James King (5:38)

Well, welcome back Alice. Welcome back from China I'm dying to hear more about your trip there, but as far as I see it, this really is pretty big. We've got what I would say is kind of like a cold war curtain coming down over the US China competition over AI. Until now, there's been a lot of rivalry, mostly commercial rivalry. We had the OpenAI's ChatGPT in late 2022 and then we had the first Deep Seek moment in early 2025. And both the US and China were going really strongly fueled by a lot of money and a lot of enterprise. But now we've got the White House accusing China of industrial scale theft of intellectual property from US AI labs. This is different. And on the China side, we've got the Chinese government banning the acquisition by one of America's biggest companies, Meta, of a promising AI company that was founded in China but is now based in Singapore. So I would say all of this to me means that the rivalry has entered a new phase. The White House is talking about exploring measures to hold foreign actors accountable. That's the phrase they use for industrial scale distillation campaigns. To me, I think the important thing is that politically, geopolitically, this is a step change. It is like the US law enforcement agencies are limbering up to really get moving on the AI frontiers with China. So what is distilling? It's basically the scenario in which a Chinese AI company would send hundreds of thousands or millions of prompts, probably from proxy accounts through VPNs to camouflage their source to a US LLM. That's a large language model. And then it collects all the replies that it gets and it collates all those replies. And that allows it to develop a sense of the decision making patterns of the US large language model, its reasoning, its confidence levels. It effectively allows it to kind of map what the algorithm behind the target LLM is. To me, this is what this distillation is like now, just to give China their say. They say that the US claims are entirely baseless. They say they're a slanderous smear against the achievements of China's artificial intelligence industry. But you know, whatever the truth is, it feels like both sides are getting more acrimonious that the temperature on the AI competition between China and the US is getting stronger. But what's your sense, Alice? How do you see it?

Alice Han (8:40)

Well, I think, you know, putting aside Trump's trip to China and is increasingly likely to happen next month, I sense pressure from OpenAI and Anthropic to get Washington to really crack down on China distilling US Models. Those two companies have long been hopping on about the threat to not just national security, but also to USAI lead through China's willingness to distill models. But I sense that, at least from Washington's perspective, even although many analysts and technical experts are pushing them to do more export restrictions or regulations to obviate distilling of models, right now it seems like Trump is in the mode of summiting and really trying to extract some kind of a deal or series of deals. I was in China for the last three weeks. It was obvious that the Chinese side are optimistic about the meeting, even if nothing substantive comes out of it. They believe that the mood music will be positive in a few weeks time. And they also believe that she will be going to the US in the second half of the year and that Trump meeting with Xi in China will tee up Xi's own visit to the US in H2 and that they similarly will probably meet at APEC and G20 later in the year. So in total, we could see four meetings throughout the course of the year. Although this is definitely, I think, a thorn in the side of the relationship, my base case right now is that both sides, in particular Washington, want to be seen to be making a deal and to have a positive relationship right now. So this I think will continue to be in the background, but I don't think it will be at front and center. I similarly heard that there was consternation in Washington about China's biotech and pharma supremacy increasingly, and that some members of Washington were trying to push for legislation or executive action on the biotech pharma front. But right now I think none of that matters because all that matters is what Trump wants. And Trump clearly wants to have a big win coming out of Beijing in a few weeks time.

James King (10:58)

That's really interesting, I must say. I get the sense there's a disconnect between the diplomacy between the US and China, particularly ahead of Trump's planned visit next month, and the reality of the deep state in both countries becoming more and more wary and putting on more and more controls and talking about more and more sanctions. In addition to what we've just been talking about, the DOJ in the US is actively prosecuting individuals who are smuggling advanced Nvidia servers into China. The Commerce Department is investigating companies like Deepseek for their use of restricted American AI chips. And there's a couple of big pieces of legislation being proposed, such as the Decoupling America's Artificial Intelligence Capability from China Act. That's not law yet, but it's proposed and it threatens up to 20 years in prison and millions in fines if you engage with specific Chinese AI technology. So there does seem to be a lot going on in the background. The US Seems to be really getting tough, maybe in the shadows, maybe Trump will be out there in front of making nice with the Chinese and the mood music around the summit will be fairly friendly. But I think the true trajectory of the relationship continues to be bad.

Alice Han (12:30)

One thing that I will end on that was raised in a conference I attended in Beijing just the other day. What we have discussed is the use of AI in military applications. I think there's real concern from Beijing side about autonomous weapons that have been used more recently in Iran, so that could resurface as a discussion. Certainly it was part of a strategic dialogue that had just been rehashed towards the end of the Biden administration and potentially in the bull case scenario about the relationship. If this summit goes well, that could pave the way for more strategic dialogue about autonomous weapons controls. But I'm not holding my breath. That was just raised as an issue by the Chinese side that could come to the forefront again. Okay, we'll be back with more after a quick break. Stay with us.

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Alice Han (16:49)

Welcome back. While Washington is warning about China stealing the future of AI, Wall street is quietly Buying into China's financial presentation, US banks led by Goldman Sachs are borrowing record amounts in Chinese currency, the Namib, through a booming offshore market known as dim sum bonds. The reason is simple. It is cheaper. With lower interest rates and massive demand from Chinese investors, borrowing in renminbi has become one of the most attractive funding plays in current global finance. Zooming out. And this is bigger than just bond markets. It it is part of a broader push by China to internationalize its currency and chip away at the dominance of the US dollar. And increasingly global institutions, from governments to banks, are playing along. So at the same moment the US is accusing China of exploiting American innovation. The financial system is drifting quietly but materially towards China's orbit. This is an interesting topic for me because you know, I deal a lot with, with markets, with clients. You know, anytime you meet with the pbc, they're really trying to sell you both the Panda bonds, the onshore maybe denominated bonds and the dim sum bonds, the offshore ones that are sold through Hong Kong. And purely looking at it, as I mentioned, economically it makes sense at a time where Chinese interest rates remain considerably low at around 10 year, government yields around 1.75%. If the rest of the world, including the US has inflation risks and to the upside and rates are probably going north, that I think continues to make Chinese bonds look attractive in terms of lower borrowing costs for foreign investors.

James King (18:32)

My sense of this is that this is certainly a signal of something. When you've got Goldman Sachs, the symbol of American capitalism, issuing Chinese debt in renminbi in the middle of a US led war against Iran, it has to be a signal of something. But what exactly I've been puzzling over, my sense is that it is not yet a sign of the decline of the US dollar or anything as drastic as that. US dollar is in pretty good shape. US financial markets are just unbelievably strong. But it probably is a sign of something more simple. And as you said, issuing debt in Chinese and these dim sum bonds is much cheaper than issuing them in the US I think Goldman Sachs had to pay about a 3% coupon on its 10 year dim sum bond. If it had issued the same bond in America, it would have to pay about 5 to 5.7%. So there is a bit of a differential there. I also think that this is a move by Goldman Sachs to show cooperation, to show commitment to the Chinese government. China does like foreign companies issuing these dim sum bonds. It likes the way this offshore renminbi bond market is getting deeper and Bigger. It thinks that this shows China's rising status in the world. So I think there's a bit of a nod to Beijing as well. I don't know whether the, the US would be worried about that. I'm, I'm really not, not that sure about that. But do you think that's a possibility? Do you think the US will be looking at Goldman thinking, hmm, why are you issuing bonds over there in China?

Alice Han (20:20)

Well, there is a, I wouldn't say no to that being a risk given the Trump administration and its scattergun attention to detail. But I would say in general that it isn't a risk to the US Dollar, despite the fact that we're seeing the doubling of issuance of dim sum bonds just year to date compared to the same period in 2025. Yes, that suggests that more investors are getting interested for structural reasons. But this doesn't displace dollar dominance, which largely is derived from total share of global FX reserves, total share of trade invoicing and total share of loans. And across all metrics, the US Dollar is by far at huge magnitudes, much larger than cny. And that will take a while for CNY to even close, get close to closing the gap. But it does suggest one, I think key principle which really started over a year ago when we started to see the unwinding of the yen trade to the Japanese yen on the back of greater inflation expectations and rising rates. So traditionally, the yen, as you know, has been a very popular carry trade in the sense that investors will borrow yen at low interest rates and it's generally a cheaper currency and then use that to invest in higher yielding assets and then pocket the change. So with the unwinding of that, I think the CNY has replaced some of that structural dynamic. But I think this is all really just marginal compared to the real table stakes, which are how will CNY increase in the use of global trade and in FX reserves? Now, I do think that since Trump 2.0 that CNY has been creeping up in global FX reserves. There's also been creeping up in some level of trade invoicing, notably with the Russians, and now it seems increasingly in the Middle East. But this is still a long, long game and China is quite a bit behind. I will mention, since the Iran issue hasn't resolved itself, that at least two ships recently have been paid in Namibi, and this is payment to Iran to secure safe passage to the Strait of Hormuz. So again, an indication of the direction of change potentially in bilateral payments between Iran and China.

James King (22:50)

Right, Absolutely. So the renminbi is becoming more of an international currency but still very far from a threat to the dollars dominance in the global economy. Is that fair?

Alice Han (23:01)

Yeah, I completely agree. And I think investors who are worried about the trajectory of America fiscally, politically, militarily and a risk off look to China and go, well, the risk premia are lower, seems to be a more stable regime. They seem to be suffering less on the energy front because they put in these pretty generous price caps to support the economy. And so they look at that and think China is a good place to park your cash, not just in the equity markets but also in the bond market where again I was hearing that the PBOC is unlikely to do anything to rates, especially before the Trump Xi Summit and that there will be reluctant to cut rates considerably this year. So we'll probably stay at around the 1% level that is considerably lower than the rest of the world. And James, just so that people get a sense of the size of the Chinese dim sum bond market relative to say, peers in the US and Japan, how big is it?

James King (23:59)

At the moment the dim sum bond market is about US$260 billion in size, about 1.8 trillion renminbi, that is, which is really tiny compared to the US bond market. That's, I mean roughly about US$60 trillion. We're talking about a small market, but it's growing quickly and I think it's going to become more and more significant.

Alice Han (24:25)

Okay, let's take one last quick break. Stay with us.

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Alice Han (27:21)

And while China is racing ahead in AI and expanding its financial footprint, there's a very different story playing out on the ground. Across cities from Shanghai to Shenzhen, a strange new industry has popped up. Pretend to work offices where young people are literally paying something like $7 a day to just sit at a desk, take meetings, and send photos home to prove they actually have a job. On one level, it sounds absurd, but it's really a window into a deeper problem. A tough job market, especially for young people, and a culture where unemployment still carries real shame and stigma. So instead of sitting at home, some are choosing structure, routine, and frankly, dignity, even if it is staged. And when you zoom out, it creates a striking contrast. At the top, China is projecting strength, cutting edge artificial intelligence, a rising currency, global ambition. But underneath it all, there is a generation struggling to find its footing in an economy that's not delivering the same opportunities as their parents experienced. James When I was looking at some of the videos of these pretend to work offices. My first reaction, and I have to say this facetiously, is kind of like we work back in the day, people would just come into these co working spaces, arguable, debatable as to whether or not they were working. And then when I dig deeper into it, there was this company in particular called Hangzhou, I believe Hangzhou pretend to work limited run by Mr. Chen. And it seems that a lot of the people who work in the space are kind of like freelancers, they're content creators. So maybe it's not fair to say that they're pretending to work and that it's all fake, but there's a degree to which new jobs have been created and located in these pretend to work office spaces, mainly in the influencer, content creation, freelancer realm of things. What's your take?

James King (29:18)

Yeah, people were talking about this when I was in China recently a little bit, and my sense is rather similar to yours, actually. It's not a full pretense. I think quite a lot of people go to these places because everybody else there knows that they haven't got a job and they'd like to have a job. And so they're almost like advertising their joblessness. And, you know, obviously some people are there pretending to work, but yeah, I mean, what struck me about this trend is that it's quite widespread. You find these pretend to work offices in Beijing, Shanghai, Shenzhen, places like Taiyuan, Dongguan, all kinds of cities across China. I'm not gonna say it's a massive number of people, but I must say it does remind me very much of the time I spent in Japan in the early 90s when you would find quite a lot of salarymen who'd lost their jobs, getting up every morning, putting on their suit and tie and going to a local library to basically sit there all day because they'd been laid off, but because they felt so ashamed that they couldn't admit it to the rest of their family. So I think there's a little bit of that sense here. I didn't get the same sense of shame in this particular dynamic, but one thing struck me, one journalist who went there was going around and there is some humour in these places too. For instance, in one of the offices in Beijing there was a door marked Chairman's Office, but when you opened it, you opened it and only found the fire escape going outside. So I suppose it was a bit of a play on that. The chairman doesn't exist, obviously. I think the reason why we chose this topic is because it shows an angle on one of China's biggest problems, social and economic, and that is the way in which young people, 16 to 24 year olds, are finding it really hard to get jobs. The latest number is among this cohort, 16.9% were unemployed, unable to find a job in March. And if you ask me, based on the conversations I was having in China, I wouldn't be at all surprised if that number really starts to rise now. You must have had very similar conversations during your trip, Alice.

Alice Han (31:46)

Yeah. What I actually did hear is that there have been moves by Beijing to pressure universities to increase the degrees by a year so that students stay on campus a little longer. There's also been pressure on SOEs to do these stages, to do these internships for a period of time in order to get some youth into the workplace as well. So this is coming at a time where I think Gen Z in China are really struggling to get a job and that's having broader cultural, sociological implications. We talked in the past about Tangping, you know, this idea of lying flat and not being aggressive or ambitious about work. And certainly I think this pretend to work culture somewhat fits into that in the sense that these people want to cosplay working, but they don't really want to go out or fail to go out and find real jobs. And so this is the closest alternative that they get. But it really, I think, hits on the nail on the head in terms of a lot of these themes that we've talked about in the past. What was interesting to me is that the Global Times actually even acknowledged this trend. I was looking back into a piece that they wrote in August last year. It's titled Chinese Urban Freelancers Turn to Pretend to Work Offices for Disciplined Spaces. So the narrative is that these spaces are sort of disciplined workspaces for this new generation of workers in the freelance content creation spaces. And it was largely spinning it as a positive mode of employment, even though it was listing towards the end some of the risks attached to this industry, potentially if there is fraud involved. But this all comes together, I think, to your point, James, in this feeling that traditional jobs are no longer growing. And in fact a lot of jobs are being lost in the manufacturing and increasing the white collar, stable sectors, including in SOEs. And that young people either need to give up on the traditional job searches or find these alternative means. And you know, I think for people who are not so familiar with China's digital ecosystem, there's a lot of content creation that goes out there. There's people who are full time Content creators, live streamers, selling products, creating video, short form, long form content that is being consumed. You know, farmers, for instance, use Kuaishou to sell goods direct to the market. So the positive side of this is that people are finding alternative jobs in this new digital AI driven era. And the negative side of it is that it is again an indication that the structural unemployment really exists and is worsening. 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?

James King (34:46)

Well, I couldn't resist going back to the dim sum bonds. I do think this is a very interesting trend. My prediction is that by the end of 2030, the market for dim sum bonds will be worth more than 10 trillion renminbi. That's up from about 1.8 trillion now. So I think it's going to increase by more than five times by the end of 2030. And the reason I think it's an interesting topic and an interesting trend is because this is effectively China's offshore renminbi market that we're talking about. A lot of foreign companies can go and issue bonds in renminbi in this market and a lot of foreigners can buy these bonds if they like. But this is a different thing. Obviously the size of the market is nothing compared to the US treasury bond market or the Japanese government bond market. But it's significant and it's going to grow quickly.

Alice Han (35:47)

Well, that's really, really fascinating. I agree with you. Mine is about inheritance laws and wealth transfer. The Economist had a really good piece. I believe that it was really, really good, Great research on how we're going to see very soon the biggest transfer of intergenerational wealth in China's history and by some estimates at least $2 trillion that will be transmitted to the next generation. And if you think about the fact that really since the 70s you've had a one child policy in place largely until 2016, what are the implications for the next generation inheriting all those assets? My prediction really is that we're going to see some form of legislation around an inheritance tax or a capital gains tax because central and local governments are chomping at the bit for more fiscal revenues. There needs to be more tax reform. Property tax is unlikely now given the property sector is still severely deflated. And in the five year plan there was mention about doing research on inheritance tax and capital gains tax. So I foresee in the next couple of years legislation surrounding that. And that could be really, really interesting because it's the first time we have seen anything like that in recent memory in China.

James King (37:06)

Yeah. That's such a fascinating topic. Yeah, really interesting.

Alice Han (37:09)

All right, that's all for this episode. Thank you for listening to China Decode. This is a production of Prof. G Media. Make sure to follow us wherever you get your podcasts so you don't miss miss an episode. Talk to you again next week.

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