China's Deflation strategy
China Isn't Exporting Goods Anymore. It's Exporting Deflation.
There’s a real chance the AI agent that handled your support ticket this month was thinking in Chinese weights.
Since last year, Chinese models usage are on an upward march. Peak week: 46%. A year ago their share was 4.5%. And is currently higher than American models. Let that Sink In!!
Not because American companies turned pro-Beijing. But because the tokens are frontier levels and 60–90% cheaper
China’s newest export isn’t EVs. It isn’t solar panels or batteries. It’s intelligence — that is priced to kill.
And tomorrow an important company CXMT, China’s DRAM champion, lists in Shanghai after raising ¥66.6B — about $9.8B, the biggest semiconductor IPO the mainland has ever done. Everyone will cover it as a chip story.
Wrong lens.
Cheap tokens and cheap memory come off the same machine — one that’s been running for five years. It eats Chinese household wealth on one end and exports deflation out the other.
Lets unpack.
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INSIGHT 1: The quietest mega-crash in financial history
China’s property market peaked in Q3 2021.
Since then: $18–20T of household wealth has been erased. That’s the BIS number, not a doomer blog. Real prices are down 25% from the peak — below where they stood in 2006.
Two decades of housing gains. Gone.
And it’s not finding a floor. New home prices have now fallen 17 quarters in a row.
Property was the Chinese savings account. So the Chinese consumers have pretty much shut down making expenses
INSIGHT 2: Beijing’s answer was factories, not welfare checks
America’s answer to its housing bust was to reflate the consumer.
Beijing looked at the $19T hole and chose a different religion: build more supply.
Except the printer wasn’t pointed at households. It was pointed at industrial capacity.
The output shows up exactly where you’d expect. China ran a record $1.19T trade surplus in 2025 — while producing 30% of everything manufactured on Earth.
INSIGHT 3: You’ve already watched this movie. It was called solar.
Solar modules cost over $4/W in 2008. Today: about $0.25. Down 94%.
Now put that curve next to what DeepSeek did to frontier token prices.
Yep!!
INSIGHT 4: The newest export is intelligence — and it’s tariff-proof
Going back to the number in the open. 4.5% to 46% in one year
The mechanism is brutally simple: GLM-5.2 and Kimi-K3 land within spitting distance of the US frontier while running 60–90% cheaper.
If you are a believer of 24X7, Always on AI, this is an important change to pay attention to.
Super-nerd stat: OpenRouter itself went from 5T tokens a week to over 20T in twelve months. The pie quadrupled AND China’s slice went 10x.
INSIGHT 5: CXMT watch it for interesting clues
Back to tomorrow’s IPO.
CXMT priced at ¥8.66 — an $85B valuation, the largest mainland chip listing ever. Business Times reckons it could end day one as the biggest listed company in all of China.
Will memory get the solar treatment? Honest answer: I don’t know. AI demand is a different animal
INSIGHT 6: No Lehman. Something slower and meaner
China’s capital account is closed, and so the losses are domestic, held by state banks, socialized in slow motion. A $19T wipeout with no margin call. Nothing like the 2008 Great financial crisis.
The real casualties are industrials, not financial. “As China exports its surplus, Korea, Germany and Japan pay the industrial price” — that’s a January news headline, not my phrasing. By March, the EU Parliament had commissioned a formal overcapacity study. By June, the Atlantic Council was writing that Europe “has had enough.”
Disinflation for consumers. Deflation for competitors. Trade wars for everyone.
What am I doing with this?
1. Respect the machine. Anything where the Chinese marginal producer sets the price — commodity chemicals, mass-market EVs, legacy solar — is structurally short. The competitor’s margin IS the export
2. Own the cost-curve consumers. Cheap tokens subsidize the application layer the same way cheap panels subsidized solar developers. Falling input prices re-rate whoever BUYS intelligence at scale
3. Watch what CXMT does with the war chest, not the day-one pop. Capacity announcements over the next year tell you if memory gets the solar treatment
Watch out for the Open source beneficiaries
Staying away from ORCL since, they bet on Open AI and I see value that accrued on the frontier labs are starting to shift
America is trying to inflate away its debt by exporting inflation while China is exporting it’s deflation. Truly the war of the titans!
US labs have no choice but to cut prices! This is why Fable was pretending to leave the Stable (Subscription) , but it could never do so
P.S.
This article is a premise to 3 articles that I will publish in a flurry. So stay tuned
I don’t intend to buy any positions in CXMT