Xi Jinping has put the fate of his country and regime in the hands of others, especially the next leader of the country he considers an enemy, the United States. Yes, China’s ruler, who many consider the world’s most powerful figure, is, in reality, helpless.
How did that happen?
In short, Xi did it to himself. For largely ideological reasons, he has consistently rejected common sense advice to boost consumer spending to make it the basis of the Chinese economy, and almost all his recently announced stimulus measures will directly or indirectly erode consumption. “The chance of structural reform in Xi Jinping’s China is,” as Anne Stevenson-Yang of J Capital Research USA told me, “none.”
This means Xi has only one option left: export his way out of economic difficulties.
Although China’s exports have been soaring – they were up a stunning 12.7 per cent year on year last month – the growth is not sustainable. As Nobel laureate Paul Krugman pointed out in June to Bloomberg, global markets are not big enough for Xi’s plan to succeed. “We can’t absorb,” he said. “The world will not accept everything that China wants to export.”
Moreover, countries are already resisting China’s predatory trade practices, with many now determined to stop Beijing’s decimation of their industries. Not least the United States.
China, as a result of Xi’s misguided economic ideas, is entering what some have called a “doom loop.” “China’s economy is in a slow grind downwards,” as Andrew Collier of Orient Capital Research and the Harvard Kennedy School told me in June. The deterioration since then is evident.
The economy is unlikely to be growing anywhere near the reported 4.6 per cent rate for the third quarter. Even if it were, the country would not be creating the output needed to pay back its debt. China, as a practical matter, is undergoing its long-delayed 2008. Debt defaults, beginning with the high-profile failure of Evergrande Group in 2021, threaten to derail the economy.
More defaults are virtually inevitable because China’s total-country-debt-to-GDP ratio is dangerously high. After taking into account the infamous “hidden debt” and adjusting for inflated GDP reports, the ratio could be, according to my estimates, 350 per cent. Given simultaneous challenges, China has an extremely small chance of avoiding a financial crisis.
It can – and has – delayed a reckoning. So far.
Enter Donald Trump. If there was one consistent economic promise he made during his successful run for the presidency, it was upping tariffs.
In February, speaking to Maria Bartiromo on the Fox News Channel, Trump suggested that he might impose tariffs greater than 60 per cent on Chinese imports.
Levies of that size – not to mention the 100 per cent rate he has talked about at times – would tank China’s already weak economy. At even the 60 per cent rate, some Chinese goods would be shut out of the US market entirely. For others, China’s central or local governments or Chinese manufacturers would have to absorb most of the cost.
In 2018, when Trump, as president, imposed tariffs of up to 25 per cent on Chinese goods, Beijing and Chinese manufacturers through various stratagems essentially paid 75 to 81 per cent of the tariffs in order to preserve sales.
With factory-gate prices sinking – the country’s Producer Price Index in October fell for the 25th straight month – Chinese manufacturers are already reeling. They cannot afford to cut prices any more.
Moreover, the prospect of new Trump tariffs is already having one other effect: convincing companies to move production from China, as American shoe company Steve Madden announced after the American election.
As Trump’s tariffs reduce Chinese exports and ultimately damage the Chinese economy, members of the Communist Party elite will almost certainly fight among themselves for shrinking sources of graft. They will be forced to engage in even more vicious fights for power. Xi will be presiding over an increasingly unstable ruling group.
Unfortunately for Xi, he has few means to retaliate. Trade-surplus countries have very little ammunition in struggles with trade-deficit ones. Last year, America’s goods trade deficit with China came in at $279.1 billion. This year, America’s China deficit through September amounted to $217.5 billion. Trump has many trade bullets he can fire.
Ultimately, Xi faces an insoluble paradox. To create growth, China needs to export more. To export more, Xi needs to double down on extremely selfish trade policies. As he doubles down, countries will impose tariffs and otherwise restrict access to their markets.
“Evading trade sanctions has become a blood sport for China,” Collier told me this month, but Trump does not seem to be in the mood to permit Chinese cheating. The likely appointment of China hawk Marco Rubio as secretary of state and Mike Waltz as national security advisor would seem to add to the seriousness of the President-elect’s intent.
For Xi Jinping, there is now no exit strategy.
Gordon G Chang is the author of ‘Plan Red: China’s Project to Destroy America’ and ‘The Coming Collapse of China’. Follow him on X @GordonGChang.
