Hosts Win Open Models’ Margin as Alibaba’s EBITA Jumps 57%
Alibaba’s most important AI number is not Qwen’s 700mn downloads. It is the 57 per cent increase in adjusted EBITA repor…
Technology
Beijing has begun to address the most visible symptoms. It tightened scrutiny of local-government spending, publicly acknowledged a mismatch between supply and demand, and pledged to curb competition that sacrifices profits for market share.[2] Official commentary has also said prolonged weakness in consumption cannot be justified indefinitely and that the economic model must change.[2] Those steps can slow some new capacity and reduce the most destructive competition among Chinese producers. They do not yet show that China is redirecting capital away from subsidized manufacturing or replacing export demand with household spending.
The distinction is decisive. Weak consumption and excess capacity have accounted for an estimated 75% of Chinese export growth, while Chinese firms received between three and eight times more government support than firms in OECD economies from 2005 to 2024.[2, 3] About 60% of the market-share increases achieved by expanding Chinese firms were linked to subsidies, but those gains did not deliver significant improvements in productivity or profitability.[3] Annual additions to China’s productive asset base equal three times the combined additions in Europe and the United States, yet returns on that capital are roughly 40% lower.[2] Limited discipline may improve producer margins at the edge, but current evidence does not establish economy-wide gains in returns or lower dependence on exports.
Limited Chinese restraint leaves Europe exposed to sustained price pressure
That leaves Europe exposed to a policy mix that is more stable than a rupture but not less competitive. Chinese exporters retain access to a large market while Beijing slows only selected sources of incremental overcapacity. European manufacturers using Chinese intermediate goods continue to receive a cost benefit, and euro-area industrial output has been positively associated with greater exposure to those inputs.[4] Producers competing against Chinese finished goods face the opposite effect: higher final-goods penetration has weighed on output, and euro-area firms have lost market share in areas where Chinese competition intensified after 2020.[4, 5]
The same import flow can therefore strengthen one European balance sheet and weaken another. Electronics manufacturers can receive cheaper components while confronting Chinese competitors in the finished market; furniture and metal producers face more direct final-goods pressure.[5] Broad trade continuity is consequently politically unstable. The companies benefiting from low-cost inputs are not necessarily the companies losing orders, margins and market share, so aggregate trade data conceal the industries most likely to demand stronger protection.
That demand is already influencing policy. Brussels has expanded trade-defense activity, foreign-subsidy screening and procurement scrutiny as its deficit with China widened.[1] It is considering procurement preferences for EU-made goods, restrictions on Chinese suppliers in critical infrastructure and rules requiring sensitive industries to source from at least three suppliers.[6] Existing measures have not settled the competitive question: tariffs of up to 35.3% have done little to slow Chinese electric-vehicle brands including BYD, Geely and Chery.[6] Product-specific anti-dumping cases are also being circumvented as exporters introduce new products faster than the Commission can respond.[7]
Dialogue reduces the incentive for immediate escalation, but it has not altered those underlying pressures. Maroš Šefčovič and Wang Wentao met in Brussels on 29 June and called for a more stable and balanced relationship, yet Šefčovič set October as the point by which further talks had to produce concrete outcomes.[7] Beijing’s preference is consistent with the approach it used after US tariffs above 100% failed to sustain pressure once China exploited its dominant rare-earth position.[2] Alicia Garcia-Herrero described that episode as a template for managed engagement with Europe that gives Beijing more time.[2] Time is valuable because market access can continue while the cost of adjustment remains concentrated inside Europe.
China’s critical-material leverage raises the cost of European escalation
China’s control of critical materials raises the cost of turning European defensive policy into a full break. The EU receives 100% of its heavy rare-earth supply from China, which is also its leading supplier for a broad range of other critical raw materials.[8] China has formalized that position through licensing and end-use controls covering minerals, processing technology and magnet production.[9] The consequence extends beyond negotiating power. Licensing delays have exposed automakers, aerospace companies, chipmakers and defense contractors to disruption.[9]
European automotive suppliers have reported production-line and plant shutdowns following restrictions on rare earths and magnets.[10] China later agreed to ease restrictions, and magnet exports to the EU rebounded, but approvals remained selective and some applications took months despite an official 45-day processing window.[11] Whether those delays reflect administrative weakness or deliberate pressure is unresolved.[11] Their economic effect is established: an approval process can interrupt European output without a formal license denial.[11]
This leverage explains why limited Chinese restraint may postpone a rupture without materially reducing the forces driving one. Beijing can acknowledge weak demand, slow selected investment and keep negotiations open while preserving the export capacity, price competitiveness and supply-chain control that concern Brussels. European intermediate-goods users gain from continuity; Chinese exporters preserve sales; European final-goods producers absorb the competitive pressure; and dependence on Chinese minerals limits how aggressively Europe can respond.
Durability depends on whether managed engagement delivers returns without deeper reform
The strongest case for a durable Chinese advantage is that this arrangement can persist: export access remains open, critical-material control raises the cost of retaliation and investment scrutiny may limit additional excess capacity without requiring major concessions. But durability requires more than leverage. Manufacturing investment had recently risen 9.1%, household saving remained structurally high, and subsidy-supported market-share gains still lacked comparable profitability gains.[3, 12, 13] China has demonstrated an ability to preserve its position during confrontation. It has not yet demonstrated that the position produces stronger returns without continued state support and weak domestic absorption.
Implementation now matters more than official recognition. A sustained slowdown in fixed-asset investment across capacity-heavy sectors would show that restraint reaches beyond selected local projects.[2, 12] Enforceable rules against below-cost competition would test whether price discipline can survive local and corporate incentives.[2] A material household package addressing income, childcare, housing, healthcare, pensions or precautionary saving would indicate that growth is becoming less dependent on exports.[14] On the European side, the October deadline matters only if it produces implemented concessions on tariffs, subsidies, procurement, export controls or licensing.[7]
Reduced rupture risk would first appear in rare-earth licenses processed within 45 days, uninterrupted European production lines and stable market shares.[5, 10, 11] Without those outcomes, European industrial producers continue to bear the cost of China’s managed engagement: Chinese final goods erode their market share, while Chinese intermediate inputs and critical materials remain necessary to their costs and production continuity.[4, 5, 8]