China Fortifies Against Trump 2.0 Trade War

Image Source: Getty

The escalating trade tensions between the two top economies of the world show no sign of ending. U.S. President Donald Trump has steadily raised tariffs on imports to 125 percent, in turn, Chinese President Xi Jinping raised levies to 125 percent on American goods. Considering this escalating trade war, Chinese leaders have opted to prioritise improving domestic consumption, modernising the industrial setup, and promoting technological self-sufficiency.

Premier Li Qiang’s Work Report presented during the National People’s Congress seeks to revive the economy. In a nod to the onslaught of Trump’s tariff war, the Work Report acknowledges that China faces mounting external and internal challenges. The trade war with the U.S. has the potential to exacerbate existing problems and create new ones.  The Party-state is grappling with drained consumer confidence because of President Xi Jinping’s zero-COVID strategy that mandated arbitrary lockdowns, and its bid to deleverage the property sector.

In a nod to the onslaught of Trump’s tariff war, the Work Report acknowledges that China faces mounting external and internal challenges.

Since 2020, new regulations have effectively starved developers of credit from banks, resulting in some projects getting abandoned. In turn, this credit squeeze for developers has affected buyers who were unable to get their apartments on time. The advance sale of houses hit a nearly two-decade low in 2024 as real estate firms left projects unfinished. Pre-sale of flats benefits both realtors and buyers. Real estate developers can recover their investment faster, allowing them to proceed with new projects. Home buyers stood to gain from pre-sale discounts and further appreciation in asset prices after completion. Pre-booking had become the primary method of buying a flat in China and facilitated the expansion of housing stock. Leading developers are feeling the heat. China Vanke Group, a big name in the realty sector, posted a loss of 49.5 billion yuan (US$6.8 billion) for 2024, making it the first time it has had such a disastrous showing since it went public in the early 1990s. Other firms like Country Garden are seeking to restructure offshore debt that was US16.4 billion at the end of 2023. China’s 100 largest realtors sold units cumulatively valued at yuan 4.35 trillion (US$609 billion) last year, down 30 percent compared to 2023. The housing and banking sectors are closely connected. With consumer sentiment not picking up, that has caused credit to plateau, and banks, too, are facing a problem. The non-performing loans at China’s big-four lenders—Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China—have touched 1.3 trillion yuan (US$182 billion) in 2024, rising by 82 billion yuan (US$11.26 billion).

Thus, the Work Report proposes a new approach to rebuild the real estate sector through issuing special bonds to the tune of 4.4  trillion yuan (approximately US$609 billion) towards acquisition of plots, construction, purchase of unsold housing stock, and settlement of arrears owed by local governments to businesses. Earlier, bonds would be used to finance large infrastructure projects. Another tranche of yuan 1.3 trillion (approximately US$182 billion) of special treasury bonds will be issued, out of which a sum of yuan 500 billion (approximately US$69 billion) will go towards recapitalising large state-owned commercial banks.

The Party-state hopes that the trade-in programme will deal with excess supply, spur domestic consumption, and mitigate the impact of the tariff onslaught.

Over the years, China adopted a strategy to fuel growth by investing large amounts of capital, which has resulted in the problem of overcapacity. Prices of goods dropped for the second consecutive month in March as a mounting trade war has heightened anxieties about a mounting stock of unsold exports, which could lead to domestic prices plunging even lower. To tide over deflationary fears, a sum of yuan 500 billion (approximately US$69 billion) will be utilised towards initiatives that induce spending, like a trade-in programme that encourages people to replace consumer durables and vehicles with newer ones. The Party-state hopes that the trade-in programme will deal with excess supply, spur domestic consumption, and mitigate the impact of the tariff onslaught.

Another top priority is promoting local innovation in technology, considering the US technology-denial regime. The US-China contestation has also been defined by technological prowess, and Washington has denied Beijing access to sophisticated technology. Yet, China seeks to push ahead with innovation developed in-house. It has sought to reference, among others, twin achievements: the Chang’e-6 space mission that successfully brought back samples from the far side of the moon, and the commissioning of the Mengxiang ocean drilling vessel. The is increased focus on ploughing ahead with industries of the future and ‘deep-sea technologies’ [shēnhǎi jìshù (深海技术)]. It has singled out bio-manufacturing, quantum technology, embodied AI, and 6G technology for dedicated funding through venture capital. Xi is rallying China Inc. and rehabilitating Alibaba’s founder, Jack Ma, who had been a target of the state’s crackdown. Now, efforts are on to boost the private economy and improve business confidence, through building a “unified national market” and easing tax and business compliance.

The US-China contestation has also been defined by technological prowess, and Washington has denied Beijing access to sophisticated technology.

Noted scholar Kenneth Waltz’s reflection on international politics started with the belief that, with an anarchic international order and no single higher authority to enforce rules, states had to increase their chances of survival by balancing. States are said to opt for internal balancing when they seek to leverage domestic economic capability through judicious management of resources. Thus, survival is the key, and states do everything to maximise their chances of endurance. Yet, it is not like the White House holds all the cards. Under its lawfare strategy, China has enacted legislation that aims to control the trade of rare earths and critical minerals. The potential implication of this strategy may be felt strongly in technology-supply chains, which may lead to a pressure group in Washington. All eyes will be on which side blinks first.

Kalpit A Mankikar is a Fellow with the Strategic Studies programme at the Observer Research Foundation.

• International Affairs
• China
• USA and Canada
• bank recapitalisation
• China Economy
• credit squeeze
• Domestic Consumption
• Industrial Policy
• private sector reform
• property market
• rare earths
• real estate crisis
• special bonds
• Supply Chain
• Tariffs
• tech innovation
• US-China Trade War

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.

PREV NEXT