Is China holding back fire to deal with Trump tariffs?

China’s economy is still struggling to recover from the pandemic, nearly two years after Beijing dropped its draconian zero-COVID lockdowns. In the first three quarters of 2024, economic growth came at 4.8% — just shy of Beijing’s 5% target.

Deflation, weak consumer demand and a huge real estate crash have hurt the country’s incredible growth trajectory, while ongoing trade tensions with the United States — likely to worsen under Donald Trump‘s second term — have hurt exports, which were credited with helping China’s ascent to become the world’s second-largest economy.

“China suffers from overproduction and under-consumption,” George Magnus, a research associate at the University of Oxford’s China Centre and former chief economist at UBS, told DW. “[Chinese leaders] have finally recognized that the economy seems to be losing momentum and is not a one-off.”

Beijing tries targeted approach to stimulus

In September, Beijing injected liquidity into the banking system worth 2.7 trillion yuan ($370 billion, €350 billion) to encourage lending, cut interest rates and announced new infrastructure spending and aid to indebted property developers.

Earlier this month, the Chinese government unveiled a further boost worth 10 trillion yuan to help ease a debt crisis among regional governments, which borrowed heavily for infrastructure and economic development projects in recent years.

These measures sparked a spectacular short-term rally in Chinese stocks — the CSI 300 index of the largest stocks listed in Shanghai and Shenzhen soared by 35%. Investors bet that Beijing would soon announce trillions more yuan to help boost domestic consumption.

“There was speculation that there would be finally demand-side policy to support consumption. So far, none of this has come true,” Singapore-based Jiayu Li, senior associate at the public-policy advisory firm Global Counsel, told DW.

Not real stimulus measures

Li said that while the package announced was “impressive,” it was primarily focused on restructuring existing debts and “cannot be regarded as a new stimulus.” She said Beijing was still underestimating the size of local government debt at 14.3 trillion yuan. The International Monetary Fund (IMF) has put the figure at 60 trillion yuan, or 47.6% of the gross domestic product (GDP).

The new measures are much larger than the amount unleashed in the wake of the 2008/09 financial crisis, which was worth up to 4 trillion yuan. Then, however, the measures equated to almost 13% of GDP, versus about 10% this year. This intervention helped China to keep GDP growth above 8% during the global downturn.

Magnus believes the latest raft of measures will only have a “marginal effect” on growth as they will ease the pressure on local and provincial governments to slash budgets. But he warned that Beijing was “just skirting round the edges” and would quite soon need to take “radical” steps to tackle many structural issues in the economy.

Trump 2.0 will require support from Beijing

Many other China watchers also think the recent moves don’t go far enough, especially with Trump threatening new US tariffs on Chinese imports when he returns to the White House in January. Trump said on Monday he would put an additional 10% levy on all Chinese goods entering the US, potentially raising the overall tariff to 35%. A poll of economists by the Reuters news agency last week predicted that new US tariffs could hurt China’s growth by up to a percentage point.

“The market is hoping that Beijing is choosing to hold off on more fiscal measures until next year [when Trump takes office],” Li told DW, adding that concerns are growing that the impact of any potential stimulus will be even more limited by then.

Chinese currency likely to weaken

Magnus, meanwhile, said he thinks the new tariffs “won’t have a huge impact” on China’s economy, although they may lead to further weakening of the yuan.

During the first round of Trump‘s tariffs in March 2018, Beijing offset some of the impact by letting the yuan depreciate, which made Chinese exports cheaper. The currency fell by roughly 12% against the US dollar, reaching its lowest point in nearly a decade by August 2019. Washington then labeled China a “currency manipulator,” which sparked even higher US tariffs for months until negotiations eased tensions somewhat between the two powers.

Does China need a Marshall Plan?

Huang Yiping, dean of the National School of Development at Peking University and a member of the People’s Bank of China’s Monetary Policy Committee, has called for a much larger stimulus program to “stabilize and spur domestic demand.”

In an interview this month with the South China Morning Post, he called for Beijing to unleash a “Chinese Marshall Plan,” referring to the post-World War II economic aid program launched by the US to rebuild Europe.

Huang’s version proposes using China’s surplus industrial capacity to help low-income countries in the Global South build new infrastructure and transition to renewable energies. The proposal is, however, likely to face a backlash from the West, which is already concerned about China’s growing influence in Africa, Asia and Latin America.

How much will Beijing unleash next?

Other analysts agree that Beijing still needs to inject substantial amounts into the economy — with projections ranging between a further 5 trillion yuan to 10 trillion yuan. Union Bancaire Privee (UBP) Asia senior economist Carlos Casanova told Reuters this month that a 23 trillion yuan package was needed.

Many analysts also recommend that any future stimulus should focus on social welfare spending for households and more help for the ailing real estate sector, rather than traditional industrial investment and infrastructure projects.

While Magnus agreed that the government will “fine-tune” its policies to boost domestic demand, he is skeptical whether China will speedily move from a production-based, export-driven economy.

“I’m not saying that Beijing will be hollow when it comes to further stimulus measures, but I think the government’s priority is certainly not to change the development model to become a more consumer-led, welfare-oriented economy,” he told DW.

Edited by: Uwe Hessler