Trump muddies an already-chaotic debate in China

Shuli Ren, Bloomberg

They might have to meet again. As President Xi Jinping decides on the size of China’s stimulus package, he has to consider the possibility that Donald Trump, who started a trade war in 2018, may soon be in the White House for a second term.

After Xi’s policy pivot in late September to meet his economic growth target of 5%, investors are looking at the gathering of the Standing Committee of the National People’s Congress, usually held in late October. Concrete details have so far been largely lacking, pausing the enthusiasm of markets. In 2023, Chinese legislators increased the government’s fiscal deficit, the first intra-year revision since 2000, in a tacit acknowledgment that the post-Covid economic recovery was stalling. Investors will be hoping for considerably more this year.

That this year’s NPC will convene from Nov. 4 to 8, which means policy details are unlikely to emerge until after we get some clarity on the US election, might be a sign that Beijing is on high alert. A possible Trump win will only muddy the already-chaotic debate among senior officials on the size of fiscal borrowing as well as how the money should be spent.

Until recently, Xi’s stimulus was entirely a domestic affair. Ministry-level officials have promised the largest one-time debt swap in recent years to improve municipal finances. The state will also buy unsold housing to stabilize property prices, as well as boost banks’ capital buffer to increase their willingness to lend in a weak economy. All these are sensible blueprints to lift China out of deflation.

But a Trump win can change Beijing’s priorities again. His hawkish rhetoric on Chinese imports, as well as the wide latitude that the US president enjoys in setting and imposing tariffs, directly threatens Xi’s ultimate passion of transforming China into a high-end manufacturing powerhouse.

China has certainly reacted to Trump’s moves before. After Huawei Technologies Co. was placed on the US trade blacklist in 2019, state resources were poured into industrial upgrades. Huawei alone received over $1 billion in government grants last year, more than quadruple the amount in 2019, in part a reflection that President Joe Biden has furthered Trump’s tough trade policies. Bank lending to industrial firms has also soared in that time.

As such, it’s possible that Xi will bring out a bigger bazooka if he has to deal with Trump again. Nomura Securities economist Lu Ting reckons that Beijing’s stimulus could be 20% greater under this election outcome.

Senior officials are starting to give us the impression that the government is reluctant to resolve the core tensions ailing the economy. In a recent media briefing, the Ministry of Finance commented that local governments still had unused 2.3 trillion yuan bond quota to tap this year. It’s as if their funding gap wasn’t an urgent issue and that municipal fiscal austerity wasn’t a key reason behind this year’s slowdown. Lately, state media has gone quiet over what Beijing’s stimulus might look like, while diligently broadcasting the three-day BRICS Summit that Xi attended in Russia with great fanfare.

It’s understandable that Xi wants to fight back against Trump’s unpredictable bullying. But without a solid domestic economy and buoyant consumers flexing their muscles to multinationals, what leverage does he have? China’s president needs to stay focused on his internal affairs.
[Abridged]

Bloomberg/Shuli Ren