China's cautious stimulus is nothing but a financial fig leaf, barely hiding the inevitable collision course it faces with Trump's return.
It
appears that China's long game strategy has been hit by a series of unfortunate
events, and the "three Ds"—debt, deflation, and poor demography—seem
to be converging at a treacherous crossroads. If that wasn't enough, America
might be tossing Donald Trump back into the mix as a fourth threat. Like a
cherry atop a melting sundae, Trump's threats of high tariffs on Chinese
exports are now looming large over an already fragile economic landscape. So,
while China’s financial leaders gathered on November 8th, investors eagerly
awaited a decisive move that could serve as a lifejacket for a nation sinking
slowly into economic stagnation. But what they got, in a sense, was a tiny
bucket instead—one just big enough to bail out a little bit of water from a
very large boat.
Lan
Fo’an, the Chinese finance minister, offered something that seemed more like
maintenance than a genuine fix: a debt restructuring plan involving trillions
of yuan in new bonds. These new bonds would replace riskier, “hidden” debts
largely held by local-government financing vehicles (LGFVs), shadowy
infrastructure firms heavily reliant on state backing. The numbers involved are
staggering—up to 10 trillion yuan ($1.37 trillion) in bonds over the next five
years, aimed at refinancing an estimated 60 trillion yuan in debt that LGFVs
had amassed by the end of 2022. According to Goldman Sachs, about one-fifth of
this debt is considered risky, and if any of it collapses, it would trigger a
domino effect of default.
But
herein lies the rub. Replacing debt with more debt—albeit at presumably lower
interest rates—does not fix an underlying economic ailment. It simply postpones
it. China has, in the past, attempted to bring local government debt under
control, but these efforts always seem to lose momentum as the country's
leadership prioritizes growth over fiscal discipline. During President Xi
Jinping's first term, Lou Jiwei, then finance minister, famously said, “Open
the front door and close the back door.” It was a reference to allowing local
governments to issue explicit bonds to replace hidden, off-balance-sheet debt.
Yet the “back door” has remained stubbornly ajar, and now that China’s slowdown
is leading to dwindling tax revenues and slumping property sales, that back
door might just swing wide open again.
Just
ask the grocer in Shaanxi province who was slapped with a fine of 66,000 yuan
for selling 2.5kg of substandard celery. It’s a bizarre but telling
anecdote—authorities have resorted to desperate measures, such as harassing
businesses for back taxes and selling off public assets, just to plug holes in
budgets. The cabinet’s plea to the most indebted provinces to "smash the
pots and sell the iron" is like a poverty-stricken family auctioning off
their silverware to pay the rent. It’s a desperate situation, and desperate
measures simply aren't enough when faced with the risk of collapse.
Trump,
meanwhile, isn’t waiting for the ink to dry on any nuanced diplomatic measures.
If he returns to the White House, he's promised a second round of tariff hikes
on Chinese imports—a more aggressive, "fiercer" trade war. History
serves as a reminder of what such tariffs could do. In the 2018-2019 U.S.-China
trade war, American tariffs on $250 billion worth of Chinese goods triggered a
tit-for-tat series of duties, which led to disruptions across global supply
chains. The economic bruises of that round still haven’t healed, and the
thought of reopening those wounds must surely terrify China’s policymakers. But
they’re not showing it—not just yet.
Perhaps
they’re saving what remains of their fiscal ammunition. Perhaps Xi Jinping and
his top brass believe that any real stimulus would be better deployed next
year, closer to when the stakes with the U.S. become apparent. But in a broader
sense, this calculated delay could end up being too little, too late. China’s
economy is standing at the edge of a cliff, weighed down by not just the three
Ds, but by the general sentiment of weariness among its people. The demographic
bomb—years of falling birth rates and an aging population—is ticking. The
government has toyed with ideas of handouts to poorer families, subsidies for
childbirth, and even a version of the “cash for clunkers” program, encouraging
people to trade in old appliances for new, greener ones. Still, these are
band-aid solutions at best. None of these measures even hint at resolving the
deeper structural issues plaguing the economy.
Economists
argue that China’s deflation—a decline in general price levels—is a sign of an
economy that has lost its vitality. Deflation is, in essence, the opposite of
inflation, but unlike inflation, deflation is not a sign of healthy,
consumer-driven demand. It’s the classic sign of a decelerating economy, where
factories overproduce, businesses struggle to sell, and people are wary of
spending. Recent data indicated that China’s consumer price index dropped by
0.1% in September 2024 compared to the previous year—a small but crucial signal
that price cuts are happening not because of efficiency gains but because of
lackluster demand.
Meanwhile,
at the grassroots level, people are feeling the squeeze. Slumping wages and
diminishing job prospects have led to a more cautious consumer, unwilling to
spend money on anything beyond the essentials. China has a savings culture,
yes, but there’s a fine line between prudent saving and national
belt-tightening out of fear. The masses are not stupid; they know when it's
time to cut corners. Fear, after all, breeds more fear, and cautious consumers
ultimately spell a bleak future for domestic growth.
Then
there’s Trump, waiting in the wings of American politics. If he secures another
term, he could pull the rug right out from under China's plans. Let’s not
forget, Trump once called himself a "tariff man." Should he again
impose punitive tariffs on Chinese exports, it would shake investor confidence
globally. Trump’s tariff threats during his first presidency set a
confrontational tone with China, which ultimately led to higher costs for
American consumers and losses for Chinese exporters. China’s leaders cannot
afford to pretend otherwise. The next round of tariffs would most certainly
target tech products and other high-value goods that China has used to bolster
its economic ambitions.
Perhaps
China’s strategy here is to bet on time. They might be hoping that the
uncertainty of American elections can somehow be their saving grace. But that’s
a risky gamble, one that makes an implicit assumption—that other global forces
will somehow spare China. Unfortunately, wishful thinking isn’t exactly a sound
economic policy. The leadership’s inability to take swift, concrete action is a
glaring sign that they’re either unwilling or unable to make the tough choices
necessary to rescue the economy from its downward spiral.
Maybe
what China needs isn’t just a fiscal stimulus but an entirely new strategy—one
that takes into account its ailing demographics, its indebted local
authorities, and the external threats it faces. But at this point, the
long-held cautious approach has its limits. They say “time and tide wait for no
man,” and in China's case, it seems neither debt, deflation, demography, nor
Donald Trump are willing to wait, either.
After
all, as China tiptoes around its woes, Trump seems more like the elephant about
to stomp into the room. If China's stimulus is a raindrop in a drought, then
Trump, quite possibly, is the incoming sandstorm. Better bring umbrellas—or
maybe just better economic policies—because a storm’s a storm, no matter how
you look at it.
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