As Trump 2.0 looms, China’s biggest threat is the threat he thinks it poses
(Originally published Jan. 10 in “What in the World“) Of the many nations dreading another four years of schizophrenic policy under incoming U.S. President Donald Trump, perhaps none has more to fear than China.
Trump has promised to jack up tariffs on Chinese imports to 60% from 25%, and threatened to boost them to 200% if China invades Taiwan. He has promised to revive his first-term crackdown on Chinese industrial espionage, which largely translates into blocking Chinese students entry to U.S. universities and revoking visas for visiting scholars. And although he has broken from his own party’s moves to ban the wildly popular Chinese-owned social media app TikTok, Trump has said he will restrict new Chinese investment in the U.S. and oblige Chinese companies to sell U.S. assets they already own.
All in all, China can expect relations with its largest single trading partner to be rocky—not helpful as Beijing continues its halting measures to tease its economy out of a deflationary abyss. Not much has changed on that front: Producer prices fell 2.3% in December, the 27th consecutive month of declines. China’s efforts last year to use cheap exports to gin up growth haven’t helped soften the mood in Washington.
Foreign fears for China and its markets are fed by the conviction in Western media—in outlets both conservative and liberal—that China is a staunch and sinister foe deservedly in Trump’s crosshairs. As noted previously in this space, such overwhelmingly hostile coverage (often led by the very journalists China has ejected) only feeds Beijing’s narrative that the West is unfairly committed to China’s failure and humiliation. Conversely, Washington often sees China as determined to encourage and capitalize on America’s own domestic weakness and social decline.
One of the latest examples comes from the Financial Times, which notes that concerns about Trump’s tariffs have contributed to a slide by the Chinese yuan that has sent it to its lowest against the U.S. dollar in 16 months. This is true. What the FT fails to mention, however, that the yuan isn’t the only currency falling. Most global currencies are falling against the dollar, which the prospect of higher U.S. tariffs has sent soaring. Indeed, both the Euro and the Australian dollar have fallen much farther than the yuan. While China’s renminbi has dropped about 2.8% in the past year, the Euro has fallen 5.6% and the Aussie 7.2%. The Japanese yen has dropped 8.6%.
That’s not to say the yuan’s decline isn’t bothering Beijing. While a weaker renminbi helps exports, it signifies a lack of confidence in China’s economy and tends to accelerate efforts by Chinese to move their savings out of the country, further braking economic growth. So the People’s Bank of China on Thursday moved to defend the currency by announcing it would this month sell a record 60 billion yuan ($8.2 billion) in 6-month bills in Hong Kong. Central banks sell bills to soak up cash in the economy, and by using its own bills to buy yuan, the PBoC aims to drive up the yuan’s price.
The PBoC is taking other steps to rebalance the economy, repeating an all-too-familiar pattern among nations where politicians refuse to risk votes to redress them. Not only does the PBoC plan to cut interest rates this year, but it also plans to drop targets it imposes on banks for expanding credit. These have always encouraged banks to take undue risks, thereby feeding both the property bubble and the explosion in off balance-sheet lending that has made the Chinese financial system so brittle. Instead, the PBoC plans to do what most central banks do and use a single, benchmark interest rate to guide the supply of money. In the PBoC’s case it will use the 7-day reverse repo rate.
But China’s larger problem isn’t the exchange rate, the interest rate, Western media bias, anti-China prejudice or Trump’s animosity. The larger issue is Beijing’s continued reluctance to take the political pain required to restructure an economy locked in a Japan-style, debt-driven deflationary spiral.
As former Deutsche Bank economist Michael Spencer writes:
Investors’ initial enthusiasm in September that the Chinese government had embarked on a broad fiscal stimulus has given way to a realization that something more incremental and tactical is intended. Yes, this year’s deficit will be higher; we’ve been told that often enough. But not much higher. A few trillion CNY over two or three years isn’t moving anyone’s needle. But the more interesting elements of the strategy that is emerging show an effort to stabilize local government finances—through fiscal reform to rebalance local-central revenue and expenditure assignments and increases in special bond issuance to replace higher-cost borrowings. At the same time, the government has begun another round of bank recapitalization—to repair the damage done by property price declines and to prepare them to bail out local governments…
…But the recapitalization of China’s biggest banks is a reminder that the whole system is being shaken by property price declines. Property is the collateral underlying most loans and the source of revenues used by local governments and many state-owned and private firms—even those not obviously engaged in property development—to service their loans.
Beijing has elected to deploy only half-measures. The latest is a subsidyforconsumers. Beijing this week expanded the program to include cashbacks for purchases of smartphones, smartwatches, and tablets. Economists say it also won’t be sufficient to revive spending by consumers worried about losing their jobs.
With consumers so dour, it’s no surprise that consumer prices are also moribund. The official CPI for November came in at a negligible 0.1%, below the official target of 3%. And economists from the China Finance 40 Forum think tank estimate that CPI over the past three years has declined 2%.
As China’s economy withers, the temptation to divert public attention with foreign misadventures rises. And Beijing’s obsession with restoring China’s pre-colonial stature and overcoming the West’s efforts to contain that have already led it into a new Cold War with Washington.
In the latest bout of tit-for-tat reprisals, China has slapped export bans on U.S. defense contractors. The U.S. Commerce Dept. is reportedly weighting a ban on China-made drones, for fear they are secretly programmed to spy on the U.S., or worse. And the U.S. Defense Dept. has made waves by adding China’s giant videogame-cum-social media company Tencent as well as battery maker CATL to its list of companies that it says supply China’s military. Addition to the list of 134 companies carries no direct consequences. But it can hurt their reputations and the eagerness of U.S. companies to work with them—like the Wall Street banks looking to help CATL list its stock in Hong Kong. Not surprisingly, therefore, both companies have protested their addition by the Pentagon to its list.
China does itself no favors by getting caught engaging in apparent sabotage. News emerged last fall that a hacking operation dubbed Salt Typhoon had infiltrated several U.S. telecommunications networks to spy on official calls and text messages.
China also appears to be escalating the kind of “hybrid warfare” Russia has been waging on Europe. Investigators, led by Sweden, are already looking into whether a Chinese bulk carrier in the Baltic dragged its anchor along the bottom to ensnare undersea internet cables. Taiwan now suspects a Chinese cargo vessel of using the same technique last week to damage a communications cable off its northern coast.
China’s persecution complex has driven it into the arms of Russian President Vladimir Putin, with whom it has a shaky alliance. Beijing has still stopped short of shipping arms directly to Moscow to use in Ukraine, but that hasn’t stopped it from sending commercial drones and other parts that Russia’s military uses there. It also hasn’t discouraged it from supplying weapons to Russia’s friends in Europe, like Serbia, which just installed a Chinese air-defense system.
Most troubling, however, is that China continues to practice blockading Taiwan, most recently by sending naval and coast guard vessels on maneuvers near Japan’s far-flung Senkaku Islands. Such moves are meant to warn Taiwan not to give in to the temptation to declare itself independent of China, but also to prepare for an actual blockade if Taiwan did indeed do so.
The problem is that, while Beijing fears being forced to act against Taiwan to prevent independence, hawks in Washington view its preparations as part of an offensive plan to re-conquer Taiwan. Generals on both sides seem convinced they would lose any war over Taiwan. So, the risk is that either side decides the other’s actions are on the verge of achieving an irreversible superiority that must be blocked by preemptive attack—much as Japan decided it needed to attack Pearl Harbor despite what it viewed as a likely defeat there.
Paranoia is blinding both nations. Washington maintains a sort of cognitive dissonance about China: on one hand believing it a juggernaut whose ambitions must be contained and whose economic vulnerabilities must be exploited; on the other it fails to recognize how little threat a nation so vulnerable and economically precarious poses to America’s own dynamic economy and global hegemony.
Former U.S. National Security Adviser and Brookings Institution fellow Ryan Hass and RAND Corp. China Research Center Director Jude Blanchette put things in perspective in a recent piece in Foreign Affairs:
China’s progress and power are substantial. But it has liabilities on its balance sheet, too, and without looking at these alongside its assets, it is impossible to evaluate the United States’ real position. Even the most formidable geopolitical rivals have hidden vulnerabilities, making it crucial for leaders to more keenly perceive not only the strengths but also the weaknesses of their adversaries. And although China will continue to be a powerful and influential global player, it is confronting a growing set of complex challenges that will significantly complicate its development. Following a decade of slowing growth, China’s economy now contends with mounting pressures from a turbulent real estate market, surging debt, constrained local government finances, waning productivity, and a rapidly aging population, all of which will require Beijing to grapple with difficult tradeoffs. Abroad, China faces regional military tensions and increasing scrutiny and pushback by advanced economies. Indeed, some of the foundational conditions that drove China’s remarkable growth over the past two decades are unraveling. But just as these new difficulties are emerging, demanding nimble policymaking, Chinese leader Xi Jinping’s consolidation of power has stifled political debate and sidelined technocrats, yielding a policymaking process that is brittle, reactive, and prone to missteps. Chinese young people now lament the narrowing space they have to achieve their goals, a trend that won’t change unless their country’s leadership does. But that event appears distant.
While some might take such perspective as call to live and let live, others see it as an opportunity to push the U.S. advantage. In another piece for Foreign Affairs, Stanford Professor Niall Ferguson advises Trump to adapt former U.S. President Ronald Reagan policies hastening the end of the Soviet Union, by pushing China to the brink, then driving them to the table to negotiate a modus vivendi: “After ratcheting up frictions over trade in 2025 and 2026—which will hurt the Chinese economy more than it hurts the U.S. economy, as in 2018–19—Trump should adopt a more conciliatory stance toward China, just as Reagan dramatically softened his attitude toward the Soviet Union in his second term.”