With Donald Trump proposing a 60% tariff on Chinese goods—a significant increase from the 7.5%-25% tariffs during his first term—China’s economy faces unprecedented challenges due to several vulnerabilities:
- Property Market Crisis
In 2018, a booming property market contributed a quarter of China’s GDP, supporting local government revenues through land auctions for residential projects. Since 2021, however, this sector has faced a severe downturn, causing local government finances to suffer significantly. With an oversupply of housing and dwindling revenues, the real estate sector is no longer able to absorb external shocks, putting the economy in a weaker position. - Debt Overhang
The property slump has exacerbated China’s debt issue, particularly at the local government level. Total government debt reached 147 trillion yuan ($20.7 trillion) by the end of 2023, and combined household and corporate debt exceed 350 trillion yuan, or roughly three times the economy’s size. This debt burden limits Beijing’s ability to implement fiscal policies that could counteract external economic shocks. - Weak Domestic Demand
China’s household spending is just under 40% of GDP, considerably lower than the global average, due to low wages, pensions, and a fragile social safety net. Addressing this would require reforms such as adjusting tax policies, boosting social welfare, and tackling income inequalities. However, China’s focus remains on its export-oriented manufacturing sector rather than domestic consumption. - Deflationary Pressures
The downturn in real estate, high debt, and weak domestic demand have driven deflation, especially in the industrial sector. China’s emphasis on manufacturing has resulted in industrial overcapacity and factory gate deflation, worsening the economic strain. With consumer price inflation now at a modest 0.4%, further tariffs could worsen deflation, hurting businesses and growth. - Limited Currency Depreciation
In response to Trump’s initial tariffs, the yuan depreciated to offset the impact. This time, to counteract a 60% tariff, the yuan would need to fall by 18% against the dollar, reaching levels last seen during the 1990s Asian financial crisis. However, due to concerns about capital outflows, Chinese authorities are cautious about allowing significant currency depreciation. - External Demand and Market Opportunities
China benefited from U.S. consumer spending during the pandemic and Russia’s increased demand for Chinese goods after Western sanctions. These were temporary boosts to China’s economy, and with the global economy slowing, such opportunities may not recur.
In this economic environment, China’s vulnerabilities are heightened, and the proposed tariffs could deeply impact growth by reducing exports, driving deflation, and exacerbating debt pressures.
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