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China’s Economic Reality, AI Growth, and the Consumption Gap

This week we kick it off with our global strategist Chris Wood’s latest dispatch from Beijing. He offered a candid assessment of China’s economic positioning, particularly in the context of tariffs, artificial intelligence, and consumer behavior.

Chris noted that while many Western observers focus on China’s race to produce the fastest AI models, the reality is different. “China’s AI ecosystem is not so concerned about building the next great fastest model per se… they’re about building the next killer app on top of DeepSeek”

DeepSeek, a top 10 AI model, is emblematic of this strategy: rather than chasing marginal gains in raw model performance, the emphasis is on creating software and services that can scale across industries.

The reality of AI’s Deepseek moment is that efficiency gains and price declines have led to an explosion in usage as we discussed in last week’s note. More than one AI provider has announced usage limits lately, demonstrating demand continues to exceed GPU compute supply. Our chart from last week’s research showed AI model usage is up 10x in six months, underscoring the tension between efficiency gains and capacity bottlenecks.

Energy constraints are looming large and will likely limit the growth in AI usage unless we continue to see model efficiency improvements. Outside of code improvements, cooling and generation capacity will be critical to sustaining AI compute growth.

Beyond technology, Chris painted a sobering picture of China’s domestic economy.

Deflation is likely here to stay with the Chinese consumer’s spending making up only 40% of GDP, compared with 70% in the US and 55% in Japan.

Despite government efforts to stimulate services spending, cultural and structural factors keep consumption subdued. The country remains a “net saving culture,” with 163 trillion RMB in short-term deposits, even though they yield only 1%. Over 73% of these deposits are locked up in time deposits, the equivalent of CDs in the US. Conservative savings in China provide the manufacturing base a ton of free money to continue ramping capacity, but a culture of savers remains a challenge to stoking spending growth. This easy capital keeps production humming, but reinforces deflationary pressures: supply grows faster than demand, keeping prices flat or falling.

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India, Russia, and the Energy Trade Loophole

Shifting focus to India’s role in global energy flows. The US recently imposed a 35% tariff on Indian imports tied to refined Russian crude. In practice, this means India buys Russian oil, refines it into diesel, and exports it to Europe — a way of “washing” sanctioned crude.

A similar pattern is emerging in liquefied natural gas (LNG). Despite official rhetoric, Europe continues to import record volumes of Russian LNG directly via pipeline. Promises to increase purchases from the US have done little to move LNG producers’ share prices; Cheniere Energy, for example, rose just 2% on the news.

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