Mandated Momentum: Beijing’s Billion-Dollar Bet on an AI-Driven Recovery
The End of the Initial Purchase Era
In 2024 the government of China was faced with a dilemma. The country’s population had been rising in affluence since the early 2000’s and the economy had seen massive growth. However by 2017/18 consumer electronics’ products, bought by this new Chinese middle class, were up for replacement, and CE growth transitioned from initial purchase growth to a more normal replacement cycle. The value of purchases continued to increase as middle class affluence continued to grow, but in 2017 unit volumes in flagship products began to decline for the first time.
In 2024 the government of China was faced with a dilemma. The country’s population had been rising in affluence since the early 2000’s and the economy had seen massive growth. However by 2017/18 consumer electronics’ products, bought by this new Chinese middle class, were up for replacement, and CE growth transitioned from initial purchase growth to a more normal replacement cycle. The value of purchases continued to increase as middle class affluence continued to grow, but in 2017 unit volumes in flagship products began to decline for the first time.
Figure 1 - China Mobile Phone Shipments - 2012 - 2025 - Source: SCMR-LLC, CAIST
The Urban-Rural Connectivity Gap
By that time ~98% of the Chinese population had at least a mobile phone and the transition from a ‘dumb’ mobile phone to a smartphone had already reached between 55% and 60% of the population. This was driven by the urban population’s desire for better connectivity and more “user-experience” oriented applications. However the fall in unit volume, for the first time since China had been collecting such data, was a head’s-up for the Chinese government. There were other factors that precipitated this change, such as the over 98% of the Chinese population who accessed the internet through their phone, and that smartphone conversion was now moving from the urban population to more remote regions, but the unit volume outcome was a blow to the growth that the Chinese government had been touting for years..
The "Urban Bubble" and the Delayed Response
Chinese government officials lived in the same urban environments as affluent consumers and were sheltered somewhat from the slowing smartphone growth. They were aware that the growth of more mature CE products, particularly appliances, had been slowing and put in place some relatively narrow subsidies for these items in the early 2020’s, but it was not until 2024 when smartphones were beginning to be considered as part of the government’s “New for Old” program. In fact, smartphones were not included until January 2025, after almost 8 years of declining sales.
From Green Energy to National Solvency
That program, which began in a slightly different form in 2024, was originally intended, at least so the Chinese government says, to focus on energy efficiency. Initially 8 home appliances were targeted:
The Fiscal Pivot: Centralizing the Burden
In the early days of the subsidy (2024) much of the funding was done through local governments who fronted the capital. This local emphasis was the reason behind the program’s slow start and considerable friction between provincial governments and the Central government, but in July of 2024 the Central government issued 150 billion yuan ($20.7 billion US) of ultra-long special treasury bonds (20, 30, and 50 year).
The Central government changed the plan at that time from a roughly 50/50 burden on the provinces, to a general 1:9 ratio, with the central government now bearing most of the program cost. In actuality, the percentage changes based on the prosperity and location of the provinces involved, with less prosperous provinces in the 5% range and the more affluent in the 15% responsibility range.
We note, in the table below, that the consumer allocation percentage of the float is less than half of the float (and spend) with the larger allocation going to industrial equipment.
By that time ~98% of the Chinese population had at least a mobile phone and the transition from a ‘dumb’ mobile phone to a smartphone had already reached between 55% and 60% of the population. This was driven by the urban population’s desire for better connectivity and more “user-experience” oriented applications. However the fall in unit volume, for the first time since China had been collecting such data, was a head’s-up for the Chinese government. There were other factors that precipitated this change, such as the over 98% of the Chinese population who accessed the internet through their phone, and that smartphone conversion was now moving from the urban population to more remote regions, but the unit volume outcome was a blow to the growth that the Chinese government had been touting for years..
The "Urban Bubble" and the Delayed Response
Chinese government officials lived in the same urban environments as affluent consumers and were sheltered somewhat from the slowing smartphone growth. They were aware that the growth of more mature CE products, particularly appliances, had been slowing and put in place some relatively narrow subsidies for these items in the early 2020’s, but it was not until 2024 when smartphones were beginning to be considered as part of the government’s “New for Old” program. In fact, smartphones were not included until January 2025, after almost 8 years of declining sales.
From Green Energy to National Solvency
That program, which began in a slightly different form in 2024, was originally intended, at least so the Chinese government says, to focus on energy efficiency. Initially 8 home appliances were targeted:
- Refrigerators
- Washing Machines
- Televisions
- Air Conditioners
- Computers
- Water Heaters
- Household Stoves
- Range Hoods
The Fiscal Pivot: Centralizing the Burden
In the early days of the subsidy (2024) much of the funding was done through local governments who fronted the capital. This local emphasis was the reason behind the program’s slow start and considerable friction between provincial governments and the Central government, but in July of 2024 the Central government issued 150 billion yuan ($20.7 billion US) of ultra-long special treasury bonds (20, 30, and 50 year).
The Central government changed the plan at that time from a roughly 50/50 burden on the provinces, to a general 1:9 ratio, with the central government now bearing most of the program cost. In actuality, the percentage changes based on the prosperity and location of the provinces involved, with less prosperous provinces in the 5% range and the more affluent in the 15% responsibility range.
We note, in the table below, that the consumer allocation percentage of the float is less than half of the float (and spend) with the larger allocation going to industrial equipment.
Future Tech and the Aging Demographic
This year’s program will expand further, with the NDRC indicating that while 2024 and 2025 was oriented toward unit volume (moving inventory), 2026 will be more about “Future Tech” and the “Silver Economy”. Future tech is easy to understand. It includes new items like:
Mandating Quality: The War on "Involution"
At the same time the government also narrowed the number of home appliance categories from 12 to 6, eliminated most Grade 2 subsidies, and lowered the caps on high-end appliances from 2,0900 yuan ($290.61 US) to 1,500 yuan ($217.96 US) to open the funding to a large population swath. That said, in a more uncharacteristic move, the central government also implemented in the 2026 program what it calls “Anti-Involution”. Involution is a Chinese word for a “race to the bottom”, the point at which companies are so willing to compete on price that profitability disappears, innovation is stalled, and workers suffer.
New “Price Conduct Rules” that are part of the 2026 subsidy plan make sure that manufacturers do not sell product below cost to capture share and use these rules to rein in ‘disorderly’ low-price e-commerce competition by blacklisting violators for 6 to 12 months. It seems that the central government, after years of idly standing by while Chinese companies undercut foreign businesses by selling at or below cost to gain share, they seem to notice that it also has the effect of causing deflation, and when that is internal to China it becomes a very sensitive subject A number of Chinese smartphone brands are very familiar with the issues surrounding price “conduct” and are well-known for those tactics.
The AI Filter: Subsidizing the Next Generation
This year (2026) the requirements go even further. Any smartphone looking to generate a 15% subsidy must meet the following three new requirements relating to AI:
In the 2nd half of this year the Chinese government is expected to release a set of AI Handset Standards (2.0) that will mesh with the subsidy requirements. The focus here will be AI privacy, essentially keeping AI from leaking sensitive user and corporate data. This will be significant for Apple (AAPL), as the company will find itself caught between the strict subsidy price caps and AI compliance issues. Apple is able to pass the NPU requirement as both the A19 and A19 Pro chips in the iPhone 17 series have a neural engine that qualifies. The iPhone 17 Pro, the Pro Max, and the iPhone Air all meet the RAM requirement (12GB) but the basic iPhone 17 does not with 8GB, meaning it can be cut out of the subsidy pie if the memory is not changed, a margin question for Apple, especially given the rapid rise in memory pricing. Apple also faced the price cap rule (6,000 yuan) for the iPhone 17 in 2025, but was able to ‘adjust’ the initial price to 5,999 yuan last year, making the 500 yuan subsidy available to this basic model in China.
But there is another more fuzzy issue, that referring to Apple Intelligence. Apple has been forced to partner with Alibaba and Baidu to ‘backend’ Apple intelligence in China and Apple’s AI must be able to refuse to answer 95% of the 2,000 questions asked by the government concerning sensitive political issues. Apple is still in the testing phase, but could find itself in an “all”, “none”, or “partial” mode where it might not be able to access subsidies in every province. Apple can assuage these potential problems by offering higher trade-in values for other Apple products to offset the loss of the subsidy, but it is still up in the air about the final level of compliance. On the opposite pole is Transsion (688036.CH). Transsion is probably the most well-known for the price cutting tactic mentioned above, as the company dominates the low-end market in China and Asia, but has the ability to rein in its aggressive pricing nature to capture this more draconian subsidy program.
Conclusion: Engineering the Upgrade
The shift from 2024’s volume-based subsidies to 2026’s "Future Tech" and "Silver Economy" mandates represents more than just a retail stimulus; it is a calculated attempt to force-march the Chinese consumer into a domestic, AI-integrated ecosystem. By tying financial incentives to high-threshold hardware specs, like the 12GB RAM floor and dedicated NPUs, Beijing is effectively de-platforming the "low-quality" growth that defined the previous decade.
For domestic champions like Huawei and Xiaomi, these rules provide a subsidized path to premiumization. For foreign players like Apple, the path is narrower, requiring a delicate dance between maintaining global brand margins and meeting increasingly localized, "fuzzy" AI compliance standards.
Ultimately, the "New for Old" program's success will be measured by whether it can truly break the cycle of "Involution." If the government can successfully pivot the middle class from "buying cheap" to "buying smart," they may finally solve the deflationary puzzle that has haunted the post-2017 market. However, with the central government now bearing 90% of the fiscal weight through ultra-long treasury bonds, the stakes are high. Beijing is not just subsidizing a replacement cycle; it is betting the national balance sheet on the hope that AI and the Silver Economy can reignite a cooling economic engine.
As we move into the second half of 2026, the rollout of "AI Handset Standards 2.0" will be the ultimate litmus test. It will determine if China can create a self-sustaining, high-value tech market, or if it has simply replaced a "race to the bottom" with a high-priced, state-funded "race to the top."
[1] The official Chinese government definition of “Silver Economy” - "The sum of economic activities that provide products and services to senior citizens and prepare for the challenges of an aging population."
This year’s program will expand further, with the NDRC indicating that while 2024 and 2025 was oriented toward unit volume (moving inventory), 2026 will be more about “Future Tech” and the “Silver Economy”. Future tech is easy to understand. It includes new items like:
- Smart glasses (AI/AR) (15% rebate capped at 500 yuan ($72.65 US)),
- Fitness bands (not previously included) and some
- Health related products
Mandating Quality: The War on "Involution"
At the same time the government also narrowed the number of home appliance categories from 12 to 6, eliminated most Grade 2 subsidies, and lowered the caps on high-end appliances from 2,0900 yuan ($290.61 US) to 1,500 yuan ($217.96 US) to open the funding to a large population swath. That said, in a more uncharacteristic move, the central government also implemented in the 2026 program what it calls “Anti-Involution”. Involution is a Chinese word for a “race to the bottom”, the point at which companies are so willing to compete on price that profitability disappears, innovation is stalled, and workers suffer.
New “Price Conduct Rules” that are part of the 2026 subsidy plan make sure that manufacturers do not sell product below cost to capture share and use these rules to rein in ‘disorderly’ low-price e-commerce competition by blacklisting violators for 6 to 12 months. It seems that the central government, after years of idly standing by while Chinese companies undercut foreign businesses by selling at or below cost to gain share, they seem to notice that it also has the effect of causing deflation, and when that is internal to China it becomes a very sensitive subject A number of Chinese smartphone brands are very familiar with the issues surrounding price “conduct” and are well-known for those tactics.
The AI Filter: Subsidizing the Next Generation
This year (2026) the requirements go even further. Any smartphone looking to generate a 15% subsidy must meet the following three new requirements relating to AI:
- Dedicated NPU – The phone must have a stand-alone NPU (Neural Processing Unit) and cannot rely on Ai produced on the phone’s general CPU or GPU.
- On-Device Processing – With variations, this requirement states that the phone’s hardware must be capable of running a 7-billion parameter model without the cloud.
- Memory – All phones must have at least 12GB of RAM, forcing budget phones, which are typically 8GB out of subsidy territory.
- Domesticity – In order to receive a subsidy the phone must be on the central government’s approved list. To maintain a place on that list it must contain a domestically-produced processor or a compliant one. Typically Huawei’s (pvt) Kirin processors, Xiaomi’s (1810.HK) Surge, and certain Qualcomm (QCOM) Density processors, along with AI framework processors like those from Baidu (BIDU) (Ernie) and Alibaba (BABA) (Qwen)
In the 2nd half of this year the Chinese government is expected to release a set of AI Handset Standards (2.0) that will mesh with the subsidy requirements. The focus here will be AI privacy, essentially keeping AI from leaking sensitive user and corporate data. This will be significant for Apple (AAPL), as the company will find itself caught between the strict subsidy price caps and AI compliance issues. Apple is able to pass the NPU requirement as both the A19 and A19 Pro chips in the iPhone 17 series have a neural engine that qualifies. The iPhone 17 Pro, the Pro Max, and the iPhone Air all meet the RAM requirement (12GB) but the basic iPhone 17 does not with 8GB, meaning it can be cut out of the subsidy pie if the memory is not changed, a margin question for Apple, especially given the rapid rise in memory pricing. Apple also faced the price cap rule (6,000 yuan) for the iPhone 17 in 2025, but was able to ‘adjust’ the initial price to 5,999 yuan last year, making the 500 yuan subsidy available to this basic model in China.
But there is another more fuzzy issue, that referring to Apple Intelligence. Apple has been forced to partner with Alibaba and Baidu to ‘backend’ Apple intelligence in China and Apple’s AI must be able to refuse to answer 95% of the 2,000 questions asked by the government concerning sensitive political issues. Apple is still in the testing phase, but could find itself in an “all”, “none”, or “partial” mode where it might not be able to access subsidies in every province. Apple can assuage these potential problems by offering higher trade-in values for other Apple products to offset the loss of the subsidy, but it is still up in the air about the final level of compliance. On the opposite pole is Transsion (688036.CH). Transsion is probably the most well-known for the price cutting tactic mentioned above, as the company dominates the low-end market in China and Asia, but has the ability to rein in its aggressive pricing nature to capture this more draconian subsidy program.
Conclusion: Engineering the Upgrade
The shift from 2024’s volume-based subsidies to 2026’s "Future Tech" and "Silver Economy" mandates represents more than just a retail stimulus; it is a calculated attempt to force-march the Chinese consumer into a domestic, AI-integrated ecosystem. By tying financial incentives to high-threshold hardware specs, like the 12GB RAM floor and dedicated NPUs, Beijing is effectively de-platforming the "low-quality" growth that defined the previous decade.
For domestic champions like Huawei and Xiaomi, these rules provide a subsidized path to premiumization. For foreign players like Apple, the path is narrower, requiring a delicate dance between maintaining global brand margins and meeting increasingly localized, "fuzzy" AI compliance standards.
Ultimately, the "New for Old" program's success will be measured by whether it can truly break the cycle of "Involution." If the government can successfully pivot the middle class from "buying cheap" to "buying smart," they may finally solve the deflationary puzzle that has haunted the post-2017 market. However, with the central government now bearing 90% of the fiscal weight through ultra-long treasury bonds, the stakes are high. Beijing is not just subsidizing a replacement cycle; it is betting the national balance sheet on the hope that AI and the Silver Economy can reignite a cooling economic engine.
As we move into the second half of 2026, the rollout of "AI Handset Standards 2.0" will be the ultimate litmus test. It will determine if China can create a self-sustaining, high-value tech market, or if it has simply replaced a "race to the bottom" with a high-priced, state-funded "race to the top."
[1] The official Chinese government definition of “Silver Economy” - "The sum of economic activities that provide products and services to senior citizens and prepare for the challenges of an aging population."
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