2026-08-15 Observatory briefing¶

The Next Global Economic Crisis Could Be Made in China¶

The argument here is not that China’s export machine is too powerful, but that it has become structurally incapable of stopping. Froman’s central claim is that the world’s capacity to absorb Chinese overcapacity is finite, and that the political and arithmetic limits are converging. The arithmetic is stark enough: a $1.2 trillion surplus growing at three times the rate of global goods trade cannot be sustained by any conceivable expansion of demand. The political limit is the shrinking tolerance of the advanced economies and the Global South for deindustrialisation and strategic dependency. When these two limits meet, the result is not a gentle rebalancing but a protectionist short-circuit of Beijing’s dual circulation strategy.

The deeper contradiction is internal to the Chinese model itself. The state-directed financial system channels credit to firms that are instructed to expand regardless of profitability, producing a manufacturing sector where nearly a third of industrial firms operate at a loss. Local governments prop up failing enterprises to preserve employment and tax revenue, while state banks roll over debt for insolvent borrowers. This is not a market failure but a political-economic equilibrium: the fiscal health of local states depends on factories staying open, and the factories can only stay open by exporting at negative margins. The machine cannot slow down because slowing down would trigger the very crisis of unemployment and bad debt that the system is designed to suppress.

What Froman describes as China’s “outgrowing its economic model” is better understood as the exhaustion of a particular accumulation strategy. The surplus is not a sign of strength but of overaccumulation—capital that cannot be profitably reinvested domestically and must be dumped abroad at below cost. The anti-involution campaign and the 15th Five-Year Plan’s consumption promotion are gestures toward rebalancing, but they do not touch the core: the suppression of household consumption that forces savings into industrial expansion. The US position is not neutral advice but a demand that China internalise the costs of its own overproduction before those costs are externalised as a global crisis. Whether Beijing can manage that transition without a domestic political rupture is the question the article leaves open.

The Long Shadow of the Iran Shock¶

Source: Foreign Affairs

The five months since Tehran closed the Strait of Hormuz have produced a paradox that the policy establishment is eager to misread as proof of its own competence. Brent crude averaged just over $100 a barrel, peaked at $126, and has since fallen into the $80s. Against the $200 forecasts, this looks like resilience. But the headline numbers conceal the actual mechanics of the shock: the world did not absorb the disruption so much as redistribute it. Demand fell by roughly five million barrels per day in the second quarter of 2026, not because consumers chose to drive less, but because governments imposed rationing and forced reductions in consumption. The pain was pushed onto Asia and Europe, where diesel and jet fuel shortages bit hard, while the United States and China—the two actors with the strategic depth to manage the crisis—emerged relatively insulated.

That unevenness is the real story. China stabilised the global oil balance by drawing on its immense state capacity to curb imports, holding inventory off the market and throttling its own refining and consumption. This is not a market outcome; it is a geopolitical one. Beijing effectively absorbed the cost of the disruption to prevent a price spiral that would have damaged the global economy, and in doing so demonstrated a form of power that no amount of pipeline diplomacy can replicate. The United States, for its part, benefited from its position as a net exporter and from the fact that the crisis hit Asian and European importers hardest.

The authors are right to warn against complacency, but their prescription—renewed investment in energy security, diversified routes, emergency stocks—misses the deeper point. The cushions that absorbed this shock were not the product of prudent policy alone. They were the accumulated result of a decade of overinvestment in supply capacity, much of it driven by the very geopolitical competition that produced the crisis. The spare capacity that saved the market was itself a form of fictitious capital: assets held idle, waiting for a disruption that would justify their existence. Now that the disruption has arrived and inventories are depleted, the next phase will test whether the system can rebuild those cushions while the strait remains a permanent point of vulnerability. The authors note that alternative routes are becoming more vulnerable and infrastructure will take years to repair. What they do not say is that the resilience they celebrate was always a function of who held the spare capacity, and that the current distribution of that capacity—concentrated in states with the political will to use it strategically—is itself a source of inter-imperialist tension, not a solution to it.

Xeneta analyst insight – Middle East war impact spreads to long term market¶

Source: Hellenic Shipping News

The war premium has migrated from the spot market into the contractual bedrock of the container trade, and Xeneta’s data shows carriers converting a geopolitical shock into a durable pricing structure. Spot rates from the Far East to the US West Coast have climbed 271% since late February, but the more telling figure is the long-term contract rise of 41% on the same lane — and 40% to the US East Coast, 41% to North Europe. These are not panic purchases; they are shippers signing away elevated costs for a quarter or more, accepting that the Red Sea disruption is not a temporary rerouting but a new cost baseline.

The analyst’s advice to shippers — avoid one-year deals, seek shorter tenures with adjustment mechanisms — reads as a confession of the carriers’ structural advantage. With capacity constrained by rerouting around the Cape and the Suez route effectively closed to many operators, the major lines hold a concentrated grip on available slots. The spread between spot and long-term rates on the Transpacific, now over USD 4,000 per FEU, is the leverage made visible: carriers can point to the spot market as evidence that today’s contract prices are still a bargain, while knowing the spot market itself is their own making. This is overaccumulation in reverse — not a glut of capital seeking outlets, but a scarcity of shipping capacity being monetised to its maximum.

The longer-term contract increases matter beyond the immediate quarter. They embed the war premium into the cost structure of importers and manufacturers, who will pass it down the chain into retail prices. For the shipping lines, the crisis has delivered what years of consolidation and alliance-building could not: pricing power so complete that the analyst openly frames the market as one where carriers "call the shots." The question is whether this pricing power survives the peace — and whether the capacity discipline that has made it possible will be abandoned once the Suez route reopens, flooding the market with tonnage and collapsing the very rates now being locked in.

What Should Be Done About Asia’s Undervalued Currencies?¶

Source: Project Syndicate

The argument that the renminbi, yen, and won are undervalued because of bilateral surpluses with the United States mistakes a symptom for a cause. Frankel is right to dismiss coordinated intervention as a fix, but his framing of "fundamentals" stops short of where the analysis needs to go. The surpluses are not a currency mispricing; they are the structural expression of where productive capacity sits relative to the dollar-centred financial system.

China, Japan, and South Korea do not run surpluses with the US because their currencies are cheap. They run surpluses because their industrial bases are integrated into global supply chains that denominate trade in dollars, while their domestic financial systems remain too shallow to absorb their own savings productively. The US runs the corresponding deficit because it offers the deepest, most liquid capital markets on earth — a form of financial privilege that lets it consume beyond its production. Intervention would merely shuffle the paper; it would not touch the underlying asymmetry of who manufactures and who finances.

The deeper problem is that the dollar's role as the world's reserve currency gives the US an effective veto over any coordinated rebalancing. For the yen or won to appreciate meaningfully, the US would have to accept a shrinking deficit, which means accepting a reduction in its own consumption and a potential challenge to the very financial dominance that sustains its position. No amount of central-bank coordination can resolve that contradiction, because it is not a technical problem of exchange rates but a political problem of who bears the cost of adjustment. Frankel's caution is analytically sound, but it leaves the real question untouched: the imbalances persist precisely because the system that produces them has no mechanism for resolving them without a fight over relative power.

The Real Competitiveness Test¶

Source: Project Syndicate

The McKinsey authors reduce competitiveness to a single observable: where capital chooses to locate. On its face this is a useful demystification — it cuts through the World Bank’s indicator sprawl and names the actual decision that matters. But the framing quietly assumes that investment flows are a neutral referendum on national policy environments. They are not. They are the product of a global system in which capital moves not toward the most productive site but toward the site offering the highest risk-adjusted return, which is a different thing entirely.

China’s three-decade ascendancy as the leading destination for productive capital is cited as the test’s proof. Yet that ascendancy was built on state-directed credit, forced technology transfer, and a labour regime that suppressed wages relative to productivity growth — conditions no amount of deregulation in Europe or America can replicate. The authors’ prescription, making it “cheaper and easier to build, operate, and innovate,” treats competitiveness as a purely administrative problem. But the gap is not primarily regulatory. It is that China’s state has been willing to subordinate the logic of immediate profitability to strategic accumulation over a longer horizon, while Western capital remains hostage to quarterly returns and shareholder primacy.

The real test the authors propose is therefore less a measure of competitiveness than a measure of which political economies can sustain the conditions for overaccumulation without crisis. The US and Europe cannot simply deregulate their way back; they would need to reorganise the relationship between the state and the productive base in ways that cut against the interests of the very capital whose location decisions they hope to influence. That is the contradiction the investment metric exposes, even if the authors do not name it.

Azul targets ‘transition year’ as it reports record revenue despite losses¶

Source: FlightGlobal

Azul’s framing of 2026 as a “transition year” papers over a more awkward reality: record revenue alongside persistent losses, achieved by deliberately shrinking the airline. The capacity cuts, especially on international routes, were a defensive response to the fuel price surge, and management now presents the normalisation of those costs as the precondition for recovery. But the airline’s own numbers suggest the problem is not merely the price of kerosene but the structural position of a Brazilian carrier in a global market where the dollar-denominated costs of leasing, maintenance and fuel collide with a depreciating real and a domestic consumer base whose disposable income is under constant pressure.

The distinction between revenue growth and profitability is doing heavy lifting here. Azul can report record turnover because it has pricing power in a consolidated domestic market, yet that same consolidation is a symptom of the overcapacity that plagued the sector before the crisis. The “transition” is really an attempt to re-time capacity additions to a demand curve that remains hostage to the broader Brazilian economy. If fuel costs have indeed normalised, the airline’s continued losses point elsewhere: to the interest burden on debt taken on during the downturn, and to the terms imposed by lessors and creditors who hold claims senior to any shareholder return.

For the wider industry, Azul’s manoeuvre is a reminder that capacity discipline is not a strategy but a survival reflex. The moment fuel prices ease, the incentive to restore capacity and chase market share returns, and with it the downward pressure on yields. The real question is whether the demand Azul says it sees can absorb that restoration without another round of overcapacity and another “transition year” further down the line.

Why Airbus Is Building A350s Faster Than Airlines Can Actually Take Them¶

Source: Simple Flying

The A350 programme has reached the peculiar point where the factory floor and the balance sheet are pulling in opposite directions. Airbus is accelerating structural output toward a 12-per-month cadence by 2028, yet delivered only 26 aircraft in the first half of 2026 — roughly four to five per month. That gap is not a production failure in the conventional sense; the airframes are being built. The bottleneck has migrated downstream, into cabin outfitting and the synchronisation of delivery slots with airline capital expenditure cycles.

Faury’s insistence that production speed and handovers are not interchangeable metrics is an admission that the manufacturer has decoupled industrial throughput from the realisation of value. Aircraft rolling off the line but sitting on ramp space awaiting interiors are, in effect, fixed capital frozen in a state of incomplete circulation. The irony is that Airbus’s own vertical integration drive — absorbing Spirit AeroSystems’ Kinston and Prestwick facilities — was meant to secure the supply chain, but has instead concentrated the friction. Composite curing cycles and automated fastening routines at feeder plants now determine the rhythm of the entire programme, and any micro-disruption halts final assembly bays.

The deeper tension is between the imperative to clear an 800-plus order backlog and the reality that airlines, facing uncertain demand and stretched balance sheets, are not eager to take delivery of aircraft they cannot immediately deploy. Lufthansa’s decision to extend the lives of older widebodies rather than absorb delivery delays is a rational response to a situation where the manufacturer’s need to amortise its own capital expenditure collides with operators’ need for certainty in their own. The completion-centre bottleneck is thus not merely technical; it is where the interests of industrial capital and airline capital diverge most sharply. For now, the backlog provides cover, but if the gap between assembly velocity and delivery cadence persists, the order book itself becomes a form of fictitious capital — a promise of future revenue that cannot be converted into actual cash flow.

SAA names new acting chief as predecessor put on immediate special leave¶

Source: FlightGlobal

The timing of Seshibe’s removal is the story. He was appointed in April, signed a codeshare with Emirates in early August, and was gone by mid-August. Four months is not enough time for a chief executive to fail on operational metrics; it is enough time for a board to decide a direction is wrong. The undisclosed reasons suggest the decision was political rather than performance-based, and the immediate special leave — a suspension dressed in softer language — indicates the departure was not amicable.

SAA is a peculiar beast: a state-owned carrier that has been through business rescue, government bailouts, and a search for a strategic equity partner that keeps stalling. The revolving door at the top is a symptom of a deeper structural tension. The South African state needs SAA to exist as a flag carrier and a symbol of national economic presence, but it cannot or will not fund it adequately, and private capital will not touch it without concessions the government is unwilling to make. Every new chief inherits this contradiction; every new chief eventually collides with it.

The Emirates codeshare is a clue. For a carrier with SAA’s constrained network, a Gulf partnership is a survival mechanism — feeding traffic to a stronger hub rather than competing. If Seshibe was pushing further down that road, deepening dependence on Emirates or other Gulf carriers, he may have crossed a line that the board or the ministry considered a step too far toward surrendering SAA’s independent route network. Alternatively, he may have been moving too slowly on the partnership the government actually wanted. Either way, the pattern is familiar: a state-owned enterprise lurches between commercial logic and political necessity, and the chief executive is the expendable part that absorbs the shock. The next acting chief will face the same structural bind, and the same fate.

Thrive’s Joshua Kushner chides Silicon Valley VCs over AI euphoria¶

Source: TechCrunch

Kushner’s letter is a rare instance of a major capital pool publicly admitting that the price of AI assets has detached from any sober assessment of their worth. His warning that “not every exceptional company is a great investment at every price” is not a critique of speculation but a claim that Thrive can speculate more intelligently. The distinction matters: he is not arguing against the mania, only against the indiscriminate form it takes among his West Coast peers.

The concentration strategy he champions is less a philosophical divergence than a structural one. Thrive’s ability to pour 90% of a fund into fifteen companies rests on access that is itself a form of inherited capital — the son of a real-estate billionaire does not face the same diversification pressures as a first-time fund manager. The “outlier” model Andreessen espouses is the rational response for firms that must spread risk because they cannot guarantee entry into the best deals. Kushner’s independence is the luxury of someone who never needed the portfolio to hedge against exclusion.

The OpenAI cross-ownership arrangement is the most revealing detail. When a venture firm’s portfolio company takes an equity stake in the firm itself, the traditional distinction between investor and asset collapses. Thrive is not merely betting on AI; it has fused its balance sheet with the sector’s most important player. The 41% gross IRR is impressive, but it is also a measure of how much of that return is now circular — value generated by OpenAI’s own valuation feeding back into Thrive’s books. The promised liquidity events, the SpaceX IPO and OpenAI’s debut, will be the real test of whether the paper gains convert into realised capital. Until then, the letter reads less as a warning to the industry than as an attempt to position Thrive as the sober buyer at the top of the market.

How Corporations Can Mitigate an AI Jobocalypse¶

Source: Project Syndicate

The piece is a plea for corporate voluntarism dressed as political economy. Rajan’s central move is to frame AI displacement as a problem of pace rather than of structure: if firms stagger their adoption, the argument runs, workers can be absorbed through attrition and retraining. The Census data he cites — 37% of large firms using AI against 20% of small ones — is meant to show that adoption is still shallow enough for managed transition. But the numbers cut the other way. The gap between large and small firms is precisely the mechanism by which competitive pressure forces adoption: the 63% of large firms not yet using AI are not exercising restraint, they are waiting for the technology to clear its cost curve. When it does, they will move together, and no amount of corporate social responsibility will stagger that synchronised wave.

The appeal to “social solidarity” assumes the corporation is a moral actor with long-term interests in social stability. Yet the shareholder-owned firm’s time horizon is set by quarterly reporting and the cost of capital, not by the social costs of unemployment. Rajan’s proposed incentives — tax breaks for retraining, subsidies for gradual transition — are transfers from the state to firms that would likely adopt AI anyway, converting public funds into private profit while leaving the structural dependence of labour on wages untouched. The real question is not whether corporations can be persuaded to slow down, but whether the state is willing to compel them. On that, the piece is silent, which is itself an answer.