China Signals Slower Growth as Provinces Cut GDP Targets

Chinese President Xi Jinping recently held separate phone calls with U.S. President Donald Trump and Russian President Vladimir Putin, addressing critical global issues as Beijing works to manage its key international relationships.

The discussions reflect China's strategy of solidifying its partnership with Moscow while navigating persistent tensions with Washington over trade, Taiwan, and international security.

Xi and Trump: A Push for "Mutual Respect"

According to official accounts from both nations, the conversation between Xi and Trump covered a wide range of topics, including Iran, trade, Taiwan, and Russia's war in Ukraine.

President Trump described the call as "excellent" on his Truth Social platform, noting that his personal relationship with Xi remains "extremely good."

From the Chinese side, the focus was on de-escalation and building trust. Xi reportedly told Trump that disputes between the world's two largest economies could be resolved "one by one," fostering incremental progress. He outlined a vision for U.S.-China relations built on "mutual respect, peaceful coexistence and win-win cooperation," framing 2026 as a pivotal year for stabilizing bilateral ties.

Figure 1: U.S. President Donald Trump and Chinese President Xi Jinping's recent call focused on stabilizing relations amid ongoing economic and geopolitical friction.

Taiwan Remains a Core Friction Point

A central message from Beijing concerned Taiwan. Chinese state broadcaster CCTV reported that Xi warned Trump to proceed with "caution" on the issue.

Taiwan continues to be one of the most sensitive subjects in U.S.-China relations. Beijing consistently opposes American arms sales and political support for Taipei, highlighting the island as a major point of strategic friction even as both leaders emphasize the need for stability.

Beijing and Moscow: Deepening a Strategic Partnership

In his separate call with Vladimir Putin, Xi signaled a desire for deeper cooperation with Russia. Both leaders have consistently portrayed their relationship as a source of stability in an uncertain global landscape.

The partnership comes as European leaders continue to pressure China to withdraw its support for Russia, which is facing Western economic sanctions.

Russian state television broadcast Putin's opening remarks, in which he reaffirmed the alignment between the two countries. "I would like to once again assure you of firm support for our shared efforts to ensure the sovereignty and security of our countries, our socio-economic welfare and the right to choose our own development path," Putin stated.

The European Union's sanctions are inflicting a "significant impact" on Russia's economy, which could reach an unsustainable breaking point by 2026, according to the EU's top sanctions envoy, David O'Sullivan. Speaking ahead of the fourth anniversary of the full-scale invasion of Ukraine, the veteran official expressed confidence that the unprecedented economic measures are working as intended.

O'Sullivan acknowledged that sanctions are "not a silver bullet" and will always face attempts at circumvention. However, he remains optimistic about their long-term effects on Moscow's ability to finance its war.

The EU's economic sanctions aim to pressure the administration of Russian President Vladimir Putin over the war in Ukraine.

"I am fairly bullish," he stated, noting that the pressure is building. "Defying the laws of economic gravity can only go on for so long."

Sanctions Take a Toll on Russia's Economy

The core of O'Sullivan's argument is that Russia's pivot to a war economy is severely distorting its entire financial structure at the expense of its civil sector. This strain is manifesting in key economic indicators. Russia is currently grappling with inflation running at about 6% and interest rates set at a high of 16%.

Vladimir Putin's war machine is also facing shrinking revenues. According to Russia's own finance ministry, federal budget revenues from oil and gas—the lifeblood of the economy—were halved in January, falling to their lowest point since July 2020. This economic pressure comes as Russia intensifies its attacks on Ukraine's energy infrastructure during a harsh winter.

Cracking Down on Sanction Evasion

Appointed in December 2022, O'Sullivan's primary mission is to counter the evasion and circumvention of EU sanctions. The EU has launched an unprecedented 19 rounds of sanctions since 2022, targeting over 2,700 individuals and entities and restricting trade across sectors like energy, aviation, IT, and luxury goods.

A key focus has been persuading non-EU countries to prevent the re-export of European goods to Russia, particularly components that can be repurposed for military use. O'Sullivan noted some success in stemming the flow of critical products through Central Asia, the Caucasus, Turkey, Serbia, the UAE, and Malaysia. He clarified that in most cases, this circumvention is driven by "economic operators seeing economic opportunity" rather than by deliberate government policy.

The China Factor: A "No-Limits" Challenge

China, however, stands out as an exception. O'Sullivan described Beijing as "clearly sort of backfilling and providing support" to Moscow, though he stopped short of accusing it of supplying direct military equipment.

He said that when EU leaders raise this concern with their Chinese counterparts, the response is consistently dismissive. "The answer is always the same: 'Nothing to see here. We don't know what you're talking about. We don't see any problem.'"

Targeting Russia's Shadow Oil Fleet

The EU has also claimed significant success in disrupting Russia's "shadow fleet"—a collection of aging oil tankers with obscure ownership used to transport crude to markets in China and India. By December, nearly 600 of these vessels had been placed under EU sanctions.

"We've been very successful in getting flag states to remove their flags from sanctioned vessels," O'Sullivan said. "I think we have tightened the screws on that particular form of circumvention, very considerably. I think the Russians are struggling to keep the oil flowing."

The India Dilemma and US Criticism

Despite these efforts, the EU has faced criticism from the United States for not going far enough. U.S. Treasury Secretary Scott Bessent recently accused the EU of "financing the war against themselves" by signing a trade deal with India without securing tougher commitments on Russian oil purchases. Since the invasion, India has become one of the top global buyers of discounted Russian crude.

O'Sullivan defended the EU's engagement with India, arguing that cooperation is more effective than isolation. He highlighted several key actions taken before the trade deal was signed:

• EU sanctions were imposed on a large Indian refinery.

• The EU banned imports of refined products made from Russian crude, including those from India.

• The Adani Group, owner of 14 Indian ports, decided to block access to sanctioned tankers.

"India is a hugely important country," O'Sullivan stated, "and I think we gain much more by engaging with it, even if we don't always agree with every Indian foreign policy position."

Stemming the Flow of Western Tech to Russia's Military

A critical area of focus for O'Sullivan's team is a "common high-priority list" of 300 products. These items, such as memory cards, optical readers, and circuit boards, are not classified as dual-use goods requiring export licenses but have been consistently found inside deconstructed Russian drones, missiles, and helicopters.

The fact that these components originate from Western countries—including the US, EU, Switzerland, and the UK—is "embarrassing for us all," O'Sullivan admitted. He added that awareness among EU member states about this supply chain vulnerability has grown, and while the problem has been reduced, it has not been completely eliminated.

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South Korea is executing a delicate dual strategy to secure its supply of critical minerals, essential materials for its world-leading semiconductor and electric vehicle battery sectors. While joining a new U.S.-led alliance designed to reduce reliance on China, Seoul is simultaneously pursuing closer cooperation with Beijing to ensure a stable flow of these vital resources.

Seeking Stability Through Direct Engagement with China

Recognizing its vulnerability, South Korea's trade ministry has announced plans to establish a direct hotline and a joint committee with Chinese authorities. The goal is to help South Korean companies import Chinese minerals more quickly and reliably.

This move addresses a core dependency: South Korea lacks a complete domestic supply chain for rare earths and other critical minerals. The situation grew more precarious in October when Beijing expanded its control over rare earth exports, a move that South Korea's trade ministry noted increased instability in global supply chains. By opening direct channels, Seoul aims to mitigate the risks of unexpected shortages and navigate China's tightening export policies.

Diversifying Sources with a US-Led Alliance

At the same time, South Korea is actively diversifying its sourcing away from China. The country was recently chosen to chair the Forum on Resource Geostrategic Engagement (FORGE), a preferential trade bloc for critical minerals unveiled by Washington. This alliance aims to prevent any single country from using resource supply chains as a tool for geopolitical leverage.

As chair of the bloc through June, South Korean Foreign Minister Cho Hyun stated that Seoul will boost coordination with partners and promote investment in projects to secure supply chains.

Domestically, the government is taking several concrete steps:

• Strategic Designation: Authorities will designate 17 specific minerals as critical for national security, placing their supply chains under tighter monitoring and analysis.

• Global Partnerships: Seoul will deepen cooperation with other nations, including the United States, Vietnam, and Laos, to develop alternative sources.

• Financial Support: The government plans to allocate 250 billion won (US$172.35 million) in state funds to support local companies developing overseas mines.

A Diplomatic Approach to Geopolitical Risk

This two-pronged strategy highlights South Korea's pragmatic approach to a complex geopolitical landscape. While the U.S. has taken aggressive steps to secure its own critical mineral supplies, Seoul is adopting a more diplomatic path.

By engaging directly with China while simultaneously building resilience with Western allies, South Korea is attempting to insulate its critical manufacturing industries from the escalating competition over strategic resources.

The Malaysian ringgit, Asia's top-performing currency over the past year, may have more room to strengthen, according to Second Finance Minister Amir Hamzah Azizan. Citing the country's robust economic performance, he signaled that growth forecasts could be revised upward.

In a Feb. 4 interview with Bloomberg TV, Amir stated that the ringgit was undervalued in 2025 and the market is now adjusting to that reality. He noted that inflows into Malaysia's equity and bond markets in January helped strengthen the currency, a trend he expects will continue.

"I think the ringgit still has potential because growth is still intact in this country and it's still growing well," he commented. This follows a prediction he made four months earlier, correctly forecasting the currency would strengthen past the four-per-dollar mark against the US dollar.

Malaysia's Economy Defies Global Headwinds

For now, Malaysia’s economy has proven resilient in the face of US tariffs, a factor that prompted the central bank to hold its benchmark interest rate steady since July. The nation's economic momentum is outpacing much of Southeast Asia, supported by resilient domestic demand.

Key drivers include strong investment flows into several high-growth sectors:

• Electronics

• Data centers

• Energy transition projects

These investments are helping to cushion the economy from turbulence in global trade.

Strong GDP Growth Fuels Currency Rally

Malaysia's economic expansion hit 4.9% in 2025, exceeding the government's own forecast of 4% to 4.8%. While the official forecast for 2026 is a more moderate 4% to 4.5%, Amir expressed optimism that Bank Negara Malaysia might revise this estimate upward in the coming months. He also added that he sees no catalyst for inflation to rise this year.

This strong economic foundation is translating directly into currency performance. The ringgit has gained 3% in 2026, building on a 10% surge in 2025. This rally is attributed to structural factors like investment flows and growth momentum, not just the broad weakness of the US dollar.

Fiscal Consolidation Bolsters Investor Confidence

The government is also focused on improving its fiscal health to attract investors. Malaysia aims to narrow its budget deficit to 3.5% of gross domestic product in 2026, down from a target of 3.8% in 2025. Amir noted that the 3.8% target for 2025 was "within reach," with final numbers expected by the end of February.

To achieve this, Prime Minister Anwar Ibrahim's administration is counting on better tax collection and reduced subsidy spending, even as it contends with lower petroleum-related revenue and a relative slowdown in growth.

Amir emphasized that the government is deliberately reducing its reliance on oil and gas revenues. He stated that the current oil price range was already factored into the budget.

"The key for Malaysia was the diversification," he explained. "The more we push for economic diversification, the more we improve our fiscal space and tax collections, the resilience of the fiscal space of the government is much better."

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