Made in China 2025

The Made in China 2025 policy has made it a global high-tech leader

 

Some ten years ago, China launched its ‘Made in China 2025’ strategy, the goal of which was to achieve over 70% self-sufficiency within a decade in ten high-tech sectors from semi-conductor to robotics manufacturing. This was designed to transition the country from a low-cost producer of goods to a global leader in high-tech industries. Despite blocking efforts by the US, by 2024, the policy had achieved most of the stated goals.

Whilst not disclosed at the time, this was to be funded by state-lending and investment as part of China’s Belt & Road Initiative, resulting in investments worth trillions of dollars.

Until now a full disclosure of China’s state lending has never been published because financing appears to have been masked by the use of shell companies registered in the Cayman Islands and Bermuda. Now, AidData researchers at the William & Mary University have identified loans provided to fund businesses in Europe and the US that could allow China access to technology that it considers essential to its global development.

Despite Washington’s longstanding warnings to other countries against accepting loans from Chinese state banks, the US has ironically emerged as the single largest recipient of such funding. The AidData team believe that in recent years, Chinese state lenders have channelled an estimated $200bn into US businesses critical to national security and technology. European technology firms have also been targets for Chinese investment.

There is now mounting concern that China is seeking to gain control over economic choke points and use this leverage. Some governments are either just waking up to the threat or having to try to wrest back control of some of these key businesses.

For example, in the UK, the High Court recently upheld a final order issued under the National Security and Investment Act 2021 requiring the Chinese state-backed company FDTI to divest its interest in Future Technology Devices International which, develops semiconductor devices. Meanwhile, the Dutch government has been arguing with China over the control of Nexperia, a Chinese-owned chipmaker based in the Netherlands. Nexperia is a major supplier of semiconductor chips critical to the global car industry. China blocked exports after the Dutch government intervened over allegations of ‘serious governance shortcomings.’ Previously in December 2024, the US government added Wingtech Technology, the parent company of Nexperia, to its “entity list” (a trade blacklist) due to national security concerns.  This latest dispute risks triggering temporary global car plant shutdowns due to a shortage of computer chips.

The technological struggle between the world’s two biggest economies, the US and China looks set to continue. Smaller US allies, like the UK must tread a careful path between monitoring Chinese activities and maintaining trading relations. Japan has recently discovered how upsetting China politically can come with potentially significant economic cost after Beijing ordered Chinese tourists not to visit Japan!

 

What have we been watching?

 

The Thanksgiving holiday in the US made for a shorter trading week with American investors heading into the break with increased optimism for an interest rate cut by the Federal Reserve (Fed) which helped propel equities higher. Markets are still pricing in an 80% chance of a Fed rate cut next week.

The market mood was also helped by news that Presidents Trump and Xi Jinping had held their first talks since agreeing to a tariff truce last month. The two leaders discussed Taiwan, the Ukraine war and lacklustre Chinese purchases of American soybeans. Trump confirmed he will visit China in April and that Xi Jinping will visit Washington later in 2026. There were also reports of US diplomatic initiatives aimed at mitigating elevated tensions between Tokyo and Beijing. Markets also focused on a potential Ukraine peace deal, while in the UK, the government’s Budget was received smoothly by the market, after an initial chaotic wobble due to it being leaked beforehand by the OBR!

Hopes for a Ukraine peace deal continued. Initial reports suggested that the US and Ukraine had slimmed down the 28-point plan to 19 points, leaving out some of the more sensitive questions such as territory. US media then reported that a US official said Ukraine had agreed with the US on the terms of a potential peace deal with minor details to be sorted out later. Ahead of Thanksgiving, the news flow slowed with the Kremlin confirming that a Steven Witkoff-led US delegation is planning to visit Moscow this week and that US Secretary of State Marco Rubio has pushed Ukraine and its European partners to accept a peace deal before the US agrees to any security guarantees for Ukraine.

 

Meanwhile, European Commission chief Ursula von der Leyen accused Russia of having no ‘real intent’ of engaging in peace talks. She also referenced the £185bn of Russian frozen assets held in European financial institutions which might be used to fund the reconstruction of Ukraine. Belgium is currently opposing the idea of diverting these assets to Ukraine, as it fears contravening international law and who would foot the bill should Russia mount a legal challenge. Trump’s 28-point plan called for Ukraine’s reconstruction to be controlled by the US but financed by $100bn of frozen Russian assets matched by another $100bn from the EU with 50% of the profits sent back to the US!

 

The market reaction to Chancellor Rachel Reeves’s second Budget was generally quite positive as the 10-year gilt yield initially dropped back to under 4.5%. This reflected the fact that the fiscal headroom will more than double to £22bn by 2028-29. This bigger margin of error should reassure fixed interest investors that a further round of fiscal tightening would be less likely. However, the £26bn of tax increases will be concentrated towards the latter part of the government forecast period so that there will inevitably be questions on whether the backloaded tightening fully materialises. While the Budget may have appeased Labour backbenchers for now, once the electorate understands the scale of the tax rises it is hard to see how this will improve Labour’s current unpopularity and could introduce another layer of political risk if there is any challenge to PM Sir Keir Starmer.  Meanwhile, Chancellor Rachel Reeves’s competence has been brought into question following claims she overstated the UK’s financial problems in the long run-up to the Budget, contradicting guidance from the OBR.           

In the meantime, the Budget will be seen as a wealth transfer from the middle classes to fund welfare increases through the fiscal drag of freezing income tax thresholds. The total tax increase will lift the tax burden to 38% of UK GDP by the end of the forecast period. The increase in tax to record levels is unlikely to help economic growth as the fiscal drag from freezing tax thresholds will probably dampen spending. Indeed, the OBR said that there are no measures in the Budget that promote economic growth. The silver lining is that the Budget was generally considered disinflationary with the OBR suggesting the measures will lower inflation by 0.4% in 2026-27. This may allow the Bank of England to cut interest rates a little more aggressively than expected. The market is currently pricing in a 93% chance of a 0.25% rate cut in December. After the most chaotic run up to a Budget, the economic reality is marginally better than worse case expectations and just removing the uncertainty should be positive for UK equities.

 

China’s manufacturing PMI business activity indicator came in slightly below expectation at 49.2, marking the eighth successive month of contraction. Chinese investors continue to expect further stimulus measures given this soft data.

Read our latest investment insights from Alpha PM

 

Brent oil hovered around $63 as traders continued to assess Ukraine peace talks.

Finally, we highlighted in Alpha Bites Power to the people, the renaissance in the UK’s nuclear energy industry. Unfortunately, the UK has become the ‘most expensive place in the world’ to build nuclear power plants, according to a government review commissioned by PM Sir Keir Starmer which criticises ‘overly complex’ bureaucracy!

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