Trump goes from capricious to a China patriot

Shuli Ren, Bloomberg

From Trump the Capricious to Trump the Baby, the US president-elect has quite a few nicknames in China. The most interesting on social media is perhaps — using a direct translation — Trump the Nation Builder.

The latter phrase can be interpreted multiple ways. In the decade after the founding of the People’s Republic in 1949, it was a popular name given by parents who wanted their children to become patriots. Thus, it is a dig at Donald Trump’s rhetoric during his rowdy campaign rallies. Now that he won, this nickname is taking on a more meaningful tone. It’s starting to represent a school of thought whose argument is that Trump’s return to the White House can help — rather than harm — China. His presence might just accelerate structural economic reforms that Beijing has been slow to enact.

Boosting domestic demand is now seen as the only viable way to offset Trump’s tariff blow to exports, the one bright spot in an otherwise anemic economy. In an extreme scenario, if trade tensions escalate and wipe out all Chinese exports to the US, which currently account for 3% of gross domestic product, Beijing will have no choice but to get people to spend to meet its growth ambition. There’s certainly room for improvement: Private consumption accounts for just about 40% of the economy, versus around 55% in Japan and Germany, and 63% in Brazil.

According to Goldman Sachs Group Inc., China’s real domestic demand declined during the pandemic lockdowns in mid-2022 and is currently growing in the neighborhood of 2.5%, significantly below the government’s 5% growth target. A prolonged property downturn and stubbornly high youth unemployment have turned the notoriously thrifty Chinese even more cautious.

There are signs that Beijing is looking to focus on households as well.

Economists have been arguing for years that China needs to move away from an investment-driven economy — pretty much to deaf ears. When Trump started the trade war in 2018, Beijing responded by weakening the yuan and doubled down on its industrial policy with a massive influx of cheap bank loans. Fierce price competition among solar and electric vehicle producers resulted from that policy overreaction.

Seven years on, the old tricks can no longer work. The fear of capital outflows restricts Beijing’s ability to maneuver the yuan much lower. Meanwhile, Europe and other emerging markets, which Beijing is keen to woo, are getting worried that China is exporting its industrial overcapacity as well.

Anticipating Trump’s return, President Xi Jinping has made some minor tit-for-tat moves, such as cutting off drone supplies to the US. But he’s neglected his most lethal weapon. With more than 1 billion people and their 148 trillion yuan ($20 trillion) of savings, China can be the world’s most vibrant consumer market that lures every chief executive, who in turn may effectively lobby Washington.

After years of de-coupling, Trump’s bargaining chips over China have diminished. The US accounts for 15% of its exports now, versus 20% a decade earlier. However, a hostile White House can still corner Xi and force him to look inward and not overly rely on exports for growth. If that becomes reality, the optimists among us might say that Trump is a great patriot of China, forcing a reluctant government to deepen economic reforms and leapfrog the nation out of its middle-income trap.

[Abridged]

Courtesy Bloomberg/Shuli Ren