China Decode: Ballistic Missile Test, Europe's AC Addiction, and China's AI Coding Challenger

Alice Han and James Kynge start with China's latest ballistic missile test into the Pacific and what it means alongside a new Australia-Fiji defense pact. Then: Europe wants to shrink its record trade deficit with China, but its worst heat wave on record has sent demand for Chinese air conditioners soaring. They break down whether the two sides can actually cooperate on AI and renewable energy even as tensions rise. Plus: Z.ai just launched ZCode, a coding agent for its GLM-5.2 model said to rival Claude and ChatGPT. Alice and James discuss how big a threat this is to U. S. AI dominance, as well as the fallout from claims that Anthropic used hidden code to track Chinese users. Finally: China's new "Ethnic Unity" law took effect July 1. What does it mean for Tibetans, Uyghurs, and Taiwan… and how is Beijing defending it internationally? Subscribe to China Decode on Substack for weekly analysis, livestreams, and deep dives into the biggest story shaping the global economy: chinadecode.profgmedia.com Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 1:27James Kynge?

  My concern is that because the Chinese models are open source, it will not be Chinese models used in China and US models used in the US. It'll be Chinese models used in China and everywhere else in the world and US models used in the US. It's possible the US may try to corral European countries into using only US models, but that would be a big, heavy lifting operation if the US was to try to do that.

• 2:01Alice Han?

  Well, welcome to China Decode. I'm Alice Han.

• 2:03James Kynge?

  And I'm James Kynge.

• 2:05Alice Han?

  In today's episode of China Decode, we're discussing China test firing a ballistic missile with a dummy warhead into the Pacific, a Chinese AI model that rivals Anthropic, and a new ethnic unity law drawing criticism. That's all coming up, but first let's do a quick check in with how the markets in China are starting the week. On Monday, the CSI 300 was mostly flat, while the Shanghai Composite was down slightly 0.06%. The Shenzhen component, however, fell 1.16% to a three-week low. Bank stocks saw gains, with the Industrial and Commercial Bank of China up 1.14% and the Agricultural Bank of China up 1.19%.

• 2:47Alice Han?

  Notable falls were with Eoptolink Technology down 3.6% and Victory Giant Technology down nearly 5%. All right, let's get into it. On Monday, China test-fired a ballistic missile with a dummy warhead into the Pacific Ocean, only the second time it has done so in two years. The launch coincides with Australia and Fiji announcing a new mutual defense treaty, showing how China's growing missile capabilities are accelerating a broader regional defense buildup. Meanwhile, in China-Europe relations, the EU's ongoing attempts to balance the trade deficit with China have hit a new hurdle, soaring temperatures. The bloc's worst-ever heat wave is driving unprecedented demand for imports of Chinese-made

• 3:32Alice Han?

  air conditioners, which is making serious inroads at undercutting the deficit reduction push. Cooling demand has been pushed to its highest level in at least 45 years. James, I'm in Spain at the moment, which is quite sweltering. It's in the sort of 35 region, but the UK a few weeks back, you know, we're both based there, was also close to 40, was seeing record temperatures across Europe. And I was just looking at some of the figures of Chinese air conditioners being imported by the Europeans. So the first five months, we saw a 10% rise in household air conditioners imported from China to Western Europe. And apparently 70% year-on-year rise in that same period of portable fans, portable

• 4:16Alice Han?

  air conditioners from China to Europe. And I see a lot of those on the trains in the UK, I have to say, on the London trains, where they're very much needed. But the reason this image is so startling is that on the one hand, you have Europe, you know, undergoing blistering heat, but also undergoing record trade deficit with China. We just saw the Chinese Commerce Minister Wang Wintao in Brussels, a bit of a nothing burger in terms of what came out of it, but they're apparently engaging a strategic dialogue for a framework that will probably be unveiled in October. But it seems like the Europeans haven't really been on the offensive in terms of trying to seriously address these deficit concerns.

• 5:00Alice Han?

  James, we'll go to the Europe and heat dimension in just a bit. I want to start firstly in terms of this ballistic missile launch with a dummy warhead that China's just made. And it's obviously riled a lot of the Asia-Pacific countries, Australia, my own country being one of them. What was your read of that? Because the Chinese readout was, hey, this is a very bog-standard military exercise that we do in the region, nothing to worry about. But it certainly has caused a lot of consternation amongst some of the surrounding countries.

• 5:34James Kynge?

  Yeah, absolutely, Alice. I mean, I think, you know, the world is getting hotter geopolitically, climatically, and in terms of trade tensions. And yeah, as you say, I mean, it is pretty tough in the UK at the moment without air conditioning, but we'll come to that in a minute. I think the, this issue of this long-range ballistic missile that was fired by China with a dummy warhead, in other words, it wasn't armed, of course, and it landed somewhere in the Pacific Ocean. We don't exactly know where, but this happened, as you mentioned, just hours after Australia had signed a defense pact with Fiji.

• 6:16James Kynge?

  I think it definitely shows assertive behavior by China. And that assertive behavior, we can see in so many other domains right now. I think that's, to me, the theme that binds together what we're seeing in European trade, what we're seeing in China's military assertiveness. And I also think that this is particularly relevant to the United States because if you look at the detail of this missile, it does appear, at least to me, that this was also a veiled warning to the United States. And that's because, according to the official Chinese media, the missile that was fired

• 6:59James Kynge?

  from a submarine was likely to have been the JL-3. Now, that is, as I said, a submarine-launched missile. And the point is that this missile could reach the continental United States from Chinese coastal waters, according to the Pentagon. So although we're talking about a missile that was launched into the Pacific and it had a dummy warhead, not a, not a real warhead, we can see that in terms of signaling, this is basically saying to the West, to the United States, and certainly to Australia, Fiji,

• 7:40James Kynge?

  and anyone else who cares to watch, it's saying, don't mess with us. We are a growing and increasingly assertive military power. And for that reason, I think that the context around this is also key. China has been launching many, many more combined military exercises with different countries. In fact, more than 45 partner countries in the decade that ended in 2025. It's conducted more than 154 of these combined exercises, mostly with Russia. And the scope of the exercises has also increased.

• 8:23James Kynge?

  It's done exercises in the Pacific, Indian Ocean and around Africa, and it's had extensive voyages, naval voyages, this is, around Australia. So to me, this is part of the same picture, this missile test into the sea somewhere in the Pacific. Obviously, it's part of another big picture, which is China's very rapid expansion of its missile arsenal. China is supposed to have, we think, estimates say, around 500 ballistic missiles currently.

• 9:03James Kynge?

  But by 2035, it is projected to have about 1,500 nuclear warheads, which could be delivered on ballistic missiles by that time. So this is part of a much bigger picture. It's part of the rise of an assertive China. And, you know, to flip that to the trade domain, we've got another side of an assertive China emerging, and it's showing in China's trade surplus with Europe that is really hitting the big time this year. Last year, it was 360 billion euro, and this year, the estimate is that it will top 400

• 9:47James Kynge?

  billion euro. So I don't know what you think of it, of the trade side of things, or maybe if you want to talk about ballistic missiles, Alice, but on the trade side of things, you came in talking about these air conditioners. This is just one example of the way that Europe seems to be ineluctably drawn to importing Chinese stuff. And I suppose that's because Chinese stuff is so much cheaper, it's often better in terms of technology than what the Europeans can produce. But structurally, it seems to me, sitting here in Europe, that Europe is really very weak when it comes to industrial production and producing things that Europeans can buy.

• 10:30James Kynge?

  And that's simply why, whether it's a heat wave causing us to import air conditioners, or in the middle of winter, if there's a cold snap, we'll be importing Chinese heat pumps, I'm sure of it. It just seems that these days, we turn to China for all of our needs. What do you make of it, Alice?

• 10:48Alice Han?

  Yeah, I know that on the surface, these two stories don't look too interlinked, but hopefully we can convince people that they somewhat are, right? Because on the one hand, You see China that is worried about the geopolitical situation. I think that that exercise is more of a deterrent strategy than an offensive, you know, saber rattling one. It's to show, hey, we have long range missiles with capabilities to reach Australia, to reach the US. And, you know, don't mess with us in a period where we've seen a lot of geopolitical uncertainty and uncertainty that's increasing. And I don't think it's a coincidence that Fiji and Australia signed that mutual defense treaty. China has been, you know, engaged in a, in an influence campaign with the Pacific Island countries.

• 11:33Alice Han?

  And, you know, my counterparts in Australia have been worried about that, you know, the amount of Chinese investment that's gone into, say, a Fiji, which was the first Pacific Island country to diplomatically recognize China, by the way. But also the telecommunications and, and infrastructure development that, you know, is almost completely Chinese at this point in a lot of these countries, including Fiji. So I think that there is one side, which is from Chinese vantage point, we want to maintain influence in the Pacific. We also want to deter any kind of coalition building or, you know, offensive coming from the Quad or coming from the US by showing that we have these ballistic missile technologies and capabilities.

• 12:18Alice Han?

  On the one hand, it's trying to strategically deter. On the other hand, it is showing that it is still very much embedded in the multilateral trade system. The numbers that you just cited in terms of the trade deficit that Europe is running with China now almost close to 400, it could be this year, billion euros of trade deficit between EU and China. The EU is 15% of Chinese exports in terms of market destination. It's a huge market for Chinese manufacturers. So China is still heavily dependent, we've spoken previously, on this export engine. Net exports are 30% of total GDP growth.

• 13:03Alice Han?

  You know, in a way, I think they're kind of playing this balancing act of being tough on the geopolitical issues, but, but really still, I would, I would argue somewhat vulnerable on the trade issues. But the big question here is why isn't Europe doing more? Because I think that they have some leverage to bear, given what I've just noted, China's trade dependencies and its total, you know, macro machine. But as also a dependency on Europe is a huge market. So all I can point to is the structural fragmentation in Europe as this supranational body to try to get its act together and put in legislation that is smart in terms of,

• 13:45Alice Han?

  you know, maybe price minimums on Chinese exports, limitations on the amount of exports that come into certain markets, getting smart about IP development being based in Europe and not just assembled in Europe. But the big question, and, and here I defer to you, James, as the expert, is why isn't Europe doing more? Because I think it could have a lot of leverage.

• 14:09James Kynge?

  That is absolutely the key question, Alice. I do note that the EU and China recently released a rare joint statement that aims at balancing trade and addressing market access issues. And the two sides said that they would set up a bilateral working group to monitor trade flows. Beijing offered reassurances that existing rare earths and permanent magnet export controls will not disrupt EU supply chains. So that's the, the official sort of picture. But to be honest with you, I'm, I, I, I sort of, my feelings on this are similar to what you just described, Alice.

• 14:51James Kynge?

  I feel that Europe is fatally disunited on this issue. They cannot get consensus among the member states of the European Union to actually impose stiff tariffs or other forms of restrictions on Chinese imports. And they don't seem to have the political clout to push European exports to China either. And so the reason why this is important is that we're not just talking about trade balances here. We are talking about the end game for European, European industry. Europe stands to lose its industrial base. And I don't make any apology for speaking in such blatant and blunt terms.

• 15:36James Kynge?

  It really is that simple. The reason is that China has overtaken Europe when it comes to technological advancement. And the technology products that China is producing are way cheaper than the nearest competitors in Europe. That's why we've seen this flood of high tech products. Everybody knows about the EVs that the Europeans are buying from China, but it's happening in almost every sector. And this is why we are in a very important moment. It seems to me that Europe has not yet imbibed the necessary sense of crisis that attends this situation.

• 16:16James Kynge?

  And while it doesn't, while it remains fairly flabby, sort of talking around the issues like Europe always seems to do, without coming out with strong staunch action, it is presiding over the, well, I won't say extinction of its industrial base, but certainly the weakening and erosion of its industrial base, which is going to take decades to build up again if it loses it. So this is vitally important. And, and, and as I said at the top, it's a geopolitical question. Therefore, I think it does belong with the story about the ballistic missile landing in the middle of the Pacific.

• 16:57Alice Han?

  Yeah, because in the question which we've discussed in, you know, previous episodes of this Taiwan crisis risk and what will be the corollaries or outcomes or responses from some of these other countries, whether it's the US, we've talked about Japan and Korea, Australia in the past. But another question is what is the EU going to do, right? Because China is a huge, obviously, market, but it's also a big exporter of a lot of goods that the Europeans require. We haven't discussed it rare earths yet, but that's another choke point that the Chinese have over the Europeans that they have not yet weaponized, but they have with the Japanese. The big question for the Europeans will be, what will you do when there is a Taiwan crisis?

• 17:38Alice Han?

  If there's an invasion, a blockade or quarantine, will you put economic, financial, you know, technological sanctions on China? And then will China react in kind? And here, I think you, Europe could be quite vulnerable to a China counter response, which is, I'd imagine, something in the vein of, we'll cut off exports of critical technologies and rare earths commodities. I can imagine that that would be hugely disruptive for the Europeans. Oh, and we'll also import less agricultural products and chemicals products from the Europeans. Again, very, very disruptive for European business.

• 18:15James Kynge?

  Yep, I fear that you're right there too, Alice. I think China's got so much coercive power that it could use. It is easy to imagine a scenario under which China does something that Europe doesn't like, and then China threatens to use these coercive powers and Europe backs off. I think that's also highly possible.

• 18:38Alice Han?

  Okay, we'll be back with more after a quick break. Stay with us.

• 18:49Scott Galloway?

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• 22:10Alice Han?

  Welcome back. Speaking of AI, there's more exciting news coming from Chinese models, specifically GLM 5.2 from ZAI. It was released in mid-June, but just last week, ZAI launched ZCode, a harness for its model that lets it function as an autonomous coding agent. The model is said to rival ChatGPT 5.5 and Claude. So James, a lot of chatter in the news about how Anthropic just cut off its latest Claude Fable and Mythos models from non-US users. They were clearly worried about the fact that the Chinese have been distilling a lot of their cutting-edge models. They're also worried about the national security risk and pressure from Washington

• 22:55Alice Han?

  to make sure that this is indigenized, this technology is indigenized as possible so that American businesses and the military intelligence community have a step up or a leg up relative to other countries. And they have been forced to comply with the US Department of Commerce's export controls that are now not just applied to chips and equipment, but also to increasingly AI models, right? But the big news that came out of China just recently is there's a couple of models that are purported to be competitive in this space. There's one, for instance, a cybersecurity firm called 360 Security Technology has apparently

• 23:35Alice Han?

  unveiled two AI-powered cybersecurity tools that could rival Anthropic's Mythos. And then obviously, as I've mentioned, you've got Jipu's GLM 5.2. This is an open-air model that people can download and use that is supposed to be as competitive as a new cutting-edge Claude code or even Cursor code. So the big question then is, how accurate are these statements? Can we test them out? And how do we compare them even against the cutting-edge models that may or may not be available to a lot of non-Americans because of the Department of Commerce's shadow on export controls?

• 24:17Alice Han?

  I find this exceptionally hazy and opaque and would welcome anybody to come and tell me what the best benchmarks or testing mechanisms are to really compare. But this whole world seems to be moving so quickly and yet it's so opaque.

• 24:32James Kynge?

  Yeah, I couldn't agree more, Alice. This is really hard work to keep up with all of this. As I see it, basically, we have a couple of trends going on here. First of all, the AI race between the US and China is kind of diverging. We're getting a separation, certainly in terms of the users of these models. The other thing that's happening is that China is catching up. It's producing more and more very impressive pieces of technology. I think this is, you know, a very considerable move by China.

• 25:14James Kynge?

  And as you mentioned, Alice, it takes this Jipu GLM 5.2 into the arena with some of the best, like the Claude Opus 4.8. Almost all of these Chinese LLMs and agents are open source. And this means that they can be downloaded pretty much anywhere in the world and used by anybody who wants to develop their own AI products. And so what we're seeing is vast numbers of people all over the world downloading these very good Chinese LLMs.

• 25:56James Kynge?

  Alibaba's Quen, for instance, appears to have surpassed 1 billion downloads worldwide. And this Jipu GLM 5.2 has climbed to the top of the Western usage charts on third-party development platforms such as OpenRouter. So we can see that the Chinese open-source approach, as opposed to the US approach, which is much more closed, is creating a really big following internationally. I'm not going to call it, I never call, the AI race between the US and China. I think that's a mug's game. Basically, China seems to be ahead in some areas, the US is ahead in other areas.

• 26:41James Kynge?

  It's basically neck and neck, as I see it. But what I would say is that this latest GLM 5.2 is another reminder that China's doing some very impressive stuff.

• 26:53Alice Han?

  And you see this in Chinese tech companies. They basically subsidize usage, make it a freemium model to try to get subscribers to get onto their platform. They've done this with developers. They increased their data quotas for existing subscribers by 50%, offered 5 million free tokens to new users. And at the same time, you know, shout out to my friend Kevin Xu, who writes the great AI blog Interconnected. He's saying that this is a bigger deal than the DeepSeek moment, and if he says that, I'm listening. Apparently, he's noting that, according to the arena's agent leaderboard, that the

• 27:31Alice Han?

  Jipu AI's GLM 5.2 is the only open model that is competitive with OpenAI and Anthropic's latest LLMs. And, you know, reportedly, according to this leaderboard, bested Claude Fable on Design Arena. So there are areas in which they seem to be as competitive. But I think when I broaden it out to this geopolitical question, and I made this prediction probably a few episodes back, it's only a matter of time before Washington starts cracking down on this. You know, they probably don't like the fact that so openly you've got developers in Silicon

• 28:13Alice Han?

  Valley and elsewhere that are using Quen and Jipu and Chinese open source, right? And so, on the other side, there seems to be these guardrails that Anthropic is now putting in because they're very worried about distillation. And they've made it very clear compared to OpenAI that China is the strategic threat or strategic challenge for the US AI community. And so apparently, they're able to covertly track now Chinese users of their Claude code platform. They've got this hidden tracking code that is basically able to pick up on, you know, Chinese users using it. And the idea is to prevent future distillation efforts. So this space is getting politicized or geopolitized very, very rapidly.

• 28:56Alice Han?

  And it wouldn't surprise me if we end up with some kind of AI iron curtain being, you know, pushed by both Beijing and Washington.

• 29:06James Kynge?

  Absolutely, Alice. That's a very interesting, thought-provoking phrase. And I have to say, you did predict this several episodes ago. And it does seem that if this trend continues, there will be this divergence between the US models and the Chinese models. My concern is that because the Chinese models are open source, it will not be Chinese models used in China and US models used in the US. It'll be Chinese models used in China and everywhere else in the world, and US models used in the US. This is the big concern because I can't see a country in Europe, let's say, which has

• 29:47James Kynge?

  none of its own AI LLMs, or very, very few, and none of them nearly as impressive as the Chinese or the Americans are producing. I can't see countries over here, let's say, saying, okay, you're not allowed to use Chinese LLMs, because we simply don't have other choices. It's possible the US may try to corral European countries into using only US models, but that would be a big, heavy-lifting operation if the US was to try to do that. So I feel that your iron curtain analogy actually may come to pass in some shape or form.

• 30:29Alice Han?

  But don't you think, James, that in a way, Washington, under this administration, is killing the golden goose, so to speak? Because if it's telling Anthropic, hey, you're not allowed to release the latest Fable or Mythos to foreign nationals, if you're European, going back to Europe, what are you going to do? Right? And then there is no real, clear argument that, hey, we're going to pick American models because Americans are also national securitizing this AI issue. And Chinese models are cheaper. You know, we do run some kind of a security risk, but what can we do? Because we don't have models that are as competitive as the two countries, right? On the open source question, which I think we shouldn't take our eyes off of, is Nvidia getting into the mix?

• 31:12Alice Han?

  Nvidia is now offering open-source LLMs because it's a big believer in that ecosystem.

• 31:20Alice Han?

  So maybe it's not fair to say that the bifurcation or breakdown between China versus the US on the AI front is open source versus closed source. Maybe it's more an idea of, yes, China has predominantly open source, but there are some important open source players, you know, Hugging Face in Europe, Nvidia now is a big one in the US. And I'd imagine that with the frustrations that people have because of Washington politicizing the closed models like Anthropic, there may be some more entrance into the market like Nvidia in the open source space, where things are harder to control politically.

• 32:00James Kynge?

  That's a very good point, Alice. That's a very good point. Yes, of course, Nvidia is putting out open source models. So it's not as simple as a clear bifurcation between Chinese open source and US closed source. Things are shifting, things are varying. This is an endlessly complicated and rapidly evolving situation. It's very hard to draw clear conclusions. But one thing is for certain, and that's what you've been describing, which is that the temperature of the rivalry between the US and China is rising.

• 32:36Alice Han?

  Yep. Well, we keep coming back to rising temperatures, both in the climate and in geopolitics. Let's take one last quick break. Stay with us.

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• 35:00Alice Han?

  Welcome back. A new ethnic unity law in China came into effect on July 1 and is drawing criticism while the Chinese government works to promote and defend the measure. So James, this ethnic unity and progress promotion law was introduced by the National People's Congress Ethnic Affairs Committee on September 8, 2025, and it was signed into law and became effective July 1, 2026. And just for context, I think a lot of people don't understand this about China. There are around 55 recognized ethnic minority groups. They account for about 9% of the population, which is still predominantly Han Chinese.

• 35:40Alice Han?

  That's about 91% of the population. And obviously, throughout history, there have been periods of ethnic conflict and division. And, you know, if you look, go back to the Yuan Dynasty, China was taken over by the Mongols. Then you go back to the Qing Dynasty, China was also taken over by the Manchurians in the Qing Empire. So it's fair to say that China is a lot more multi-ethnic than people understand it to be. But this has become a political issue under the Chinese Communist Party because a big part of the core tenet of the CCP, since its founding in 1949, as the head of the People's Republic of China, is this idea of ethnic unity.

• 36:25Alice Han?

  And my own take on this is that it's grounded in a desire for political unity and control, and a fear that because China's had periods of, you know, the warring states of warlordism, of great instability, creating ethnic unity and political unity are important in ensuring political stability. So when I look at this and I look at some of the language about, you know, trying to avoid and preclude foreign agents who undermine ethnic unity and ethnic stability, I look at that as, you know, and maybe this is a simplification, so correct me, I look at that as the government saying, hey,

• 37:10Alice Han?

  we need to make sure that we ensure political stability, we don't have protests and unrest, and make sure that there aren't these foreign agents that are trying to undermine our political unity.

• 37:19James Kynge?

  I think that the first thing is that this new law, the ethnic unity law for short, took effect on July 1, and that's why we're talking about it now. The next thing I think that's really significant about this is that it appears to give China extraterritorial powers. In other words, it appears to give China powers to enforce Chinese law in other parts of the world. And in this regard, the critical article of the law is Article 63, which states that organizations and individuals outside mainland China

• 38:02James Kynge?

  who commit acts, quote, aimed at China, close quote, that undermine ethnic unity are, quote, are to be pursued for legal responsibility in accordance with the law. Now, that's a very vague statement. What does that actually mean? How do you define acts aimed at China? That could be virtually anything, I would say. And then the other side of it, the question of being pursued for legal responsibility in accordance with the law. What does that mean? Pursued, does that mean arrested?

• 38:44James Kynge?

  Does it mean sent a letter? Does it mean sent an email telling you to stop doing whatever you're doing? Does it mean reported on or legal responsibility? What kind of legal responsibility are we talking about? So it is a very vague law. And I have to say that, you know, in the interests of balance, Beijing says that this law is intended to protect national minorities, 55 of them in China, and many of them living abroad as well. So the first thing to say about this is that we really don't have a clear sense

• 39:24James Kynge?

  of what this law means in practice. However, one concern of this law is that it could mean something like the following. We all know that the Dalai Lama, who is recognized as the spiritual leader of Tibetan people, some Tibetan people living abroad, some Tibetan people living in China. He is 91 years old. What would it mean if China decides that the Dalai Lama is acting in a way that is aimed at China or inimical to the interests of China?

• 40:05James Kynge?

  I mean, China regularly calls the Dalai Lama a splitist, a separatist, trying to split China. So if this is the case, then what would happen there? Would China invoke this law to go after the Dalai Lama? Would they try to apprehend him and bring him to China to stand trial? I mean, we just don't know. It's really not that clear. But what I would say is significant in this is that it is giving China extraterritorial powers. If China chooses to use them or decides to use them, that could mark a significant shift in the way that China conducts itself around the world.

• 40:49James Kynge?

  So I think that's really key.

• 40:52Alice Han?

  Do you find that a lot of, and I look back to, say, sanctions law in particular in technology? That a lot of the time China will announce, whether it's the unreliable entities listing or the anti-blocking law, certain legislation, but not necessarily enforce it. They use it as a kind of option, so to speak. If something happens that they don't like, they at some point may weaponize that. But in general, is it fair to say that we shouldn't see this as a kind of trigger-happy activity, where they're going to go out and find different groups, whether they're Chinese or otherwise, that are undermining this ethnic or political unity?

• 41:36Alice Han?

  Are they really going to be, I guess what I'm trying to say, going on the offensive and trying to find these people and stop them and sanction them? Or is it really going to be a symbolic move when they're upset with certain policies from a particular country or activities from a particular group or individual?

• 41:52James Kynge?

  It's a really good question. I really don't think it's clear at the moment. One thing I would say as part of the big picture is that, you know, we've seen the way that the US has been invoking extraterritorial laws on China. I mean, all of the US entity lists, the lists of Chinese companies that foreign countries are restricted from dealing with because of US law, right? That's an extraterritorial law. I mean, if you're telling a European country that it can't deal with a certain Chinese company, then that is extraterritorial. And I would say that this might be, in some senses, an answer to that type of extraterritorial pressure

• 42:37James Kynge?

  that is coming from the US. We've seen, I would say, the start of it in some of the laws that China's been coming up with. In May this year, the Ministry of Commerce in China issued an enforcement order blocking US sanctions imposed on five Chinese companies related to Iranian oil transactions. That's just one small example. But basically, I would say that law is going extraterritorial all over the world. This is not just a Chinese thing. And so maybe it's part of that. Maybe it's related to that, but it's got different aims and different antecedents. It's really hard to tell at the moment because, as I said, this is a very vague law.

• 43:22Alice Han?

  Yeah, and it reminds me a little bit, even though it's not in the same category of the extraterritorial laws that were unveiled last year, if you recall, for rare earths, James, in which, if you actually read the fine print, they were saying as little as, if something was as little as 0.8% comprised of Chinese-originated rare earths, then it could be subject to Chinese export restrictions. They haven't yet weaponized that, but that was a pretty expansive extraterritorial inset they put into the new export restrictions on rare earths. But my take and the reason why I lumped that in the category of this one is that, in a way, it's more about the symbolism

• 44:04Alice Han?

  that, as opposed to being, you know, an offensive legislation that they're going to go at and to really try to find people and stop them. I think it's more like case by case. Are they worried about a particular group or a particular country? Because remember, a lot of other countries have agency. When I look back to some of the sanctions over the legal rights issues, labor rights issues, Chinese issued sanctions on European ministers. European Union also issued sanctions on Chinese companies and individuals in response. So it becomes a bit of a multipolar trap in the sense that you have escalation on dominance or escalation potential on both sides. And I want to take it a little bit back, maybe to the domestic side of things,

• 44:48Alice Han?

  which I find interesting. Because as a historian, a big part of what this CCP and Mao first tried to do is to really nationalize the system. Because if you recall, China is a multi-ethnic but also multi-dialectical country. You know, my own people are from Shanghai. Shanghai is a very particular dialect. If anyone who's not living in Shanghai speaks to a Shanghainese person, they can find it very difficult to understand them. And, you know, very early on, when the communists came to power, they enforced, you know, unified writing system and simplified, made sure that schools use Mandarin as their primary language. And this law, in effect, is trying to reinvigorate,

• 45:33Alice Han?

  I think, some of those moves. Because now it's saying that schools and government agencies must use Mandarin as their primary language and that curriculum needs to, quote unquote, forge a strong sense of the community of the Chinese people. There's also an element of trying to make sure that people speak the same language and think the same way, right? And, you know, we talked about the extraterritorial dimension, but there's also this kind of internal unity dimension. And it, you know, comes up in the education system, in the political system. But I thought that that was another interesting aspect of this law. It's harkening back to the legacy of Mao.

• 46:13James Kynge?

  Yeah, absolutely. I think the last thing to say on this from my side would be that it has attracted criticism from abroad, outside China. I'll just mention a couple of those. A UN letter from eight former special rapporteurs said earlier on this year that the law could violate at least 12 international human rights treaties that China has ratified. That's the first thing. And then the other piece of reaction has been from the European Parliament, which adopted a resolution in April this year condemning this law. We're talking about the ethnic unity law and warning that it could intensify

• 46:56James Kynge?

  the systematic suppression of ethnic identities. That's a quotation. And further strain relations between the EU and China. Of course, China has rejected those criticisms. So, you know, this is yet another point of tension between the West and China, or is evolving into that.

• 47:18Alice Han?

  Yeah, and the last thing that I will have to say, James, you know, as much as it's a political issue, I have noticed, again, this is more of a cultural observation as a political one, based on travel to China, that there is more of an opening up and I would say from everyday people an appreciation of different dialects and different ethnic minority groups, a celebration of their cultures. You know, I was in Yunnan a couple, two years ago, and it's the most dense area for ethnic minorities in China. You've got the Miao, you've got the Hui. You've got a lot of different ethnic groups there. And everyday people in China are keen to learn about their different cultural practices. So I just wanted to offer a flip side, which is, yes, this is, seems like a bit of a politically

• 47:59Alice Han?

  sensitive and potentially controversial issue. But I have detected, at least in everyday Chinese society, that there still is a growing appreciation for the ethnic minority groups and not just the Han Chinese identity.

• 48:16James Kynge?

  Yeah, I would definitely agree with that. I have personal friends who very much respect certain ethnic minority cultures and religions in China. And I very much hear from them exactly the same trend that you're talking about.

• 48:32Alice Han?

  All right, James, you know what time it is. It is prediction time. As you peer into the crystal ball for the future this week, what do you see?

• 48:40James Kynge?

  Okay, I'm going back to the big topic for me, which is the EU's commercial relationship with China. This is a massive topic. Let's not forget that the European Union comprises about 450 million consumers. This is one of the biggest markets in the world. And EU exports to China, in my prediction, will continue to fall this year. In 2025, they were about 199.6 billion euro. This year, I think they'll fall back to around 180 billion euros. So that's about a 10% contraction.

• 49:25James Kynge?

  And it contrasts with Chinese exports to Europe, which so far this year have been rising by around 16%. So you've got a very significant contraction of exports to China from Europe and a very significant increase of Chinese exports to Europe. So that's my prediction. Alice, what have you got for us?

• 49:49Alice Han?

  So I've been running numbers on the Chinese consumer landscape. And what I find fascinating, just looking at the recent history since COVID, is that Chinese households are actually quite sensitive to what I would call geopolitical risk. So in a way, they attach a risk premia to their consumption based on the uncertainties that they're seeing geopolitically, economically. We saw that first with a massive downfall in Chinese consumer confidence during the COVID lockdowns from 2020, really to 2022. And then from 2022 onwards, Russia, Ukraine had a huge impact on Chinese consumer spending habits as well as confidence. And we're starting to see, you know, early signs

• 50:34Alice Han?

  that the Iran crisis is also starting to weigh on consumer confidence. So my prediction, it's kind of unfair because I've already run the numbers, would be that we're going to see further weakening in Chinese consumer confidence and therefore spending because everyday Chinese people are worried about not just the geopolitical landscape, but also the economic landscape in terms of a hit to external demand. 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 an episode, and we'll talk to you again next week.

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