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Chinese battery shares fell after Beijing unveiled a plan to reduce export tax rebates, while South Korean materials companies advanced.

Contemporary Amperex Technology Co. led the drop with a decline of as much as 4.8% in onshore trading Monday, among the worst performers on the MSCI China Index. Its smaller peers including Eve Energy Co. and Gotion High-Tech Co. also slid more than 4% at one point.

China announced a rejig of its value-added tax rebates on hundreds of export products starting from April, with discounts on 22 battery-related goods to be cut to 6% from 9%. A complete removal is planned from 2027.

"The decline in Chinese battery stocks today appears to be a knee-jerk reaction," said Gary Tan, portfolio manager at Allspring Global Investments LLC. "Investors view it as an early signal of tighter oversight on overseas battery shipments, a key demand driver last year."

The measure comes as Beijing takes voluntary moves to rein in the exports of some goods, including battery-related items, as trade tensions with partners such as the European Union remain intense despite a tariff truce with the US. This could also add pressure to the battery sector when China is already urging the industry to curb excessive capacity expansion and avoid cutthroat competition.

Lithium, meanwhile, extended its recent rally on Monday, aided by expectations of a potential rush of battery-related exports ahead of the April policy changes. The most-active lithium carbonate futures rose by the 9% limit on the Guangzhou Futures Exchange to 156,060 yuan ($22,372) a ton. Share of producers including Tianqi Lithium Corp. and Ganfeng Lithium Group Co. surged as much as 6% in Shenzhen.

"The latest policy should open a potential front-loading export window during the year," analysts at Citigroup Inc. wrote in a note.

Some observers pointed to limited impact of the tax changes to CATL, the world's biggest electric vehicle battery maker, given the company's stronger pricing power and scale advantages. The policy may potentially be more challenging to tier-two manufacturers.

"Smaller players have historically leveraged the higher VAT refund to implement aggressive low-pricing strategies to win ESS orders," analysts at Morgan Stanley wrote in a note, referring to energy storage systems. The lower rate will leave them exposed to margin compression and competitive pressure, they added.

Meanwhile, shares of South Korean battery-materials makers rose as Beijing's policy move narrowed the cost advantage of the Chinese companies. Ecopro BM Co. and POSCO Future M Co. each gained more than 6% on Monday.

Source: Bloomberg Europe

China's strategic pivot to high-tech industries is failing to compensate for its deep-rooted property crisis, leaving the economy increasingly vulnerable to global trade disputes, according to a new report from research firm Rhodium Group.

The analysis highlights a fundamental imbalance in the country's economic strategy. While Beijing is channeling state investment and favorable policies into advanced technologies like artificial intelligence, robotics, and electric cars, the growth from these sectors is being swamped by the decline in real estate.

The Growth Numbers Don't Add Up

According to the Rhodium Group report, which analyzed official Chinese data, the math is stark. From 2023 to 2025, new industries contributed just 0.8 percentage points to economic output. Over the same period, the property sector and other traditional industries saw a combined decline of 6 percentage points.

This gap presents a serious challenge to Beijing's goal of achieving annual GDP growth around 5%. Logan Wright, a partner at Rhodium and co-author of the report, was direct in his assessment. "China's growth strategy isn't going to work," he told CNBC. "They're not going to achieve their targeted rates of GDP growth based on the policies they have outlined so far."

To sustain a 5% growth pace, Rhodium estimates that new industries would need to expand their investment sevenfold over the next five years. This translates to a staggering 2.8 trillion yuan in additional investment needed this year alone—a 120% increase over 2025 levels. Analysts believe that while some sectors like AI might see a boost, others are unlikely to maintain such explosive growth.

"Electric vehicles have likely already reached their fastest rates of growth, and output in the industry may be slowing in the years ahead," the report noted.

The Unyielding Drag of the Property Market

While Beijing prioritizes tech development, its response to the multi-year real estate slump has been less aggressive. The property sector once accounted for over a quarter of China's economy, but its decline continues to deepen. According to the China Real Estate Information Corp., new home sales by floor area last year dropped to levels not seen since 2009.

Global investment firm KKR echoed these concerns in its macro outlook, estimating that property weakness will shave 1.2 percentage points off China's GDP growth this year. Even with a projected 2.6 percentage point contribution from digital technologies, KKR’s forecast puts overall growth at 4.6%, below the government's likely target.

"Despite a potential 5% growth target for 2026, headwinds from real estate and a weak job market cast doubt on achievability," the KKR report stated. While the property drag might halve in 2027, the firm sees limited upside from digital industries or consumer demand to fill the gap.

Broader Economic Risks: Jobs and Trade Friction

This intense focus on technology comes with significant economic side effects that extend beyond GDP figures.

A Looming Jobs Deficit

The new high-tech sectors, while offering higher wages, employ far fewer people than the traditional industries they are meant to replace. The Rhodium analysis pointed out this critical jobs mismatch.

Furthermore, increased factory automation could have a devastating impact. KKR projects that automation, combined with China’s already dominant 30% share of global manufacturing, could eliminate up to 100 million jobs over the next decade. This level of displacement would surpass the entire workforce of most developed nations.

These pressures compound an already difficult employment situation. China's urban unemployment rate hovered above 5% for much of last year, with youth unemployment running approximately three times higher.

Growing Reliance on Exports

With domestic demand and investment unable to absorb the country's industrial output, China is set to become increasingly reliant on selling its goods abroad.

"Beijing will become even more dependent upon gaining market share in export markets," the Rhodium report concluded. "China will remain even more reliant upon exports in the future, leaving the economy vulnerable to new trade restrictions."

This trend is already sparking international backlash. As a wave of lower-priced Chinese goods, particularly electric vehicles, flows into global markets, trading partners are pushing back. The European Union and Mexico have already joined the United States in raising tariffs on imports from China, signaling growing friction ahead.

Japan's currency markets are on alert as Prime Minister Sanae Takaichi reportedly considers a snap election, a move that could reshape the nation's economic and geopolitical landscape. The yen weakened on Friday following speculation that Takaichi might call for a vote in February to solidify her ruling coalition's narrow majority, signaling investor concern over her policy direction for the $4 trillion economy.

Yen Sinks as Snap Election Rumors Swirl

The yen's latest slide came after Hirofumi Yoshimura, leader of the ruling coalition partner Ishin, remarked that he "wouldn't be surprised" by a snap election on February 8 or 15. His comments, made to public broadcaster NHK, followed a meeting with Takaichi and aligned with an earlier Yomiuri newspaper report.

Japan's Prime Minister Sanae Takaichi meets with Hirofumi Yoshimura, leader of coalition partner Ishin, fueling speculation of an early election.

Since Takaichi secured the premiership on October 6, the yen has softened by 5%. Her rise to power was built on a promise to combat inflation through increased government spending, a strategy that now worries currency traders.

High Approval Ratings vs. Mounting Economic Risks

Takaichi currently enjoys a honeymoon period with approval ratings around 70%. If she leverages this popularity to win a stronger mandate, she will have greater freedom to expand Japan's already massive government debt.

This policy path presents several risks:

• Increased Borrowing Costs: A surge in government spending would likely push up borrowing costs.

• Weaker Yen: Higher debt levels could further depress the value of the yen.

• Import-Driven Inflation: A falling yen makes imports more expensive, potentially accelerating inflation.

While the finance minister has hinted at currency intervention, these warnings have done little to stop the yen's decline, highlighting the market's focus on Takaichi's fiscal agenda.

Compounding Pressures from China Dispute

The economic challenges are amplified by an ongoing diplomatic dispute with China concerning Taiwan. The prime minister's off-the-cuff remarks in November have led to retaliatory measures from Beijing.

China has already restricted tourist flows, causing airlines to cancel at least a dozen flight routes to Japan. More recently, a Wall Street Journal report indicated that Beijing has also cut off exports of vital rare earths to Japanese firms. An electoral victory for Takaichi could embolden her stance, potentially inviting further economic pressure from China.

An Uncertain Electoral Outcome

Despite Takaichi's personal popularity, a victory for her Liberal Democratic Party (LDP) is not guaranteed. The LDP lost nearly 70 seats in late 2024 due to a slush-fund scandal that Takaichi dismissed after taking office.

The scandal also led to the collapse of the LDP's long-standing coalition with the Komeito Party in October. Without the support of Komeito's powerful urban political machine, the Nikkei has estimated that the rural-backed LDP could lose another 25 seats.

Should the prime minister proceed with an early election, Japan's economy faces a period of heightened uncertainty, both in the lead-up to the vote and in its aftermath.

Even at the height of the British Empire, its military power had clear limits. When Prime Minister Lord Palmerston considered sending troops to defend Denmark from Prussia in 1864, Chancellor Bismarck of Prussia famously scoffed that he would just send the police to arrest them. While the Royal Navy dominated the seas, Britain’s volunteer army was consistently outmatched by the massive conscript forces of continental Europe before World War I.

Today, the gap between the UK's military ambitions and its actual capabilities is even wider. The navy is a fraction of its former size, and the army has shrunk to just 71,000 soldiers—for comparison, the U.S. Marine Corps alone has between 180,000 and 190,000 personnel.

A Bold Pledge for Ukraine Meets Harsh Reality

Despite these constraints, Prime Minister Keir Starmer and French President Emmanuel Macron recently pledged to send a combined force of up to 15,000 troops to Ukraine should a ceasefire be reached in its four-year war with Russia, according to The London Times.

This commitment followed an initial proposal from British military chiefs to send 10,000 UK troops as part of a larger 64,000-strong European coalition. That plan was quickly scaled back when it became clear that, accounting for rest and rotation, it would require committing a total of 30,000 troops—a number far beyond current capacity. The UK already finds it difficult to maintain its deployment of 900 soldiers in Estonia, a force that has already been halved.

Russia's Resilient War Machine

As Bismarck also noted, Russia is never as strong as it appears or as weak as it seems. Vladimir Putin has mobilized 710,000 men for his invasion of Ukraine, defying predictions that Western sanctions would trigger an economic collapse. While Russia's economy is only about a tenth the size of the rest of Europe's, its military spending in purchasing-parity terms this year will equal that of all European NATO members combined. The International Institute for Strategic Studies warns that Russia could pose a direct threat to Europe by 2027.

The Franco-British initiative may boost Ukrainian morale, but it is unlikely to intimidate Putin without guaranteed U.S. air support—a major uncertainty, especially if Russia doesn't even agree to a ceasefire. The small number of proposed troops, combined with Germany's decision to only commit forces to Ukraine's western neighbors, exposes Europe's underlying military weakness.

The £28 Billion Hole in Britain's Defense Budget

UK defense spending has fallen from 4% of its gross domestic product at the end of the Cold War to just 2.3% today. Starmer has made ambitious promises to reverse this trend, targeting 2.6% by 2027 and 3.5% by 2035 to meet new NATO goals. However, these are essentially postdated checks.

The fiscal reality is grim. It was revealed on Friday that Air Chief Marshal Richard Knighton, Chief of the Defence Staff, had warned the prime minister before Christmas of a £28 billion ($32.6 billion) shortfall in defense funding over the next four years. A planned £66 billion in tax increases by Chancellor of the Exchequer Rachel Reeves will not be enough to cover it. Meanwhile, the defense investment plan, originally due in December, has been postponed again until March.

Domestic Politics Handcuff Foreign Policy

Starmer's ability to project power abroad is severely constrained by his political weakness at home. His approval ratings have hit historic lows, dropping to minus 59 in the latest poll, and Labour lawmakers are openly discussing a leadership challenge. An attempt to appear authoritative by allowing cameras into a Cabinet meeting backfired when he was seen reading his lines from a script.

The governing Labour party remains more focused on welfare than warfare. The Treasury's efforts to trim social spending have been blocked by backbench rebellions. Starmer is also retreating from tax rises opposed by powerful lobbies, including farmers, pub landlords, and small businesses, who have the support of his MPs. Last month, he ordered Rachel Reeves to reverse a decision on inheritance taxes for farmers.

But who lobbies for the armed forces? While military leaders have been sounding the alarm for years, their protests against budget cuts have been largely ineffective. In an aging society with slow GDP growth, spending on pensions, health, and social care has far more powerful political advocates. This reflects a broader European trend: the continent accounts for less than 10% of the world's population but, by some estimates, more than half of its social spending.

The Mars vs. Venus Divide Persists

This dynamic echoes a transatlantic debate ignited over two decades ago by military analyst Robert Kagan's article, "Americans are from Mars and Europeans are from Venus." He argued that Europe champions a world governed by law, but its rejection of power politics "ultimately depends on America's willingness to use force around the world against those who still do believe in power politics."

This created a rift in perspectives: Washington often sees Europeans as "annoying, irrelevant, naïve and ungrateful," while Europe views the U.S. as a "rogue colossus."

A Few Nations Buck the Trend

Not all of Europe is lagging. Richer Nordic countries, the Baltic states, and Germany are now meeting or exceeding NATO spending targets. Poland plans to spend 4.8% of its GDP on defense next year, and German Chancellor Friedrich Merz has pledged to make the Bundeswehr the "strongest conventional army in Europe" by 2029, a goal aided by Germany's smaller national debt.

Germany and France are also introducing popular volunteer programs to train young people in the armed forces. In contrast, Britain's equivalent program is negligible.

Ultimately, the responsibility falls to Prime Minister Starmer. While some Labour MPs demand gestures of defiance against leaders like Trump, they are not clamoring for the defense budgets that would give such gestures weight. It is the prime minister's job to make the case to his party and the nation why, sometimes, guns must come before butter.

In her first 18 months as UK Chancellor, Rachel Reeves has faced a persistent fiscal headache: the high cost of government borrowing. With annual interest payments reaching £110 billion ($150 billion), the stubbornly elevated yield on UK government bonds, or gilts, is severely restricting her policy options.

This has prompted a turn toward creative, and arguably brazen, fiscal strategies. In her November budget, Reeves introduced unorthodox spending measures designed to lower inflation, including a fare freeze on the newly nationalized rail network and significant subsidies for household energy bills. The Bank of England noted these actions could shave half a percentage point off inflation this year, potentially paving the way for it to lower its official rate from 3.75%.

However, a less visible but equally bold plan is now taking shape: a strategic shift in how the UK manages its national debt.

A Strategic Pivot from Gilts to Treasury Bills

The core of the new approach is to issue more short-term debt to deliberately force down the yields on longer-dated bonds. This technocratic maneuver aims to directly tackle the high borrowing costs that have plagued the UK Treasury.

Last week, the Treasury's Debt Management Office (DMO) signaled its intent to issue more short-dated UK Treasury bills. These instruments function as government IOUs; they don't pay a regular coupon but are sold at a discount and redeemed at face value upon maturity.

This move heralds a major change in the UK's debt composition. By increasing the supply of these "T-bills," the government can reduce its reliance on issuing traditional, longer-term gilts. An oversupply of these long-dated bonds has been a primary driver of their high yields, and this stealth operation is designed to reverse that pressure.

Inside the UK's Short-Term Debt Push

This shift toward shorter-term financing is already underway. The average maturity of UK bonds has been substantially shortened under Reeves, falling from over 14 years to less than 13 years. For new inflation-linked gilts, maturities have been cut by two-thirds.

While finance ministries globally are exploring similar "longer to shorter" strategies, the move toward T-bills is a significant departure for the UK, drawing inspiration directly from the U.S. Treasury's playbook, where bills constitute a fifth of all government debt.

The potential for expansion in the UK is vast. Currently, there is only £98 billion worth of one-, three-, and six-month UK Treasury bills in circulation, a fraction compared to the nearly £3 trillion in gilts. The financial appeal is clear: T-bills yield around 3.8%, roughly 80 basis points less than 10-year gilt yields, offering immediate cost savings for the Treasury. Their slightly higher yield compared to gilts of an equivalent maturity is due to a different tax treatment, as bills are subject to capital gains tax while gilts are not.

Market Winners and Losers from the T-Bill Flood

The DMO anticipates strong demand for a new flood of T-bills. Banks, pension funds, and investment firms will likely be eager buyers, seeking liquid, short-term assets. Additionally, these bills serve as high-quality collateral for derivatives traders and hedge funds in the overnight repo market—a development the Bank of England would welcome.

However, the strategy creates potential losers. Big commercial banks will face stiff competition for depositor funds, as the 3.8% return on government-backed T-bills is higher than what most savings accounts currently offer.

Conversely, retail savers stand to benefit. Michael Smith, head of debt capital markets at Winterflood Securities Ltd., noted that these measures will be welcomed by individual investors. This initiative aligns with Reeves's broader efforts to open up UK capital markets, with T-bills and corporate bonds seen as excellent candidates for Individual Savings Accounts (ISAs), which have been criticized for holding too much idle cash.

Ultimately, the Chancellor's primary goal is to drive down long-term gilt yields by diversifying the government's funding sources. A welcome side effect, however, should be improved liquidity and greater access for individuals in the UK's capital markets.