Did America Just Checkmate China? | Chinese Economy | US-China Tech War | Japan Tensions

Did America Just Checkmate China? | Chinese Economy | US-China Tech War | Japan Tensions

Happy Wednesday everybody. Welcome to another episode of China Update where we discuss leading political, economic, and geostrategic analysis on the world’s number two economy. My name is Tony. Big episode today. A lot to cover. Let’s jump in. Arguably, the global technology race is as important, if not more important, to the long-term US China competition than the trade war. So, we follow the space closely. Over the last 24 hours, we’ve received more details about the US loosening of chip restrictions. So, we begin today by unpacking some of these details. Now, this should be seen as supplementing yesterday’s coverage of this space. US President Donald Trump’s unexpected decision this week to allow Nvidia’s H200 artificial intelligence AI chips along with comparable products from AMD and Intel to be exported to China marks a sharp inflection point in the ongoing technological contest between Washington and Beijing. The announcement ends months of speculation about whether Chinese buyers refusal to accept Nvidia’s downgraded H20 chips had been a negotiating tactic or a sign that Beijing was serious about purging US companies from its AI ecosystem. It now appears to be both. Beijing will permit purchases of the more capable H200’s, but only through a case-bycase approval system that preserves its long-term ambitions for semiconductor self-reliance. For China’s leading AI developers, the approval offers a lifeline. Although the H200 is not Nvidia’s most advanced processor, that title belongs to the Blackwell generation GPUs, it still dramatically outperforms anything currently available domestically and can help fill acute gaps in model training capacity. PRC hyperscalers despite public messaging about dinvidiaing continue to run abundant high-end Nvidia hardware accessed via overseas cloud channels. The H200 adds an additional legally permitted rung on that latter. Yet, even as Washington loosened one restriction and added another, Trump announced that Nvidia will pay the US government a 25% commission on H200 sales to China because export taxes of this nature are illegal. The chips will be fabricated in Taiwan, shipped to the United States, and then reexported, allowing the government to classify the fee as an import tariff. The chips will also undergo what the administration calls a special security review, a vague new layer of security that while nominally targeted at preventing illicit technology transfer, may heighten suspicions among Chinese security agencies about hidden trackers or firmware back doors. Veteran China analyst Bill Bishop observed that these fears are exaggerated, but that paranoia is part of the job description in Beijing, adding that it could suppress Chinese demand even without explicit political directives. If the US decision reflects a surprising softening, US-based Bloomberg reporting suggests the shift was driven less by economic liberalism than by reassessment of China’s capabilities. According to officials familiar with internal deliberations unnamed by the outlet, Trump’s team concluded that Huawei’s emerging AI platforms already rival Nvidia’s. In particular, Huawei’s cloud matrix 384 system powered by its new Ascend accelerators reportedly matches the performance of Nvidia’s NVL72 Rex built on cuttingedge Blackwell chips. The administration now expects Huawei to be capable of producing several million Ascend 910C accelerators by 2026. A dramatic upgrade from US estimates earlier this year. In that view, restricting H200 sales would not meaningfully slow China while allowing them might at least limit Huawei’s market share. The plan, therefore, is to get Chinese firms hooked on US chips, retarding the growth of the domestic chip industry. Still, Beijing is not planning on unrestricted buying sprees. According to UK based The Financial Times, regulators intend to limit H200 access and require buyers to justify why domestic chips cannot meet their needs. The policy squares with political messages about semiconductor self-sufficiency and with long-standing security concerns about US-made hardware. Hadia’s early age 20 product was flagged by the cyerspace administration of China for alleged security risks and some institutions especially in government and finance are expected to remain weary. The strategic consequences of this shift are substantial. If Nvidia were to ship 3 million H200 units to China next year, broadly in line with pre-control revenue patterns, China could add more than triple its current annual AI computing capacity. According to a recent report by the Council on Foreign Relations, that would accelerate model training cycles for firms like Deep Seek, help narrow the performance gap with US Frontier Labs, and potentially fuel a Chinese AI belt and road, enabling Chinese cloud providers to compete more aggressively in global markets. The approval also quietly reopens China’s access to HBM3e, the high bandwidth memory that makes modern AI GPU so powerful. While standalone HBM shipments to China remain restricted, the memory modules come pre-mounted on Nvidia’s H200 boards, a loophole effectively reinstating access to one of the United States’s most potent choke points on China’s semiconductor progress. Critics in Washington, including former diplomats and security analysts, argue that Trump’s move sacrifices long-term technological leverage for short-term business gains. Others see it as a pragmatic attempt to calibrate export controls without pushing Beijing into more aggressive retaliation, especially as Trump seeks diplomatic concessions ahead of a planned visit to China in April of next year. Others still argue, as we just covered, that shipping advanced but not bleeding edge chips keeps Chinese firms hooked on US technology and slows domestic development of self-sufficiency. Let me know in the comments below what you think. Is this a strategic blunder from the US side or is this a savvy move which on balance will be in the US’s interest over the long term? Let me know your thoughts. Ultimately, China may determine how meaningful Trump’s decision becomes, even with approval. Bureaucratic caution, security anxieties, and political priorities could sharply constrain H200 purchases. The paradox of this moment is that both sides are acting from positions of uncertainty. Washington is unsure how quickly China can scale its domestic AI infrastructure, and Beijing is unsure how much American silicon it dares to rely on. What is clear is that the strategic equilibrium in AI is shifting and the H200 decision, far from resolving tensions, marks another complex turn in the US China race to shape the technological foundations of the 21st century. Next up, we move to the Chinese economy. But just quickly, if you want to continue to be on top of updates like this up-to-date, grounded analysis on China news, whether domestically or part of its international competition with the US-led West, consider subscribing to China update, hit the bell notification icon and you will be. If you’re getting some value from today’s episode, don’t forget to hit the like button. And if you’d like to help support the channel financially as we move into the Christmas period, Patreon and buy me a coffee links are in the description below. This channel relies primarily on subscriber support to keep going. It has now for years and I want to continue that as we move into 2026. So, this is a tremendous help. Thank you so much. Next up, China’s consumer prices accelerated in November, offering a rare sign of inflationary momentum even as deflationary forces continue to dominate the world’s second largest economy. The consumer price index rose 0.7% from a year earlier, up from October’s 0.2% increase. and in line with economists expectations. Yet beneath the headline figure, price weakness remains pervasive. Producer prices fell for a 38th consecutive month, slipping 2.2% and underscoring persistent factory gate deflation. Core CPI, which trips out food and energy, held steady at a modest 1.2%. quote, “The larger thanex expected contraction of PPI suggests China’s deflation does not abate and quote said Raymond Young of A&Z Bank, adding that restoring price stability should be a key policy focus for 2026, and indeed it looks like it will be. China has struggled with deflation since the pandemic’s aftermath. Weighed down by a protracted housing downturn, subdued household spending, and industrial overcapacity, it forces firms to cut prices to stay afloat. profitability has collapsed among domestic Chinese firms. These will all be familiar points to regular China update viewers. Even November’s strongest CPI reading was flattened by surging gold jewelry prices, which jumped 58.4% amid global bullion strength. Meanwhile, China’s GDP deflator has remained negative for more than two years, its longest decline on record, dampening nominal growth despite the economy being on course to meet its roughly 5% real GDP target for 2025. And finally for today, we also have more details on the escalating Japan China tensions, specifically the very dangerous military escalation from Sunday, which we initially covered on Monday. We have more details and so we need to examine these here. The latest radar lock-on incident between Chinese and Japanese fighter aircraft marks a dangerous escalation in an already fraught strategic environment. As we initially discussed on Monday, over the weekend, Tokyo revealed that two PLA Navy carrierbased fighters operating near the Leoning Carrier Group had locked on two Japan Air Self-Defense Force JDF F-15s with radar. Beijing countered immediately, insisting that Japan had been notified in advance of the training area and that the Japanese jets also activated their radars. What might seem like a technical dispute over radar protocols is in fact a sharp reminder that the risk of miscalculation between Asia’s two largest powers, the world’s second largest economy and a key security ally of the United States is rising quickly and visibly. Japan flatly rejects China’s claim of advanced notification. Quote, “China claims to have announced the training airspace and sea area in advance, but we are not aware of any such prior notification.” End quote. Defense Minister Shinjiro Koisumi told Parliament, emphasizing that the encounter unfolded over international waters near Okinawa. Meanwhile, Chinese state affiliated media insisted that Japan had acknowledged the warning by radio and that the PLA aircraft only activated its search radar after a JDF fighter approached within 50 km. Tokyo’s foreign ministry retorted that China is quote fabricating a variety of things to disseminate end quote underscoring how contested even the basic facts have become. Making matters worse, Japan says China did not answer the bilateral defense hotline during the incident established in 2023 to prevent precisely this kind of escalation. The line failed at a critical moment. Quote, “Our side tried to call, but the other side didn’t accept it.” End quote. A Japanese lawmaker said, “This technological and political malfunction demonstrates a troubling reality. Crisis management mechanisms exist but are not being used. With both sides blaming the other, it will ultimately come down to which side different nations trust. Beijing’s few security partners will likely side with it. Japan’s security partners with Japan. Of course, Japan has a much better record in recent decades with transparency and honesty versus China. So many third countries will likely be inclined to side with Japan’s stating of the facts. In Beijing, a foreign ministry spokesperson doubled down, claiming China’s actions were quote professional, standard, and beyond reproach end quote while urging reporters to question why Japanese fighters quote came to those areas to create this dangerous incident end quote. Tokyo sees it differently. Liberal Democratic Party lawmaker Takayuki Kobayashi called China’s radar lock on quote an extremely dangerous act that could easily lead to an accidental incident and quote and absolutely unacceptable. This exchange would be concerning on its own, but it comes against a backdrop of the most rapid military buildup in Japan’s southwestern islands in more than four decades. From Kyushu to the far-flung outpost of Yonauni, just 110 km from Taiwan, Japan is fortifying what analysts now call a quote missile archipelago in quote new radar towers, ammunition depots, anti-ship and anti-air missile units, electric warfare detachments, and F-35 deployments are transforming the Ryuku chain into a forward defense belt. This expansion reflects Tokyo’s sharpened view. China’s military pressure on Taiwan directly implicates Japan’s security. Local sentiment on Yonagumi is mixed. Some residents fear their quiet island is becoming a frontier target. Others say Japan is currently defenseless and must counter rising drone activity and electric threats from the People’s Liberation Army. Yet, the strategic logic is unmistakable. Analysts warn that in any Taiwan contingency, Yonoguni’s new electric warfare unit could help create a US Japan so-called killchain, feeding targeting data to missile batteries, a role that would make it a priority target for Beijing. The historical dimension, or at least the use of history in contemporary political rhetoric, further intensifies the tensions. Chinese officials and state media have recently revived arguments questioning Japan’s sovereignty over the Ryukus, citing World War II era declarations. Tokyo, Washington, and Taipei reject these claims, pointing to the legally binding San Francisco peace treaty. But such rhetoric inflames nationalist sentiments and injects historical grievances warped by ideology into already volatile security dynamics. Younger Japanese overwhelmingly back Prime Minister Sinay Takayichi’s defense expansion, while older generations, haunted by memories of Okinawa’s devastation in 1945, urge caution. Yet across the political spectrum, there is recognition that Japan’s proximity to Taiwan makes it inseparable from the region’s future stability. Against this backdrop, a radar lockon is not a mere technicality. It is a warning shot, one that shows how thin the margin of error has become. With China and Japan trading accusations, with crisis hotlines unanswered, and with military forces operating in ever tighter proximity, the risk is no longer theoretical. It is real and a dangerous possibility. The region is entering a new era where a split-second decision in the skies over Okinawa could ignite consequences. They drag the entire world into crisis. Okay, that is today’s episode of China Update. I know it was a little long and a little heavy, but we had to go through uh these developments today. Thank you so much everybody for watching. Have a good Wednesday and I hope to see you for the next episode which will either be tomorrow or on

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00:00 Introduction
00:13 US-China Tech War: Nvidia Chips
07:30 Chinese Economy: November Numbers
09:08 Japan-China Tensions

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