This article first appeared in Forum, The Edge Malaysia Weekly on July 27, 2026 - August 2, 2026
As the summer sizzles with record heat in Europe, the European Commission has slapped Chinese platform AliExpress with a €550 million (RM2.56 billion) fine over sales of illegal and counterfeit products under its Digital Services Act. This is more than double compared to the €120 million fine handed out to Elon Musk’s social platform X in December 2025 and the €200 million fine for Chinese platform Temu in May.
At the same time, global trade tensions are rising in the sphere of global imbalances. According to a European study, based on the International Monetary Fund’s (IMF) 2025 External Sector Report, global imbalances in 2024 were not judged excessive overall, with the US current account being “moderately weaker than implied by fundamentals and desirable policies” while those of China and the euro area were assessed to be “moderately stronger”. These are not excessively large by historical standards but the rapid widening of imbalances in 2024 and 2025 has raised concerns.
According to the IMF, roughly two-thirds of the increase in global current account balances in 2024 were driven mainly by China’s current account surplus rising from 1.4% in 2023 to 2.3% of GDP in 2024 and an estimated 3.3% in 2025 while the US’ deficit widened from about 3.3% to about 4% of GDP, with a smaller contribution from the euro area.
The European economies are terrified by Chinese exports of electric vehicles (EVs), batteries and automotive parts, which are eating the lunch of German and French car manufacturers. In June this year, China’s exports surged 27% year on year (y-o-y) to a record US$412.4 billion, driven by AI-related goods, with semiconductor exports growing 122% while computer and parts exports rose 53%. China also exported more than one million vehicles for the first time, with their value rising 70%, as Chinese EV makers gained a 15% share in Europe.
Given the high capital expenditure in AI, data infrastructure and onshoring of manufacturing, the US current account deficit would remain high at about 3.5% of GDP while higher welfare payments, interest costs and defence expenditure are also keeping the US fiscal deficit high at 5.8% of GDP for 2025 and its rising debt-to-GDP ratio at 122%. The Pentagon has spent some US$37.5 billion so far on the Iranian war and it has applied to Congress for approval of US$87 billion in funding, with US$67 billion scheduled for Middle East operations.
As a result, the US’ net international investment position (NIIP) reached about 90% of US GDP, or 24% of world GDP, by end-2024. This was due to sustained current account deficits but also to valuation effects arising from US equity prices and an appreciating dollar.
Meanwhile, the Chinese balance of trade, which has been strong on the manufacturing export side, has been offset by a services deficit, driven largely by Chinese outbound tourism. However, the Chinese services deficit is beginning to narrow as Chinese outbound tourism has been hurt by weak domestic consumption arising from the real estate slump.
The fragmentation of global supply chains and logistics is here to stay.
In short, the Ukraine and Iran wars have deteriorated from the expected quick finish to asymmetric attrition that is painful not only to both sides but also to the whole world as national security decisions are trumping all business decisions. The market must adjust to arbitrary sanctions, conflict escalation and strike-counterstrike moves at chokepoints that affect all businesses, which must suffer because there is no alternative.
As Iran begins to strike back at Saudi and Persian Gulf infrastructure, the conflagration is widening. Losses of key oil and gas infrastructure will hurt Middle Eastern export income and, hence, the ambitious spending in infrastructure vital to maintain social stability. In the Arab Digest’s view, the region is on the verge of “an unmanageable, multi-front war” that is a regional cataclysm.
In the meantime, the global stock markets are at record highs, driven by the AI capital expenditure boom of over US$700 billion — especially by the big platforms — that has pushed up profits for the chip manufacturers. Taiwan Semiconductor Manufacturing Company (TSMC) announced record profits, another US$100 billion investment in US plants and its intention to raise prices by 10%. Demand for memory chips is pushing profits and market capitalisation higher for South Korean and Chinese chip manufacturers.
This is in sharp contrast to the declining yen at 163 per US dollar and US Treasury yields rising to 4.6% for 10-year and 5.1% for 30-year papers. Meanwhile, Japan’s 30-year government bond yields rose to a record 3.9%, implying that when interest rates converge, the exchange rates will “normalise”.
How will the AI’s rising profits and capex story burst?
One possibility is an outright escalation of conflict that shuts down global trade. Another is the iron law of technology innovation operating — with a new breakthrough catalysing “creative destruction”. Austria’s former minister of finance and economic historian Joseph Schumpeter in his 1942 book Capitalism, Socialism and Democracy had identified this process of industrial mutation that destroys old value and creates new ones.
Of course, as US magazine The Atlantic says, the AI Bubble is no ordinary bubble. All bubbles are self-fulfilling expectations until they are not. Investors expect revenues and profits to rise perpetually, so spending on capex gives the hope that they will generate more revenue in the future. The share price rises and market cap reaches astronomical levels, so the wealthier you feel, the more you invest. When the tide recedes, some will be caught naked.
However, Chinese AI company Moonshot AI released the Kimi K3 model that is attracting global model builders and enterprise users to switch to open-source and open-weight models because these are cheaper and more efficient in terms of computing power. Essentially, US large learning models boil oceans of data to get nuggets of insights. They ask users to pay an escalating subscription price for the privilege. As my good friend Michael Spencer in his blog AI Supremacy says, “If Chinese models that are getting larger and more efficient and can replicate the performance while undercutting the cost” reach critical mass, they have “the potential to become an AI crisis in the stock market”. Capex that is normally depreciated over 10 to 15 years may have to be written down in three to five years due to innovation obsolescence, hitting profits and market cap simultaneously.
As Chinese AI start-ups and platforms are now raising capital domestically, the geonomics rivalry is fragmenting technology, finance and trade supply chains. Both sides are now restricting sensitive technology or AI models that have military use potential, such as the US directives on Anthropic and Chinese concerns over robotic technology. The US is building fortress protectionism that taxes users of American technology while sanctioning or warning non-users. China is going for open-source global leadership and democratisation of innovation.
There are huge opportunities in arbitrage in this fragmenting world. However, it will require risk-taking by entrepreneurs and governments alike to max-min (maximise profits while minimising sanction or retaliation risks). This is not the game for the meek or showman bravado. The quiet professional business that goes below the radar screen wins. The bluffer who cannot execute or deliver will be exposed. But luck is the random variable.
Fortune rewards the brave (or reckless).
Tan Sri Andrew Sheng writes on global issues from an Asian perspective
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