The tables have turned. As US President Donald Trump reignites his trade war with China, he holds all the bargaining chips.
The growth trajectories of the world’s two biggest economies have diverged sharply since Trump’s first term. While global investors are doubling down on US exceptionalism, keeping faith that the US dollar and US equities would continue to outperform, the Chinese economy is limping along and might not able to shake off deflation, perhaps for decades to come.
That could use some introspection. Knowing that the US wanted an ugly divorce as early as 2018, when Trump first started slapping tariffs on Chinese imports, did Chinese President Xi Jinping (習近平) mismanage the economy somehow, or was it pure bad luck?
In a global trade war, the economy with a powerful consumer base wins. Trump can throw insults at foreign heads of state and coerce big businesses to reshore in the US, because he is able to block access to the world’s most resilient spenders. Selling goods and services to Americans is much more profitable, thanks to robust demand.
That insight seems to have gone missing in Beijing.
Instead of encouraging consumption, Beijing has doubled down on industrial policy. It is fostering high-end manufacturing, such as electric vehicles, semiconductors and robotics, with subsidies and cheap financing. State-owned banks have been offering low-interest loans to industrial companies, while reining in lending to the real-estate sector, which arguably triggered a deep property downturn.
At the same time, the welfare of China’s middle class has been ignored.
As they stumbled out of COVID-19 pandemic-related lockdowns in late 2022, they discovered an economy that suffers from long COVID. “Rotten tails,” or residential projects distressed developers had sold, but were unable to finish, are peppered across the nation. A harsh big tech crackdown has left fresh college graduates jobless and their middle-aged parents anxious. Between 2018 and last year, the number of births tumbled by more than one-third, hard evidence of the economic pressure couples are facing.
Consumers are hunkering down.
Household savings more than doubled from 2018 to about 151 trillion yuan (US$20.7 trillion) last year, even as banks repeatedly cut deposit rates. Instead of slavishly buying European luxury goods, until recently a symbol of aspiration and economic success, people are opting for self-care and engaging in activities that do not cost as much, such as camping and road trips.
What this has resulted in is an economy that is even more imbalanced than before. Consumption last year contributed only about 30 percent to economic growth, versus 68 percent at the onset of 2018. Most of the 5 percent GDP growth came from exports, as the likes of electric vehicle maker BYD Co took the world by storm.
It is a dismal report card — boosting consumption would have been a low-hanging fruit. Private consumption is relatively low in China, it accounts for just about 40 percent of the economy, versus about 55 percent in Japan and Germany, and 63 percent in Brazil.
That also puts Xi in a tight spot as he jostles with Trump, who has a knack for finding pain points. As an example, the US Postal Service is temporarily suspending inbound packages from China and Hong Kong, potentially delaying or blocking shipments from retailers such as Shein and PDD Holdings Inc’s Temu.
That would hurt. Textiles and apparel that the two e-commerce platforms sell are the third-biggest category of US imports from China after computers and electrical equipment. Without exporters, Xi can kiss his 5 percent growth target goodbye.
After Trump’s election victory, perhaps in a nod to its vulnerability, Beijing signaled to the public in December last year that boosting consumption would be its top priority this year. Is that a real pivot, or mere lip service? Only time would tell, but one thing is certain, Xi squandered his most powerful trade war weapon — his public.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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