Why Growth Ain't Happening: A Sneak Peek into China's Economic Dilemma
Tensions escalate between United States and China
First off, the phobia of anti-corruption investigations haunts local officials (with a whopping 889,000 officials punished in 2024, a 50% surge from the average 2018 numbers).
Secondly, the government's spending structure is more about financial stability than stimulating demand. Just consider the fact that 500 billion yuan is earmarked for recapitalizing state banks and another 800 billion for refinancing regional debts. Although these measures have some impact, they ain't as effective as private sector purchases.
Thirdly, despite record stimulus measures, transfers only make up 6% of GDP, way below the standard in major economies.
Making matters worse, the U.S.-China trade war is far from over. China's countermeasures are a direct response to policies that, whether intentionally or not, seem hell-bent on severing ties between the world's two largest economies.
The trade war between these heavyweights will hurt the global economy, with China accounting for approximately 33% of global production. Tariffs are already at levels not seen since the 1930s, and the risk now is that Trump might resort to other measures like restricting or banning U.S. investments in Chinese companies or delisting Chinese companies from American exchanges.
Given that China's economy has been operating below potential for several years, with high unemployment and deflation, stimulating domestic demand is crucial. Policy shifts from simply increasing spending to supporting consumption, implementing programs such as subsidies for household appliance replacement, increasing basic pension payments, and preparing subsidies for families with children (pilot projects are already underway in regions).
However, the support program is limited: too small to be effective, and too large to maintain fiscal stability, especially considering the aging population. Moreover, measures beyond direct payments, such as revitalizing the real estate market, are needed.
The 5% GDP target for 2025 seems like a pipe dream, especially in deflationary conditions. Meeting this goal requires nominal GDP growth, job support, and consumption expansion, which remains a significant challenge with limited resources.
China's added challenge lies in the booming black market, which serves as an alternative to domestic demand. China, being not subject to the de minimis rule, encourages businesses to find loopholes to access the U.S. market through unconventional means:
- Goods are imported as North American through Canada and Mexico.
- Products are repackaged and shipped to the U.S. via third countries.
- Undervaluing allows goods to fall under the $800 limit and reduce duties.
Weak control makes these schemes effective: one U.S. port employee handles up to 50 containers daily. Only 10% of U.S. customs staff are port-based. In 2024, the U.S. received 1.25 billion packages, most uninspected.
The trade gap between the U.S. and China exceeds $100 billion, reflecting the scale of circumvention. Small businesses actively use these schemes, and tracking contraband is increasingly difficult. Without enhanced inspections, gray imports will continue to rise.
In the eventuality of refusal or withdrawal from the U.S., export-oriented growth becomes unsustainable for other countries.
Ideological resistance remains a significant barrier in negotiations. Trump's use of a "carrot and stick" approach is limited by his diminishing leverage, considering the falling dollar, Treasury yields, and U.S. stock market, among other factors. The offers to join an anti-China coalition may be appealing, but most countries will likely decide that prudence trumps bravery, refusing or at least shying away from this offer.
So, brace yourself for a bumpy ride in the world stage. The U.S. is facing a tough challenge in displacing China without the necessary leverage, and most countries are probably thinking twice about joining an anti-China coalition. Stay tuned for more updates on this developing situation. For more news, follow our Telegram channel at @expert_mag #China #Economic Development #Analysis.
- The increased tariffs due to the ongoing U.S.-China trade war, reminiscent of levels last seen in the 1930s, pose a significant risk for exacerbating economic instability.
- The government's budget allocations for financial stability, like the 500 billion yuan for state bank recapitalization and 800 billion for regional debt refinancing, have little impact compared to private sector purchases in stimulating economic growth.
- Government spending transfers, amounting to only 6% of GDP, are much lower than the standard in major economies, making it difficult for China to stimulate domestic demand effectively.
- To support consumption and alleviate unemployment amid deflation, policy shifts are being considered, such as subsidies for household appliance replacement, increasing basic pension payments, and preparing subsidies for families with children. However, these support programs are limited in scale and fiscal impact.
- Given politics' role in shaping economic policy, the 5% GDP target for 2025 may not be achievable, especially with limited resources, and continued reliance on the black market as an alternative to domestic demand will further complicate efforts to achieve economic growth and stability.
