China long-term real interest rate dips to 0.5% in Feb vs 1.6% in Jan and avg of 1.7% in 2025, driven by higher CPI.
China long-term real interest rate is calculated by 10-year CGB yield ~1.81% in Feb minus Feb CPI of 1.3%.
Avg. long-term real interest rate of 1.7% in 2025 is calculated by averaging monthly LT real interest rate using the same method.
vs. US 10-Year Real Interest Rate of 1.75% in Feb.
Little inflation is a sign of weak economy, which China has been criticized for past few year.
That has changed.
China’s past 3-month core CPI (excl. food and energy) is the best in years, after February core CPI of 0.7% MoM.
The yoy number of 1.8% in Feb is also the highest in years – even higher than 1H of 2021.
Chinese policymakers kept their annual consumer inflation target steady at “around 2%” for 2026. Although China hasn’t seen 2% CPI for 3 years since Jan 2023, 2026 looks to be closer.
Despite that
1/ Solar is now the dominant form of global capacity additions, comprising 60% of new capacity in 2024
2/ China is a renewable energy juggernaut: it now accounts for 50%-60% of all global new renewable capacity additions.
3/ Most renewable supply chains go through China.
It doesn’t change the fact that China is a big (and biggest) and growing net importer of oil. In 2024, China imported about 11.1 million barrels/day of crude oil.
A round-up of recent deals
1/ Anta Sports x Puma (Sportswear)
2/ JD.com x CECONOMY (Retail)
3/ CFMOTO x Kalex (Automotive/Racing)
Luckin Coffee, the largest coffee chain in China, posted 1.2% company-owned same-store sales growth for 4q25, which is weak.
During earnings call, Luckin says China’s coffee market is still in a rapid growing phase – is that so?
I think there is still room, but current “coffee intensity” is already like in a mature stage.
Starbucks reward members (35mn) consume 3-5 cups per month.
Luckin members consumes close to 342mn cups per month in 2025 (4.1bn cups annually) and close to 100mn monthly transacting consumers, which translate to over 3 cups per customer per month approximately.
Why there is still room (but may be hard to penetrate)?
1) Luckin’s 450mn customer base means there could be 1.5x to 2x room in China, excluding children and elderly.
2) If Starbucks can get 16k stores in US, Luckin may get up to 4x of that which is over 60k stores in China, or 2x from current 30k stores.
3) Starbucks Reward member is an underestimation of active consumers of Starbucks, which could be like 70-90mn. 4x of that gives you 210-360mn potential which is 2-3x from current 100mn for Luckin.
Why hard to penetrate?
1) lower-hanging fruit / easy regions already have footprint.
2) China has more “layers” of consumers; thus hard to have one-size-fit-all offering. There are more competitions in China. Can’t handle price sensitive and premium customers together.
When gov requires buyback
When gov invest money as LP, the GP usually requires investees to buy back after say 5 years, with annual rate of up to 8%.
The equity investment is essentially a 5-year convertible loan that carries interest rate.
If things go well, gov should never lose money on these investments.
When gov buys you back
In rare cases, gov may promise to buy you back – e.g. Shenzhen gov promises to buyback 保障性配售住房, it applies an annual discount of 1% or more.
You will earn a negative interest rate annually.
It’s a very keen observation and description by Kenneth Rogoff in his book Our Dollar, Your Problem that China prioritizes a USD exchange-rate objective over domestic inflation targeting.
What are the implications?
1/ Tighter capital movement control
The “impossible trinity” says a country cannot simultaneously have a fixed (or tightly managed) exchange rate, free capital movement, and independent monetary policy.
Since China uses the peg and China wants more independent monetary policy (when Fed raised interest rate last cycle in 2022, China didn’t follow), it has to have tighter capital movement control.
Or PBOC policy shall move more in-line with US Fed policy.
2/ Real exchange rate moves
With a mostly fixed nominal RMB/USD, the real exchange rate moves via the inflation gap:
If China inflation below the US, China gets a real depreciation (more competitive) even without nominal RMB weakening. This is what happened in the last few years, and foreigners will find traveling in China very cheap (e.g. Chinese hotel price).
If China inflation above the US, China gets a real appreciation (less competitive) even if the nominal stays “stable.”
3/ Intervention can force money/credit swings
Defending the exchange-rate path often requires buying/selling FX:
When inflows are strong, the central bank buys USD and creates RMB liquidity (which can be inflationary/credit-boosting).
When outflows dominate, defending the rate can drain RMB liquidity (which can be contractionary).
4/ It tends to bias the economy toward tradables and away from household consumption
If the RMB is held weaker than it otherwise would be (or just “less strong” than productivity would imply), it functions like:
a subsidy to exporters/tradable producers, and
a tax on importers/consumers (imports cost more in RMB terms than under a stronger currency).
5/ Bigger reserves and bigger balance-sheet exposure to USD assets
Exchange-rate management usually accumulates FX reserves (especially in surplus periods). That brings valuation risk when USD moves, opportunity cost (low-yield reserve assets vs domestic needs), geopolitical/financial exposure to the dollar system.
In Our Dollar, Your Problem, author raised this question – why China didn’t see a faster inflation it should see. The higher inflation rationale is that when tradable goods sector productivity rises fast, this part of the economy will attract more workers, presumably from non-tradable goods sector. Thus, wage should rise and likely at a faster pace than the productivity gain in non-tradable goods sector, which should result in higher inflation in non-tradable goods sector to counter labor inflation.
In the books, the author mentioned one plausible explanation, which was Chinese gov could move massive population from rural areas to cities and factories. The amount of inflow was so large that wage increases were not seen. Thus, there is lower than expected service inflation.
This sounds reasonable.
I have additional arguments on #why China didn’t see strong inflation in non-tradable goods sector.
1/ The high-end of services are not priced fairly in China.
Unlike more capitalism-driven societies, the high-end supply and demand are exchanged in non-monetary channels. E.g. think about the high-end healthcare senior gov officials may receive in China – that’s not charged at the “market price”. Thus, you can’t measure the inflation, if that doesn’t carry a “price”.
In additional, the high-end services may not be available to the public or openly marketed. Thus demand is lower than it should be.
2/ High-end demand is shifted abroad.
Chinese wealthy like to shop, travel and live abroad.
This lowers the inflation across the board.
Some simple calculation:
Xiaomi smartphone GPM was 12.6% in 2024, with 192bn revenue.
Xiaomi sold 1.64 billion smartphones that year.
The GP per handset is about 147 RMB in 2024
Across different smartphone models, memory cost is different, ranging from 50-500 per handset.
But in a nutshell, it’s about 12-18% of BOM.
It’s could be about 150 memory cost per handset for Xiaomi, which is similar to GP per handset.
Then if memory cost is rising 50-100%, the entire GP per handset could be at risk.
To offset, Xiaomi may increase prices for customers.
And as a large customer for memory chips, it may not receive full mark-up immediately.
In the end, maybe 1/3 of the memory cost impact of 120 need to be absorbed by Xiaomi.
Then GP per handset could be more like 100-110 RMB.
And as the price increases, volume could be impacted, plus the RMB appreciation recently (two-thirds of Xiaomi smartphone volume is overseas).
Total impact to Xiaomi smartphone GP could be like 65-75bn, or 25-30% negative impact from 2024 level.
1/ FSD approval in China.
I have seen various posts on Chinese social medias that Tesla FSD is being updated in China. Not many news mentions though. This was previewed by Elon Musk back in Nov 2025 and recently in Davos.
3/ Trump Administration Pushes Out Key Officials Focused on China Tech Threat – WSJ
4/ Medtronic and Mindray North America broaden strategic partnership
5/ H200 China approval after US approval
6/ BYD and ExxonMobil signed a long-term strategic cooperation memorandum on 26 January
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Edit:
Jensen Huang on Jan 29 said H200 has yet to be approved in China.
