Hyper Involution and Hyper Inflation

The week ended on May 23, 2025, interesting news items to look at this week are:

1. Hyper Involution and Hyper Inflation: Two important pieces of information in the media this week have focused the mind on the extremely perilous state of the global economy and geopolitics. The root of the malignancies began in 2018 and unless remedied, WWIII will almost be a certainty. In China, the malignancy is Hyper Involution and in US, Hyper Inflation. The world’s two biggest economy has a combined share of 44% of the global GDP and they have respectively weaponized the supply chain and payment chain in a cage fight to out last the opponent. There will be no escape from a sea of pain for all third party countries unless US & China reconcile their differences.

(i) Hyper Involution: Involution (内卷, neijuan) in the Chinese economy is a sense of diminishing returns, where intense domestic competition and pressure, particularly in education and the workplace, result in a feeling of futility and a "rat race" with little real progress. The genesis of Involution began in 2018 when the U.S. drew first blood in a Tech War against Chinese communication giants Huawei and ZTE just when China made her maiden launch of a 5G integrated telecommunication system. The US, fearful of losing its preeminence in semiconductor technologies, a key driver in substituting the petrodollar hegemony by the tech dollar hegemony has since rolled out a full spectrum attack and encirclement of everything Chinese. In response to an existential threat, the Chinese national team decided to reallocate all funding away from the speculative sectors namely real estates and shadow banking into industries, particularly new energy, NEV(new energy vehicles) and high speed rail.

(Fig. 1) is a telltale picture of this particular shift which explains most of the economic phenomenon we observe today both in China and internationally. From a peak of Rmb 6 trillion annual new lending in 2018 to the real estate sector, the downdraft imploded to a net liquidation in 2024. Conversely, annual new bank lending to Chinese industries rose from below Rmb 1 trillion to over 5 trillion in 2024. Provincial and municipal governments all jumped into the bandwagon and as an illustration, between 2019 to 2021, there were 500 registered NEV companies with an active participation of 400 NEV brands. In China, commercial competition is both a sprint and a marathon and by 2024, 350 NEV brands has fallen by the wayside and only 50 brands survived  (Fig. 2).

However, competition between NEV brands is not unique, the same cutthroat competition is found in semiconductors, mobile phones, AI, consumer electrical appliances and electronics, e commerce, food and beverage and right down to the gig economy like share ride, delivery and logistics. The key to survival in China is speed, innovation, razor thin margins, continuous cost cutting and capacity expansion to capture unfilled demand and market share. Such competition eventually spilled over to jobs and employment with the “996” work culture all pervasive in China (The "996" work culture in China refers to a grueling work schedule where employees are expected to work from 9:00 AM to 9:00 PM, six days a week, which translates to 72 hours per week. This system is widely prevalent in the tech industry and is a violation Chinese labor laws, which set a standard workday of eight hours and a maximum of 44 hours per week.) In the long run, the severe competitive culture is just burning of candles from both ends and by 2025 both the Chinese National Team and industry leaders sense the risks of this unsustainable behavior. On a macro level, China national savings and liquidity is at record levels and despite US out all trade war, China trade surplus hit $1 trillion mark yet citizens are pessimistic and fearful of spending. Why, their net-worth is contracting because of collapsing property prices and job security is gone as business shutters on involution, supply chain realignment and skills upgrade.  DJI Drones (with a 70% global market share of civilian drones), Midea Group (the largest Appliance Maker in China) and Haier (Owner of GE Appliance in US, Fisher & Paykal in NZ, Candy in Italy, Hoover in Europe, AQUA and Sanyo in Japan) all issued work rules that no employees should stay behind in the office after 6pm and enforced by wifi and power switched offs. Discussions are ongoing with policy implementation at government and industry association levels for new development protocols on a more balanced approach. I am not here to make fun of a serious situation, but if cleanliness devolved to the point of OCD and  mysophobia, such a behaviour is detrimental to one’s health and severely affects the well being of those that needs to interact with the sufferer.  The EU China Accord to set a floor price for Chinese NEV imports is a good beginning as it gives breathing space for EU car makers and with a smaller volume but higher margin for Chinese exporters. Competition remains and consumers are not taxed but protected with a wider range of selections.

(ii) Hyper Inflation: Across the Pacific, the malignancy is also a form of OCD (Obsessive Currency Debauchery). Just in the past week we saw; (a) Moody downgrade US Credit Rating, (b) Miserable 20YR bond auction with an interest rate cross over beyond 5%, (Fig. 3)

(c) Yet, Congress just passed the Big Beautiful Spending Bill that would add another $4 trillion to the unsustainable federal deficits (Fig. 4),

(d) Another $175 billion for the Golden Dome defense shield (Fig. 5)

(e) Federal Reserve stealthily reignited QE with a $44 billion purchases in 4 days (Fig. 6) whilst officially the QT program is still on to contract Fed’s Balance by $5 billion a month.

(f) To calm a very nervous market, Stephen Miran, Chairman of White House’s Council of Economic Advisers was said to deny this week the Administration was planning to re-rate bonds held by foreign countries by forcing an extension of maturities to 50 to 100 years. (Fig. 7).

In 2018, a precedent was established by Greece in a default restructuring exercise that effectively halved the carrying value of the bonds. (g) EU to delay implementation of Basel III rules and (Fig. 8)

(h) Treasury Secretary Bessent is set to relax SLR (Supplementary Liquidity Ratio) to allow banks to hold more US Treasuries than existing prudential regulations permits. No doubt the current lack of genuine buyers for US Treasuries is giving the Administration little choice but to stuff US commercial banks with increasing US Government Debt and to ignore the disaster that bankrupted Silicon Valley Bank in March 2023 . (Fig. 9)

There can be no cure to the malignancy of the Western financial system so long as the powers that be refuse to acknowledge the use by date of their empty promises on currencies and debt issuance has finally arrived.

My hope and prayers is that China can relax a little and US will have the courage to claw back some of the ill gotten gains by those who gamed the system, since post Bretton Wood,s for a much needed global re-balancing

1Timothy 6:6  Now godliness with contentment is great gain. 7  For we brought nothing into this world, and it is certain we can carry nothing out. 8  And having food and clothing, with these we shall be content. 9  But those who desire to be rich fall into temptation and a snare, and into many foolish and harmful lusts which drown men in destruction and perdition. 10  For the love of money is a root of all kinds of evil, for which some have strayed from the faith in their greediness, and pierced themselves through with many sorrows.