Dragoman Digest

Xi recalibrates China’s governance architecture amid economic headwinds 

Delegation to loyalists may reflect pragmatic adjustment rather than weakened authority 

China’s Politburo established new regulations in June targeting special committees and working groups that President Xi Jinping created after taking power in 2012. These bodies allowed Xi to make decisions directly, bypassing the normal government ministries and departments that traditionally handled policy implementation. The regulations instruct these institutions to avoid “overstepping boundaries” and “taking over others’ functions”. This has been interpreted by some China watchers as a tacit acknowledgment that micromanagement through parallel structures has created inefficiencies and overreach. Some of the most important leading small groups and commissions set up by Xi have met with declining frequency. One of these is the so-called Central Commission for Comprehensively Deepening Reform (CCDR) – which was established in 2013 by Xi to help centralise governance and economic policymaking. The CCDR convened 38 times during Xi’s first term (2012-2017) but has met only six times since beginning his third term in 2022. Meanwhile, the Central Financial and Economic Affairs Commission has met just four times since 2022, down from 11 in Xi’s last term. The declining frequency of these meetings coincides with China’s official economy growth being just 5.2 percent in 2023, its second-slowest rate in over three decades. Some independent analysts have suggested that the real growth figure is much closer to 2.5 percent. 

The putative decline of these bodies does not mean Xi’s power has been reduced. Xi’s loyalists head up the government bodies which seem to be regaining influence. Premier Li Qiang, Xi’s former Zhejiang chief of staff, has benefited from the revival of the “Premier’s Work Meeting” in March 2023 – discretionary sessions Beijing abolished in 2003 for enabling “arbitrary” decisions. Li has convened eight State Council plenaries in just two years, matching his predecessors’ five-year totals. These meetings are having more influence in setting economic agendas than the commissions Xi had previously used. Li Qiang completed more foreign visits to G-20 nations in his first two years than former premier Li Keqiang conducted over the same period in either of his two terms, suggesting Xi trusts him with major diplomatic assignments. 

China’s leadership has historically adjusted governance mechanisms during periods of economic stress. This pattern may be repeating as growth slows and debt accumulates. These governance shifts, combined with Xi’s absences from official engagements, have fuelled speculation about the security of Xi’s tenure, though such rumours remain unverified. As one expert observed, Xi appears to be transitioning to a more “oracular leadership style” – preserving final decision-making while entrusting implementation to subordinates. The opacity of China’s political system means that even this observation remains conjecture. 

China’s EV price war exposes overcapacity crisis as automakers haemorrhage cash 

Destructive competition pushes suppliers to bankruptcy as employment concerns and local government protectionism prevent consolidation 

China’s EV sector faces a critical transition point as a vicious price war threatens the survival of a swathe of companies. Best-selling cars are now 20 percent cheaper than two years ago, with market leader BYD cutting prices up to 34 percent in its latest May offensive. Its entry-level Seagull now starts at just US$7,770 domestically versus US$26,000 in Europe. Factory utilisation rates languish below 50 percent while the top 10 EV producers control over 70 percent of sales despite around 200 competing in the market. 

The malaise afflicting China’s auto sector stems from conflicting political and economic imperatives. While Beijing wants healthy companies to anchor President Xi Jinping’s “new productive forces” economic strategy, provincial governments generally resist consolidation that would eliminate jobs across the supply chain and factories in their provinces. China’s automotive sector has created nearly one million jobs since 2020. Concern over jobs torpedoed a potential merger between state-owned Changan and Dongfeng in June – neither side could agree on “who closes their factories”. According to analyst estimates, the auto sector has become a net negative contributor to GDP growth (-0.1 percent). 

The EV price war creates ripple effects throughout the industry. Automakers deferring payments because of their own liquidity issues has pushed suppliers toward bankruptcy. BYD’s debt-fuelled expansion has been particularly damaging, squeezing competitors despite warnings of Evergrande-style (failed property group) implosions. Beijing’s intervention in June, extracting pledges from automakers to pay suppliers within 60 days, represents a band-aid on structural problems. Despite local government opposition, some sort of consolidation – and potentially bifurcation – appears inevitable in the long term. Only five relatively mature brands currently meet the two-million-unit threshold analysts deemed necessary for survival. These companies command the economies of scale necessary to survive the race to the bottom on pricing. Newer, digital native entrants like Xiaomi may yet carve out niches through advanced technology differentiation. Still, this consolidation process will be complicated by the very same subsidies that birthed dozens of EV startups and helped propel China’s industrial ambitions. 

US industrials find refuge in AI infrastructure boom 

Traditional manufacturers pivot to data centres as manufacturing contracts and hyperscaler spending surges 

Certain US industrial companies are now redirecting their capabilities toward data centre equipment as the AI infrastructure boom accelerates. While the Institute for Supply Management (ISM) manufacturing index (measuring US factory activity) has remained in contraction territory since March, hyperscalers including Amazon, Alphabet, Meta, and Microsoft are spending over US$300 billion annually on infrastructure build-out. This spending surge has created elevated demand for data centre equipment. Grid infrastructure strain adds urgency, with fossil fuel generator retirements and lengthy interconnection queues intensifying data centres’ need for on-site backup power, cooling systems, and related equipment. 

The pivot reveals unexpected synergies between traditional manufacturing capabilities and the needs of the new digital economy. Colorado-based Gates Industrial has discovered its pumps and pipes designed for heavy trucking are a good fit for the liquid cooling systems now required in data centres housing Nvidia’s advanced Blackwell chips. Honeywell’s building automation and control systems expertise has enabled “double-digit growth” in its new hybrid cooling controllers for data centres. The company’s CEO Vimal Kapur told investors the firm was “focused on pivoting” into segments like data centres that continue growing “regardless of current conditions”. Struggling Generac, whose stock has plummeted 75 percent since its 2021 peak, is targeting hyperscalers with purpose-built backup power systems. Generac’s US-based manufacturing footprint has led to much shorter delivery times, with its order book full through 2026. 

This industrial transformation carries broader implications for American manufacturing competitiveness. Companies successfully reconfiguring manufacturing towards data centre equipment are capturing premium pricing while avoiding some of the economic headwinds battering traditional customers. Timing will be critical. Smaller players risk missing opportunities as first movers establish hyperscaler relationships and investment eventually moderates. 

Indian Prime Minister Modi leads efforts to secure critical minerals 

Latin America emerging as a focal point for India’s critical minerals’ supply chain efforts 

Indian Prime Minister Narendra Modi’s recent two-day visit to Argentina marks the latest step in New Delhi’s efforts to secure critical mineral supply chains essential to its domestic manufacturing and energy transition goals. Modi discussed cooperation in lithium with Argentinian President Javier Milei and lobbied for his support in India’s attempts to strike a free trade deal with the Mercosur bloc (Argentina, Bolivia, Brazil, Paraguay, and Uruguay). The trip follows a series of deals aimed at tapping Latin America’s deep reserves of copper and lithium. In January 2024, India’s state-owned Khanij Bidesh secured the rights to develop five lithium blocks in Argentina alongside Catamarca Minera y Energetica Sociedad del Estadowith. In April this year, India hosted Chilean President Gabriel Boric, resulting in a preliminary cooperation and exploration agreement between Chile’s Codelco, the world’s largest copper producer, and India’s state-run Hindustan Copper. Codelco also made supply commitments to India’s Adani Group. New Indian embassies in Latin American countries including in Bolivia, further underscore New Delhi’s minerals diplomacy. 

India needs critical minerals to support its green industrialisation initiatives. India wants more than 30 percent of all new vehicles sold to be electric by 2030. New Delhi has targets under the Production Linked Incentive and other initiatives to ensure that a significant portion of these EVs and their batteries are manufactured domestically. India itself has relatively limited domestic reserves of critical minerals making foreign partnerships essential. This urgency is compounded by fierce global competition, particularly from China. Chinese companies have recently ramped up overseas mining acquisitions to the highest levels in over a decade. They are aggressively securing assets in Latin America, Africa, and Central Asia, often outbidding Western rivals and taking on high-risk jurisdictions to lock in future supply. Consequently, India is increasingly engaging in state-to-state diplomacy rather than relying solely on private companies. Strengthening ties with Latin America positions India to reduce import dependency and also aligns with regional governments’ attempts to cultivate a more diversified customer base. 

The EU weighs up carbon levy exemptions for heavy industry  

The EU faces a delicate balancing act in decarbonising without further de-industrialising  

On Friday, the EU will publish an exemption for heavy industries from fully complying with the European Emission Trading System (ETS). Under the exemption, companies exporting goods covered by the EU’s Carbon Border Adjust Scheme (CBAM) will be able to claim compensation for payments made under the EU’s ETS. The CBAM covers goods including steel, cement, and aluminium and will go into effect in 2026. The compensation for exporters will be funded by the proceeds of the ETS.  

The proposal aims to address a perceived blind spot in the CBAM. The CBAM levels the playing field for EU companies within Europe by placing a carbon price on imported goods. However, European exporters will still face disadvantages when exporting. For example, a European producer of steel selling into Türkiye would face a much higher cost of carbon than Chinese companies – and indeed local Turkish steel producers. The proposed CBAM exemption has gradually gained traction. For example, in early June, Belgian metals group Eurometaux sent a letter to Commission President Ursula von der Leyen, warning of competitive pressure from US and Chinese rivals. 

The proposed CBAM exemption is part of a broader debate about how to protect heavy industry whilst reducing emissions. In a further concession for hard to abate sectors, Brussels is proposing to permit up to three percent of its proposed 2040 emissions reduction target to be met through purchasing international carbon credits. Another front in this debate is the role of nuclear power. France and Ireland are among countries pushing for a revision to the EU’s 2009 renewables law to recognise nuclear as a clean energy source. Others like Poland have argued for reduced red tape as a more effective measure than the CBAM.