress, backed by supply chains supported by a unified national market, could become a long-term advantage for China. But the other side of the story deserves just as much attention. Has the current growth model translated into a genuine improvement in people's sense of well-being?

It is fair to say that many industries in China are operating under constant pressure to maximize efficiency. Relentless performance metrics, price undercutting, and long working hours all reinforce the price competitiveness of Chinese products. Yet they also create a striking gap between headline GDP growth and how workers actually feel in their daily lives.

At a moment like this, if we only keep our heads down and never look up, mounting difficulties are inevitable.

The logic is simple. If China achieves near self-sufficiency across most industries, if its imports shrink relative to its exports, and if its share of global exports continues to rise, then other countries will eventually lose income-earning capacity. In turn, they will lose the purchasing power needed to buy Chinese goods.

There is another possibility. Chinese exports may increasingly displace local manufacturers abroad. If this happens because Chinese products are genuinely superior and more technologically advanced, other countries have little ground for complaint.

But if part of the competitiveness comes from pushing efficiency through extreme overtime, then competition between Chinese and foreign products becomes, in essence, a competition between ways of life. Other countries would face a dilemma: either join China in "involution," abandoning their existing lifestyles, or accept large trade deficits and unemployment, which would inevitably translate into domestic social pressures.

Too Much Manufacturing, Too Little Services

Within China, involutionary competition is widespread, but its causes differ across sectors. Put simply, manufacturing involutes because it produces too much, while services involute because they produce too little.

Start with manufacturing. China's manufacturing share of GDP is higher than that of countries at similar stages of development. With vast productive capacity, rising household incomes lead to only diminishing marginal increases in demand for manufactured goods. Excess capacity can therefore be absorbed only through exports. To keep exports competitive, firms rely on involutionary competition to push prices ever lower, with overtime becoming one means of sustaining that edge.

At the same time, manufacturing employment has declined for ten consecutive years since 2015. Cut-throat competition has not translated into more jobs or higher incomes. Instead, capital, machinery, and increasingly AI have been used to replace labor.

When manufacturing can no longer generate jobs, workers cannot realistically return to lower-income agriculture. The only viable destination for new employment is the service sector, which grows on the basis of demand.

As development raises living standards, demand for services should naturally expand, creating more jobs. Yet China's traditional growth model relies heavily on capital-intensive manufacturing, where labor's share of income is inherently low. At the macro level, this appears as a low labor-income share in national income, which in turn constrains demand for services.

Meanwhile, services face restrictions on both the supply and demand sides. These include barriers to private entry into certain service industries and policies that limit service-consumption scenarios.

As a result, even when workers move into services, they end up competing fiercely for a limited number of jobs. Service-sector involution is therefore, at its core, a product of underdevelopment. If restrictions were relaxed, services could expand, create more jobs, and ease involutionary pressures.

Escaping the "Hard-Working Trap"

Involution in both manufacturing and services does more than suppress labor income growth. It steadily erodes leisure and holiday time.

Service consumption requires not only income, but also time. A lack of time becomes a binding constraint on service demand. By international comparison, Chinese workers rank near the top in average annual working hours. From one perspective, this reflects diligence and perseverance. From another, if such intensity persists, the release of service consumption will remain limited, narrowing the space for the next stage of growth.

Consider a simple example. Not long ago, I spoke with a childhood friend whose daughter now works at a major internet company in Shanghai. She works six days a week, twelve hours a day. Watching this, he feels heartbroken and cannot help recalling that when we graduated from university, work was not like this. With such overtime, there is not only no time to spend money; there may not even be time to date or have children.

So how can people have both income and time? When this question arises, some mock it as detached, unrealistic advice. Yet the very fact that such mockery exists shows how society has fallen into a collective blind spot. Escaping it requires consensus and action.

Government intervention is necessary. If a single firm unilaterally reduces overtime or pays proper overtime wages, unless its profit margins are high enough, it risks losing competitiveness.

Please note, more developed neighboring countries have already moved beyond involution!

Recently, I listened to a podcast about a Chinese student who studied in South Korea ten years ago and later returned there for work with a Chinese company. Over that decade, Koreans have become markedly less involutionary. Even when overtime is expected, Chinese employees may stay, but young Koreans are generally unwilling to work late.

I also spoke with Japanese colleagues during a recent business trip. Japan was once synonymous with overwork, with frequent reports of death from overwork during its high-growth era. In recent years, such stories have become rarer. Through its "Work Style Reform" legislation, Japan has imposed caps on overtime and strengthened labor inspections. Excessive overtime is now an explicit regulatory target.

China's level of development now closely tracks that of Japan and South Korea. At this stage, stronger labor enforcement through government coordination is also necessary. For those who do not want overtime, the right to leave on time and rest on holidays should be protected. Where overtime is required and voluntarily accepted, clear caps and lawful overtime pay must be enforced.

Generational change may also play a role. Online discussions frequently mention "post-2000s cleaning up the workplace." This may be a healthy development. If overtime does not raise income and family circumstances do not demand it, younger workers choosing a higher-quality lifestyle may become early movers in shifting social norms.

Another crucial task is improving the holiday system. In autumn 2025, provinces such as Zhejiang and Sichuan extended school holidays, with a positive effect on consumption. This again confirms that "no time to consume" is a real constraint.

Could extended spring and autumn breaks be introduced for university students? Could paid leave be more widely implemented and flexible leave more common? Could maternity leave be complemented by care-giving leave for spouses? At the micro level, large firms and government departments should take the lead in allowing employees to leave on time, protecting weekends, and giving people time to consume services and enjoy life.

Some worry that more holidays might encourage "lying flat," or that shorter working hours could worsen labor shortages and erode competitiveness. These fears are overstated. Chinese manufacturers primarily compete with domestic peers, not foreign ones. Internationally, Chinese products are already so competitive that many countries resort to tariffs.

Rather than allowing foreign governments to capture tariff revenue, China would be better served by adjusting proactively at home: improving worker welfare, allowing labor costs to rise moderately, and stimulating domestic demand. Even if some firms face pressure, the main contradiction is clear. China's more urgent task is to raise workers' incomes and consumption capacity, not to suppress labor costs for low-price exports. Where costs rise, adjustment should come through technology and management, not by sacrificing workers' time and well-being.

The Economic Meaning of Improving Migrants' Welfare

Another critical area is social welfare for migrant populations. Beyond fairness and well-being, improving migrant welfare increasingly makes economic sense as services become more important.

Manufacturing revolves around machines; services revolve around people. In a manufacturing-led phase, workers can move frequently with limited impact. But services require familiarity with local environments and stable social relationships. This stability raises incomes and improves service quality.

Research I conducted with Wei Dongxia confirms that for migrants, entering a city earlier helps them accumulate city-specific experience and improve non-cognitive skills. This, in turn, helps them work in services and earn higher incomes.

Yet what we see in reality is the opposite. The more developed a city's service sector is, the harder it is for migrants to obtain local registration. Moreover, under the existing system, migrants often cannot be covered by the local social-security system or public rental housing, which further increases their mobility.

From the perspective of urban residents, the result is that service workers keep changing, trust is hard to build, and even tensions and conflicts can arise. If migrants cannot settle, improving service quality lacks long-term returns, and workers lack incentives to invest in raising that quality in one place.

At this point, helping migrants settle down and build stable lives in urban areas becomes increasingly important. Accordingly, the key pain points migrants face must be identified clearly.

For some time, public discussion has focused heavily on social security for migrants, especially highly mobile workers. But if national social-security integration is not complete, migrants may hesitate. If they participate in the current system and later leave the place where they paid in, they may be unable to take with them a small portion of the pension contributions made by employers on their behalf. Either way, that is a loss.

This is why national social-security integration and the full urban integration of migrants have become more urgent than before. Only then can migrants participate more fully in the social-security system. With social-security coverage, migrants are also more likely, and more willing, to settle locally and develop for the long term.

Compared with social security, however, even bigger pain points for migrants are children's education and housing. Take housing first. More and more cities have realized that the housing-support system should cover migrant long-term residents. This is not only about social justice, but also about stabilizing local employment by helping migrants stay.

Not long ago, I worked with Duan Yige and Huang Weichen on a study of public rental housing for migrants. We found that compared with delivery riders who could not move into such housing, those who successfully did so saw a clear rise in both the number of orders they took and their incomes. Migrants living in public rental housing could share work experience more effectively with housemates, and they also showed a stronger willingness to give back to society and to settle locally.

This gives strong confidence that friendlier housing policies can help migrants settle in line with the needs of a service-led economy. If future policies further enable left-behind children to move to cities with their parents, that could, in the short term, promote family reunion and resolve parent–child separation. In the long term, it would also help children accumulate urban life experience and adapt to the needs of urban development. Society as a whole should recognize that in the age of AI, today's children will increasingly need to rely on the service sector to find work and raise their incomes.

Happiness Is the Purpose of Development

China is now at a critical moment of structural adjustment. By 2025, measured by GDP per capita, it has entered the ranks of high-income countries. The ultimate purpose of economic development is not ever-longer working hours, but a happier life.

At this stage of development, a happier life increasingly comes from service consumption. Yet in China, service consumption accounts for only 46% of total consumption, far below the roughly 70% seen in some developed countries. That makes service consumption a key source of momentum for the next stage of growth. Especially in the age of AI, as machines increasingly replace assembly-line work in manufacturing, services become the final destination for ordinary people's employment. The pursuit of a happy life and the requirements of economic development will therefore become more and more aligned. Enditem

Today's issue turns to a set of academic policy recommendations on the state's high-pressure, campaign-style environmental crackdowns.

Simply put, China's "campaign-style" crackdowns against pollution are fiscally and administratively unsustainable. If Beijing wants cleaner air as long as possible, scholars say, it needs a durable mechanism — cross-regional environmental transfer payments — to fund maintenance and compliance over the long haul.

At a deeper level, this case exposes a persistent gap in how China shares the costs of environmental governance. Cleaner air is a public good, and its bill should be shared by all beneficiaries. Yet in the "coal-to-gas" conversion push, a disproportionate burden has often fallen on rural households with the weakest ability to absorb shocks, creating a fairness gap that policy has yet to fix.

The following analysis was published in 2018 as Policy Brief of the National Academy of Development and Strategy, Renmin University of China (Issue 2, 2018). It is led by Nie Huihua, then Deputy Dean and Professor at the Academy.

Prof. Nie has spent many years studying China's primary-level government. He earned his degrees in China and completed a year of postdoctoral research at Harvard University under Nobel laureate Oliver Hart.

The co-authors are Li Jing, a PhD candidate at Renmin’s School of Economics, and Zou Jingxian, a researcher and lecturer at the National Academy of Development and Strategy, Renmin University of China.

Below is my English translation of the piece, shared with kind permission from Prof. Nie.

解决河北冬季取暖难题的根本举措是建立跨区转移支付机制

A fundamental solution to Hebei's winter heating dilemma is to establish a cross-regional fiscal transfer payment mechanism

Policy Brief of the National Academy of Development and Strategy, Renmin University of China, Issue 2, 2018

Authors:

Nie Huihua聂辉华, Deputy Dean and Professor, National Academy of Development and Strategy, Renmin University of China

Li Jing李靖, PhD Candidate, School of Economics, Renmin University of China

Zou Jingxian邹静娴, Researcher and Lecturer, National Academy of Development and Strategy, Renmin University of China

Editor's note: Recently, Hebei's winter heating crisis has once again drawn broad public attention. In early 2018, our team published an article arguing that high-pressure, campaign-style environmental crackdowns are unsustainable, and that cross-regional environmental transfer payments should be introduced to support the long-term maintenance of air quality. We are republishing that article today. Please note that the authors' affiliations and titles reflect their positions as of 2017. — Nie Huihua, January 7, 2026

Abstract

In 2017, an “environmental clean-up campaign” across the Beijing-Tianjin-Hebei region and its surrounding areas produced notable results but also brought to light several problems — foremost among them a severe shortage of funding for environmental upgrades.

Preliminary calculations suggest that the cost of these upgrades may reach 10%–30% of the GDP of the areas surrounding Beijing. Such a burden will inevitably slow economic growth in the short run and affect employment and social stability. Given these pressures, local governments alone cannot realistically complete the required upgrades within a short time-frame. We argue that the solution lies in establishing a cross-regional environmental transfer payment mechanism, through which economically developed regions would compensate less developed areas for undertaking environmental protection efforts.

Two principles underpin such a mechanism: "the beneficiary pays" (those who benefit should bear the cost) and "the polluter pays" (those who pollute should assume responsibility). This type of transfer payment arrangement complies with current legal provisions and is supported by successful domestic and international experience. This article discusses potential operational models, likely challenges, and necessary supporting measures.

I. Funding constraints are the key bottleneck in tackling the Beijing–Tianjin–Hebei environmental challenge

In 2013, the State Council issued the Air Pollution Prevention and Control Action Plan, which required that by 2017 overall national air quality should improve, and the concentration of fine particulate matter in the Beijing-Tianjin-Hebei region should fall by roughly 25%.

To ensure these targets were met, in 2017, the former Ministry of Environmental Protection deployed more than 5,000 enforcement officers nationwide in 2017 to carry out stringent air-pollution inspections in the "2+26" cities located along the Beijing–Tianjin–Hebei air-pollution transmission corridor, including Beijing, Tianjin and other 26 surrounding cities.

These inspections delivered clear results: in 2017, Beijing recorded its highest number of "blue-sky days" in a decade. Yet the unprecedented "environmental clean-up campaign" also created several problems.

For example, the "coal-to-gas" conversion program in Hebei and elsewhere ran into serious difficulties, with natural-gas supplies falling short by about one-third. Some localities saw considerable public complaints, and media criticism was not uncommon, all of which affected the government's public image and credibility to some extent. Although insufficient planning by higher-level authorities, crude implementation by primary-level officials, and slow shifts in public attitudes were all contributing factors, the fundamental cause was a shortage of funds for environmental transformation and upgrading. This funding gap has long been the principal constraint on environmental upgrading across the Beijing–Tianjin–Hebei region and its surrounding areas.

First, at the household level, environmental upgrading represents a substantial additional expense for rural families and noticeably reduces their disposable income.

In past years, some farmers in the areas surrounding Beijing "preferred to risk detention rather than stop burning straw" because the cost of recycling straw exceeded that of burning it — by roughly 50–100 yuan per mu. For a farmer with an annual per capita net income of 10,000 yuan, the added cost of recycling straw on 10 mu of land amounts to 5%–10% of yearly net income.

Consider also the "coal-to-gas" conversion program. Previously, a rural household could heat its home throughout the winter by burning coal at a cost of about 2,000 yuan. Under the new system, the initial installation fee for each household was 5,000 yuan, with the government subsidizing 3,000 yuan and the household paying the remaining 2,000 yuan. Even after receiving the subsidy, households switching to gas, at about 6,000 yuan for the season, still pay 2,000 yuan more than before. In total, compared with the original coal-based system, the "coal-to-gas" conversion increases a typical household's annual heating expenditure by about 4,000 yuan, which amounts to more than 30% of its annual net income. For many elderly or impoverished households with already low incomes, an added cost of 4,000 yuan is by no means insignificant.

Second, at the enterprise level, environmental upgrading often means a doubling of costs and even thinner profit margins.

In our field research, we examined a soda ash manufacturer in the Beijing metropolitan area. When the firm previously used coal, its production cost was about 2,000 yuan per tonne. After switching to straw as fuel, the cost doubled to 4,000 yuan per tonne. If it were to comply fully with national requirements and shift to gas or electricity, production costs would soar to 10,000 yuan per tonne.

Local officials told us that for most firms, strictly adhering to national emission standards would generally result in a doubling of production costs — and this does not include the one-off capital investment needed to replace production equipment. In an environment of weak demand, such cost increases amount to an additional shock for a large portion of the manufacturing sector.

Third, at the local government level, environmental upgrading brings an immediate decline in tax revenue, a rise in unemployment, and higher fiscal expenditures.

To meet ex-post air-quality targets, local governments often impose additional ex-ante requirements and continually tighten environmental standards. While this creates enormous pressure for enterprises, it also generates significant economic strain for the governments themselves. Numerous small and medium-sized enterprises have been shut down or forced to suspend operations, directly reducing local tax revenue and GDP, increasing unemployment, and heightening pressures related to social stability.

Some localities have also ordered large, labor-intensive enterprises to relocate or halt production; when financial subsidies are provided to facilitate these adjustments, the fiscal burden can be substantial. Under such conditions, many local governments simply lack the financial capacity to offer adequate subsidies for the environmental upgrading required of farmers and enterprises.

Preliminary calculations suggest that the cost of these upgrades may reach 10%–30% of the GDP of the areas surrounding Beijing. Such a burden will inevitably slow economic growth in the short run and affect employment and social stability. Relying solely on local governments makes it hard to complete the upgrades smoothly in the near term, and may also undermine long-term growth and structural upgrading.

II. Cross-regional transfer payments as a new approach

Environmental protection concerns not only the building of a modern economic system but also the well-being of generations to come. Addressing it therefore calls for institutional and governance innovation.

We propose that the funding shortfall for environmental upgrading can be addressed by establishing a cross-regional transfer payment mechanism through which economically developed regions provide financial compensation to less developed areas. Such a mechanism would enable regions to advance environmental upgrading together and collectively achieve the shared goal of clear blue skies.

First, a cross-regional environmental transfer payment mechanism is fully consistent with basic economic principles.

According to the well-known Coase Theorem, when property rights are clearly defined and transaction costs are low, polluters and those harmed by pollution can, through bargaining and price mechanisms, reach an outcome that maximizes total output while minimizing pollution.

Current systems such as emission rights trading and carbon trading are practical applications of the Coase Theorem, and a cross-regional transfer payment mechanism for environmental protection is likewise an extension of this principle.

Second, a cross-regional transfer payment mechanism for environmental protection aligns with the basic principle that "those who benefit should pay."

Because both environmental pollution and economic development generate externalities, pollution control cannot rely solely on the rule that “polluters should pay.” Every region has the right to pursue economic development and improve people's livelihoods; it is therefore unreasonable to expect regions that generate pollution to eliminate it at any cost.

In reality, the areas surrounding Beijing are, on the whole, economically less developed. Their industrial growth has provided substantial employment and made important contributions to maintaining social stability, particularly the stability of the capital's surrounding region.

For reasons of externality correction and social equity, the principle that "beneficiaries should pay" should in fact take precedence over the principle that "polluters should pay." This implies that the Capital region should offer necessary and appropriate compensation to neighboring regions for their environmental governance efforts, while those regions should also shoulder part of the cost. Such an arrangement would help address the long-standing problem of uneven regional development.

Third, a cross-regional transfer payment mechanism is consistent with current legal requirements and is supported by successful practical experience both within China and abroad.

Article 31 of the Environmental Protection Law stipulates: The state shall guide the people's governments of beneficiary regions and ecological protection regions to conduct ecological protection compensation through consultation or according to market rules. Currently, more than a dozen provinces such as Zhejiang, Jiangsu, Liaoning, and Henan have issued local regulations for intra-provincial watershed ecological compensation and have achieved preliminary results.

For example, Zhejiang Province issued the Opinions of the People's Government of Zhejiang Province on Further Improving the Ecological Compensation Mechanism as early as 2005.

There have also been successful cases in cross-provincial ecological compensation. One well-known example is the Xin’an River. The river's upper reaches lie in Anhui Province and the lower reaches in Zhejiang Province; pollution used to be severe.

In 2010, the Ministry of Finance, the Ministry of Environmental Protection, and the two provinces signed a pilot scheme for ecological compensation. Under the agreement, the central government allocated 300 million yuan to Anhui for Xin'an River management, and Anhui provided an additional 100 million yuan of matching funds for ecological compensation in its upstream areas. During the monitoring year, water quality at the Anhui–Zhejiang provincial boundary served as the basis for evaluation: if Anhui’s upstream water quality exceeded the baseline standard, Zhejiang would compensate Anhhui 100 million yuan; if the quality fell below the baseline, Anhui would compensate Zhejiang 100 million yuan.

A classic example of cross-national pollution governance is the Rhine River. Stretching 1,320 kilometers, it flows through nine countries — Austria, Switzerland, Liechtenstein, Italy, Germany, France, Luxembourg, Belgium, and the Netherlands. Before the 1950s, pollution was severe, and fish and shrimp had nearly disappeared. In response, the nine countries negotiated an international agreement for the river’s daily management, established the International Commission for the Protection of the Rhine, set up dozens of monitoring stations along the river and hundreds of registered notifiers, and appointed a Dutch national (from the downstream) as Secretary-General. Because downstream countries are the principal victims of pollution, they also have the strongest incentive to enforce the agreement effectively.

III. Operating model and supporting measures

The operational model of the "Circum-Beijing-Tianjin-Hebei" environmental cross-regional transfer payment mechanism we envision is as follows:

(I) Stakeholders. Any provincial- or prefecture-level unit involved in environmental protection, as well as relevant central ministries and commissions, may be included as stakeholders.

The "2+26" cities in the Beijing-Tianjin-Hebei region and surrounding transmission corridor — a total of 28 provincial or prefecture-level units — together with the Ministry of Environmental Protection and the Ministry of Finance, form a group of 30 potenrial stakeholders in a "Circum-Beijing-Tianjin-Hebei" environmental cross-regional transfer payment mechanism. These actors would participate in negotiations and the implementation of transfer payments.

In practice, negotiations could proceed in two steps. Step one: The central government, the Beijing municipal government, and the Tianjin municipal government would conduct high-level consultations with the governments of Hebei, Henan, Shandong, and Shanxi to reach a preliminary transfer payment arrangement. Step two: Hebei, Henan, Shandong, and Shanxi would then allocate secondary transfer payments among the relevant cities within their respective jurisdictions.

(II) Direction of payments. Under the principle of "those who benefit should pay", the capital region should provide necessary compensation for environmental upgrading in surrounding areas. In other words, this means that the central government and the Beijing municipal government should serve as the primary payers.

During the "environmental clean-up campaign," many enterprises were shut down or forced to suspend operations; the localities where these enterprises are located should be the compensation recipients. Likewise, if certain areas around Beijing are themselves affected by pollution originating elsewhere, they too may qualify as compensation recipients.

(III) Recipients. Recipients fall into three groups: local governments, enterprises, and residents. Once a high-level cross-provincial transfer agreement is reached, provincial governments would conduct secondary redistribution.

For point-source pollution, where sources are readily identifiable, provincial or municipal governments may compensate firms or residents directly. For example, households that burn straw could receive compensation directly from provincial or municipal governments according to specified criteria.

For diffuse pollution, where sources are harder to pinpoint, provincial or municipal governments may pool and deploy compensation funds for environmental upgrading of infrastructure, transport equipment, emissions-control facilities, and related investments.

(IV) Amounts. All stakeholders would determine payment amounts on the basis of environmental upgrading costs, following a cost-compensation principle. The amounts would also depend on environmental benefits, primarily air quality at present.

Where interprovincial governments disagree over assessments, professional data provided by the Ministry of Environmental Protection or third-party evaluation results can serve as key decision-making inputs.

There are three major challenges in advancing cross-regional transfer payments:

First, identifying the sources of pollution. Pollutants, viewed through the lens of negative externalities, can be grouped into three broad categories:

• Soil pollution, which is primarily local in nature and generates minimal negative externalities;

• Water pollution, which is still largely local but carries stronger externalities (movable solid-waste pollution also falls under this category);

• Air pollution, which remains locally generated but produces very large externalities across regions.

Across jurisdictions, causal chains for soil pollution are relatively weak, for water pollution relatively strong, and for air pollution the most difficult to trace. In practice, therefore, pollutants must be handled and assessed by category. When disputes arise over pollution sources, designated third-party assessment agencies or relevant institutions under the Ministry of Environmental Protection can be relied upon to determine responsibility and carry out the necessary calculations.

Second, verifying the payment amount. Regarding cost compensation, subsidies for enterprises and rural households can be divided into two parts: one part is for the cost of upgrading environmental equipment or production equipment, and the other part is a subsidy for the increased cost of adopting clean energy.

As an institutional innovation, what matters is not the precise amount of compensation — specific figures can be refined gradually during the reform process — but rather the introduction of a new conceptual framework: an environmental compensation mechanism.

Third, arranging funding sources. Compensation should be shared among three parties: the central government, the beneficiaries of improved environmental quality, and the polluters.

More specifically, for localized pollution sources such as soil contamination, compensation should fall primarily on local governments. For air pollution, which generates strong negative externalities, costs could be split evenly, with beneficiaries covering half and local governments the other half.

To implement an environmental transfer payment mechanism effectively, additional supporting measures are needed.

First, relevant provisions of the Environmental Protection Law should be revised to make environmental compensation requirements mandatory.

Under the current Environmental Protection Law, Article 31 — which states that “the state shall guide the people's governments of beneficiary areas and ecological protection areas to conduct ecological protection compensation through consultation or in accordance with market rules” — is phrased as guidance rather than a binding obligation.

More importantly, Article 6 stipulates that people's governments at all local levels shall be responsible for the environmental quality within their administrative areas. This formulation is not conducive to implementing a cross-regional compensation mechanism. We recommend revising Article 6 as follows: "people's governments at all local levels shall be responsible for the environmental quality within their administrative areas; where their actions cause environmental impacts on other areas, they shall provide appropriate compensation."

Second, strengthen the vertical management system for environmental authorities and ensure that precise, authoritative environmental-quality data serve as a key basis for determining environmental transfer payments.

Currently, both environmental monitoring and environmental law enforcement below the provincial level operate under a vertical management structure. The next step is to further improve the accuracy and credibility of environmental data, while encouraging residents and enterprises to make use of their advantages as grassroots monitors.

Third, strengthen cross-regional information sharing and joint enforcement. The Beijing–Tianjin–Hebei region and its surrounding areas could establish a cross-regional joint conference mechanism for environmental upgrading in order to build consensus, share information, and carry out coordinated enforcement actions.

Fourth, moderately relax short-term economic growth assessment requirements for the areas surrounding Beijing. In the near term, there is an inherent trade-off between economic growth and environmental protection. When evaluating economic performance in these regions, the central government or higher-level authorities could moderately ease growth targets so as to reduce incentives for data manipulation. Enditem

Pekingnology

Hebei’s Villages Are Freezing

Over the past several years, winter air quality in North China—especially in Beijing—has improved markedly. “Beijing blue” is no longer a rare indulgence. Beijing’s municipal authorities said the share of days with “good or moderate” PM2.5 levels reached 95.3%, up from 55.9% in 2013…

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4 months ago · 51 likes · 2 comments · Zichen Wang

As the second installment of our China 101 series, this piece tries to map China's subsidy ecosystem: a labyrinthine, fragmented, stratified yet surprisingly transparent regime.

Put it simply, in the same winter, three vastly different systems are running simultaneously.

As noted in our previous guide on official rankings, privileges in China’s vast civil service, from income to social status, are inextricably tied to hierarchy. It should be no surprise, then, that the subsidy system follows the same logic.

Today's piece starts with Shandong's heating subsidies and uses them to map China's three-track system:

• The state-apparatus track: a largely self-contained “official” system.

• The social-insurance track: funded mainly by employers and the state, covering only urban employees and a relatively narrow population.

• The social-assistance track: a basic safety net for the poorest, with benefit levels that have long remained low.

The numbers tell a more vivid story. In Shandong, a retired bureau-level official can receive 4,100 yuan a year (about $590). In contrast, rural recipients of subsistence allowances and extreme-poverty aid receive 600 yuan per household (about $86).

This article was first published on Nov 19, 2025, on the WeChat account 青年志Youthology, which describes itself as approaching youth culture through sociology and anthropology, while also offering business consulting.

Please note the following translation is my own and has not been reviewed by the authors.

山东采暖补贴，揭开了补贴体系的三套逻辑

Shandong's heating subsidies unveil the three logics behind China's subsidy system

At the Start of Winter this year, Shandong Province released its heating-subsidy standards, triggering a huge reaction online.

Enterprise retirees receive 1,700 yuan per person per year, while retired government employees are paid on a tiered scale by administrative rank, up to 4,100 yuan a year for Bureau-Director level (厅局级正职) officials. Urban recipients of subsistence allowances and extreme poverty aid receive 600 yuan per household; their rural counterparts receive 300 yuan per household. Orphans and children in severe hardship receive 300 yuan per person, and unemployed people receive 185 yuan per person.

Set side by side, these gaps are bound to be startling. And yet, on reflection, they are not entirely surprising. They are a reminder that the "dual-track system" and distributional distortions are not confined to wages and social security; they also run through a vast, rarely discussed subsidy system.

Most people know that subsidies exist for housing, healthcare, transportation, and more, but few know the details. Differences in how benefits are allocated, like the heating subsidy, often invite uneasy reflection.

This article aims to map just how large China's subsidy system is, and what kind of distributional structure lies beneath it.

1. China's Off-payroll Subsidy System

To understand the distributional logic behind heating subsidies, it helps to start with China's vast subsidy system. It may look complicated, but if you trace it through the government's budget classification, it is not hard to decipher — and can be surprisingly transparent.

In fiscal spending, most subsidies are concentrated in a few line items: chiefly 30102, "Allowances and Subsidies," supplemented by smaller amounts under 22102, "Housing Reform Expenditure," and 303, "Assistance to Individuals and Families."

In statistical reporting, these are further grouped into five broad categories: Nationally Uniform Allowances and Subsidies — Standardized Allowances and Subsidies — Reform-Related Subsidies — Incentive (Reward) Subsidies — Other.

National Uniform Allowances and Subsidies are issued centrally by the State Council, or by the Ministry of Human Resources and Social Security and the Ministry of Finance. They are the most standardized part of the system, such as hardship allowances for remote areas and post allowances.

Standardized Allowances and Subsidies stem from the standardization overhaul in 2006. The reform aimed to "package and merge" the diverse allowances and bonuses previously set up by departments and localities themselves, eventually settling them into two large baskets: work-related allowances and living subsidies. In essence, it was an attempt to end the chaotic, fragmented landscape of agency-based benefits.

Reform-based Subsidies follow another thread. As welfare provision was monetized, in-kind benefits once provided by work units — housing, vehicles, medical care — were gradually converted into cash subsidies, such as housing monetization subsidies and transportation subsidies introduced through official-vehicle reform. But these subsidies have a clear historical cutoff: they largely apply to personnel who were "on-staff and on-post" (在编在岗) at the time of reform, and they are not indefinitely open to new entrants.

Reward-based Subsidies and other subsidies form a more flexible block, essentially another type of incentive outside of wages. After the introduction of the central authorities' Eight-Point Decision (八项规定), this portion was significantly tightened: local "hidden welfare bonuses" and "performance bonuses" were either cleared out or folded into performance-based wages.

Seen this way, the subsidy system is not a random pile-up. It unfolds along a recognizable sequence, uniform → standardized → reform-related → incentive-based, and is embedded in formal fiscal categories. The table below may help clarify the key question this structure raises: who gets subsidies, and how are benefits stratified across different groups?

2. Where Do Different Subsidy Standards Come From?

Back to Shandong's heating subsidies: why are the gaps between social groups so large? The reason is that there is no single unified standard. Instead, the subsidies come from three separate systems: Income Welfare, Social Security, and Social Assistance.

Cadres and civil servants fall under "Income Welfare." As early as 2006, Shandong issued a document jointly by the provincial Department of Finance and the Department of Construction, linking heating subsidies to administrative rank: the higher the rank, the higher the subsidy. The document circulating online this time is essentially part of the civil-service system's broader income-benefit package.

Retired enterprise employees are on a different track. Their heating costs are covered through a "Special Fund for Heating Subsidies," funded jointly by employers and local government.

In practice, the subsidy are usually not linked to rank or position. Instead, they are paid as a flat per-capita amount, set with reference to local heat tariffs, the typical heated floor area of ordinary housing, and what public finances can sustain. This falls under the umbrella of social security benefits and has never been integrated with the government system's rank-based hierarchy.

Meanwhile, groups such as rural subsistence allowances recipients, people in extreme hardship, and other vulnerable groups (including children in severe difficulty) fall under the "Social Assistance System."

They are neither part of the state apparatus nor fully covered by the urban-rural employee welfare framework. At this level, policy targets shift from the individual to the household. Under Shandong's social assistance rules, subsidies for urban and rural households are calculated based on floor area, unit price, and the length of the heating season, with urban standards roughly twice those in rural areas.

So, in the same winter, three systems operate in parallel:

• The state-apparatus track: a largely self-contained "official" system.

• The social-insurance track: funded mainly by employers and the state, covering only urban employees and a relatively narrow population.

• The social-assistance track: a basic safety net for the poorest, with benefit levels that have long remained low.

In practice, the second track reaches only a minority, because many in China are not classified as "urban employees城镇职工" but as rural and non-working urban residents城乡居民, flexibly employed workers, or migrant workers — groups that often cannot access the full social-insurance welfare package.

The third track is social assistance aimed at the destitute, and its subsidy levels have remained low for years. The result is structural stratification: benefits within the government system continue largely unchanged, employee-based social insurance covers only a limited population, and the broadest groups are left outside a sustainable welfare framework.

This same three-track split extends well beyond heating subsidies — to high-temperature allowances, transport stipends, and housing subsidies, among others. That makes the most practical reform direction fairly clear: expand the coverage of the second track and gradually align the first track with it, while raising benefit levels under the third track. In reality, though, delivering on that agenda would be extremely difficult.

3. Flexibility, Standards, and a Safety Net That Falls Short

With the three tracks laid out, we can now look inside them — compare how they operate — and see the logic that drives the differences. The starkest contrast appears in the single largest area of spending: housing.

Start with Track II, the "urban employee" system, which is probably the one most people know best. It sets the contribution rates for the housing provident fund (HPF) paid by employers and employees: in general, each side should contribute no less than 5%, while the upper cap is set locally and usually does not exceed 12%. Within the same employer, the employer contribution rate should in principle be uniform across staff, and the employee contribution rate must not be lower than the employer's. These contributions can be used for home purchases, renovation, or rent, and constitute a standardized entitlement explicitly protected by law.

Now consider Track I: government agencies and affiliated public institutions. When it comes Here, the degree of discretion in housing benefits is striking. Take Tianjin as an example. A 2025 policy specifies that the supplementary housing provident fund contribution rate for "municipal-level agencies and public institutions managed under civil-service rules" can be as high as 30%. The contribution base can be adjusted to an employee's average monthly total wage bill, with a ceiling set at three times the average wage (around RMB 27,861). That rate is nearly six times the typical cap under the urban-employee system, and much of it is borne by the employer, underscoring how flexible, and how generously insulated, this track can be by design.

And that is only part of the picture. People within the state apparatus may also receive additional housing-related benefits, including:

• Housing monetization allowance: After the state ended welfare housing distribution in 1998 , state apparatus personnel were issued a one-time differential subsidy based on rank and area. In Beijing , below section level is 60㎡ , section chief/deputy is 70㎡, deputy division head is 80㎡ , division head is 90㎡ , deputy bureau head is 105㎡ , and bureau head is 120㎡ .

• Rent Subsidy: Employees who rent may receive subsidies keyed to administrative rank.

• Home-purchase subsidy: In some localities, civil servants may be eligible for fiscal support for home purchases — for example, housing subsidies and discounted purchase schemes reported in Zhanjiang, Guangdong, in 2024.

• Talent housing: Core staff on established posts in universities, research institutes, public hospitals, SOEs, and high-tech firms may also receive extra support such as talent apartments and settling-in allowances.

In short, compared with the rule-bound design of Track II, Track I is far more discretionary — and that discretion is a defining feature of many subsidies within state apparatus. By contrast, rural and non-working urban residents, flexibly employed workers (who can contribute to the housing provident fund only in some pilot cities), and those outside any formal welfare framework are largely excluded from housing subsidies. Government-subsidized housing exists, but it is often tied to household registration (hukou), making it hard to turn into a broadly accessible, universal form of support.

Seen this way, the direction of subsidy reform is not hard to identify: reduce the discretionary space in Track I, align it progressively with the standards of Track II, raise those standards, and extend coverage to a much wider share of the population.

4. A Vast Subsidy System That Is Hard to Roll Back

After mapping the subsidy system’s architecture, the next question is scale: how large is it in practice?

Take "personnel expenditure" within the general public budget as an example. In 2022, personnel spending accounted for roughly 27% of national general public budget expenditure, described in academic work as "high in share, fast-growing, and highly rigid". Within personnel spending, allowances and subsidies have long made up around half of wage-based income, pointing to an imbalanced pay structure. On a rough estimate, off-payroll fiscal payments (including various allowances and subsidies) amount to about 13% of general public budget expenditure — roughly 2%–3% of GDP — potentially reaching RMB 4 trillion.

The sheer scale has historical roots. Reform of the civil-service pay system has lagged, and base pay was not raised in step for a long time. Many localities therefore used allowances and subsidies to lift incomes indirectly, driving the base-pay share down to around 23%–30%, while allowances and subsidies rose to 60%–70%.

The nationwide 2006 campaign to "standardize civil-service allowances and subsidies" focused on cleaning up locally created items and unifying standards and funding sources — its core aim was regulation and standardization, rather than deep cuts.

A 2019 State Council notice on reforming the civil-service pay system pushed further: it called for higher rates for position pay and grade pay, folding some standardized allowances, subsidies, and performance pay into base pay, and "appropriately increasing the share of base pay", while freezing or tightening the growth of allowances and subsidies. In large cities, this brought the split between base pay and allowances closer to 1:1, but in some smaller cities the gap remains pronounced.

After 2023, the "tighten our belts" principle has led many localities, under growing fiscal pressure, to adjust performance pay and allowances and subsidies. In a sense, this has been the first real test of the allowance-and-subsidy system.

Why is it so difficult to scale these subsidies back? The challenge lies not only in institutional design, but also in the way fiscal constraints, administrative rules, and incentive structures have become tightly intertwined.

First, at the level of institutional design, the core aim of the pay reforms in 2006 and again in 2015 was not to slash allowances and subsidies across the board. It was to standardize them by consolidating the previously fragmented, catch-all items into a small number of authorized categories, and folding part of these payments into base pay. In practice, however, this is difficult to implement.

The decisive constraint is the structural tension built into the fiscal system. The central government sets the nationally unified baseline for base pay, but local governments retain the real discretion over the allocation of allowances and subsidies — and most of the funding burden also sits with local budgets. This turns allowances and subsidies into a de facto adjustment valve for local "personnel authority" and "fiscal capacity": a tool to manage staffing pressures and budget realities at the same time.

Under soft budget constraints, it becomes the most malleable part of the entire system. If the central government were to compress allowances by fiat, it would either cause a sharp fall in officials’ take-home income — creating political risk — or force the central budget to assume the full cost of these payments, which is close to impossible under today's fiscal pressures.

Moreover, after the anti-corruption campaign and the crackdown on "three public expenses" (official hospitality, government vehicles, and overseas official travel), allowances and subsidies to some extent became a form of sanctioned compensation. Against that backdrop, large cuts could weaken the day-to-day functioning of local governments and agencies. In practice, many localities try to prevent a steep fall in take-home pay in order to preserve basic incentives.

That is why, even when fiscal stress intensifies, rolling back allowances and subsidies remains a complex and slow-moving process.

Against this backdrop, the controversy over Shandong's heating subsidies is not an isolated incident but a microcosm of China's highly fragmented subsidy regime. As noted above, a long-standing three-track stratification — government agencies, urban employees, and social assistance — has produced clear tiers and, with them, unequal treatment across groups.

The policy direction is clear: curb the exceptionalism and discretion built into the government-agency track, and expand both the coverage and standards of the urban-employee track. Yet rolling back entrenched benefits and pushing reform through is extraordinarily difficult. Still, a regime long seen as "too rigid to retrench" is, for the first time, facing a genuine test. When local finances can no longer sustain this supposedly flexible adjustment valve, a window for change may finally be opening.

Looking ahead, will a subsidy regime rooted in the divide between those inside and outside state apparatus be forced, under fiscal stress, toward integration, or will it become even more ad hoc as governments seek cheaper ways to plug local budget gaps? The answer will be a test of distributive fairness, and of what comes next for China's social settlement. Enditem

Robin Brooks is a senior fellow in the Global Economy and Development program at the Brookings Institution. His research focuses on global growth and inflation dynamics, capital flows to emerging and frontier markets, as well as Western sanctions policy and the G7 oil price cap on Russia.

Mr. Brooks wrote on his twitter/X on Dec. 26, 2025 that:

One thing I'll regret about 2025 is how many nonsense meetings I had to sit through on how China is becoming the world's "green" super power. Two-thirds of electricity generation in China is from thermal power plants (blue). That's coal. Give me a break...

Robin J Brooks

China's Electrification Mirage

At any point in time, there’s various themes in markets. Those are often based in fact, but markets invariably tend to get ahead of themselves. It feels that way with artificial intelligence, where I’ll temper my enthusiasm until the autocomplete function on my iPhone stops making rudimentary mistakes. It also feels like some of this is going on with al…

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5 months ago · 44 likes · 9 comments · Robin J Brooks

He linked to his Dec. 7, 2025 article, titled "China's Electrification Mirage," in which he said:

….There's no doubt that China in recent years built impressive transmission infrastructure, but what matters at the end of the day is power generation, which still overwhelmingly comes from fossil fuels. All the power lines in the world don't make you sustainable or energy independent if you're still having to import and burn tons of fossil fuels. To my mind, the hype far exceeds reality where China electrification is concerned.

Mr. Brooks presented the chart above and added:

It's true that solar and wind are growing in importance, but let's keep things in perspective. Their shares in total electricity generation were five and nine percent, respectively, in October 2025 versus 67 percent from thermal power. Maybe China is electrifying, but what matters is where this power comes from and that's still overwhelmingly from fossil fuels.

He further noted:

There does look to be a ramp up in electricity generation in the last few months of data, but even that is mostly from thermal power plans and not wind or solar. The chart above shows the growth contributions of various power sources on a quarter-over-quarter basis. Much of the ramp up in electricity production is due to thermal and isn't based on renewable energy. I don’t mean to diminish the extensive build out of China's transmission infrastructure. But - in the end - what matters is where the electricity comes from and it’s from the same old fossil fuels as before.

Mr. David Fishman has offered a detailed response to Mr. Brooks' comment. Mr. Fishman works at the Lantau Group, specializing in China's power sector. His work spans solar, wind, coal, nuclear, hydro, transmission, and power markets, with a particular focus on renewable energy policies and market forecasting. He holds a joint MA in International Relations and Energy Policy from Johns Hopkins SAIS and Nanjing University, and is fluent in Mandarin.

With his permission, I am sharing an adapted version of his response below, in the hope of contributing to a more comprehensive and balanced debate. Please note this is not a word-for-word quotation. I have slightly edited the wording and formatting for clarity.

A more careful way to read the data on China's power mix

1. The premise is flawed

If we must go about assigning a label like "green superpower," then it's too narrow to define "green superpower" by what percentage of a country's power comes from renewables.

This is immediately obvious when we look at the list of countries that lead the world in % of power from renewable energy today - see any superpowers in there? It's lovely to be blessed with abundant hydropower or geothermal resources, but that hardly drives global change.

China, at around 36% renewables (and rising of course) both installs more than the rest of the world combined, and exports the technology to green the power sectors of developing nations globally. If we must have this conversation, then it should acknowledge absolute volume and international impact, where China is clearly dominant...

2. Erroneous Analysis and Data

OP's post says "Two-thirds of electricity in China is from thermal plants...that's coal".

This is incorrect on several accounts. First, "thermal" in the monthly press release of the National Bureau of Statistics includes coal, gas, and renewables like biomass. Coal is the lion's share, but no, it's not ALL coal. So that's already a problem.

Next, the NBS monthly datasets do not report full power generation (全口径) across the whole economy, only generators "at-scale" (规模以上) which excludes small wind and solar (like rooftop solar, which is half the solar).

Thus, it's impossible to calculate from this data series what percentage of power generation is coal without many assumptions. You must estimate, or wait for the quarterly data dumps or the annual statistics yearbook.

I'm not the first person to point this issue out. But OP has either ignored or dismissed everyone else who's pointed it out so far, so it must be repeated.

In the 2024 annual statistic yearbook published by China Electricity Council (CEC), coal comprised 54.8% of generation at the end of 2024, with gas-fired power adding another 2.6%. These numbers have been falling steadily for a decade and will fall again this year.

3. Flawed chart-making and chart premise

Another issue here is OP's odd chart choices, which undermine the credibility of his argument. As a purported professional with a finance background, these mechanical errors are baffling.

First, the minor chart and nomenclature gaffes:

1. "Electricity power generation" is redundant. Pick "electricity," "power," or "electric power."

2. "Electrification" means "% access to electricity" or "electricity's share of energy consumption". It's misused in the linked post.

3. Watt should be capitalized in units like kWh.

4. "billions of kWh" should convert to TWh for clarity.

5. The "total" data series adds nothing. Delete it or use it for labels and hide the line.

6. The color scheme is inexplicable (I admit this is subjective). Why blue for thermal? Red for hydro?

Now, the glaring chart issue:

Why cram 20 years of data into a stacked area chart to discuss trends emerging in the last 3-5? Could anyone see from OP's chart if thermal, solar, or wind is rising? Can you see any recent trends or inflection points? OP's chart obscures everything, while he makes sweeping statements without visuals to back those statements. You must use the right tools for the job. This is not a minor error.

Let us try to do better, starting with this chart, using the same NBS monthly datasets, but looking only at the last 5 years. Now, we can start to see what looks like a flattening of thermal generation while other generation types grow. But to be honest, it's still tough to see...

Thus, it should be helpful to zoom in even more. Here's a look at generation by discrete fuel type (nuclear is excluded here, as it's the least interesting).

Now the trends should be a little easier to spot...(but please note the differing y-axes among charts).

What do we see? Looking at the charts above, a few things are clear:

1. Wind and solar are growing extremely rapidly (but the y-axis tells us they are still small overall).

2. Hydropower is very seasonal.

3. Thermal power is doing...something? Actually even in that chart above, it's still hard to tell if it's trending upwards, downwards, or flat. We're going to need a different chart for this — something that can show annual changes.

OP used seasonally adjusted QoQ data in the linked article, which is unnecessarily complex and still vulnerable to distortion. How about something much simpler, like Monthly YoY changes?

Ah, now we're getting somewhere. Thermal generation data over the last few years show considerable monthly volatility; some months spike well above the prior year's levels, while others dip sharply below. To gauge progress toward peaking coal consumption, we'll need to see the chart dwelling mostly in negative territory, indicating year-over-year declines, with minimal positive excursions.

And that's what we're starting to see! Over the past 18 months, thermal generation has hovered below the zero line about as often as above it. In other words, over 2025 China routinely used less thermal power in a given month than the year before.

Of course, the net impact hinges on timing: a drop during high-demand summer or winter months carries more weight than an uptick in low-demand shoulder seasons. But at least this year-on-year monthly view is a cleaner way to spot long-term trends in generation than a QoQ seasonal adjustment. Again, you must use the right tools for the job.

And what is the net effect of spending more time below the 0 line than above it? Net falling thermal generation...!

That's why recent NBS data show 2025 YTD (i.e., Jan-Nov) at-scale thermal generation is DOWN 0.7%, even though total at-scale power generation is up 2.4%.

For contrast, here are the monthly YoY trends for wind and solar generation....consistently 20-30% higher than the previous year...in almost every month.

Notice how much volatility there is in renewables though — especially from wind. Every year, there's always more generation capacity than there was in the same month the year before, and yet we sometimes see very weak — or even negative — year-on-year monthly growth from these variable resources.

In 2025, October was particularly poor for both solar and wind, despite the vastly higher capacity numbers versus October 2024. That poor wind and solar performance directly corresponds with the October spike in thermal generation in the charts above.

Another variable generator to worry about is hydropower. Hydropower isn't nearly as variable on a daily or weekly basis, but has seasonal variation, and can vary a lot annually based on rainfall.

Over the last 5 years, hydropower generation and thermal generation have been moderately negatively correlated (r = -0.575). As wind and solar capacity grow, this correlation will probably weaken. But for now, like with other renewables, if hydropower doesn't perform well, thermal is needed to fill the gap. This will continue to be a risk that can cause thermal generation to rise in certain months.

3) In summary

This year, China added enough low-carbon power to meet 100%+ of its 2025 incremental power demand, peaking thermal generation. We don't know yet if it will be a durable peak, but even if it ticks up again in 2026, it's bound to be very close. It happened because China has made it a top strategic priority to dedicate more capital and resources to build and transmit low-carbon power than the next 10 countries together.

Regardless of whether we look by month or by quarter, we see thermal generation flattening out. China hit the inflection point this year, where the trendline slips below zero. The share of thermal power has already been declining for years; now the absolute thermal generation volume will also begin declining.

There's just no strategic or tactical value in dismissing these facts — not that I can see at least.

4. In Conclusion

In this review, I’ve relied on public datasets and presented them as transparently as possible. No privileged information was used, only industry knowledge. As I’ve proudly written before: I’m an analyst, not an activist. My focus is the economics of Chinese electricity, not climate advocacy or sustainability consulting. That distinction matters: my role is to provide independent assessments, not satisfy interest groups. Our work primarily serves multinational clients, not Chinese firms, and certainly not any agenda about portraying China in a particular light.

I take issue with the narratives and dataset handling in the original piece because the seniority of its author should demand greater rigor. The emphasis on narrative-policing and framing debates around perceived mischaracterizations of China’s clean energy leadership misses the point entirely. China is already demonstrating the capacity to add green power equivalent to the annual consumption of entire countries. This is not only a significant contribution to the energy transition...it’s also good business. Where else could that trajectory lead?

Over the past decade, generalist commentary from overseas has repeatedly underestimated China’s disruptive potential - whether in EVs, batteries, solar PV, drones, telecom/5G, AI, or even rare earths. Each time, the signs were visible, yet dismissed, resulting in repeated unnecessary“surprise”moments. The same pattern is now unfolding in energy. China’s energy transition “surprise” has been building quietly for years; it is now beginning to accelerate visibly. Ignoring or downplaying this reality will not change a thing. Enditem

Before we get to today's issue, I want to wish every reader a joyous holiday season. Wherever you are, I hope you and your loved ones have a happy, healthy, and prosperous New Year.

I also want to say a heartfelt thank you for your support throughout 2025. Every subscription, like, and share really keeps this newsletter going. The whole goal here is to make China a little more "readable," and I hope I've been able to do that for you this year.

One last thing: If you're looking for some holiday reading, I've linked my Top 3 most-popular posts of 2025 at the very bottom of this issue. Check them out if you missed them the first time around!

Basic Intro of Today's Issue

Today's newsletter features a conversation between Mr. Daniel Yergin, a world-renowned energy strategic thinker and Vice Chairman of S&P Global, and Dr. Lu Ruquan (陆如泉), president of the Economics & Technology Research Institute at China National Petroleum Corporation (CNPC ETRI), the only one among China's 29 nationally recognized elite think tanks dedicated to energy.

This exchange took place at the International Energy Executive Forum 2025 from Dec. 11 to 12.

The Speakers

• Mr. Daniel Yergin served as the U.S. presidential energy advisor from 1993 to 2021 and now the Vice Chairman of S&P Global. He won a Pulitzer Prize for his seminal book, The Prize: The Epic Quest for Oil, Money, and Power. Mr. Yergin also founded CERAWeek, an annual gathering described by the Financial Times as "the Davos of energy."

• Dr. Lu Ruquan 陆如泉 leads the Economics & Technology Research Institute at China National Petroleum Corporation (CNPC ETRI). Holding dual degrees in Petroleum Engineering and English, as well as a PhD in International Relations, Dr. Lu is a veteran of CNPC’s projects in Iraq and Sudan. Since 2006, he has devoted himself to strategic management and policy analysis.

Conversation Highlights

This dialogue covers macro policy, industry pain points, and future variables. Key takeaways include:

• China vs. U.S. Strategy: The two discuss the divergence in energy strategies between the two countries over the coming decade. Yergin introduces the concept of "Energy Dominance," noting that the U.S. strategy is driven by resource endowment (oil & gas) and market costs, rather than ideology. "If the cost is low enough, the U.S. will use solar, too."

• Potential Cooperation: Yergin suggests that if U.S.-China trade friction can be resolved in a way, there is significant potential for cooperation in the LNG sector.

• Security Over Transition: Acknowledging the vulnerability of the U.S. power grid, Yergin notes that coal plants are being retained due to fears over system stability. This indicates a global trend: the priority of energy security is once again overriding energy transition.

• The AI Energy Crunch: On the topic of AI, Yergin notes that U.S. tech giants are less worried about innovation and more worried about power. The rise of ChatGPT has forced companies to re-embrace baseload power sources to meet massive computational energy demands.

Please note the transcript below was originally published in Chinese by Dr. Lu on his personal WeChat account. The English text provided here is a translation based on that Chinese record and is not a verbatim transcript of Mr. Yergin’s original English remarks. Dr. Lu has kindly authorized the translation.

“我的对面是你”：记录一场与丹尼尔·耶金先生的对话

“The Person Across from Me is You”: A Record of a Dialogue with Mr. Daniel Yergin

“The Person Across from Me is You《我的对面是你》” is the title of a book by Ambassador Fu Ying傅莹, a renowned Chinese diplomat, former Vice Minister of Foreign Affairs, and former Vice Chairperson of the Foreign Affairs Committee of the National People’s Congress. The book recounts the stories behind the press conferences she hosted.

I am borrowing her title here to record a unique and spirited dialogue I had with Mr. Daniel Yergin, a world-renowned energy strategic thinker and Vice Chairman of S&P Global, at the recently concluded International Energy Executive Forum 2025 (IEEF). This dialogue had been in the works for a long time and served as a key agenda item during the plenary session on the first morning of the forum.

I recall beginning the session as follows:

Lu Ruquan: Distinguished guests, leaders, ladies and gentlemen, good morning! Welcome to the International Energy Executive Forum 2025. In this upcoming segment, we are honored to invite a very important guest: Mr. Daniel Yergin. He will first deliver a keynote speech, followed by a 15-minute dialogue between Mr. Yergin and myself.

I believe you are all as familiar with Mr. Yergin as I am, but I would still like to provide a brief introduction. Mr. Daniel Yergin is a global strategic thinker in the energy sector and the Vice Chairman of S&P Global. At the same time, he is a prolific author of works such as The Prize, The Quest, and The New Map. More importantly, he is the founder of CERAWeek, a highly renowned forum in the energy industry. Now, let us turn the time over to Mr. Yergin.

After Mr. Yergin concluded his keynote speech, which lasted approximately 15 minutes, we proceeded to the dialogue. The following is a record of the full content of our conversation.

Lu Ruquan: Thank you! Mr. Yergin, please remain on stage, as we have a dialogue session scheduled. We have just listened to your brilliant report. I think we can begin our conversation with the energy policies of the Trump 2.0 administration.

We know that Trump is currently re-embracing fossil energy, including oil and natural gas. This implies that in the near future, U.S. oil and gas production is likely to climb further. According to forecasts by S&P Global experts, U.S. export capacity in the liquefied natural gas (LNG) sector could potentially double by 2035, reaching a massive 250 million tonnes.

China, however, is adopting different measures; we place great emphasis on energy transition and electrification. Many experts note that China may become an electrification-led nation in the future, while the U.S. continues to be a major power in oil, gas, and fossil fuels. I would like to ask for your views on this. Are there potential areas where China and the U.S. can carry out energy cooperation in the future?

Daniel Yergin: To answer this briefly: Yes, there are. China is indeed poised to become the dominance of renewable energy and the electrification revolution. The term the current U.S. administration uses is “energy dominance,” which primarily refers to fossil fuels, including oil, gas, and coal.

We are seeing a huge shift in U.S. energy policy, arguably canceling subsidies for the renewable energy industry. However, renewable energy is still growing in the U.S. When some European representatives attended CERAWeek, they pointed this out, noting that they will continue to invest in this sector in the U.S. I believe there is one area of cooperation, namely the LNG sector. I look forward to the issue of U.S.-China trade friction being resolved perfectly. Once resolved, I think the U.S. LNG sector could potentially engage in some cooperation with China.

Lu Ruquan: You just mentioned that the Trump administration wants to restart coal, and the U.S. also reactivated many coal-fired power plants. My question is: What is the situation regarding the overall coal supply chain in the U.S.? Can the U.S. infrastructure and labor force support the Trump administration’s restart of coal power projects?

Daniel Yergin: I think during the Biden administration, the U.S. closed down a lot of coal plants, but this has changed. A concern in the U.S. now is that its power generation capacity is insufficient. The country is very worried about the stability of the power system. This is why it is keeping some coal plants in operation. The current administration likes coal power, and coal is a critical source of electricity.

Lu Ruquan: Does this mean that in the future, there is still some room for the development of coal power in the U.S.?

Daniel Yergin: Yes, speaking of now, the U.S. is still using coal power. The country is very reluctant to shut down these coal plants, even though wind and solar energy are increasing.

There is also natural gas and LNG. By 2030, the U.S. originally intended to sell off all three major natural gas turbine production plants, but it has now halted this transfer agreement. (Note: The three major U.S. gas turbine manufacturers generally refer to GE, Pratt & Whitney, and Honeywell).

Lu Ruquan: It is expected that after the current Trump administration ends, the U.S. will continue to follow Trump’s current policy of retreating to fossil energy. If that is the case, by 2032 — essentially the end of the next administration — the pace of the U.S. energy transition will lag seriously behind Europe and China. If this situation truly arises, can the American people accept it?

Daniel Yergin: I feel you are actually predicting who the next U.S. president will be. We don’t know; we are always prepared for surprises.

I think that while the renewable energy industry has many development opportunities, its development is currently facing severe blows. We in the U.S. need cost advantages. If we want to generate power quickly — for example, solar energy is a very good method — I think it is possible that the U.S. will increase investment in solar energy in the future.

Lu Ruquan: From Mr. Yergin’s response, we can gather that for any energy type, as long as there is a cost advantage, there is a development advantage; cost advantage is a very important consideration. If oil and gas remain relatively cheap after the Trump administration, will this catalyze the re-industrialization of the U.S.?

In China, the government focuses heavily on innovation. The cost of new energy power generation continues to fall; specifically, the costs of wind and solar have dropped by 60% over the past decade. This is why China is vigorously developing wind and solar energy.

Daniel Yergin: I think China has a huge advantage in this regard. You have driven costs down so significantly, and you have large-scale manufacturing.

Lu Ruquan: The next question is about artificial intelligence (AI) You mentioned AI in your keynote speech. We know that AI is now extremely important, arguably embedded in every aspect of life, including the energy sector.

Some of Chinese experts have mentioned that the business model of the AI industry in the U.S. focuses heavily on leading innovation, leading technology, and leading chips, combined with commercial impact. However, China’s model is a bit different: China’s AI model is driven by top-down policy. While China’s chips may not be particularly leading-edge, they can still drive China’s manufacturing sector to maintain its advantage. How do you view the different AI business models of the two countries?

Daniel Yergin: It is very regrettable that the degree of free trade between the two countries is not as high as it used to be. Formerly, free trade increased our transfer and exchange of technology and knowledge. Now, high-end chips are not just a commercial product but also a political product, which is very regrettable.

Competition among major U.S. AI companies is extremely fierce. While the discussion has consistently revolved around competing with China’s AI sector, the reality is that domestic competition within the U.S. is incredibly intense.

The Trump administration has recruited business leaders from Silicon Valley to the White House to oversee the formulation of U.S. AI policy. Reflecting seriously on your question, I believe the integration of government and private enterprise in the AI sector is vital — and this is a major American advantage.

Some U.S. AI companies are strong advocates for scaling. They are not particularly concerned about knowledge or innovation; their primary worry is energy. With the rise of AI, traditional oil and gas resources are regaining favor. This implies that AI companies, which previously never had to consider energy, will focus heavily on this area moving forward.

When ChatGPT burst onto the scene in November 2022, I believe it marked a turning point. It has been only a few years, yet in that short time, we have witnessed tremendous development in AI.

Lu Ruquan: I strongly agree with your point that AI requires massive amounts of electricity. It is understood that in the U.S., natural gas accounts for approximately 40% of power generation, whereas in China, that figure currently stands at perhaps only 4%. What is your outlook on the future of natural gas power generation in China?

Daniel Yergin: I believe you have a better understanding of this issue than I do. China has formulated the "15th Five-Year Plan," which likely contains more specific language regarding natural gas. China possesses a very stable existing energy architecture; coal-fired power accounts for a very significant proportion, and you also place great emphasis on nuclear power and fusion.

In the U.S., many nuclear plants were shut down. The goal now is to reverse this situation and pursue the development of nuclear fusion, which is also a critically important aspect. There are also numerous hydrogen projects — hydrogen can also be utilized for power generation. I recall one hydrogen project with a capacity that appears equivalent to that of 60 nuclear power plants.

Lu Ruquan: Yes, China should certainly learn from the U.S.; there is a need to align with the U.S. in terms of natural gas power generation. Given the time constraints, I will ask one final, simple question: what is your outlook on oil prices for 2026?

Daniel Yergin: If one looks strictly at supply and demand, the conclusion would be that oil prices next year could be $60 per barrel or lower. However, if geopolitical risks are taken into account, prices could be higher. This specifically depends on various geopolitical events, such as the situation in Venezuela recently. If the focus is on price fundamentals, one must look primarily at supply and demand, which I believe offers a clear answer.

Lu Ruquan: Thank you. That forecast appears to align closely with the projections from our Economics & Technology Research Institute at China National Petroleum Corporation (CNPC ETRI).

The Institute predicts that over the next five years, Brent crude prices will experience some volatility, likely ranging between $55 and $65 per barrel, with a more optimistic estimate placing the range at $55 to $70.

Daniel Yergin: I hope so.

Lu Ruquan: Our time for this segment is almost up. Ladies and gentlemen, please join me in giving Mr. Yergin a round of warm applause to thank him for his insights. We have prepared a small gift for Mr. Yergin: an exquisite commemorative plaque bearing his name.

The above concludes the dialogue between myself, Lu Ruquan, and Daniel Yergin. To share the stage with a globally recognized energy strategist and engage in a direct exchange entirely in English was a profound honor — though, I must admit, one accompanied by a sense of trepidation.

“Across from me is you” — on this occasion, the one seated across from me was Mr. Yergin. Of course, at the Opening Plenary Session, facing both Mr. Yergin and myself was also an audience of over 600 distinguished guests. This was my first dialogue with Mr. Yergin, and I trust it will not be the last.

(Saturday, December 20, 2025, at Energy Valley, Future Science City, Beijing)

Below are the most popular posts of this newsletter in 2025. If you enjoy them, a quick like or share really helps new readers find my work!

While Western observers often attribute China's dominance in the field of electric vehicles to opaque state subsidies, today’s newsletter, an excerpt from the book The Heart of Electric Vehicles (电车之心), reveals another aspect: the combination of a local government’s sheer strategic resolve and the region’s unique natural endowments.

Published in August 2025, The Heart of Electric Vehicles bills itself as a "biography" of China’s power battery industry. Its authors, Lu Yang杨璐 and Congzhi Zhang张从志, are reporters at Sanlian Lifeweek, a Beijing-based flagship magazine renowned for its in-depth social and cultural reportage.

Yang has spent nearly two decades covering the rise of domestic brands and supply chains, and Zhang focuses on the intersection of industry and public welfare.

In their account of Yibin’s transformation, what stands out most is the intensity of the city’s determination.

To secure industry giant Contemporary Amperex Technology Co., Limited (CATL), officials displayed an extraordinary level of mobilization. For example, they promised and delivered the relocation of ancestral graves within a single week to clear land.

Moreover, the local government offered "mama-style" administrative service, operating less like bureaucrats and more like hungry venture capitalists, even successfully courting top academicians from Tsinghua University to solve talent bottlenecks in a fourth-tier city.

Such "iron will" is further amplified by an objective advantage: abundant hydroelectric power. In a market increasingly sensitive to carbon footprints, Yibin offers manufacturers not just lower costs, but a path to the "zero-carbon" production demanded by global clients.

Since CATL broke ground in Yibin in late 2019, the project has expanded through ten phases. With a planned total capacity exceeding 300 GWh, it has cemented Yibin’s status as the site of the world’s largest single power-battery industrial base.

The following is an abridged excerpt from Chapter 5 of The Heart of Electric Vehicles.

Please note the translation is my own and has not been reviewed by the authors.

宜宾，从白酒名城到动力电池之都

Yibin, from a famous liquor city to a power-battery capital

Upstream on the Yangtze River, more than 1,000 kilometers away from Changzhou, east China's Jiangsu Province, sits Yibin, a city long known for Wuliangye, China’s famous liquor. It has now been awarded the title “China’s Power Battery Capital” by the China National Light Industry Council.

Step out of Yibin Wuliangye Airport and a strong aroma of fermentation hangs in the air. While the scent of liquor still lingers, the Sanjiang New Area on the outskirts of Yibin comes into view. In the misty humidity, rows of silvery power-battery factories stretch on and on, as far as the eye can see.

At the end of 2019, Contemporary Amperex Technology Co., Limited (CATL) began construction of its battery plant here. It has now signed projects through Phase 10, with a planned total capacity of more than 300 GWh, making this currently the world’s largest single power-battery industrial base project.

Unlike Changzhou, when Yibin entered the lithium industry, the market outline was already distinct, and the industry hierarchy was largely settled; everyone seemed to be waiting on the eve of take-off. Yibin was like a child standing outside a shop window, staring at a Lego set called “China’s Power Battery Capital,” needing to assemble it brick by brick.

The most important brick, of course, was CATL. In September 2019, CATL and the Yibin municipal government signed an investment agreement and set up a wholly owned subsidiary, Sichuan Contemporary Amperex Technology Limited (SCATL). The plan was to invest RMB 10 billion to build a power-battery production base in Yibin, while also signing an agreement to land the first-phase project of 15 GWh.

Compared with Changzhou back then, Yibin faced fiercer competition at this point. Zhou Qiang, head of the Power Battery Division I at Yibin’s Bureau of Economic Cooperation and Emerging Industries, recalled: “Back then, the cities competing with us, just within Sichuan Province alone, there were three or four, not to mention nationwide. Even Beijing wanted to bring them in. Once, when we went on a business trip to a first-tier city and met comrades there, they were incredibly envious of us, saying, ‘We didn’t manage to recruit CATL, but you guys pulled it off.’”

At the time of signing, it was said that the Yibin municipal government issued a strict commitment, promising to provide at least 500 mu (roughly 82.4 acres) of levelled land within three months. Back then, that land was criss-crossed with gullies, and some plots still had villagers living on them.

Zhou Qiang said: “After the signing, we came back immediately to arrange the work. This area was then called the Lingang Economic Development Zone. Cadres from every sub-district office and neighborhood committee were sent to the countryside, each assigned to specific villages and households to do the persuasion work.

There were also 60 ancestral graves on that 500 mu of land. Relocating graves is extremely difficult, but we moved them within a week. We mobilized every bit of capacity we could. The villagers also showed real public spirit. They knew that if this industry took off, it would mean a lot for Yibin.

In the end, SCATL alone hired more than 10,000 workers, and the local villagers were not even enough to meet its demand. The first-phase project pleased CATL. Over the following years, it increased investment in Yibin, signing agreements from Phase 2 through Phase 10.

In 2022, SCATL achieved an output value of RMB 56 billion (roughly USD 8 billion), accounting for 41% of the total industrial output value above designated size in Yibin’s Sanjiang New Area. Behind the output value is tax revenue, but from the government’s perspective, there are also more intangible social benefits.

Zhou Qiang told us: “SCATL itself now has about 15,000 to 16,000 employees. The broader supporting ecosystem has more than 30,000 people employed across the city. I have studied the ratio of industrial employment above designated size to the urban population in Yibin, and it is about 1:10. There are now over 100 projects in Yibin’s power battery industry starting construction one after another. If fully built, they can create over 80,000 jobs, and the matching urban population could reach several hundred thousand.” Yibin’s permanent resident population has increased by two to three hundred thousand over the past few years, a phenomenon rarely seen in the western regions which typically see a net outflow of population.

CATL did not choose Yibin as charity or poverty alleviation. The most immediate benefit of building a plant here is lower costs. Leaving aside land prices and various preferential policies, electricity alone can save the company a great deal.

Battery plants are major electricity consumers. When I was interviewing in Changzhou, Sun Zhihong, a local industrial policy official, once walked me through the numbers: “If a battery plant uses 500 million kilowatt-hours of electricity a year, and in some parts of Southwest China with abundant hydropower resources, the hydropower price can be 0.20 to 0.30 yuan cheaper per kilowatt-hour than what we pay,” then for the company, a single factory can save more than RMB 100 million in profit each year.

In Sichuan Province, where 80% of electricity comes from hydropower, this advantage is even more pronounced. For example, the Yibin Lingang Economic Development Zone, where SCATL is located, benefits from the national policy for a “hydropower absorption demonstration zone”: electricity costs only RMB 0.35 per kilowatt-hour there, while industrial electricity in a certain city in Jiangsu costs RMB 0.68 per kilowatt-hour.

“SCATL uses tens of billions of kilowatt-hours of electricity a year in Yibin. Let’s calculate based on 2 billion kilowatt-hours: if each kilowatt-hour is more than 0.30 yuan cheaper, that adds up to 600 to 700 million yuan, equivalent to an extra RMB 600 to 700 million in profit,” Zhou Qiang said.

The production process for lithium batteries requires extremely strict environmental controls. Keeping the entire workshop at constant temperature and humidity consumes a great deal of energy, which is also one of the points frequently criticized about the lithium-battery industry. Even though lithium batteries are a core component of the new-energy sector, the high energy consumption brought by their manufacturing processes, combined with the fact that China’s power supply is still dominated by coal-fired generation, creates an environmental contradiction for the industry. This not only troubles the sector on a moral level, but is also a real, practical challenge for industrial development.

Zhou Qiang explained to us: “Domestic lithium-battery products are exported to developed markets in Europe and the United States. They have a non-tariff barrier, what they call a green barrier, where they track your carbon footprint to see whether you meet the standard. You can say your product is green, but if it is produced using thermal power, it is not green. Hydropower counts as green electricity.”

Zeng Yuqun also repeatedly said at the World Power Battery Conference in Yibin in 2023 that CATL aims to achieve carbon neutrality in core operations by 2025, and carbon neutrality across its value chain by 2035.

This means that by 2025, CATL’s battery plants will all be zero-carbon factories, and by 2035, the batteries it produces will all be zero-carbon batteries, achieving carbon neutrality across the entire chain from mineral resources to the battery itself. To reach this goal, whether for CATL’s own plants or its suppliers, the appeal of green electricity becomes hard to ignore. Companies must reduce carbon emissions during production and prioritize clean energy such as hydropower and wind power.

In addition, Yibin, though seemingly tucked away in the southwest, is not behind in transport. Compared with other southwestern cities, it even has advantages. A look at the map shows that Yibin sits right at the intersection of an X-shaped high-speed rail network connecting four major southwestern cities—Chengdu, Chongqing, Kunming, and Guiyang—and any one of them can be reached within two hours.

Yibin is also the first major city along the Yangtze River when counting from its source. Its urban area is built at the confluence of three rivers — the Jinsha River, the Min River, and the Yangtze — giving it an exceptionally dense and well-developed water system.

Zhou Qiang said: “In Jiang’an County under our jurisdiction, there is a battery supply-chain company. The ore it buys overseas can be unloaded directly at Yibin Port, then transferred by road to the factory. Land transport usually costs five or six times as much as water transport, but the distance from Yibin Port to its plant is only a few dozen kilometers. It only needs road transport for that short stretch. If it were elsewhere, transportation costs would be much higher. Right now, we’re considering helping them save that money too by opening another dock in Jiang’an, so that the iron ore can be shipped directly into their factory.”

How an industrial cluster takes shape

Once CATL, as the “chain leader,” moves in, putting the whole Lego set together becomes much easier. The lithium-battery industry has many segments and a long supply chain, so to improve efficiency it naturally tends to concentrate geographically.

Whether in Changzhou in the east or Yibin in the west, once the industry lands, clusters form quickly. Factories spring up one after another, side by side, a phenomenon insiders call “wall-to-wall factories.”

“CATL is huge. It has pull and bargaining power. Put differently, supply-chain companies have to chase after it,” Long Xingyin told us. Long previously oversaw investment at Yibin Emerging Industry Investment Group.

For many places, lithium batteries are a brand-new industry. When CATL builds a new plant somewhere, there are often no local companies, or very few, that can supply it directly. “

That’s why CATL has maintained a long-term ecosystem partnership with the CDH Fund, which mainly invests in CATL’s supply-chain companies. After CATL signed its agreement with Yibin, Yibin Emerging Industry Investment Group partnered with CD Fund and set up a fund dedicated to investing in CATL’s supply-chain companies. The fund moved fast: the first tranche was RMB 3 billion, and it was fully invested in less than two years, bringing dozens of supply-chain companies into Yibin.”

An industrial cluster is an ecosystem. The chain leader can obtain upstream raw materials and components nearby to reduce costs, and can communicate more closely with supporting companies in R&D and manufacturing, inspiring each other and driving further innovation and iteration.

LIBODE, a cathode-material company founded in 2017, was Yibin’s first enterprise related to the lithium-battery industry. It initially struggled to stand on its own, but after the cluster formed, it rose rapidly. Now, within a half-hour drive from LIBODE’s plant, many battery factories can be found.

“The advantage of battery plants is that they deal with many cathode-material companies nationwide. They have seen more, and they hold more information than we do,” said Zhang Bin, LIBODE’s deputy general manager. “This is an industry run by smart people. Someone will always think of what others don’t. Right now, several of our new materials have already been sent to customers for testing. At the same time, we’re also engaging other customers. Different power-battery companies follow different technology routes, so we need to develop cathode materials they may be interested in, as well as materials that can help steer the market.”

Also entering Yibin alongside CATL was Tyeeli (Yibin) Co., Ltd., which produces and sells battery-grade lithium hydroxide. Its chairman, Pei Zhenhua, is a shareholder of CATL, and the two parties also jointly established Tianyi Lithium. For Tyeeli, CATL is both a shareholder and a customer.

Shenzhen Kedali Industry Co., Ltd is a company making precision structural components for lithium batteries and structural parts for automobiles. Its lithium-battery structural parts account for 31% of the global market. It also opened a branch plant in Yibin and became CATL’s largest local supplier of structural parts. Dozens of supply-chain companies like this have landed in Yibin.

Next to Kedali is a company called Liangya New Materials亮雅新材料, founded in 2019 and newly admitted into CATL’s supply chain.

When I arrived at the company, its owner, Luo Wei, was about to head out on a business trip with samples in hand — one piece looked like a thin sponge, the other like a strip of tape. Luo demonstrated on the spot: he took out a lighter and burned the tape. Not only did it fail to ignite, it did not even show scorch marks.

Luo said: “We mainly make functional materials such as insulation, thermal insulation, electrical conductivity, and thermal conductivity. For example, news reports sometimes say that after a battery catches fire, car doors and windows cannot be opened. That is because cars now have no mechanical locks, only electronic locks. The high temperature generated the instant the battery burns destroys the circuits. Our material is used inside the battery pack. In temperatures of 1,000°C to 1,400°C, it can hold out for at least five minutes and will not let the wiring burn through.”

Luo has worked in this industry for 20 years. He started out working with Taiwanese partners, then founded his own company in Dongguan 10 years ago and witnessed phones evolve from feature phones to semi-smart phones to smartphones. His customers include major brands such as Apple, OPPO, and VIVO. But in recent years, Dongguan has become intensely competitive, and customers pushed him to set up factories in Southeast Asia. Another option was to follow the phone industry’s shift toward the southwest.

Luo is from Sichuan. There are not many companies like his in the Sichuan–Chongqing region, so he came to Yibin to open a branch plant, and unexpectedly found new gains.

Many of the companies near his plant are in the power-battery supply chain, and information circulates among neighbors. Luo realized that battery plants also need functional materials such as thermal insulation, flame retardancy, and insulation: “The battery pack needs to be wrapped in flame-retardant materials both above and below. Even the screws and screw caps on the water-cooling plate are sealed up.” In the past, most of these materials relied on imports and were expensive. For example, a material called silicone foam cost RMB 300 to 400 per square meter.

Luo spotted an opportunity. He believed these materials were not difficult to make. With research institutes he had long worked with, and after two years of R&D, he developed silicone foam with the same functions, priced at just over RMB 100 per square meter. And that tape that fire could not burn through: “Other companies have a very complex process that takes five steps. We developed a process that only needs two. The procurement price used to be RMB 65 per square meter. Now I sell it for RMB 35.”

Behind such low prices is 20 years of hard-earned market experience in the fiercely competitive 3C industry. Luo said: “Foreign companies and Chinese companies price differently. Take Japan and South Korea. If they develop a material, they might produce 100,000 square meters a month and sell it at RMB 100 to protect their profit margins. They’re relatively conservative in how they estimate the market and use scarcity-style marketing. China has a huge market and pursues volume. Costs come down through scale, and I can still make money selling at RMB 60.

After making the samples, Luo still saw himself as a “small player” who could not reach CATL’s procurement managers. Yibin’s government proposed providing “mom-style service” for companies settling in the park, and the names of the designated liaison staff are even posted at the entrance of each firm. Luo hence found Guan Min, the director of the investment-promotion office responsible for their park. Guan came to the company, made introductions, and successfully helped Luo win the trust of CATL as a major client and reach a cooperation agreement.

After stepping into this new industry, Luo updates his understanding every day. “In Apple’s supply chain there are many small suppliers, but in CATL’s supply chain there are basically none. My earlier understanding was very superficial — I thought the functions were the same. But after working with CATL, I realized that while Apple’s requirements are also very high, it doesn’t really involve safety. A phone can have a black screen or poor signal, but in cars, safety is always the top priority. In the 3C field, testing a function for a week is enough. Now sometimes testing takes months.”

Luo is considering moving his company headquarters from Dongguan to Yibin, because he sees many opportunities here. During the few days he spent in Yibin, he communicated with Kedali next door and found they also need these functional materials. He has already begun producing samples, hoping to close a deal worth tens of millions of yuan.

In Changzhou, I interviewed Hymson Laser Technology Group Co., Ltd., a company focused on laser die-cutting equipment mainly used for cutting and cleaning electrode sheets. Founded in 2008, it previously concentrated on the 3C industry and entered Apple’s supply chain, but in recent years it has shifted its business focus to the lithium-battery industry.

Li Rui, a staff member at Hymson’s Changzhou plant, is in his thirties. He is from Suizhou, Hubei Province. He joined Hymson in 2014 and in 2020 was assigned from the Shenzhen headquarters to Changzhou. He took me on a tour of the plant’s production line. Hymson began R&D on lithium-battery laser equipment in 2015 and started mass production two years later. During that process, it directly transferred much of the technology and experience it had accumulated before. In 2017, Hymson built a plant in Jintan District, began operations in 2019, and subsequently entered the supply chains of many leading manufacturers.

As I reviewed the supply-chain companies I interviewed on this trip, I found that many entered the lithium-battery sector through this kind of “cross-over”: some started in trading, others began in mining or large chemical conglomerates, and quite a few were originally part of Apple’s supply chain. Even if some companies’ previous core businesses were not directly related to batteries, a deeper look shows they could usually connect to the lithium-battery industry in one way or another.

Just as Japan’s Sony once leveraged the foundations of the photographic film industry, China’s rapid lithium-battery development is also a reflection of broader manufacturing capabilities. These companies have found new paths for transformation in the lithium-battery sector, and their “cross-over,” in turn, has brought technical and experiential support that helps raise the level of lithium-battery manufacturing.

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The pressure and logic behind local-government investment promotion

From the perspective of local governments, the “clustering” phenomenon in the lithium-battery industry makes it an ideal target for attracting investment, especially after China’s economy entered the “new normal,” when industrial transformation became the top priority faced by virtually every locality. The success or failure of that transformation does not merely affect the promotion prospects of a few officials; it also determines the trajectory of a place’s economic development and the shifting fortunes of its residents’ lives.

Take the ride-hailing drivers we dealt with in Changzhou. Many were from other places. Some used to work in factories. After saving some money, they wanted a different life and bought cars to drive ride-hailing. Others used to run small businesses locally, then the pandemic wiped them out, so they switched to driving to make a living, while waiting for another chance.

Because lithium batteries brought more people in and out of Changzhou, including me, we became their customers and provided them income. Industrial development brings not only high-end technology and chances for factories to start production, but also an overall pull on local employment and the socio-economic fabric. It tends to create opportunities, whether for senior managers or for primary-level service workers.

In terms of motivation to develop new industries, inland Yibin is undoubtedly stronger. Yibin’s longstanding industrial pillars have been wuliangye and coal. While these provide stable revenue, they also face growth bottlenecks.

Zhou Qiang once worked at the municipal finance bureau. He said, “Traditional industries are mature industries, and their growth rate will slow. If we want to maintain high-speed growth, we must open up new space.”

Yibin’s GDP has long been stably ranked fourth in Sichuan Province. By 2016, Nanchong, which ranked behind it, was closing the gap quickly. Long Xingyin said, “At the leadership level, there was a strong sense that something had to be done — one way or another, Yibin had to move up a level. The fifth regional Party Congress set the strategy: rely on traditional competitive industries and develop emerging industries from scratch. At that time, our understanding of what ‘emerging industries’ really looked like was still quite hazy, so in total we set eight directions: rail transit, smart terminals, new materials, new energy vehicles, medical devices, and so on. If four or five of them could break out, that would already be very good.”

At this stage of China’s emerging industries, getting into this “club” requires a ticket. I was curious why several business leaders independently mentioned that Yibin’s investment-promotion team keeps its word.

Zhou Qiang explained: “Our biggest advantage is confidence. In the 1990s, Yibin’s development strategy was to ‘grasp the big and let go of the small,’ focusing on nurturing a few state-owned enterprises, and Wuliangye Group was one of them. So our state-owned capital is strong. Yibin Development Group is the parent company of almost all local state-owned enterprises. Its national credit rating is AAA, which is very high. The support policies we promise can be honoured with capital, so we can deliver on what we say.”

To make this work, Yibin almost turned itself into a venture-capital firm. Starting from top-level design, it launched reforms, broke through the old institutional structure, and set up a number of dedicated working units. Each unit was responsible for its own industry area, pushing forward in parallel, without interfering with the others.

In 2017, Zhou Qiang was seconded to the New Energy Vehicle dedicated unit, and later moved into the even more specialized power-battery industry. “In the traditional system, all industry falls under the Bureau of Industry and Information Technology, but its bandwidth is limited. If we want to develop multiple emerging industries, we need dedicated units.”

These units have now been institutionalized. Zhou Qiang, for example, was placed into a new agency called the Bureau of Economic Cooperation and Emerging Industries. The Power Battery Division I where Zhou Qiang works is responsible for enterprise services, while the Power Battery Division II handles investment-attraction projects.

Zhou Qiang said: “In a traditional system, investment promotion is handled by the investment-promotion bureau, and after the contract is signed, it’s handed over to the economy and information bureau. That can easily create disconnection between departments. Now, from project attraction, to construction, to enterprise cultivation, to industry operation, one bureau takes responsibility all the way through.”

Zhou Qiang speaks quickly, as if pouring everything out at once, barely pausing even for a sip of water. Yet he is well-organized. He can explain Yibin’s advantages and the origins of this large plan, cleanly and sharply, getting straight to the key points. Investment promotion is, in effect, a city’s sales pitch. In a short time, it must make its strengths and sincerity clear. It was obvious Zhou has delivered this pitch many times.

Of course, talking alone is not enough. Zhou told us that in early 2017, the city established an emerging-industry group, a platform capitalized by governmental funds and combined with private capital. It now has 24 industrial funds, covering the power-battery industry, the automobile industry, the photovoltaic industry, and more, with a total size of RMB 31.7 billion. “Compared with big cities, 31.7 billion may not seem large, but for a city the size of Yibin, it is already a very large scale.”

What Long Xingyin did at Yibin Emerging Industry Investment Group is to provide “landing support” for the companies Zhou Qiang and his team targeted, put simply, to invest.

Long Xingyin originally studied automation and knew nothing about finance when he took on the assignment. He got up at 6 a.m. every day to study fund qualification materials, securities qualifications, company law, insurance law, and the operation of state-owned capital, and he also passed the fund practitioner qualification exam. He said that when he went to Chengdu for the exam, most people in the same room were university students — only he was already in his forties.

Attracting talent, a small city’s challenge

Many local governments hope to attract high-tech industries through preferential policies on land and funding. Changzhou and Yibin have been able to move ahead partly because they also look for ways to attract talent. The lithium-battery industry is a typical technology-intensive sector with strong demand for technical and innovation talent, precisely the weak spot for western cities like Yibin.

Zhou Qiang said: “It is relatively hard for a fourth-tier city like ours to attract talent. Local people go to big cities to study, and it takes real determination to come back. Students from other places who study in big cities are even less likely to come to Yibin to work.”

So while building factories, Yibin also rushed to build schools. The city designated 36 square kilometres at once to build a university town and a science-and-innovation town, attracting 10 universities to set up branch campuses. Walking in the park, I only had to look up to see rows of neatly arranged road signs — each bearing the name of a university. These branch campuses have all been built and moved in within the past three years.

“We call this a ‘turnkey project.’ Teaching buildings, dormitories, laboratories and even desks, chairs, and air-conditioning, we’ve equipped everything. We know that where a person go to university becomes their second hometown. Now we also have industry here, so students who study here are more likely to stay,” Zhou Qiang said.

Yibin is not content with being merely a production base. In recent years, it has also invested heavily in attracting top-tier research talent.

The most emblematic example is its recruitment of Minggao Ouyang, an academician of the Chinese Academy of Sciences and a professor at Tsinghua University. In 2020, he placed his only Academician Workstation in Yibin. Starting in 2007, Ouyang has served as the chief expert for the national key science and technology programme on new energy vehicles for three consecutive Five-Year Plans. Dozens of the PhD students he trained are now active across every segment of the new-energy vehicle industry chain.

On the day I visited the academician workstation, it happened to coincide with the completion and commissioning of the Zhili IoT factory for a heavy-duty truck battery-swapping project. Heavy trucks account for a high share of carbon emissions in the transport sector. If they can be electrified, the emissions-reduction impact is substantial. Li Liguo, founder of Zhili IoT, is Ouyang Minggao’s student and also secretary-general of the China Electric Heavy Truck Battery Swapping Industry Promotion Alliance.

Yibin put a lot of thought into bringing in Ouyang Minggao. With only one academician workstation, the decision of where to place it required careful consideration. “Yibin’s leaders may have come to visit every year, talking about Yibin’s determination to transform and its natural conditions. In this process, we gradually saw an opportunity for cooperation,” Li Liguo said. “At that time, equipment in our power-battery safety laboratory at Tsinghua University was already packed tightly. Battery testing carries certain risks, and Beijing’s environment also restricts some experiments. In addition, we were beginning frontier research on battery mechanisms. Some equipment can cost tens of millions of yuan per unit. It is possible to secure research funding by applying for projects, but the time cost is high. Yibin not only provided us with excellent office and R&D space, it also funded the purchase of equipment we wanted.”

Although Yibin entered the field relatively late, it has already hosted a high-profile World Power Battery Conference for two years. This is inseparable from the industry’s network support. The unveiling ceremony for Li Liguo’s heavy-truck battery-swapping project was also attended by important experts and entrepreneurs from the sector. Previously, coastal cities in the east had also invited Li Liguo, offering an RMB 8 million subsidy, but he ultimately came to Yibin.

“After Academician Ouyang began working with Yibin, several of us came too, working diligently to build teams here. After our lab was established, our PhD students did research here and gradually got to know the city. This year, three or four postdocs may stay to work here,” Li Liguo said.

“Yibin has not attracted many Tsinghua alumni through the market alone, but the academician workstation brought more than a dozen alumni.” He added that their team is also pushing research results to land in Yibin, sometimes by incubating start-ups, sometimes by cooperating with local companies. “One of our PhDs is doing anode-material research in Yibin. We think his project has industrial value, so we discussed whether he could start a business. After landing, that PhD became the company’s founder.”

This year’s Chinese readout runs to just over 3,600 characters, slightly shorter than last year’s 4,000-plus-character text.

Below is some notes, along with the full translation of the Chinese readout.

1. Re-emphasis of "cross-cyclical adjustment" may signal a view that the economy is back on track

明年经济工作在政策取向上，要坚持稳中求进、提质增效，发挥存量政策和增量政策集成效应，加大逆周期和跨周期调节力度……

In terms of policy orientation for next year’s economic work, the meeting pointed out, efforts must be made to pursue progress while maintaining stability and improve quality and efficiency. It stressed the need to bring into full play the combined effects of existing and new policies, increase the intensity of counter-cyclical and cross-cyclical regulation…

Note: In the near term, “counter-cyclical” and “cross-cyclical” adjustment are key phrases to watch for how much weight policymakers place on stabilizing growth and how forcefully they are prepared to act. When “counter-cyclical adjustment” is stressed, more forceful policy support is usually in sight; when “cross-cyclical adjustment” is emphasized, the stance tends to be more conservative.

At the Sept. 26, 2024 Politburo meeting, “cross-cyclical” disappeared entirely from the readout. That signaled a shift in priorities: from balancing long-term development and short-term stability to focusing squarely on shoring up current growth.

More than a year later, the Politburo meeting earlier this week formally brought back “cross-cyclical,” and today’s CEWC has carried that wording through. This is a very important change.

It likely reflects a top-level judgment that China’s economy has moved back onto a more normal track, and that policy is shifting from “extraordinary” responses toward a more normalized and balanced approach.

That judgment is also reflected in how the situation is described: last year, the focus was to “prevent and resolve risks in key areas and external shocks,” whereas this year the wording has shifted to “better coordinate domestic economic work and the country’s international economic and trade endeavors,” suggesting a more proactive approach to managing and responding to current challenges.

2.“More proactive” fiscal policy and “moderately loose” monetary policy: wording unchanged, stance likely tighter

要继续实施更加积极的财政政策。保持必要的财政赤字、债务总规模和支出总量……要继续实施适度宽松的货币政策

The country should continue to adopt a more proactive fiscal policy….It should maintain an appropriate level of fiscal deficit, overall debt and total expenditure, strengthen scientific fiscal management…

The country should continue to implement a moderately loose monetary policy.

Note: Taken together with the renewed emphasis on “cross-cyclical adjustment” above, monetary policy in practice may already be shifting onto a more cautious footing. Expectations for further easing next year should probably be tempered, even though the official description of a “moderately loose” stance has been preserved for various reasons.

This stance can be echoed by a piece on Financial News金融时报, a newspaper under the People’s Bank of China back in November:

货币政策虽然还有一定空间，但边际效率已明显下降。必须警惕过度放松货币金融条件可能产生的一些负面效果。比如，资金空转、资本市场波动加大等

While monetary policy still has some room, its marginal effectiveness has clearly declined. We must be vigilant against potential negative consequences of excessively loose monetary and financial conditions, such as funds circulating within the financial system without reaching the real economy, and increased volatility in capital markets.

3. 2026 task-setting: No.1 priority is expanding the domestic circulation

一是坚持内需主导，建设强大国内市场。深入实施提振消费专项行动，制定实施城乡居民增收计划……优化“两新”政策实施……优化实施“两重”项目……

First, efforts should be made to uphold the leading role of domestic demand and build a robust domestic market. A special campaign dedicated to stimulating consumption should be implemented, and plans should be formulated and implemented to increase the incomes of urban and rural residents…the implementation of projects for implementing major national strategies and building security capacity in key areas should be optimized…

Note: For the second year in a row, domestic demand tops the list of economic tasks. This is hardly a surprise. The renewed focus comes against the backdrop of China’s goods trade surplus reaching a record US$1 trillion in the first 11 months of this year.

Within domestic demand, boosting consumption is the core priority.

On incomes, this year’s wording is: “plans should be formulated and implemented to increase the incomes of urban and rural residents.” Last year, the phrase was: “efforts should be made to increase the incomes, alleviate the burdens of low- and middle-income groups.”

Two changes stand out:
• The target group is broader. Last year the focus was explicitly on low- and middle-income groups; this year it is “urban and rural residents,” a clearly wider universe.
• The tools are more concrete. Last year’s “make efforts” was vague; this year’s “formulate and implement plans” is more specific and implementation-focused. That suggests there may be room to expect somewhat stronger, more targeted pro-consumption policies.

In addition, many of last year’s measures are set to continue, such as the “special campaign dedicated to stimulating consumption” and the optimization of the “two new” policies on equipment upgrades and consumer goods trade-in.

4. 2026 task-setting: No.2 priority is innovation and new growth drivers

二是坚持创新驱动，加紧培育壮大新动能。制定一体推进教育科技人才发展方案……深化拓展“人工智能+”，完善人工智能治理。创新科技金融服务。

Second, efforts should be made to follow an innovation-driven strategy and speed up fostering and strengthening new growth drivers… The “AI Plus” initiative should be deepened and expanded, and AI governance should be improved. Financial services for science and technology should be innovated.

Note: The top two tasks — expanding domestic demand and accelerating innovation — both reflect the particular context of 2026.

Next year marks the start of the 15th Five-Year Plan, which is expected to focus heavily on big pushes in science, technology and industrial upgrading.

It is also a key year in what might be called a pause in “China-U.S. trade war 2.0.” Both sides have incentives to use this window to reduce or resolve critical choke points where they depend on the other side.

Against that backdrop, the two core priorities for 2026 fall into place:
• Build out the domestic circulation to cushion the impact of any renewed trade frictions.
• “Speed up” the cultivation of new growth drivers to cut technological and industrial vulnerabilities more quickly.

Moreover, the AI Plus initiative, first raised last year, will also continue and deepen, with an emphasis on embedding AI across the real economy and broader society.

5. 2026 task-setting: Risk prevention (especially real estate) pushed down to the last slot

八是坚持守牢底线，积极稳妥化解重点领域风险。着力稳定房地产市场，因城施策控增量、去库存、优供给，鼓励收购存量商品房重点用于保障性住房等……有序推动“好房子”建设。加快构建房地产发展新模式。

Eighth, efforts should be made to firmly guard the bottom line and actively and prudently defuse risks in key areas. Focus should be placed on stabilizing the real estate market. City-specific measures should be taken to control new supply, reduce inventory and optimize supply, and the purchase of existing commercial housing should be encouraged, with a focus on using it as government-subsidized housing and for other purposes…and efforts should be made in an orderly manner to advance the construction of “good housing.” The country should accelerate its efforts to foster a new development model for the real estate sector.

Note: The way housing appears and disappears in policy language throughout 2025 arguably reflects ongoing hesitation and internal debate at the top over how to approach the property sector.

For example, at the July Politburo meeting, real estate was not mentioned explicitly at all. The readout only said “implement the spirit of the Central Urban Work Conference and carry out urban renewal in a high-quality way,” effectively folding the property issue into urban work — a clear downplaying.

In August, however, Premier Li Qiang chaired the ninth plenary meeting of the State Council and called for “strong measures” to consolidate the nascent stabilization in the housing market, a tone that cut against the downplaying seen in July.

In the December Politburo meeting a few days ago, real estate once again dropped out of the wording, only to reappear at this CEWC.

In practical terms, there have been very few substantive support measures for housing this year, aside from limited easing of purchase restrictions in outer rings of some first-tier cities in September. The stance has been hesitant and cautious.

For 2026, the work on the housing market is framed around three concrete approaches:
• Control new supply: “control new supply” through city-specific measures;
• Reduce inventory: “reduce inventory,” with an emphasis on government-backed purchases of existing commercial housing, especially for subsidized housing and related uses;
• Optimize supply: “optimize supply” by “advancing the construction of ‘good housing’ in an orderly manner,” while “accelerating efforts to foster a new development model for the real estate sector.”

6. First-ever mention of “positive attitudes toward marriage and childbearing”

七是坚持民生为大……倡导积极婚育观，努力稳定新出生人口规模……

Seventh, efforts should be made to put people’s wellbeing first…Positive attitudes toward marriage and childbearing should be advocated, and efforts should be made to stabilize the number of newborns…

Note: This is an interesting formulation, indicating that demographic challenges, especially around fertility, have risen on the leadership’s agenda.

Below is the full translation of the readout by Yuzhe He:

BEIJING, Dec. 11 (Xinhua) -- The Central Economic Work Conference was held in Beijing from Dec. 10 to 11. Xi Jinping, general secretary of the Communist Party of China (CPC) Central Committee, Chinese president and chairman of the Central Military Commission (CMC), attended the conference and delivered an important speech. Li Qiang, Zhao Leji, Wang Huning, Cai Qi, Ding Xuexiang and Li Xi, all members of the Standing Committee of the Political Bureau of the CPC Central Committee, also attended the conference.

In his speech, Xi summarized the economic work in 2025, analyzed the current economic situation and arranged the economic work for 2026. Li Qiang delivered a summary speech, in which he laid out requirements for implementing the guiding principles of Xi’s speech and doing a good job in economic work next year.

2025 is a truly extraordinary year, the meeting noted. In the face of difficulties, the CPC Central Committee with Comrade Xi Jinping at its core has united and led the entire Party and the Chinese people of all ethnic groups to forge ahead with resolve and work hard. It has unswervingly applied the new development philosophy, promoted high-quality development, coordinated both domestic and international imperatives, and implemented more proactive and impactful macro policies, ensuring that the main goals and tasks of economic and social development will be successfully completed. China’s economy has forged ahead under pressure and achieved development toward greater innovation and higher quality, the building of a modern industrial system has continued to advance, fresh progress has been made in reform and opening up, positive headway has been made in defusing risks in key areas, and people’s livelihood has been better safeguarded. Over the past five years, China has effectively dealt with various shocks and challenges and promoted new major achievements in the cause of the Party and the country. The 14th Five-Year Plan (2021-2025) is drawing to a successful close, and a good start has been made in embarking on the new journey toward the second centenary goal.

The meeting noted that, through practice, we have gained new understanding and experience in doing a good job in economic work under the new circumstances. It is imperative to fully tap the potential of the economy. It is essential to advance policy support and reform and innovation in parallel. It is necessary to ensure both an economy that is dynamic thanks to appropriate deregulation and one that is well-regulated thanks to effective governance. It is important to closely combine investment in physical assets with investment in people. It is also crucial to strengthen our internal strengths in order to cope with external challenges.

The meeting pointed out that China still faces many long-standing problems and new challenges in its economic development. The impacts of changes in the external environment have deepened, while at home, the contradiction between strong supply capacity and weak demand is prominent, and there are many risks and hidden dangers in key areas. Most of these are problems that have arisen in the course of development and transformation and can be resolved through hard work. The supporting conditions and fundamental trend for China’s long-term sound economic growth remain unchanged. It is necessary to strengthen confidence, make good use of our strengths, and rise to the challenges, so as to continuously consolidate and expand the sound momentum of steady economic performance.

The meeting emphasized that to do a good job in next year’s economic work, it is necessary to follow the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, and fully implement the guiding principles of the 20th CPC National Congress and all plenary sessions of the 20th CPC Central Committee. The new development philosophy must be fully and accurately applied on all fronts, efforts to foster a new development paradigm must be accelerated, and high-quality development must be promoted with a strong focus. It is imperative to adhere to the general principle of pursuing progress while maintaining stability, better coordinate domestic economic work and the country’s international economic and trade endeavors, and better coordinate development and security. More proactive and impactful macro policies should be implemented, with enhanced forward-looking, targeted and coordinated macro regulation. Continuous efforts should be made to expand domestic demand and optimize supply, make better use of incremental resources and revitalize existing resources, and develop new quality productive forces in light of local conditions. Efforts should be made to push ahead with the building of a unified national market in greater depth, continue to prevent and defuse risks in key areas, and focus on stabilizing employment, enterprises, markets and expectations. The goal is to promote a qualitative improvement in economic performance and reasonable quantitative growth, maintain social harmony and stability, and secure a good start to the 15th Five-Year Plan (2026-2030).

In terms of policy orientation for next year’s economic work, the meeting noted, efforts must be made to pursue progress while maintaining stability and improve quality and efficiency. It stressed the need to bring into full play the combined effects of existing and new policies, increase the intensity of counter-cyclical and cross-cyclical regulation, and enhance the effectiveness of macroeconomic governance. The country should continue to adopt a more proactive fiscal policy. It should maintain an appropriate level of fiscal deficit, overall debt and total expenditure, strengthen scientific fiscal management, optimize the structure of fiscal expenditure, and regulate tax incentives and subsidy policies. Greater attention should be paid to resolving fiscal difficulties at the local level and ensuring that basic living needs are met, salaries are paid, and governments function smoothly at the primary level. Fiscal and economic discipline must be strictly observed, and CPC and government departments should keep their belts tightened.

The country should continue to implement a moderately loose monetary policy. Promoting steady economic growth and a reasonable rebound in prices should be taken as important considerations for monetary policy. It is necessary to flexibly and efficiently make use of various policy tools, including cuts in the reserve requirement ratio and interest rates, maintain ample liquidity, and ensure smooth transmission of monetary policy, so as to guide financial institutions to increase support for expanding domestic demand, boosting scientific and technological innovation, and serving micro, small and medium-sized enterprises and other key areas. The RMB exchange rate should be kept basically stable at a reasonable and balanced level.

It is important to enhance the consistency and effectiveness of macro policy orientation. Economic and non-economic policies, as well as existing and new policies, should all be included in the evaluation of the consistency of macroeconomic policy orientation. A sound expectation management mechanism should be established to boost social confidence.

The meeting outlined the following key tasks for 2026.

First, efforts should be made to uphold the leading role of domestic demand and build a robust domestic market. A special campaign dedicated to stimulating consumption should be implemented, and plans should be formulated and implemented to increase the incomes of urban and rural residents. Efforts should be made to expand the supply of quality goods and services. The implementation of large-scale equipment upgrades and consumer goods trade-in programs should be further optimized. Unreasonable restrictions in the field of consumption should be removed to unleash the potential of service consumption. Work should be done to halt the decline in and stabilize investment. Investment from the central government budget should be appropriately increased, the implementation of projects for implementing major national strategies and building security capacity in key areas should be optimized, the management of the use of local government special-purpose bonds should be improved, and new-type policy-based financial instruments should continue to play their role, so as to effectively stimulate the vitality of nongovernmental investment. Urban renewal should be advanced in a high-quality manner.

Second, efforts should be made to follow an innovation-driven strategy and speed up fostering and strengthening new growth drivers. An integrated plan for the coordinated development of education, science and technology, and talent should be formulated. International science and technology innovation centers should be built in Beijing (Beijing-Tianjin-Hebei region), Shanghai (Yangtze River Delta) and the Guangdong-Hong Kong-Macao Greater Bay Area. The principal role of enterprises in innovation should be strengthened and the intellectual property protection system for emerging fields should be improved. An action plan for expanding the capacity and improving the quality of the service sector should be formulated and implemented. A new round of actions should be taken to promote the high-quality development of key industrial chains. The “AI Plus” initiative should be deepened and expanded, and AI governance should be improved. Financial services for science and technology should be innovated.

Third, efforts should be made to press ahead with reform in key areas and enhance the driving force and vitality for high-quality development. A regulation on building a unified national market should be formulated, and rat-race irrational competition should be thoroughly addressed. Plans should be formulated and implemented to further deepen the reform of state-owned capital and state-owned enterprises, and supporting regulations and policies for the private sector promotion law should be improved. Work should be accelerated to clear overdue payments owed to enterprises. Efforts should be made to promote win-win development for platform enterprises and the operators and workers on their platforms. Trials for market-based allocation of production factors should be expanded. A sound local tax system should be established. Further efforts should be made to streamline and upgrade small and medium-sized financial institutions, and the comprehensive reform of investment and financing in the capital market should be continuously deepened.

Fourth, efforts should be made to stay committed to opening up and promote win-win cooperation in multiple fields. Institutional opening up should be steadily advanced, voluntary opening up in the service sector should be expanded in an orderly manner, and the layout and scope of pilot free trade zones should be optimized, while solid progress should be made in building the Hainan Free Trade Port. Integrated development of trade and investment and of domestic and foreign trade should be promoted. Service exports should be encouraged and supported, and digital trade and green trade should be actively developed. The institutions and mechanisms for promoting foreign investment should be further reformed. The overseas comprehensive service system should be improved. High-quality Belt and Road cooperation should be promoted, and efforts should be made to advance the conclusion of more regional and bilateral trade and investment agreements.

Fifth, efforts should be made to promote coordinated development and advance integrated urban-rural development and regional collaboration. Work should be done in a coordinated manner to advance urbanization with county seats as an important vehicle and to promote all-around rural revitalization, so as to boost high-quality development of county economies. The red line for the total area of China’s farmland must be resolutely safeguarded, and grain production must be pursued with unrelenting efforts, so as to keep the prices of grain and other key farm produce within a reasonable range. Gains made in poverty alleviation should be further consolidated and expanded, regular assistance should be incorporated into the overall strategy of rural revitalization, and the bottom line of preventing large-scale lapses or relapses into poverty should be firmly guarded. Major economically developed provinces should be supported in playing a leading role. Coordination among key city clusters should be strengthened and cooperation across administrative regions should be deepened. Overall planning for major bays should be strengthened to promote the high-quality development of the maritime economy.

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Sixth, efforts should be made to follow the “dual carbon” goals as a guiding principle and promote a comprehensive green transition. Work should be further advanced to upgrade energy conservation and carbon reduction in key industries. A master plan for building China into an energy powerhouse should be formulated, the development of a new-type energy system should be accelerated, and the use of green electricity should be expanded. Efforts should be stepped up to develop the national market for carbon emissions trading. An action plan for the comprehensive treatment of solid waste should be implemented, and continued and intensive efforts should be made to keep the skies blue, waters clear and lands clean, with strengthened governance of new pollutants. Solid progress should be made in the tough battle for the Three-North Shelterbelt Forest Program, and efforts should be made to integrate and optimize nature reserves. The meteorological monitoring, forecasting and early warning system should be strengthened, and shortcomings in flood control, drainage and disaster mitigation infrastructure in northern regions should be addressed at a faster pace, so as to enhance the capacity to cope with extreme weather events.

Seventh, efforts should be made to put people’s wellbeing first and strive to do more practical things for the people. Actions should be taken to stabilize jobs, expand employment and improve job quality, with a focus on stabilizing employment for key groups such as college graduates and migrant workers, and encouraging and supporting people in flexible and new forms of employment to participate in employee insurance schemes. The layout and structure of education resources should be adjusted and improved, with increased supply of senior high school places and expanded enrollment in quality undergraduate programs at higher education institutions. The centralized procurement of medicines should be optimized, and reform of medical insurance payment methods should be deepened. A project to expand and upgrade rehabilitation and nursing services should be implemented, the long-term care insurance system should be promoted, and care and assistance for disadvantaged groups should be strengthened. Positive attitudes toward marriage and childbearing should be advocated, and efforts should be made to stabilize the number of newborns. Solid efforts should be made to ensure work safety, disaster prevention, mitigation and relief, and food and drug safety.

Eighth, efforts should be made to firmly guard the bottom line and actively and prudently defuse risks in key areas. Focus should be placed on stabilizing the real estate market. City-specific measures should be taken to control new supply, reduce inventory and optimize supply, and the purchase of existing commercial housing should be encouraged, with a focus on using it as government-subsidized housing and for other purposes. Reform of the housing provident fund system should be deepened, and efforts should be made in an orderly manner to advance the construction of “good housing.” The country should accelerate its efforts to foster a new development model for the real estate sector. Active and orderly measures should be taken to defuse local government debt risks, and local authorities should be urged to take the initiative in debt resolution, with no new hidden debt allowed in violation of laws and regulations. Debt restructuring and swap arrangements should be optimized, and multiple measures should be taken to defuse operating debt risks of local government financing vehicles.

The meeting urged that thinking and actions be unified with the CPC Central Committee’s scientific assessment of the situation and that the overall trend of China’s development be accurately grasped, so as to strengthen confidence in future development. It called for comprehensively implementing the overall requirements and policy orientation for next year’s economic work, adhering to an active and pragmatic target-oriented approach, focusing on resolving existing difficulties and problems, making greater breakthroughs in achieving effective qualitative improvement, and enhancing the sense of gain among residents and enterprises. It emphasized the need to strengthen the synergy between reform and policies, and continue to improve economic performance and market expectations.

The meeting stressed the need to identify the key focal points of next year’s economic work within the broader picture. Efforts should be made to focus on strengthening the domestic circulation and opening up new space for domestic demand growth; to focus on developing new quality productive forces and promoting deep integration between scientific and technological innovation and industrial innovation; to focus on stimulating the driving force and vitality for high-quality development and unswervingly deepen reform and expand opening up; to focus on continuously improving people’s wellbeing and increase efforts to ensure and improve people’s livelihood; and to focus on firmly guarding the security bottom line and prudently defusing risks in key areas.

The meeting emphasized that it is necessary to strengthen the CPC’s overall leadership over economic work and form unified will and strong synergy. It stressed the need to uphold the centralized and unified leadership of the CPC Central Committee, and for all regions and departments to fully implement the CPC Central Committee’s thinking, tasks and policies on next year’s economic work in light of their own realities and local conditions. It is important to establish and apply a correct view of political achievements, stay committed to delivering governance outcomes for the people and achieving solid results through hard work, consciously act in line with objective laws, and improve differentiated evaluation systems for assessing performance. In line with the proposals adopted at the fourth plenary session of the 20th CPC Central Committee, national and local 15th Five-Year Plans and special plans should be drawn up to promote high-quality and sustainable development. Efforts should be made to foster a sound political environment, talent environment, business environment and public-opinion environment, strengthen policy communication and interpretation, and fully stimulate positive energy in society.

The meeting demanded efforts to ensure the supply of key livelihood-related commodities at the turn of the year, care for people in difficulty in their production and daily life, and resolutely prevent and curb major and serious accidents.

The meeting called on the whole Party and all sectors of society to closely unite around the CPC Central Committee with Comrade Xi Jinping at its core, forge ahead with unity and resolve, work hard to achieve next year’s economic and social development goals and tasks, and ensure a good start to the 15th Five-Year Plan (2026-2030).

Members of the Political Bureau of the CPC Central Committee, secretaries of the Secretariat of the CPC Central Committee, vice chairpersons of the Central Military Commission, leaders of the Standing Committee of the National People’s Congress, state councilors, president of the Supreme People’s Court, procurator-general of the Supreme People’s Procuratorate, leaders of the National Committee of the Chinese People’s Political Consultative Conference, members of the Central Military Commission, and others attended the meeting.

Also present at the meeting were leading officials of provinces, autonomous regions, municipalities directly under the central government, municipalities with independent budgetary status, and the Xinjiang Production and Construction Corps, as well as leading officials from relevant central Party and government departments, people’s organizations, some financial institutions and enterprises under central management, and relevant departments of the CMC. Enditem