Despite ongoing negotiations between China and the United States, no major progress has been achieved yet. During the tariff war and the decline in mutual trade, commerce between the two countries dropped to its lowest level since 2006.

By late 2025, both sides have reached only preliminary agreements on several key issues; including export controls, a 90-day tariff truce extension, tariffs on fentanyl-related goods, expansion of bilateral trade, and port service fees in China.

Recently, China has shown its strategic leverage by restricting the export of rare earth minerals, signaling that it can target U.S. interests when needed. These talks appear more focused on maintaining the current balance of power rather than achieving a breakthrough deal. Both nations continue to test each other’s strength and apply mutual pressure. China controls over two-thirds of the world’s production of rare metals and aims to keep this dominance. Other major producers like the U.S., Australia, Thailand, and Russia remain far behind in this critical field.

Rare earth elements are essential materials for modern military technology. From submarines and warships to fighter jets, these minerals play a key role in the systems that give the U.S. military its strategic edge. An analysis of rare earth use across major U.S. defense platforms reveals how deeply these materials are embedded in modern warfare. They are not only used in large quantities but also in highly specialized roles, from laser-guided weapons to stealth technologies that make aircraft invisible to radar.

By restricting the export of rare earth elements, China has put severe pressure on the U.S. defense supply chain, driving up production costs. These minerals are vital for manufacturing everything from ammunition to advanced weapon systems. Currently, China supplies about 90% of the world’s rare earth elements and also dominates the production of several other strategic minerals. This dominance has caused serious disruptions: a U.S. drone component manufacturer reported two-month delays while trying to find replacements for Chinese-made magnets. Prices for some materials have skyrocketed by as much as 60 times in certain cases, such as samarium, a key ingredient in jet fighter engines.

This crisis highlights America’s deep dependence on China’s supply chain. Many advanced U.S. defense technologies drone engines, missile guidance systems, night-vision devices, and satellite components, all rely on these rare elements. As geopolitical and trade tensions rise, China’s control over these critical resources has become a powerful strategic weapon of its own.

China’s economy continues to walk a fine line between recovery and recession. Retail sales growth has fallen to its weakest level since last year, and overall investment has turned negative for the first time since 2020. Yet, there is one bright spot: industrial production surprised analysts with a 6.5% jump in September.

To prevent a deeper slowdown, Beijing injected 500 billion yuan (around 70 billion USD) into the economy and benefited from a rebound in exports. These moves have helped China avoid a full recession, at least for now. However, deflation and a collapsing housing market remain major threats. The property sector continues to decline, in June, sales of new homes fell to 47.3 billion USD, marking a 23% drop compared to the same month last year.

Meanwhile, China’s strength in manufacturing and exports is still visible, especially in steel production. Although domestic demand for steel has weakened due to the housing slump, foreign demand has grown; with ASEAN countries, the European Union, and the UK all increasing their orders. In contrast, North American demand has fallen as U.S. tariffs continue to limit trade. As the world’s largest steel producer, China is now focusing on expanding exports to offset its weak home market. Still, the challenges remain serious. Policymakers must craft measures that stimulate growth without creating new systemic risks, a difficult balance in an economy under constant pressure.

China’s central bank — the People’s Bank of China (PBOC), is currently caught between three conflicting goals:

1. Stimulating domestic demand, since both consumption and investment remain weak.

2. Reducing debt levels to avoid a financial crisis.

3. Fighting deflation and maintaining price stability.
   
   

At the heart of these challenges is Beijing’s effort to boost household spending and counter a growing problem known as “involution.”

What Is “Involution”?
“Involution” describes an exhausting cycle of internal competition that leads to overproduction, shrinking profits, and rising debt; without real innovation or growth. In China’s case, this phenomenon is most visible in the industrial and manufacturing sectors. For example, the country now has over 100 electric vehicle makers and dozens of battery and solar panel producers. When global demand cannot absorb this output, massive overcapacity leads to price wars and cheap exports, eroding profits and prompting Western countries to impose new tariffs.

Beijing’s Response; To deal with this, Beijing has launched a series of direct policy measures. These include:

• Forming industry cartels in key sectors such as polysilicon to stabilize prices.

• Warning companies against excessive price cutting.

• Instructing local governments to stop offering unconditional support to unprofitable firms.
  
  

This marks a significant shift in China’s political and economic approach, especially in a system where the growth of local businesses has long been seen as a measure of officials’ success. However, history offers a cautionary note. In the past decade, Beijing also tried to curb steel overproduction, even demolishing old factories for show — but at the same time, local governments built new ones, and total output kept rising.

China’s ongoing struggle shows how deeply structural these problems are. Without major reforms to strengthen domestic consumption and innovation, the country risks falling into a long-term stagnation, much like Japan’s experience in the 1990s.

Another major challenge facing China is its massive local government debt problem. Beijing is currently studying ways to resolve overdue payments owed by local governments to private companies, which are estimated to exceed 1 trillion U.S. dollars. Reports suggest that the central government may ask state-owned banks to lend money to local authorities so they can repay these debts. Altogether, the total liabilities of local governments to businesses and civil servants are estimated at around 10 trillion yuan (1.4 trillion USD), roughly 7% of China’s GDP last year.

The danger of these unpaid debts goes beyond economics. Delayed payments erode trust between the government and the private sector, creating an atmosphere of frustration and uncertainty. For many private firms, not receiving payments on time means cash shortages, layoffs, and reduced investment. This growing social dissatisfaction poses a serious risk to President Xi Jinping’s broader goal of achieving “common prosperity.” If left unresolved, the local debt issue could undermine confidence not only in China’s private sector but also in the government’s ability to manage the economy effectively.