China's Top Economists Just Give Beijing A Dire Warning | Japan & China Tensions | Russia-China
What this covers
Read the full, in-depth analysis on China News Update: https://chinanewsupdate.com/joint-air-patrols-japans-economic-security-push-deepseek-hiring-and-chinas-two-speed-economy/ Tony Fiddis breaks down the multi-front geopolitical and economic pressures reshaping East Asia, starting with joint China-Russia air patrols and Japan’s sweeping CFIUS-style economic security overhaul to combat critical mineral squeezes. He also analyses the domestic front, focusing on DeepSeek’s massive hiring drive in China’s accelerating AI race and the stark warnings from top policy advisors regarding a deepening, deflation-threatened “two-speed” economy.
⏱️ Video Timestamps 00:00 Introduction 00:14 Russia-China: Joint Strategic Air Patrol 01:30 Japan-China Tensions 06:43 Tech War: DeepSeek 07:59 China’s Top Advisers Warn of Deepening Economic Divide
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Key Video Analysis Highlights:
Regional Security: The latest long-range joint strategic air patrol conducted by China and Russia over the Sea of Japan, the East China Sea, and the western Pacific represents a physical hardening of regional military posturing. This joint show of force involved strategic bombers and fighter jets, forcing immediate defensive scrambles from both Japanese and South Korean air forces. These recurrent operations are normalising combined military manoeuvres in highly sensitive corridors, gradually shifting the security baseline in East Asia.
Japan’s Economic Security Shift: Tokyo is implementing one of its most comprehensive economic security overhauls to date, fundamentally moving away from the historical assumption that economic interdependence guarantees safety. By establishing a centralised investment screening body modelled closely on the United States Committee on Foreign Investment (CFIUS), Japan is clamping down on technology transfers, industrial espionage, and supply chain vulnerabilities. This institutional shift is heavily focused on mitigating risks associated with critical minerals, particularly as Chinese export curbs on tungsten and rare earth elements directly threaten Japanese automotive and high-tech manufacturing sectors.
DeepSeek’s Expansion in China’s AI Race: On the technology frontier, the prominent Chinese artificial intelligence startup DeepSeek is embarking on an aggressive recruitment drive across core technical and operational roles. This surge in hiring signals a transition from theoretical model research to commercialisation and real-world deployment across fields such as medicine, law, and industrial computing. Amid tight US export controls on advanced semiconductors, DeepSeek is optimising its models for domestic hardware, including Huawei’s Ascend chips, highlighting how external geopolitical pressure is accelerating China’s self-reliance strategies.
The “Two-Speed” Economic Divide: While China’s advanced manufacturing and artificial intelligence sectors are surging ahead with state subsidies, policy advisors in Beijing are raising alarms about a starkly unbalanced “two-speed” economy. The broader consumer economy is lagging, burdened by persistent deflationary pressures and weak household consumption. Prominent economists warn that technological leadership cannot be sustained if the wider economy remains depressed, sparking urgent policy debates. Proposals include a massive increase in basic pensions for rural and unemployed urban residents to structurally rebalance the growth model from investment-led to consumption-driven.
About China News Update: China News Update is an independent media platform dedicated to delivering objective, comprehensive, and clear-headed analysis of China’s geopolitical, economic, and technological landscapes. The platform is led by Tony Fiddis, an experienced independent analyst known for cutting through the mainstream noise to look at the structural and systemic realities driving Asian security and commerce. Tony’s insights provide viewers and readers with the objective context needed to understand how localised policy shifts in East Asia dictate global supply chains and macro trends.
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China faces mounting economic and geopolitical challenges including military assertiveness, supply chain vulnerabilities, AI talent competition, and a widening K-shaped economy that threatens long-term technological and social stability.
- China-Russia joint air patrols demonstrate coordinated military posturing while Japan accelerates economic security defenses
- China's dominance in critical minerals (rare earths, tungsten) gives Beijing coercive leverage over allied supply chains
- AI boom benefits only advanced sectors while deflation and weak consumer demand leave most of the economy behind, creating inequality that undermines innovation
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Mitsubishi Materials now sources around 70% of its tungsten feed stock from recycled materials and aims to reach complete recycling by 2030 in response to China's supply restrictions, while Sumitomo Electric has also invested heavily in recovering valuable metals from scrap.
“Some manufacturers have softened the impact by expanding recycling efforts. Mitsubishi Materials now sources around 70% of its tungsten feed stock from recycled materials and aims to reach complete recycling by 2030, while Sumitomo Electric has also invested heavily in recovering valuable metals from scrap.”
Liu Ting, an economics professor at Renmin University of China and former advisor to the Ministry of Industry and Information Technology, argued that China should begin discussing how the gains from AI-driven growth can be shared more broadly across society to prevent the excessive concentration of technological dividends.
“Liu Ting, an economics professor at Renmin University of China in Beijing and former advisor to the Ministry of Industry and Information Technology, said China should begin discussing how the gains from AI driven growth can be shared more broadly across society. Quote, "We need to explore how to share the gains in AI and related industries in order to prevent the excessive concentration of technological dividends." End quote, Liu said, noting that such debates are common internationally but remain rare in China.”
Prime Minister Sanae Takaichi's 2024 book on economic security argued that Japan cannot ignore China's dominant position in global supply chains or Chinese intelligence laws that require citizens to cooperate with state intelligence work when required.
“In a 2024 book on economic security, Takaichi argued that Japan cannot ignore China's dominant position in global supply chain or Chinese intelligence laws that require citizens to cooperate with state intelligence work when required.”
Huang Haizhou contrasted Japan, which struggled with decades of deflation and failed to produce globally dependent AI firms, with South Korea, whose stronger corporate profitability helped create technology champions such as memory chip maker SK Hynix.
“He contrasted Japan which struggled with decades of deflation and failed to produce globally dependent AI firms with South Korea whose stronger corporate profitability helped create technology champions such as memory chip maker SK Hynix.”
Huang Haizhou, an advisor to China's central bank, argued that it is impossible for a country trapped in deflation to achieve technology innovation, and he warned that persistent deflation poses a serious threat to China's long-term technological ambitions.
“Huang Haizhou, an advisor to China's central bank, warned that persistent deflation poses a serious threat to the country's long-term technological ambitions. Quote, "It is impossible for a country trapped in deflation to achieve technology innovation." End quote, Huang said arguing that companies need a healthier macroeconomic environment where producer prices are positive and businesses can generate sustainable profits.”
Rural Chinese residents currently live on approximately one US dollar per day, representing almost half a billion of China's citizens, and former central bank advisor Liu Shijin's proposal to increase pensions from 200 yuan to 1,000 yuan per month represents an increase from approximately one dollar per day to five dollars per day.
“The point is worth repeating as it goes to show just how low these benefits are for Chinese in rural parts of the country, which represent almost half a billion of China's citizens. He is saying that the monthly pension should move from one US dollar a day to five US dollars a day. Reminding us that up until this point, retired folks in the rural part of the economy have been living on approximately one US dollar per day.”
Masayoshi Matsumoto, chairman and chief executive of Sumitomo Electric Industries, warned that prolonged restrictions on Chinese rare earth exports would create serious problems for Japanese manufacturing, particularly the automotive sector, which accounts for roughly 10% of Japan's GDP.
“Masayoshi Matsumoto, chairman and chief executive of Sumitomo Electric Industries, warned that prolonged restrictions would create serious problems for Japanese manufacturing, particularly the automotive sector, which accounts for roughly 10% of Japan's GDP.”
Japan is launching a new investment screening body modeled on the Committee on Foreign Investment in the United States that will coordinate reviews across multiple government ministries to assess whether foreign investments pose national security risks, significantly expanding Japan's existing oversight systems.
“On Monday, today, Japan is set to launch a new investment screening body modeled on the Committee on Foreign Investment in the United States. The panel will coordinate reviews across multiple government ministries to assess whether foreign investments pose national security risks, significantly expanding Japan's existing oversight systems.”
China dominates global rare earth production and processing, controlling around 60% of global mined output and more than 90% of refining capacity, giving Beijing substantial leverage over industries ranging from consumer electronics to advanced defense manufacturing.
“China continues to dominate global production and processing of rare earths, controlling around 60% of global mined output and more than 90% of refining capacity, giving Beijing substantial leverage over industries ranging from consumer electronics to advanced defense manufacturing.”
Prime Minister Sanae Takaichi has long argued that Japan must strengthen its defense against economic coercion and technology leakage, and during her previous role as Minister responsible for economic security, she helped introduce legislation aimed at protecting critical infrastructure, supply chains, and strategically important technologies.
“Takaichi has long argued that Japan must strengthen its defense against economic coercion and technology leakage. During her previous role as Minister responsible for economic security, she helped introduce legislation aimed at protecting critical infrastructure, supply chains, and strategically important technologies.”
Former central bank advisor Liu Shijin called for stimulus to focus more on boosting household incomes and renewed his proposal to increase China's basic pension for rural residents and unemployed urban citizens from just over 200 yuan per month to 1,000 yuan, arguing stronger social support would help revive domestic consumption and rebalance the economy.
“Former central bank advisor Liu Shijin also called for stimulus to focus more on boosting household incomes. He renewed his proposal to increase China's basic pension for rural residents and unemployed urban citizens from just over 200 yen per month to 1,000 yen, arguing stronger social support would help revive domestic consumption and rebalance the economy.”
Japan first accelerated rare earth diversification after China's 2010 embargo during another diplomatic dispute, but the latest restrictions demonstrate that significant dependence on Chinese supply chains remain.
“Japan first accelerated rare earth diversification after China's 2010 embargo during another diplomatic dispute, but the latest restrictions demonstrate that significant dependence on Chinese supply chains remain.”
Japan lowered the foreign investment ownership threshold requiring government notification from 10% to just 1% in 2019, bringing thousands more transactions under official scrutiny, and foreign investment reviews have already increased sharply since that change.
“Foreign investment reviews have already increased sharply since Japan lowered the ownership threshold requiring government notification from 10% to just 1% in 2019, bringing thousands more transactions under official scrutiny.”
China has sharply reduced exports of several critical industrial minerals to Japan following deterioration in bilateral relations, with exports of some intermediate forms of tungsten to Japan effectively falling to zero this year, while shipments of rare earth elements essential for high-performance magnets used in electric vehicles, electronics, and military equipment have also stopped.
“Japanese manufacturers are now facing growing pressure after China sharply reduced exports of several critical industrial minerals following a deterioration in bilateral relations, which we've been covering for the last at least half year. Exports of some intermediate forms of tungsten to Japan have effectively fallen to zero this year, while shipments of other rare earth elements essential for high-performance magnets used in electric vehicles, electronics, and military equipment have also stopped.”
Deep Seek's job listings include AI product managers, operations specialists, and industry experts in fields such as law, medicine, and language, suggesting the company is preparing more specialized AI applications beyond frontier research.
“The company announced it is expanding every department, signaling a shift beyond frontier AI research toward commercial product development. Job listings include AI product managers, operations specialists, and industry experts in fields such as law, medicine, and language, suggesting Deep Seek is preparing more specialized AI applications.”
Deep Seek is embarking on a major recruitment drive to double the size of many of its core teams while also working with Huawei to optimize its models for Huawei's Ascend AI chips as China seeks alternatives to Nvidia hardware.
“Chinese artificial intelligence startup Deep Seek is embarking on a major recruitment drive with plans to double the size of many of its core teams as competition for AI talent heats up. Deep Seek has also been working with Huawei to optimize its models for the company's Ascend AI chips as China seeks alternatives to Nvidia hardware.”
Deep Seek's hiring expansion includes infrastructure engineers focused on AI computing clusters, networking, and data systems, suggesting continued investment in training advanced AI models.
“The hiring spree also includes infrastructure engineers focused on AI computing clusters, networking, and data systems, suggesting a continued investment in training advanced AI models.”
The restrictions on rare earth exports from China to Japan followed political tensions that escalated after comments by Takaichi last year regarding Taiwan, although Beijing has not formally linked the export controls to those remarks.
“The restrictions followed political tensions that escalated after comments by Takaichi last year regarding Taiwan, although Beijing has not formally linked the export controls to those remarks.”
Policy makers must do more to boost domestic demand as consumer spending and investment continue to weaken despite rapid growth in advanced manufacturing and AI-related sectors.
“policy makers must do more to boost domestic demand as consumer spending and investment continue to weaken despite rapid growth in advanced manufacturing and AI-related sectors.”
China's economy is increasingly K-shaped this year with industries tied to artificial intelligence, semiconductors, and exports benefiting from the global AI investment boom and massive Chinese government subsidies, while households remain cautious and consumer confidence stays very weak.
“China's economy has become increasingly K-shaped this year with industries tied to artificial intelligence, semiconductors, and exports benefiting from the global AI investment boom, as well as massive Chinese government subsidies. While households remain cautious and consumer confidence stays very weak.”
Several advisors to the Chinese government are urging policy makers to address a widening imbalance in the economy, warning that booming artificial intelligence and high-tech industries are leaving much of the rest of the country behind.
“Several advisors to the Chinese government are urging policy makers to address a widening imbalance in the economy warning that booming artificial intelligence and high-tech industries are leaving much of the rest of the country behind.”
China and Russia conducted their 11th joint long-range strategic air patrol over the Sea of Japan, East China Sea, and Western Pacific on Saturday, with aircraft including four Chinese H-6 bombers, two Russian Tu-95 bombers, two Russian Tu-142 patrol aircraft, two Chinese J-16 fighter jets, and a Russian Su-30 fighter, prompting Japan and South Korea to scramble jets in response.
“China and Russia conducted a joint strategic air patrol over the Sea of Japan, East China Sea, and Western Pacific on Saturday, just 2 days ago, prompting Japan and South Korea to scramble jets in response. China's Defense Ministry said the mission, the 11th long-range patrol between the two countries' air forces, demonstrated their quote, "resolve and capability to jointly safeguard regional peace and stability." Japan's Defense Ministry said it tracked four Chinese H-6 bombers, two Russian Tu-95 bombers, two Russian Tu-142 patrol aircraft, two Chinese J-16 fighter jets, and a Russian Su-30 fighter.”
Economists are expecting China's annual economic growth to slow to around 4.6% down from 5% in the first quarter as the economy appears to have lost momentum in the second quarter and first six months of the year.
“The comments come as China's economy appears to have lost momentum in the second quarter and indeed the first six months of the year but economists expecting annual growth to slow to around 4.6% down from 5% in the first quarter.”
Authorities have investigated allegations of Chinese-linked efforts to obtain Japanese industrial secrets, prosecutors in Taiwan have alleged that Nvidia artificial intelligence chips were smuggled to China through Japan, and officials have uncovered suspected links between Chinese organizations operating in Japan and illegal fentanyl exports.
“A series of recent incidents has highlighted the breadth of the challenge. Authorities have investigated allegations of Chinese-linked efforts to obtain Japanese industrial secrets. Prosecutors in Taiwan have alleged that Nvidia artificial intelligence chips were smuggled to China through Japan and officials have uncovered suspected links between Chinese organizations operating in Japan and illegal fentanyl exports.”
Tony notes that the K-shaped economy pattern is not unique to China but is particularly acute in China (on steroids) compared to parts of the West.
“This also fits in nicely with what we've been covering the last few months on China update, the idea of a two-speed economy in China. Now of course some could argue there are parts of the West where we were seeing this but in China this is very much on steroids.”
Japan's Defense Minister Shinjiro Koizumi described the China-Russia joint air patrol flights as an expanding show of force around Japan.
“Japan's Defense Minister, Shinjiro Koizumi, described the flights as an expanding show of force around Japan.”
Deep Seek is reportedly pursuing outside funding for the first time.
“The expansion comes as Deep Seek reportedly pursues outside funding for the first time”
Deep Seek faces fierce competition from rivals including ByteDance, Xiaomi, Zhipu AI, and Moonshot AI, all battling to recruit China's top AI engineers.
“The expansion comes as Deep Seek reportedly pursues outside funding for the first time while facing fierce competition from rivals including ByteDance, Xiaomi, Zhipu AI, and Moonshot AI all battling to recruit China's top AI engineers.”
South Korea scrambled jets after more than 10 Chinese and Russian military aircraft entered its air defense identification zone, though none violated its sovereign airspace.
“South Korea also scrambled jets after more than 10 Chinese and Russian military aircraft entered its air defense identification zone, though none violated its sovereign airspace.”
Cybersecurity incidents involving malware linked to China have heightened official Japanese concern about economic security threats.
“At the same time, cybersecurity incidents involving malware linked to China have further heightened official concern.”
Some aircraft in the China-Russia patrol flew through the Miyako Strait near Okinawa and to the Western Pacific before returning.
“Some aircraft flew through the Miyako Strait near Okinawa and to the Western Pacific before returning.”