China is sitting on a US$18 trillion time bomb

Beijing is grappling with an economic emergency that has seen “nearly US$18 trillion” wiped off Chinese “household wealth.” It comes amid a property meltdown of unprecedented scale in the past four years and the threat posed by US President Donald Trump’s Trade War 2.0.

In a move to prop up the economy, China reported a $1 trillion trade surplus last year, underpinned by heavy state subsidies on electric vehicles and smart tech exports. Outrage and dumping claims were followed by tariffs from the United States and the European Union. 

“As the American economy suffered under the weight of [Covid-19] lockdowns in 2021, China’s economy was still humming,” Ryan Hass, the director of the John L Thornton China Center at the Brookings Institution in Washington, wrote last week in a research paper. 

“Economists were debating when – not if – China’s economy would surpass America’s in terms of gross domestic product. Four years later, bilateral competition remains acute, but the relative distribution of power between the United States and China has shifted,” he said.

“The bubble around China’s property and construction sectors has popped. This is significant, given that these sectors account for nearly 30% of [GDP]. This unwinding has removed nearly $18 trillion in Chinese household wealth since 2021,” Hass pointed out. 

Trade War 2.0:

• Earlier this week, the Trump Administration imposed sweeping 10% tariffs on all Chinese imports entering the US on top of existing sanctions.
• It was just the opening salvo in what promises to be a tit-for-tat confrontation between the world’s two largest economies.
• Beijing responded with targeted measures on US imports and threatened several companies, including Google, with possible sanctions, Reuters news agency reported.

China’s share of the world economy is shrinking [after peaking] in 2021.

Foreign Affairs

Delve deeper: China’s economy is in a mess. Unemployment is rising, wages are stagnating, and consumer confidence has evaporated despite stimulus measures.

Between the lines: “As companies prioritize cost-cutting measures and profitability strategies, workers’ wages, social insurance, compensation, and living subsidies remain at the bottom of the list – if they are addressed at all,” China Labour Bulletin reported last week.  

Big picture: Xi Jinping’s Communist Party regime is facing its biggest challenge in more than 40 years. It is also in a weaker position than when the first trade war was launched.

Bottom line: “The China that Trump will face in 2025 is fundamentally different than the one he encountered when his first administration began in 2017, or even the one with which he negotiated a trade deal near the end of his term,” Foreign Affairs stressed.

What happened: “Now, for the first time in more than four decades, China’s share of the world economy is shrinking – it peaked at just above 18% of global GDP in 2021 and stands at around 16% today,” Foreign Affairs warned.

China Factor comment: Trump said this week that he was in “no rush” to speak with Xi. So, the trillion-dollar question remains, Who will blink first?