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With Donald Trump's victory, economic threats to China, with tariffs and sanctions that could profoundly impact the Chinese and global economy
Trump recently stated that he may impose tariffs of up to 60% on imports of Chinese products. With the Donald Trump's victory, the measure represents significant pressure on the China's economy, the second largest in the world, which finds itself in a scenario of economic vulnerability and faces a series of structural challenges.
Below, we explore the main reasons why this threat could profoundly impact Chinese growth.
China's real estate market crisis
In 2018, China's real estate market played a crucial role in the economy, accounting for about a quarter of the country's economic activity.
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This booming sector provided an important source of revenue for local governments, which relied on land auctions to finance residential projects and maintain regional financial health. This scenario, however, began to change in 2021, when the real estate market entered into crisis.
With the collapse of this sector, local government revenues have plummeted, and prospects for a market recovery are bleak.
The oversupply of properties and the loss of confidence among investors and buyers indicate that the real estate sector may never again play the same role as the engine of the Chinese economy.
This situation increases the country's fragility in the face of new economic shocks, such as tariffs that may be imposed by the United States.
Public and private debt
The housing crisis has also resulted in a debt overload for local governments in China. The debt burden of municipal and provincial governments has become unsustainable, constraining the country’s ability to respond to any new crisis.
In 2023 the International Monetary Fund (IMF) estimated the total debt of the Chinese government sector at about 147 trillion yuan (approximately US$20,7 trillion). When household and corporate debts are added, the amount exceeds 350 trillion yuan, which is about three times the size of the Chinese economy.
To ease this pressure, the central government in Beijing has already lined up fiscal support policies, but the burden is enormous. High debt levels not only reduce China’s fiscal flexibility, but also limit its ability to implement economic stimulus that could offset the impact of US tariffs.
Weak domestic demand
Another critical factor is weak domestic demand. The share of Chinese household consumption in GDP is below 40%, about 20 percentage points behind the global average.
This reduced consumption is due to a number of factors, including low wages, insufficient pensions, high youth unemployment and a weak social safety net. As a result, the Chinese economy is heavily dependent on exports and therefore vulnerable to fluctuations in global trade.
To strengthen domestic demand, the Chinese government would need to make a significant effort to restructure the distribution of national income. This includes promoting reforms that reduce the tax burden on households and increase investment in social security, retirement and health care.
However, so far, authorities have focused on modernizing the export-oriented manufacturing sector, which has led to advances, especially in the production of electric vehicles, solar energy and batteries.
Deflationary pressures
The real estate crisis, rising debt and low consumption have fueled deflationary pressures in the Chinese economy.
Since the policy of redirecting resources from the real estate sector to the manufacturing sector was implemented, which many Western governments see as a strategy to increase industrial capacity, deflation has become a concern.
These deflationary pressures are manifested in both industrial production and consumer prices. In 2018, producer price inflation in China was 4,6%; however, by September 2024, that number had fallen to -2,8%.
This deflationary scenario threatens economic growth, as it discourages consumption and negatively impacts business confidence.
If the new tariffs affect external demand for Chinese products, the situation could worsen even further, amplifying industrial overcapacity.
Limited room for Yuan depreciation
Another point of vulnerability is the Chinese government's limited ability to depreciate its national currency, the yuan. In 2019, the yuan ended the year about 10% weaker against the dollar, which helped offset the tariffs imposed by Trump during his first term.
However, to offset a potential 60% tariff, the yuan would need to depreciate by about 18% against the dollar, which would bring it to an exchange rate of around 8,5 yuan per dollar – a level not seen since the Asian financial crisis of the 1990s.
In addition, Chinese authorities have expressed concern about the possibility of capital outflows. In 2024, the authorities have already tried to prevent the yuan from falling below 7,3 per dollar, indicating the difficulty of implementing a full depreciation.
This leaves the Chinese economy in a delicate position, with little room to cushion the impact of tariffs on foreign trade.
Other factors that worsen the situation of China's economy
During the COVID-19 pandemic, the US government injected trillions of dollars of stimulus into the economy, which indirectly benefited China as American consumers spent some of that money on Chinese products.
Furthermore, Russia's invasion of Ukraine resulted in Moscow being cut off from Western markets, increasing demand for Chinese goods.
However, these events, which brought a temporary boost to China, are unlikely to be repeated. The economic recovery of Western countries after the pandemic and the restructuring of supply chains to reduce dependence on Chinese products indicate that the current scenario is less favorable for Beijing.
Donald Trump's victory
With Donald Trump's victory, the threat of new 60% tariffs from China poses a significant challenge to China.
The world's second-largest economy, already struggling with a housing crisis, high debt, weak domestic demand and deflationary pressures, could see its growth further hampered if the tariffs are effectively implemented. Donald Trump's victory could be a headache for China.
