The Prof G Pod with Scott Galloway - China Decode: China Steps In as Trump’s Ceasefire Unravels

Episode Date: April 14, 2026

What began as a fragile ceasefire has turned into a U.S.-led blockade of the Strait of Hormuz — and China is moving to capitalize. As tensions between the U.S. and Iran escalate, Beijing is quietly positioning itself as a global power broker — nudging diplomacy while sidestepping responsibility.  At the same time, Donald Trump is firing back with tariff threats, linking instability in the Middle East directly to U.S.–China tensions. Alice and James discuss whether or not the Chinese government is providing military aid to Iran, and explore why that’s such a fraught question. Plus — how China is playing both sides, and what it all means for global markets and oil prices. And then, author and China scholar Eyck Freymann joins the show to talk about Taiwan — and the looming military threats that a China-led “reunification” effort would pose. From Beijing’s outreach to Taiwan’s opposition, to the ramifications of a potential conflict on the global semiconductor industry, Alice, James and Eyck explore what the consequences of a direct confrontation over Taiwan could be — and whether, in the threat of a Chinese invasion, the U.S. would have what it takes to deter war. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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ambiguity lies right at the moment. Welcome to China Decode. I'm Alice Han. And I'm James King. In today's episode of China Decode, we're discussing how China's stepping in. as Trump's ceasefire wobbles. Plus, Ike Freiman joins us to discuss China's outreach to Taiwan's opposition, the real risk of a Taiwan conflict and how the U.S. can actually deter Beijing. That's all coming up, but first, let's do a quick check-in with how the Chinese markets are starting the week.

On Monday, oil prices shot back up after negotiations between Iran and America collapsed. The Shanghai A-Share Index was flat on the day. The Hangsang-A-Share Index fell about 1.5%. Alibaba slid 2% and 10 cent 3% as investors rushed to save Haven assets. However, EVMaker BYD rallied over 5% on new data showing an accelerating interest in Chinese vehicles abroad. As a reminder, China Decode now has a weekly newsletter. We go beyond the topics we cover here on the podcast and give you even more data and analysis on the most important stories coming out of China this week.

subscribe at Chinadecode.proggemedia.com. It's free for now, so be sure you get subscribed very soon. That's Chinatode.com. All right, let's get into it. What was supposed to be a fragile ceasefire is quickly becoming something bigger, a global power play. Chinese President Xi Jinping is stepping into the spotlight, nudging Tehran towards diplomacy, while avoiding ownership.

Beijing wants the credit, not the responsibility. But the balancing act is getting harder, as U.S. intelligence reports suggest that China may be preparing to send air defense systems to Iran. President of the United States, Donald Trump, is already firing back threatening 50% tariffs on Chinese goods, tying Middle East tensions directly to U.S. China economic stakes ahead of a possible May summit in Beijing. On the ground, escalation is accelerating. On Monday, the U.S. began a blockade of the state. Strait of Hormuz, and after failed talks in Pakistan, Iran is warning that if ports are targeted, no shipping in the region will be safe. James, since we last spoke, it seems like things have gotten worse. The talks in Pakistan completely failed, which isn't surprised in many experts on this topic. But what is actually interesting to me linking this back to China is the fact that China's

back in the firing line, per Washington's perspective, not only because of the tariff, that Trump is now threatening, but also potentially because China may be getting more involved militarily. There's a bigger question about the extent to which China is aiding Iran militarily or has been in recent months. But I think that the linkage of the U.S.-China relationship to the Iran issue has been, I think, the biggest change in the last week. What's your take? Yeah, absolutely, Alice. I mean, we're recording on Monday mid-morning U.S. time and the blockade that the US was going to impose on the Strait of Hormuz has just started a few minutes ago.

No news from that that I've managed to see in the last few minutes. But of course, this is a very fast-moving and highly unpredictable situation. But as you say, Alice, I think the key takeaway right now is that China appears to be back in the crosshairs of the US. Only a week ago we were talking about China as a potential mediator to the conflict, or maybe even a peacemaker. You know, China has this five-point peace plan. But now I think we flip-flopped,

and it looks like China could be, again, a loser from this situation. And it looks like, as you say, the military tension between the US and China could grow considerably. So just quickly on the first point of China being a loser, it's a rather obvious point, but let's state it again. China gets 37.7% of all of the oil exports that transit through the Strait of Hormuz. That's the most that any single country gets. So given that the U.S. has just started a blockade, obviously China has more to lose from this situation in terms of imported oil than any other country.

A quick caveat on that, very necessary caveat, is that although China is the country, that loses most in terms of the total volume of oil imports through the Straits of Hormuz, this amount only amounts to about 6% of China's total energy usage. So, you know, although China gets hit hard, it is a weatherable storm for China. I think the area that is most pressing right now is the one that you've already alluded to, and that is China and its military relationship with Iran, because President Trump said last week that the U.S. would impose tariffs of 50% with no exemptions

on imports to the U.S. from any country that supplies Iran with military weapons. And we're already seeing the U.S. Defense Intelligence Agency saying that the Iran, Revolutionary Guard Corps is using technology from a Chinese firm called Mizar Vision that's been feeding AI-enhanced satellite imagery of U.S. operations in Iran to the Iranians. And so, you know, this is kind of a gray area. It's not exactly weaponry, but it does seem to be assistance that China is providing Iran in its conflict with the U.S. So that's point number one.

Point number two is that CNN had a report last week's quoting again U.S. intelligence to say that China's preparing to deliver new air defense systems to Iran within the next few weeks. Of course, this hasn't happened yet. We don't know whether it will happen. But if that was to happen, then it seems very clear that China will be back in the U.S. crosshairs. there could be, you know, a big trade sanctioned follow-through. China's foreign ministry spokesman Guo Jia Kun has made a statement related to this situation in Beijing.

This was a regular press briefing in Beijing on Monday. He said that China has taken a consistently prudent and responsible approach to arms exports. Obviously, he's talking about arms exports to Iran in this case. It isn't any kind of a secret that China has been selling arms to Iran for decades. That's no secret at all. What's really key is whether China has been selling arms to Iran since the end of February when this war between the U.S. and Israel and Iran began. That's the key point, and that's where quite a lot of ambiguity lies right at the moment.

But it does seem like a potentially incendiary situation, I don't know how this is going to pan out, but obviously we're all watching closely. What are you seeing on this front, Alice? Well, you know, what was interesting was that about over a week ago, there was an Atlantic Council piece about this in which they were showing how the Russians and the Chinese had been historically, including most recently, militarily aiding the Iranians through pure military, but also dual-use technology. So the peace cites, what you mentioned, anti-aircraft defense systems,

missile fuel precursors, drone components, things that could be classed as dual-use technologies as well. But you're completely right, James. The real issue is the fact that politically Trump seems to be very worried about this and is going to make a big deal out of it, potentially even targeting China with these 50% tariffs. And I think this will probably scupper any kind of may visit that Trump may have believed he could have in China. And the next month or so, because fundamentally, I think this sets back some of these trade talks and negotiations, because if the Chinese have to convince Trump that they're not doing this in order to avoid tariffs, that's something that I think could really destabilize the relationship.

You know, if we look back to even the Russia relationship after Russia-Ukraine, the Chinese have long maintained the view that they are not exporting military. technology to the Russians. But there's enough research out there to suggest that there is a fine line when it comes to dual-yous technologies. But we're in a new realm where it's not just dual-use technologies that are increasingly on the list, but also what you just mentioned, James, you know, publicly available AI-generated and enhanced studlight imagery created by Chinese company that is being used by the Iranians. Now, there's a bigger debate about the intentionality, whether or not China intended for the Iranians to use it. But putting all of that opaqueness aside,

what worries me is that now we have, to your point, James, China in the firing line again, because Trump sees China as being in the Iran-Russia camp at a time where, you know, we were hoping for continued Dayton or improved relations. that I think has been dealt a major blow in the last 24 to 48 hours. Yeah, completely. But I also think that given the way this conflict has flip-flopped with regard to China's role in it, it is possible that we might be back with China being a mediator or a peacemaker.

Let's not forget that behind the scenes, China's foreign minister Wang Yi worked very hard. to try to create a more positive outcome when U.S. Vice President J.D. Vance met with his Iranian, well, met with his Iranian interlocutor in Pakistan last week to try to talk this through. They spoke for 21 hours. It does seem that there was at least some traction in that. And apparently the talks broke down over the question of the Iranian reserves of enriched uranium. and they couldn't find any kind of a solution on that front. But I wouldn't be surprised if at some point in the future,

China will be back in the frame as a kind of a mediator, helping to influence Muslim countries like Pakistan, with which China has very close relations, to try to mediate some kind of a settlement in this. Well, it's good also, James, I think, to remind people where we're at, you know, six weeks into this conflict, We're close to two months. You know, by conservative estimates, China has, you know,

three to four months of strategic reserve. So we're getting to the halfway mark fairly closely, I would say. And I think it is in China's interests for the straight to be opened up as quickly as possible, right? Because if you think about not just the pressure on energy prices, but also the supply chain for a lot of petrochemicals, things that, you know, polyethylene, these long, you know, names, of chemicals derived from hydrocarbons, that and fertilizes. The supply chain has really been broken by the blockade in the straight,

and we're starting to see in some cases massive increases in the prices domestically of helium of polyethylene. That has knock on effects across the supply chain for Chinese producers. And then as a result, global ramification. So I think that China is under pressure, especially if this conflict escalates and prolongs its, beyond the two-month mark. And that is where I could foresee the Chinese, to your point, James, getting more involved and putting more pressure on the Americans to give concessions in order to

reopen that straight. But just very quickly, the market movement since the start of the war are pretty staggering. Brent oil futures are up 41%. The daily Hormuz ship traffic has decreased by over 90 ships. The price of gasoline in the U.S. is up over 36,000. percent, European gas benchmark is up 49 percent. Gasoline prices in China jumped 11 percent in March. Global stocks are down 2.3 percent and the S&P is down about 1 percent, recovering from losses and steep as 8 percent in the last few weeks. The dollar spot index is up 1.3 percent. This is the market that we're in right now, and I think it's the roller coaster ride continues. I think we're in for a rough another week or so. But I want to end by saying that

China geopolitically may be benefiting from some of these disturbances and disruptions that the US is creating in the Middle East. But domestically and economically, we're starting to see signs that it is suffering from this prolonged blockade of the Strait of Hormuz. All right, we're going to take a short break. When we come back, we'll get even deep. into how the Iran conflict has heightened U.S.-China tensions as we talk with Aik Freeman, author of the new book, Defending Taiwan. He spoke with us on Friday before news of the U.S. blockade broke. Stay with us.

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Welcome back. Today we're joined by Ike Freiman. He is a Hoover Fellow at Stanford University and a research fellow at the U.S. Naval War College's China Maritime Studies Institute. He's also written a new book called Defending Taiwan, A Strategy to Prevent War, with China. Ike, thanks so much for joining us today and welcome to China Decode. Thanks, Alice, for having me. Ike, terrific to have you on. Let me just kick off with, I think, what is a today angle on this

story. Chung Li Wen, the leader of Taiwan's main opposition party, the Guamindang or the KMT, just met with China's leader, Xi Jinping on Friday. And therefore, she became the first KMT leader to visit the mainland in over a decade. I'm just wondering what you make of this. Is this just a sideshow or is it a sign of some interesting movement perhaps between mainland China and Taiwan? Well, the first thing to understand is that Jung is a controversial figure within Taiwan and she hasn't fully consolidated her control over her own party. Within the KMT she's seen as relatively pro-Beijing or at least soft. on Beijing. And part of the point of meeting with Xi Jinping is to show, no, I'm the boss,

even he says so. Of course, the price of the meeting was she had to make some comments, harshly criticizing the idea of Taiwan independence, essentially blaming the current president Lai Ching-Dou for the tensions. So I think if I'm Xi Jinping, I see this as a prime opportunity to drive a wedge between the U.S. and Taiwan and to encourage a more friendly KMT going into the 28 elections. Great. Well, I wanted to take us back into history and for listeners out there, you may not know this. Ike and I were in the same history program at Harvard. So this is definitely something that we were looking into when we were back there in an undergraduate degree. But can you walk us through 1949 period onwards, why we're ending up in this situation of

two Chinas and frame within that what Xi Jinping's personal goals are when it comes to a so-called reunification. How do you think he is thinking about this in historical terms? In 60 seconds or less? In 60 seconds or less, yes. I'll do what I can. So look, Taiwan is the unfinished business of China's civil war. The Chinese Communist Party and the Guangom and Mao Zedong and Chiang and Chang Kai Shek, they fought for control of the mainland. Chang Kai Shek's forces eventually lost control of northern China.

and over the course of 1949, they withdrew to Taiwan, taking many of the treasures of the imperial palace with them. They had been the ruling government of China preceding 1949. So they brought with them an unbroken chain of government extending back to the Republic of China Constitution, which had been signed in Nanjing.

And that is the reason why the Guamadang today claims that it's the unbroken, sole legitimate representative, of a China that happens to have been divided since 1949. Now, the issue is the KMT ruled as an autocratic regime for several decades, but in the 90s, Taiwan turned into a democracy. And now there's another party that has been in charge for the past decade, the DPP, which has a very different view of history.

In their view, Taiwan is and always has been an independent country called Taiwan. It just happens for some legacy historical reasons to be. called the Republic of China. So this is the fundamental problem. The question of Taiwan's status is not just about Taiwan. It's about the definition of what China means. Is there such a thing as one China that involves Taiwan, or is there one China that doesn't include Taiwan, or is there one China but different interpretations of what that one China means? Much of what Taiwan's domestic politics are about is really this core question. And from Beijing's point of view, it's willing to negotiate with anyone on Taiwan who acknowledges that there is only one China and Taiwan

is part of China. And this is why not just Xi Jinping, but his predecessors have always been open to dialogue with the KMT. But Xi Jinping is particularly interested in meeting KMT figures. He met former Taiwan KMT president, Maying Zhou in Singapore in 2015. And I think if the KMT wins the next presidential election in 2028, he would be very happy to return back to the negotiating table. cable, but with much more leverage than he had last time. What would that look like if we were to see the KMT win in 2028? How do you think Beijing is going to play that? So let's go back to 1949.

After Mao takes over the mainland, the dust settles, he's in charge in 1949. The first thing he does is instruct his generals to prepare the invasion plan to take over Taiwan. This is the unfinished business of the war. And they do the analysis and they conclude, sir, it can't be done, not even close. The Taiwan Strait is one of the most difficult waterways in the world. The weather is unpredictable. The meteorological tidal conditions are very difficult. Taiwan is this mountain fortress.

There's only a small number of beaches you can land on. And there's an attempt to squeeze Taiwan out of some of its offshore islands, which might be easier to seize. But then there's two Taiwan Straits crisis with the United States where Washington says, not on our watch. So Beijing essentially has been denied this prize. and they have been building over time the military capability to increase their chances of pulling off an amphibious invasion. But in my analysis, at least, they are still not at the point where they could have confidence that that will work, despite all of these decisions the United States has made to spend down stockpiles of critical munitions in the Middle East. So that is why diplomacy

remains Xi Jinping's preferred vector for achieving what he calls reunification. but of course he doesn't care about whether it's democratically acceptable to the people of Taiwan. He wants a very coerced form of diplomacy, one in which Taiwan feels squeezed on all sides and therefore has no choice. And what he's willing to offer Taiwan is probably something similar to what he offered Hong Kong. One country, two systems, Taiwan plan. And basically it means Taiwan has to capitulate on the principle. It has to admit, yes, there is only one China in the world, we're part of it, and Beijing is the legitimate government. And the offer on the table is if Taiwan will accept some version of that principle, it can maintain self-government. It can maintain its own control over its economic

affairs. Maybe it can get subsidized energy, other perks. It can essentially enjoy some of the benefits of being part of China without the drawbacks of being subject to authoritarian communist control. The reason this has gotten to be a harder sell is that after 2019, when the people of Taiwan watched what happened to Hong Kong, one country two systems is clearly a weasel word. It means as soon as you step out of line, Beijing will seize the opportunity to bring the hammer down. So that's the reason Taiwan is only ever going to accept some kind of deal along these lines. If it's truly under duress, it has nowhere else to turn. It's so useful to get the proper historical perspective and how all of the politics of the moment fit together around this issue.

But as a China watcher, you know, whenever, pretty much, whenever we attend a public event, the first question or one of the questions we always get asked is, do you think China will invade Taiwan? And you've just mentioned what you think Xi Jinping's diplomatic priorities are with regard to Taiwan. But let me just draw you, if I can, into that kind of invasion scenario. We hear about a quarantine strategy or a quarantine scenario that the mainland could undertake with regard to Taiwan. Could you just clear up what you think of that whole nexus of really sort of incendiary questions lead to? do you think that Xi Jinping could invade Taiwan? Well, let's break down these scenarios one by one. Xi Jinping wants to build a full menu of options,

options that he can take either simultaneously or in sequence. So one of them is obviously an amphibious invasion. That's crossed the strait on amphibious ships and deposit men on the beaches, or deposit them by air through paratroopers and helicopters. And the way that works is you have to seize a beachhead or an airhead, which is a position that you can hold under fire, and then use that to deliver some number of tens of thousands of men, plus all their vehicles, their medical, their food, their fuel, the whole logistics tail. And then, if they meet resistance, if necessary, fight into the island, seize control of the capital, mop up the remnants of Taiwan's armed forces, and install a friendly government. that's the invasion scenario. It's plausible, given that Beijing's military is almost 20 times the size and its total budget.

But in order to make an amphibious invasion work, a great number of things have to go correctly, and they have to go correctly in a highly synchronized way. There's lots and lots of ways that these things can go wrong. It's the hardest kind of military operation to do. And even the famous successes in history like D-Day, the invasion of Normandy, came very, very, very, very close to going disastrously off the rails. Another option is he can bombard Taiwan with missiles, with drones. He also has options to use cyber attacks to take out or otherwise manipulate Taiwan's critical infrastructure. He can use false flag attacks, decapitation attacks against Taiwan's

political leadership because he surely has special forces on the ground in Taiwan right now, undercover, he can squeeze Taiwan economically through a whole number of tools, including a blockade, which is a sort of medieval move, no one in or out or we shoot at you, or something that is softer or more selective that tries to filter or incrementally seize control. And then he's got options in the gray zone to bluster and posture that may or may not just lead Taiwan's morale to collapse. For example, he can mobilize his forces to potentially do any of these things and just see what happens. Maybe Taiwan gives up. Maybe the U.S. throws in the towel.

So the arguments I make in the book is the United States should seek to deter a crisis, not just a war, because a crisis would be terrible. It would be in many ways like the Cuban Missile Crisis, but also more dangerous in some respects. So we need to deter the crisis, not just the war, which means building the capabilities, so that Xi Jinping doesn't believe that an invasion would be straightforward to pull off or that a blockade would be checkmate, but also showing him that we have ways to respond in the gray zone on the road to war that would match him basically proportionally to show that we're resolved if he wants to take us to the edge, but that we're also showing restraint and we're not going to push a precarious situation into a war unnecessarily. And that's a delicate art,

and it requires you to think pretty systematically about his. his options and make sure that we have a way to close each of those off. Ike, on top of being at Taiwan and U.S.-China expert, you're also a bit of a military geek, and I'm sure in this book there are a lot of details about the military balance of power, from your best estimates or net assessments of the capabilities on both sides as they've changed and they constantly influx, how do you map out the capabilities China v. the U.S., both in military combat but also in some of these gray zone operations that you mentioned, and have these capabilities been altered by what's happening in Iran?

Are both sides learning from this, or are they being weakened, say, in the case of the Americans, by spending down precision missiles, thads, and ammunition? The first thing to say is that the U.S. enjoys tremendous advantages. And these advantages are more qualitative than quantitative. U.S. forces have experience in combat. The personnel, like the officers in question have experience in combat. that China's officer corps doesn't have. China's last experience fighting a foreign war was 1979 in Vietnam,

and it didn't go particularly well. And they've never fought a naval war. The U.S. does these multi-domain combined arms operations all the time. The U.S. also has these qualitative advantages in space, in some cyber capabilities. A lot of that is secret. Its special forces are believed to be the best in the world. Its submarines are the best in the world,

and its counter-submarine warfare is the best in the world. So yes, China has more ships. The U.S. Navy is larger by tonnage, but obviously China's Navy is right there. The U.S. Navy is spread out. China has more aircraft available. China has more missiles and drones. But the hard thing about doing what we would call a net assessment about a naval war is that era-naval wars just work differently from land wars. We know this from history. In land wars, you've got lots and lots and lots and lots of units, and each of them are basically interchangeable one for another. In Air and naval war, you have a small number of platforms, and they're more differentiated and specialized.

So if you take out one or two of these key things, like if you take out the carrier, all of the ships around the carrier, then get easier to kill. So it's like domino's falling. That's why in the past, the major engagements in naval history, once they start, tend to be the outcome is determined within minutes to hours. And that means so much depends on whose forces are deployed where, when the actual engagement begins, who has the element of surprise, and then who can blind the other and take out the other's communications in that critical opening phase to land an effective first punch. And so many of the details of how this is done are highly, highly classified. They're above top secret. They're accessible only to people with a need to know. But my hunch, based on talking to people in this business, and just based on observing China, is that if China thought that they could defeat the U.S. in a high-end war, they would be acting more assertively.

The U.S. problem would not be Taiwan. It would be the defense of Japan and South Korea and the homeland. And I think China is treading more cautiously, which suggests they think they have more work to do. And it's partly because it's hard to know when they're ready, when it's stuff that they can't count. The CCP is good when it's things that you can count. They're less confident when it's things you can't. Very interesting. And, I mean, at the moment, we're all focused on what's happening in Iran and in the war in the Gulf and obviously the shipping in the Strait of Hormuz.

If there was to be some Chinese action toward Taiwan and you've, you know, sketched out a broad spectrum of what that might involve, what kind of a hit could we expect for the global economy? I mean, one of the most famous Taiwanese companies is, of course, the Taiwan. semiconductor manufacturing corporation, TSM, with a huge share of global chip manufacturing. But that's just one, I mean, what kind of a hit are we talking about for the global economy? Well, if there is any kind of kinetic fight, which is bullets and missiles flying over Taiwan, TSM's fabs get taken off the board. If things get hot between the U.S. and China, neither side is going to let TSM's facilities these fall into the hands of the other. And that by itself throws the world economy into recession,

because there's no strategic reserve of chips. There's no backup facility. TSM makes 90% of the advanced semiconductors, but 99% of the advanced Nvidia GPUs that are training the frontier models. So, buy-by AI, goodbye, Nvidia and Open AI and Microsoft, and the whole tech trade that is holding up the U.S. economy and the U.S. stock market. So that by itself is a potential, you know, financial shock, which could mean not only a recession, but a Lehman Brothers-type moment that could lead to financial contagion unless we swoop and do something about it. But then, obviously, if the U.S. and China are at loggerheads over Taiwan, even if they're in a crisis short of war and TSMC continues to produce, there's a risk that markets front-run the crisis,

because if I'm an investor and I'm heavily invested in tech, and it looks like the U.S. and China are going to the brink, I don't want to be the last one to liquidate my positions in China or in TSM, or for that matter, in South Korea. So you could potentially get a moment where in the heat of a crisis, the U.S. government and Beijing, too, they lose control of events because the markets get a vote. And the financial shock comes before the first shot.

have been fired. And the argument I make in the book is we need a plan for this. When we war game this scenario, we assume that the day one is when China starts shooting. But that's not how history works. The crisis comes from somewhere. And if we reveal ourselves in this moment to be completely unprepared for the economic shock, then we're not going to have a war at all. We're just going to give up. And China will get Taiwan and its fabs intact. That means overnight they seize leadership in AI. And then they learn, hey, we can use this. toolkit to blackmail the Americans for everything they've got. Why not do South Korea next? So it's a very frightening prospect. Like you're run as a country where the leaders in hiding.

We don't even know if he's alive. They don't have a Navy. They don't have an Air Force. They supposedly don't have missiles anymore. But they can take 20% of global oil supply offline just by saying so. China can do the same. So China can manipulate the market and supply chains to impose economic pain on us. And we have to be ready for that, which is again why we should be focusing more in these crisis scenarios. We have to deter the crisis, not just the war. Ike, we're so excited to read this book. Thanks so much for talking with us today. Thanks for having me on. Ike's book, Defending Taiwan, is available everywhere today. Okay, let's take one last quick break. Stay with us.

Hi, I'm Brené Brown. And I'm Adam Grant. And we're here to to invite you to the Curiosity Shop. A podcast that's a place for listening, wondering, thinking, feeling, and questioning. It's going to be fun. We rarely agree. But we almost never disagree, and we're always learning. That's true. You can subscribe to the Curiosity Shop on YouTube or follow in your favorite podcast app

to automatically receive new episodes every Thursday. Welcome back. All right, James, you know what time it is. It is prediction time. As you peer into the future this week, what do you see? I'm back to Chinese manufacturing for my prediction analysts. I think the starkest comments in the economic realm from last week came from the CEO of Honda, the Japanese automaker,

who said that the Japanese auto industry is, quote, on the brink of survival. And he made this comment because of the impact of Chinese competition. The CEO, whose name is Toshihiro Miba, had visited an automated Chinese car parts supplier in Shanghai, and on emerging from that, he said bluntly, we have no chance against this. He was talking about the cost, speed, and quality advantages of Chinese EV manufacturers.

So my first reaction here is, what took you so long? We've been saying this really since we started here on China Decode, that, you know, the strength of Chinese manufacturing, not just in EVs, but, across the board is pretty much unassailable right now. But my second reaction is that Mr. Mibe is telling the truth. And my prediction is that this year we will see a major disruptive shock to a Japanese automaker. I don't quite know exactly what that means. Perhaps it means a collapse in the share price

of companies that are household names across the world. Or it could mean merger or actually acquisition at fire sale prices of one of these famous Japanese companies. Just to end, a couple of data points, Honda has experienced a severe collapse in its China sales this year, as competition from local Chinese companies has risen. So its sales have dropped from 1.62 million units in 2020 to just about 6,000 units last year. So that gives a sense of how badly Honda has been hit in the China market and is now being hit in several of the markets around the world. Okay, so James, my prediction is actually two-part predictions. It's about industrial firms and the economic state of affairs in China. So we saw just

last week the announcement that producer price inflation rose 0.5% year and year in March. it's the highest, or rather, and not just the highest, but the first time it's been rising in the last three years. CPI actually did so-so, it rose only about 1% year and year in March. The reason I cite this part of the inflation story is that I think if things get more prolonged in terms of energy blockades because of the strait of HOMO's, we'll end up seeing cost-push inflation that is net bad for firms. It eats into the firm profitability. because in some instances, they may not be able to pass on the cost to the consumers. And meanwhile, their input costs will rise, especially when it comes to energy or petrochemicals,

some of these inputs that they use for the manufactured goods. And by the same token, certain goods we're starting to see in the white goods appliances space are experiencing increases in prices. This is bad for Beijing's drive to increase consumption in the economy, especially this year and in the five-year plan. because ultimately this is cost-pushed inflation, not demand-driven inflation, and some of the costs, if it is passed on, is passed on to the consumers, which really goes against the subsidies program to boost consumption,

really trying to reduce prices to stoke consumption. So I think we end up in a very difficult situation with the inflation prints. PPI probably continues to rise. CPI really doesn't, because, of certain types of government policies to again cap the energy impact on the CPI basket. But it means that we end up with lower firm profitability for a period of time and consumption remaining stagnant, if not suffering as a result of these energy supply shocks. And the second part of my prediction is really on the energy and petrochemicals side of things.

very early on after February 28, when the crisis started Beijing banned effectively, the exports of diesel, jet fuel, and some fertilizer goods. I think that that list probably gets expanded if this conflict gets more prolonged and if the blockade remains sustained. This could be expanded to plastics, other types of petrochemicals, other fertilizers, sulfuric acid, you know, helium, other goods. because, you know, if there is no end in sight, China will double down on controlling the supply chain and preferencing and privileging domestic producers and consumers. So those are my two-part predictions, and they really hinge on the conflict, I think, persisting in the coming month or so, if not more. Pivotal moments, I think, for China, definitely. All right, before we go, just a reminder, China Decode is now available on Substack.

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