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    Home » Trump’s 60% Tariff Threat Pressures China’s Vulnerable Property and Debt-Laden Economy

    Trump’s 60% Tariff Threat Pressures China’s Vulnerable Property and Debt-Laden Economy

    Kanika SharmaBy Kanika SharmaNovember 6, 2024 Business No Comments3 Mins Read
    Trump’s 60% Tariff Threat

    Trump’s 60% Tariff Threat Adds Pressure to China’s Economy

    Donald Trump’s 60% tariff threat on Chinese imports could have serious consequences for China’s already struggling economy. Unlike in 2018, when Trump imposed 7.5%-25% tariffs on Chinese goods, China’s economic foundation has weakened significantly, largely due to its ailing property sector. In 2018, the property market played a central role, contributing to about a quarter of the country’s economic activity and boosting local government finances through land sales. However, the market downturn since 2021 has left real estate in crisis, with reduced local revenues and a high risk of housing oversupply.

    The property sector’s stagnation limits China’s ability to absorb tariff impacts, as it did during Trump’s first term. This sector may no longer drive economic growth in the same way, weakening China’s resilience to external shocks.

    Rising Debt Strains Government Response

    China’s high debt levels also add to its vulnerability. The real estate downturn has saddled local governments with unprecedented debt, which the central government is attempting to manage through fiscal support. However, the total debt burden is vast—China’s government debt alone reached 147 trillion yuan ($20.7 trillion) by the end of 2023, while the country’s combined household and corporate debt exceeds 350 trillion yuan, or roughly three times the GDP. This mounting debt restricts Beijing’s ability to respond swiftly to additional economic challenges, including external pressures from tariffs.

    Weak Domestic Demand Adds to Economic Pressures

    Low household spending further limits China’s capacity to offset external trade disruptions. Domestic consumption in China remains below 40% of GDP, significantly behind the global average of around 60%. Factors such as low wages, minimal pensions, and high youth unemployment have contributed to this lag. Increasing household spending would require significant economic reforms, such as adjusting income distribution to favour households or boosting social security benefits. However, rather than focusing on these reforms, China has prioritised upgrading its export-driven manufacturing sector, achieving success in areas like electric vehicles and solar energy. While these advancements have strengthened exports, they have also led to retaliatory tariffs from the US and Europe.

    Deflation and Limited Currency Adjustments Pose Challenges

    China’s economic slowdown, coupled with weak domestic demand and a shift in resources from property to manufacturing, has created deflationary pressures. Industrial overcapacity has caused producer prices to drop sharply, with inflation standing at -2.8% in September 2024 compared to 4.6% in July 2018. Deflation, which further discourages spending and business growth, could worsen if tariffs reduce demand for Chinese goods, amplifying the effects of industrial overproduction.

    In terms of currency response, the yuan’s previous depreciation helped China absorb the initial tariff impact. However, to offset a 60% tariff fully, analysts estimate the yuan would need to fall 18% against the dollar, a challenging target that risks capital outflows and financial instability.

    Unlikely Rebound from Past Economic Windfalls

    China’s economy previously benefited from unexpected boosts, such as increased U.S. spending on Chinese goods during the COVID-19 pandemic and increased trade with Russia following Western sanctions. However, these boosts were temporary, and similar opportunities are unlikely to recur in the foreseeable future. Without these windfalls, China could face a tougher economic outlook under heightened tariffs.

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    • Kanika Sharma
      Kanika Sharma

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