China: Chokepoint challenges

US-China relations: New chokepoint tensions illustrative of ‘fragile equilibrium’

Earlier this month, US-China relations were seriously tested, after China presented a new regime of export restrictions on rare earth metals and related products, while also announcing a rise in port fees on US ships. We think these moves are meant to mirror earlier US initiatives on this front. Over the past few years, the US has spun a broad web of export restrictions on semiconductors, which are used to contain China’s access to the most advanced chips and related machines. A remarkable acceleration in this context came in late September, after the US Department of Commerce (Bureau of Industry and Security) decided to widen the entity list used in the sphere of this export restriction policy with subsidiaries that are at least 50% owned by companies already on that list. In practice, that represents a massive global expansion of the number of companies that are regulated by this policy – this move also played a role in the recent case of Dutch semiconductor firm Nexperia.

It looks as if Beijing, already concerned about the way the US administration tightened its global grip on semiconductor flows towards China, is of the view that the latest US steps had breached the ‘spirit of good faith’ that seemed to be still present in the latest bilateral US-China talks held in Madrid mid-September. Moreover, with this new export regime on rare earths, Beijing knows it matches the US in terms of ‘chokepoint policy’. This creates proportional leverage in future trade negotiations with the US. Moreover, it gives Beijing potential leverage over countries that are willing to team up with the US against China (in a way mirroring the power play the US uses versus other countries in their approach towards China).

Washington initially reacted critically to China’s latest moves, with president Trump threatening with renewed high tariffs (which would in fact mean an end to the Geneva truce), and export controls on ‘critical software’. Treasury Secretary Bessent also threatened very high tariffs, while calling for a joint G7 reaction to the latest China moves. However, over the past few days the US has struck a more conciliatory tone. Trump did publicly call the high threatened tariffs on China ‘not sustainable’, and confirmed his plan to meet with China’s president Xi in two weeks, just before the 10 November deadline of the Geneva truce expires. He cited rare earth controls, fentanyl and soybeans as currently the main issues regarding China. Bessent stated that he would meet with China’s Vice PM He to prepare for this presidential meeting. Beijing initially criticised the US for dramatizing and setting countries up against China, but also made clear that it is still interested in a deal. At the margins of the IMF annual meetings in Washington last week, Chinese authorities stated that the setting up of the export control regime for rare earth will not affect normal trade flows. Financial markets have reacted positively to the latest signs of easing tensions.

All in all, the latest developments confirm our previous observations that US-China tensions are in a ‘fragile equilibrium’, with the focus having shifted more toward chokepoints angles (also see China: Focus in US-China talks shifts from tariffs to chokepoints). Both countries will probably still remember from the April escalation episode that large shocks that would follow from a severe escalation are not particularly welcome given the current state of both economies. We think it is unlikely that the US and China will now both completely abolish their export control regimes, but they could negotiate on how to handle them and keep ‘restraint’ in this aspect. Meanwhile, a renewed trade deal could perhaps also include agreements on fentanyl and soybeans.

Annual GDP growth drops below 5% in Q3, as expected

This morning, Chinese annual real GDP growth for Q3 came out fully in line with our expectations at 4.8% y/y (Q2: 5.2%, consensus: 4.7%). Quarterly growth was reported a bit higher than consensus expectations including ours, at 1.1% q/q s.a., while outcomes for previous quarters were somewhat revised again (Q2: revised slightly down to 1.0% q/q, consensus 0.8%). This marked the first quarter in a year that annual growth has fallen back below 5%. Still, China is on track to meet its 2025 target of ‘around 5%’, with an average growth of 5.1% in the first three quarters of this year so far. We will review our growth forecasts for 2025-26 and publish them soon in our Global Outlook 2026, adding our growth forecast for 2027 as well.

September data show further decline in investment growth, strong industrial production

The monthly activity data for September confirmed the remarkable slowdown in investment growth seen over the past few months. For the first time since the initial Covid-shock in 2020, annual investment growth fell back into negative territory, to -0.5% y/y in January-September (Jan-Aug: 0.5%, consensus: 0.1%). Property investment fell deeper into contraction territory, while investment growth in manufacturing and infrastructure slowed further. By contrast, industrial production came in much stronger than expected, at 6.5% y/y (Aug: 5.2%, consensus: 5.0%). With retail sales steady at 3.0% y/y (in line with consensus, August: 3.4%), the supply side remains clearly stronger than the demand side. Meanwhile, property sector data worsened, with residential home sales also falling deeper into negative territory (next to property investment). The surveyed jobless rate come down slightly, to 5.2% (Aug: 5.3%).

All in all, we still expect more targeted stimulus and piecemeal monetary easing (but no ‘bazooka’) to safeguard growth as we move towards 2026 (also see China: Managing the growth slowdown amidst a hot stock market). Last Friday, the Ministry of Finance stated that provinces may use CNY 500bn (around USD 70bn) in unused quota to issue additional local government bonds. This can be used to finance additional investment, but also for other goals like reducing off-balance sheet borrowing or clear payment arrears with companies.

CCP to discuss 15th Five-Year Plan (2026-2030) this week From 20-23 October, China’s Communist Party will meet for the so-called fourth plenum, to discuss the country’s 15th Five-Year Plan covering the period 2026-2030. The recent flaring-up of (chokepoint) tensions with the US will probably form an important background for these meetings, and this may mean the CCP will keep stressing the importance of continuing to develop high value-added manufacturing and to reduce dependencies in key strategic sectors. However, given the more complex external situation, and the weakness of domestic demand amidst a deepening property slump, it is likely that – at least on paper – the rebalancing of China’s domestic economy will get more attention in the coming plan. In its October WEO, the IMF also calls upon a large-current-account-surplus country like China to put more effort into rebalancing its economy. Key to watch therefore is what measures will be presented to strengthen consumption: next to traditional demand management policy, structural consumption support could come from policies aimed at strengthening the social safety net and to support household incomes. The blueprint that will be discussed next week will only give general directions: policies will be further worked out in the Central Economic Work Conference in December, with economic targets typically being approved at the annual National People’s Congress session in early March 2026.