Xi Jinping plans to do the unthinkable

The big bazooka recovery plan did not materialize. Xi apparently considers boosting consumption wasteful, but that could be the case next year, with officials considering measures that would direct funds to households through an expansion of coverage and reimbursement levels in health care schemes. health insurance, more funding for education and raises. in the basic pension.

The need to shift the balance within China's economy will become even more pressing if Donald Trump, who has threatened to impose new 10% tariffs on China if it does not do more to stop the influx of fentanyl to the United States, follows through on its commitment. threatens even greater and imposes 60 percent tariffs on all Chinese exports to the United States.

China has gone on a production and export spree in recent years, and that trend continues. Industrial production rose 5.4 percent in November from a year earlier, even though ex-factory prices have been falling for more than two years.

Faced with weak domestic demand and the inability of the national economy to absorb the increase in supply, industrial production has been channeled towards export markets, generating increasing tensions with the country's trading partners. China. It's not just the United States: The European Union imposes substantial tariffs on Chinese electric vehicles and is considering imposing tariffs on some of its other exports.

If China's current export-oriented model collides head-on with the 60% tariffs imposed on the United States and if Europe, fearing that more Chinese products will reach it, also takes measures to protect its domestic industries, the economic challenges for China will worsen. dramatically.

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Chinese officials have argued that a trade war would produce a lose-lose outcome. Donald Trump's tariffs would be very damaging to the US economy and even more so if China retaliates, but China would be the biggest loser because it has become very dependent on exports. .

Since the September policy announcements, the yuan has depreciated sharply against the US dollar, from 7.01 to 7.28 per dollar. This could help its exporters in the short term, but could only worsen trade tensions. Trump has called China a currency manipulator in the past.

Based on comments from senior officials after the Central Conference on Economic Work and a previous meeting of the Chinese Politburo, it would appear that, if it were not for the big bazooka, a still substantial policy change will be attempted l next year.

Other measures will be taken to try to stabilize the real estate and stock markets and stimulate consumption, which is at the top of the list of economic priorities for 2025.

Beijing already decided in September to set a floor for stocks and real estate, to refinance debt-ridden local governments via a 10 trillion yuan ($2.2 trillion) debt swap, to recapitalize big banks and provide them with cheap financing so that they can lend. more.

However, this was more an attempt to reduce financial risk in China's financial system than to stimulate consumption or build consumer confidence.

This had some temporary effects. The stock market rose almost 33 percent in the few weeks after the measures were announced, and real estate markets in major cities appear to have bottomed out.

The stock market, however, has fallen by around 8 percent since its recent peak in early October (down 33 percent from its all-time high in February 2021), and demand for non-bank credit was at an all-time low. level for 15 years. years last month.

This is why Beijing is seeking to be more proactive and move towards a more expansionary fiscal policy.

Stabilization of the real estate market is a prerequisite for stabilizing the economy and escaping the deflationary trap.

The Politburo said after its meeting that it would adopt a moderately accommodative monetary policy rather than using the cautious policy language it has used since the 2008-09 financial crisis, signaling the scale of the shift in stance and the strength of the commitment to try to stimulate domestic demand.

This year, the economy will likely meet Beijing's target of GDP growth of around 5 percent, although the final figure could be preceded by a 4.

Given that, even without Trump's tariffs, the economy is faltering and Xi's economic model and the export frenzy it produced are collapsing due to weak domestic demand and headwinds growing abroad, next year's challenges will be even more threatening for growth. .

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If a new, more intense trade war breaks out, Xi and his party may have to consider a much more radical change in their economic strategies and policies to address the overcapacity and overproduction that already exist within their economy and which would pose a serious threat. greater for their economy. economic and social stability if Chinese export markets contract.

For Australia, of course, with Treasurer Jim Chalmers already warning of a more than $100 billion impact on exports and an $8.5 billion impact on the fiscal bottom line over the four next few years due to China's current economic weakness, this kind of disruption and pain. restructuring the economy of our largest trading partner would be a particularly unpleasant outcome.

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