Trump will speed China’s journey to self-reliance

Cold comfort. There is no place like home. Shortly after Donald Trump launched the United States into a trade war against the China in 2018, President Xi Jinping’s administration responded with “dual circulation”, a vision to expand domestic demand to make the People’s Republic less dependent on foreign markets. The rebalancing of the world’s second-largest economy looks set to accelerate abruptly under Trump’s upcoming second term as U.S. president.

Consumption in China is already growing in importance. Economists at Goldman Sachs expect it to generate 59% of GDP next year, up from its typical cycle 41% historical average since 2000. That shift, though, has largely been driven by a collapse in the contribution of investment to growth following Xi’s campaign to deleverage the property sector.

Trump will force a further rebalancing upon the Asian behemoth if he follows through with a threat to impose tariffs of up to 60% on Chinese goods. Exports from the $18 trillion economy grew 12.7% year-on-year in October, customs data showed on Thursday, blowing past a forecast of 5.2% by a Reuters poll and a 2.4% increase in September. It’s a sign of weakness more than strength: Manufacturers are rushing inventory offshore to major markets in anticipation of more hostile trade tensions. That implies Chinese exports will remain robust in coming months, and that gross fixed capital investment, which includes the purchases of machinery, equipment and plants, may continue to decline.

Essentially, China’s share of GDP from consumption may continue to edge closer to the 75% global average as per World Bank statistics but only partly by its own design. Concerns over slower overall growth underlines the underwhelming progress in the rebalancing effort. Indeed, as its planners mapped out recent stimulus policies, Beijing seemed reluctant to use its fiscal power to directly support domestic demand. One sensible explanation is that Beijing is waiting to see how Trump acts before deciding how to deploy resources. Either way, Trade War Two will force a change in China.

Context News

China's exports grew 12.7% year-on-year in October, the fastest pace in over two years, customs data showed on Nov. 7, compared with a forecast of 5.2% increase in a Reuters poll and a 2.4% rise in September. Factories rushed inventory to major markets in anticipation of further tariffs from the United States and the European Union, Reuters added.