Enough Stimulus, Already? Navigating China's Economic Challenges
Contention escalates between United States and People's Republic of China
First off, the jitters started spreading among local officials due to the specter of anti-corruption investigations in 2024. With a whopping 889,000 officials being handed punishment – an impressive 50% increase over the average from 2018 – you can't really blame them for being a bit wary.
Moving on, let's talk about public spending and its curious reluctance to truly shake up the demand game. You see, despite throwing around some eye-popping numbers – 500 billion yuan for beefing up state banks, and another 800 billion for refinancing regional debts – those goodies aren't quite up to the excitement level of, say, receiving a hot new gadget. These measures can certainly make a dent, but they're no match for the thrill of private sector purchases.
Then there's the paltry fact that transfers account for just 6% of GDP. Pity the poor economy compared to its more lavishly doted-on peers!
Up next on our list of economic annoyances is the escalating trade war with the US. This isn't just a spat between two big kids on the block – it threatens the entire world economy. And did you know that China accounts for around one-third of global production? That's a pretty hefty slice of the global economic pie!
Tariffs have reached levels not seen since the 1930s, and the fear is that Donald Trump may decide to play some more ominous tricks, like squashing US investments in Chinese companies or booting Chinese firms from American exchanges.
China's economy has been treading water for several years now, with high unemployment and deflation complicating matters. So, stoking domestic demand has become a top priority. The focus has shifted from simply opening up the wallet to showering the people with goodies, to more targeted measures, like increasing subsidies for the exchange of household appliances and upping basic pension payments. Family-friendly moves, like preparing subsidies for families with children, are currently being piloted in some regions.
The problem? The support program isn't exactly Academy Award-winning material. If it's too small, it'll be a total flop. If it's too large, it'll cause havoc with fiscal stability, especially when you factor in the aging population. Furthermore, we need more than just direct payments to revive the real estate market.
Is a 5% GDP target for 2025 a pipe dream? Perhaps. Achieving that goal requires nominal GDP growth, job support, and an expansion of consumption – a daunting challenge, given the limited resources at our disposal.
Now, let's talk about the black market. China's maverick attitude to pesky regulations has encouraged businesses to find creative ways to circumvent the US market. Some goods find their way into the US via Canada and Mexico, mislabeled as North American. Other products are repackaged and shipped through third countries. And don't forget about undervaluing goods – a clever ploy that allows them to slide under the radar and reduce tariffs.
Weak controls make these schemes unbelievably effective. One U.S. port employee handles up to 50 containers a day, and only 10% of U.S. Customs staff are stationed at ports. In 2024, the U.S. received a mind-boggling 1.25 billion packages – most of which go without a second glance. The trade gap between the U.S. and China exceeds $100 billion, a rather telling indication of the scale of circumvention. Small businesses can't get enough of these schemes, and tracking illegal goods has become a Sisyphean task. Without stepped-up inspections, the tide of gray imports is only going to rise.
So, what's the bottom line? Major bilateral trade relations have practically ground to a halt. The U.S. is in for some inflation growth as replacing China as a production hub is a tall order, even with ideal global connections. Production transitions require materials and processing handled by China. China, meanwhile, loses its largest customer.
American industry and construction rely heavily on Chinese supplies, while Chinese high-tech production depends on US components. Both economies are intertwined within global supply chains, and tariffs will result in higher prices and component shortages – things that are hard to spot for the average consumer. Textiles, automotive, machinery, and electrical equipment are especially vulnerable, according to the OECD.
The U.S. dependence on Chinese components is three times greater than China's dependence on US components due to the differences in production scale. China is particularly vulnerable in high-tech sectors, including electronics and aerospace. Despite efforts to import substitution, global supply chains, especially in aerospace, persist.
Tariffs will hit labor-intensive sectors, potentially undermining support for a tough stance in the US. In China, the short-term losses may be exacerbated, but these setbacks could accelerate the path to self-reliance.
The U.S. faces a long-term supply shock, while China will see the opposite effect but must find new ways to avoid unemployment growth. Yuan devaluation is ineffective due to the risks of capital outflow. If the US refuses to tolerate trade imbalances, an export-oriented growth model could become unsustainable for other countries as well.
But wait, there's more! In negotiations, Trump uses a "carrot and stick" approach, but his abrupt shift to tariffs, while the dollar, treasuries, and US stock market take a nose dive, has significantly cramped his leverage. If he raises tariffs again, markets will likely tumble, and that intra-party support? Forget about it. Financial sanctions could further depreciate the dollar and bond prices, raising serious concerns.
From a foreign perspective, the first and most convincing reason to join the US was its readiness to provide security guarantees for free. Today, those guarantees don't seem quite as unshakable. They're no longer free, as demonstrated by the US's long history of battling the construction of "Nord Stream 2" (aimed at promoting American LNG in the market).
The second attraction of the US was access to its unique domestic market, the world's largest consumer. However, there are reasons to believe that the American consumer will face a rough patch ahead: the US economy is heading towards a recession, supply chains are snapping, and incomes are being eroded by inflation.
Finally, the US's comparative advantage has always been its dominance in the global tech ecosystem. But this monopoly is becoming expensive. Like all costly monopolies in history, it is now facing serious challenges from all angles, including from China, where Huawei and Xiaomi challenge Apple, DeepSeek challenges OpenAI, and ByteDance challenges Meta.
In the meantime, China is offering some tasty incentives, like its dominance in the global supply chains due to the supply of critical minerals, intermediate products, components, and equipment. None of this can be easily replaced overnight. Additionally, China leads in the field of energy transition technologies, has a rapidly developing technological ecosystem, is eager to invest abroad, offers cheaper capital, and is providing significant stimulus to its domestic market.
So, in this new chapter, the US will have to displace China from the world stage without having either the stick or special carrots that China can't match or even surpass. This seems like an overly ambitious task.
It's likely that most countries will balk at the US's offer to join an anti-Chinese coalition. Instead, they'll choose caution over braveheartedness. Stay tuned to our Telegram channel, @expert_mag, for more updates on this unfolding drama.
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Supplemental Insights:
- The State of Chinese Consumers: Chinese consumers are adapting to a "new reality" characterized by single-digit consumption growth and cautious consumer confidence. They are increasingly prioritizing personal fulfillment in their spending habits. (Source: McKinsey & Company)[2]
- China’s Long-term Economic Strategy: China's economic strategy going forward emphasizes innovation and high-tech manufacturing to enhance competitiveness. The country is working to reduce vulnerabilities in high-value sectors affected by trade restrictions. (Source: The Brookings Institution)[2]
- Global Impact of the Trade War: The trade war between the US and China could lead to a worldwide recession, with negative consequences for global trade and economic growth. (Source: International Monetary Fund)[3]
- Despite China's efforts to boost domestic demand and counter economic challenges, the government's support program, while necessary, faces the risk of being too small and causing fiscal instability, especially with an aging population.
- The escalating trade war with the US poses significant threats to both economies, with China accounting for around one-third of global production and the US relying heavily on Chinese supplies for American industry and construction.
- In the global competition for economic dominance, China is not only growing its supply chains and technological ecosystem but also offering enticing incentives, such as leading in critical minerals, energy transition technologies, cheap capital, and domestic market stimulus, that many countries might find hard to refuse.
