Saving China’s economy suddenly becomes more urgent

Beijing was clearly shaken.

Within 48 hours of Donald Trump’s decisive victory in the US elections, Chinese officials once again chose last week to break the financial firehose and spray some more cash around.

Once again, it was deemed inadequate, leaving global investors stunned.

The first round of stimulus was launched in September to support the rapidly deteriorating economy, which has been hit by the housing crisis, now in its fifth year, after years of astonishing inaction.

The various measures taken so far include lowering interest rates, easing lending and ownership restrictions, and adding $111 billion to Chinese stocks.

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On Friday, he announced a $2.1 trillion debt-reduction package to help ease the burden on the country’s heavily indebted local government sector, which has been reeling from a calamitous real estate debacle.

Investors once again yawned and complained that the measures were nothing more than a debt recycling package designed to shift debt from the local to the national level.

A series of measures announced since September have so far kept iron ore prices at triple-figure levels; This reassured Australian exporters. But just.

While the delayed and piecemeal rollout of the stimulus surprised many, some China observers believe the strategy could come in handy in the future, as Beijing awaits the full blown of Trump’s trade war and adjusts its response accordingly.

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Trump’s trade war calendar

If Donald Trump keeps his promise, China is expected to lose its World Trade Organization ‘privileged nation status’ with the US, a first step before imposing tariffs on the country and then possibly the rest of the world.

The ‘China coup’ is expected to be introduced gradually to prevent a major one-off inflation hit to the US economy and give American buyers the chance to meet their needs elsewhere, according to analysts from investment bank UBS.

“We assume that a 60 percent tariff increase on approximately a quarter of U.S. imports from China will be implemented in two phases starting in September 2025, with another 60 percent increase in January 2026, and the remainder will not face additional tariffs.” they said in a note to customers this week.

But they acknowledged that it was possible for the coup to start earlier, possibly in the first quarter of next year.

What impact will this have on the Chinese economy?

Even if the world’s second largest economy continues to move forward slowly, its impact will be huge.

But China is in the midst of a painful slowdown as it struggles with a slowdown in its construction sector and one of the biggest real estate collapses in history that has hit consumer demand and dragged the country into a deflationary spiral.

While the developed world is desperately trying to fend off its first outbreak of inflation in more than 30 years, China has the opposite problem.

Producer prices have been in reverse for more than a year, and this situation now threatens to spread to consumer prices.

While the Consumer Price Index decreased by 0.3 percent on a monthly basis in October, it increased by only 0.3 percent compared to the same month last year.

UBS thinks this will blow a significant hole in China’s growth forecasts and will certainly lose further US market share following the coup during the previous Trump regime, although it has managed to find alternative markets as the chart below shows.

While China’s share of American trade has fallen, it has maintained its share of global trade as it shifts its focus.

This may not be so easy this time, as the threat of an escalation of the trade war is on a much larger scale than in 2018 and is likely to have much broader impacts.

Anticipating tariffs, American companies operating in China slowed capital investment plans last year and will likely suspend them now; This has worsened China’s overall economic slowdown.

“This time around, we think it could also lead to significant business closures and job losses, according to the UBS Evidence Lab survey.

“The negative impact could be greater if the Trump administration imposes broad tariff increases on other countries and further tightens technology and investment restrictions on China,” they said.

What’s next?

Beijing is now expected to continue implementing stimulus measures as needed until more clarity emerges about Trump’s long-term plans.

Morgan Stanley economists are encouraged that the measures announced so far have kept iron ore prices high and there are early signs that the property meltdown may be stabilising.

It continues to get worse but at a slower pace.

But they agree that more is needed.

“Our economists think fiscal support will likely remain supply-side initially and will likely be shaped by the scale and timing of potential U.S. tariffs,” they said.

Last week, Chinese officials hinted that major stimulus plans could be on the way, as China’s government debt levels are well below those of Japan and the United States.

If history is any guide, this will involve more spending on major new infrastructure projects that will deplete the resources Australia produces.

But the biggest gap in the Chinese economy is the lack of consumer spending.

With an aging population, a declining birth rate, and a very small pension system, most Chinese people are saving rather than spending.

UBS believes the government could use some of the upcoming stimulus to stimulate domestic demand to reduce dependence on exports.

“We expect the government to expand the exchange scheme for consumer goods, increase social safety net spending, including subsidies for the unemployed, and expand subsidies to the household sector, including maternity and child care subsidies,” they said.

The value of the currency is falling, there is a flood in exports

Meanwhile, the Chinese currency continues to lose value, especially against the US dollar.

In the past, this has angered Trump, who has accused Beijing of deliberately devaluing the Renminbi to increase its global competitiveness.

More recently, it has flooded global markets with excess steel that would otherwise be used in high-rise property construction.

In the meantime, he has no choice but to cut interest rates further, retaliate with tariffs on American goods, and continue searching for new markets to boost consumer spending and help stem the housing crisis.

It’s possible that China will flood the U.S. market with goods over the next three to six months in an effort to reach as many places as possible before tariffs are imposed.

After that, it may turn to other markets such as Australia to unload its goods.

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