The China Briefing
Not all rare earths are created equal
US-China trade tensions persist amid rare earth dominance and tech self-reliance. China’s 5-year plan boosts tech growth and equity optimism.
Please find below our latest thoughts on China:
- The cycle of tension, escalation and truce appears to be a new normal for US-China relations.
- With both countries still set on their conscious uncoupling, continued economic and trade clashes seem very likely. Whether this truce lasts the full year, as announced, is certainly questionable.
- Nonetheless, for the time being, the most recent agreement should at least provide a degree of relief. Similar to “Liberation Day”, cooler heads have prevailed, which was to be expected given that both the US and China had a lot to lose from some of the more extreme measures being threatened.
- It has also prompted several sell-side brokers to nudge up their economic growth forecasts for China, with expectations that export momentum will be stronger for longer.1
Chart 1: China 5 year CDS
Source: Bloomberg, Allianz Global Investors, as at 31 October 2025. Past performance, or any prediction, projection or forecast, is not indicative of future performance.
- More broadly, the overall shock factor and market impact of tariff-related announcements seems to be diminishing.
- One way to look at this is through credit default swaps (CDS). The China 5-year CDS – the cost to insure against a default on Chinese sovereign debt over a five-year period – is trading close to the lowest level in more than three years.2
- Overall, both sides look to be buying time, digging in, and making efforts to cut dependence on one another. President Trump’s visit to Asia was peppered with announcements of rare earth deals.
- It has become one of this year’s clichés that “rare earths are not rare”. This is true for light rare earth reserves, where there are significant deposits around the world. These lighter elements are what the few rare earth companies outside China process – MP Materials in the US, for example.
- But the reality is not all rare earths are created equal. China’s grip is strongest on the most important and scarcest metals, needed to produce the permanent magnets essential for much high-tech equipment.
- These include heavy rare earths such as dysprosium, terbium, samarium and scandium, which only the most avid chemistry students will recall from their days of studying the periodic table.
- Currently useable deposits of these heavy rare earths exist predominantly in China and Myanmar, which together account for 98% of global ore supply. And essentially all processing of heavy rare earths currently occurs in China.3
- To give some sense of scale, China has an estimated 120,000 people working in the rare earths industry.4 This is the result of making it a high strategic priority over a sustained period. As Deng Xiaoping said back in 1992, "there is oil in the Middle East, there are rare earths in China”.
- Any path to breaking Chinese dominance in these most critical rare earths, therefore, would appear to be many years away. As such, China’s geopolitical advantage in this area is likely to be long lasting.
Chart 2: Battery supply chain – China rare earth dominance
Source: Allianz Global Investors, BloombergNEF, as of 17 January 2025. Breakdown calculated by production capacity.
- On the other hand, a key vulnerability for China is that although it has significantly ramped up self-sufficiency in recent years, important industries such as electric vehicles still rely primarily on imported semiconductors.5
- This explains the context of China’s latest five-year plan, which underscored the determination to build a more self reliant ecosystem.
- “The most important factor in promoting high-quality development is to accelerate high-level scientific and technological self-reliance,” in President Xi Jinping’s words.
- As well as a focus on achieving broader technological self-sufficiency, there were also references to emerging high tech industries over the next decade that are potentially at risk from reliance on Western supply chains. These include areas such as quantum technology, biological manufacturing, hydrogen energy and nuclear fusion energy, and 6G mobile telecommunications.
- One takeaway for global investors, in our view, is that accessing the China growth story through multinationals listed on Western stock markets will likely not be so effective going forward. As China pivots increasingly to a technology led growth model, it is domestic companies that should increasingly take market share.
- Perhaps the biggest surprise out of the plenum which approved the five-year plan policy framework was a statement that this year’s annual GDP growth target must be accomplished, and a call for more economic policy support.
- This was unexpected as the plenum is typically dedicated to more strategic issues. It likely reflects concern about slowing economic momentum and reinforces our expectations for incremental policy stimulus in Q4 2025.
- Combined with the technology narrative and strong domestic liquidity, we remain optimistic on the China equity outlook.
1 Source: Goldman Sachs, 31 October 2025
2 Source: Bloomberg, 31 October 2025
3 Source: Gavekal, 21 October 2025
4 Source: Gavekal, 21 October 2025
5 Source: Gavekal, 23 April 2025