Transcript: China’s economy braces for Trump

This is an audio transcript of the Behind the Money podcast episode: ‘China’s economy braces for Trump’

Michela Tindera
For the past couple of years, the FT’s China bureau chief Joe Leahy says that China’s economy has been in a tough place. 

Joe Leahy
Things have been looking pretty bleak in China. Ordinary people have been hit by a real estate slump. Many local governments, which actually drive China’s economy, have not been paying salaries and suppliers. Even the better off have been feeling pretty bad. 

Michela Tindera
At the end of September this year, there weren’t many signs that this was going to change. That is until one Tuesday, September 24th. 

Joe Leahy
China announced a massive monetary stimulus package that sent everyone’s interest in Chinese stocks soaring again. The market basically went crazy. I mean, if you look at the chart from that day, its a vertical cliff. 

Michela Tindera
After Chinese stocks spent years in consistent decline, millions of retail investors pile back in. 

Joe Leahy
The CSI 300, which is the benchmark stock index in China, just went straight up. 

News clips
What a week for China, right?

The biggest single weekly gain in nearly 16 years.

Joe Leahy
I think by the end of that first week, it was up around 24 per cent. It even shut the stock exchange down for a little while. So it was a huge day for the China market. 

Michela Tindera
Joe says that this package was China’s first major stimulus push since the pandemic began, and it marks a significant departure from how the country had been trying to navigate a post-Covid slump. 

Joe Leahy
There’s a lot riding on this new stimulus push. If China can’t get out of this slump, then it risks getting stuck in a deflationary spiral that could stunt its growth for years to come. 

[MUSIC PLAYING]

Michela Tindera
I’m Michela Tindera from the Financial Times. Today on Behind the Money, we’re looking at what President Xi Jinping’s new stimulus measures mean for China’s economy and also how Donald Trump’s election win in the US could derail his plans.

[MUSIC PLAYING]

Over the last few years, China’s economy has had its fair share of problems. My colleague Joe points out that there’s been a crisis in the country’s property sector and then the effects of the zero-Covid lockdowns. 

Joe Leahy
2022 is really when, you know, sort of things really got hard in China. You had the Shanghai lockdown, which is like three months. There were even sort of food shortages in the city. And those lockdowns, you know, spread throughout the country. 

Michela Tindera
Remember, China’s government tried to keep the country in a Covid-free bubble up through the end of 2022. 

Joe Leahy
And then abruptly at the end of 2022, the government relaxed all of these measures. And economists, you know, naturally believed that 2023, we would see this kind of huge bounce in the Chinese economy like we saw in other countries, you know, coming out of Covid. You know, revenge spending by consumers and all this kind of stuff. 

Michela Tindera
But those expectations never fully materialised.

Joe Leahy
Coming out of Covid, China really did not have the momentum that people expected. 

Michela Tindera
And this lack of momentum is a significant problem for China’s president. 

Joe Leahy
Xi Jinping, not long after he came to power in around 2012, he set a goal for China to double its per capita income by 2035. 

Michela Tindera
Reaching this goal would allow China to overtake their main geopolitical rival, the US, as the world’s biggest economy. So to try and address this, Xi Jinping opens up the economic playbook that he’s used for many years. That playbook revolves around pouring lots of money into things like infrastructure and industry. The hope is that this will create jobs and boost the economy. More recently, that’s been implemented with a twist that is favouring support for high-tech industry to try and reduce China’s reliance on the outside world and better compete with the US. 

Joe Leahy
I think Xi, his focus has been much more on how can China sort of move up the value chain in various industries. He’s been watching as the US has put export controls on high-tech exports into China, such as, you know, semiconductors. And he became more and more determined as he came out of Covid that China should invest its money into sort of trying to become more self-reliant, especially in terms of high tech industry, but across the board. 

Michela Tindera
But coming out of zero Covid, this old playbook hasn’t been super effective. And that’s for a few reasons . . . 

Joe Leahy
He didn’t really focus that much on this problem of actually the Chinese consumer coming out of Covid wasn’t feeling very happy. And there’s another reason for that, which is that during Covid, China essentially cracked down on the property sector. It had this property bubble that had been building up for years, and it decided to put limits on property developer leverage. And then the market essentially collapsed. And so consumers who had all of their wealth tied up in property necessarily weren’t feeling very, very good as they watched their prices collapse by 30 per cent in different places. And so coming out of Covid, that hangover was still there. 

[MUSIC PLAYING]

Michela Tindera
The after-effects of a property crash can leave a long-lasting impact.

Joe Leahy
This kind of phenomenon of, you know, after you’ve had a massive real estate bubble and that bursts and then everyone, instead of investing, they start paying down their debt, That’s been described as a balance sheet recession, and that’s what we’re seeing. And once you get into that sort of pattern, you can get into a deflationary sort of spiral downwards, if you like, where people are spending less or they’re downgrading their spending. Companies are making less money. So they start cutting salaries and everything sort of starts going downwards. And that’s not a good place to be. 

Michela Tindera
Despite all this, for a while, Xi and other Chinese officials are largely acting like everything’s fine. 

Joe Leahy
The narrative has always been, you know, the official narrative has always been that it’s all good. It’s a little bit weak on the domestic demand side, but it’s all fine. We’re going to pursue these headline, blue-sky strategic objectives. We’re going to invest in manufacturing and we’re going to move up the value chain. 

Michela Tindera
But earlier this year, as the summer winds down, that positive narrative begins to crack and it looks as if Xi’s 2035 GDP target could be falling out of reach. 

Joe Leahy
We had a sort of a slew of increasingly negative economic data, retail sales, not very strong, not meeting expectations, very high youth unemployment, which is a real concern for the party because it implies . . . has implications for social stability. So there was increasing indications that the economy was not heading in the direction that they wanted. 

Michela Tindera
The worst of those figures starts to take shape in early September. Officials realise China isn’t going to meet its third-quarter GDP growth target. This number is a key indicator for whether Xi is on track to hit his 2035 goal. 

Joe Leahy
Just to put it in context, you know how important this figure is. I guess if you take, you know, how people watch the Fed and the rates it’s gonna set in the US, this GDP figure is kind of the equivalent. 

Michela Tindera
But this isn’t the only issue. 

Joe Leahy
There’s a lot of other kind of stories around that, you know, local governments were complaining up to Xi Jinping’s level about how bad things were, you know, at the local government level. A lot of these local governments can’t pay salaries. They can’t pay their suppliers. They’re struggling to pay their debts. This was getting worse and worse. So it’s possible that all of this fed up to Xi Jinping. And he was on a trip to Gansu, which is one of the sort of, you know, western provinces, one of China’s, not one of its richest provinces. And, you know, there’s also speculation that perhaps while he was out there, he sort of, you know, saw some things that convinced him that, you know, maybe the time has come for us to do something about this. 

Michela Tindera
Now, it seems like red lights are flashing for Xi Jinping. And if that news isn’t enough, hanging over China’s domestic issues, there’s something else. The increasingly close presidential race in the US between Kamala Harris and Donald Trump. 

Donald Trump voice clip
And I’m doing the same thing with China. We’re going to tariff the hell out of them. (People cheering)

Joe Leahy
Chinese officials and scholars were well aware that if Trump becomes president, he probably would try to do what he promised during the campaign, which is levy tariffs of up to 60 per cent on Chinese imports. And if this happened, this would knock several percentage points off China’s GDP growth. So this was becoming quite an urgent concern. 

Michela Tindera
At this point, a deflationary spiral seems closer than Chinese officials expected. And that brings us back to late September and to the stock rally we heard about earlier, a massive monetary stimulus package.

Coming up, the market’s immediate reaction bodes well for Xi Jinping. But what exactly does he have planned? And how will the election of Donald Trump affect that?

[MUSIC PLAYING]

The stimulus package from September was a big push from China’s central bank. 

Joe Leahy
The monetary stimulus package was mostly a combination of interest rate cuts, including interest rates on mortgages and also support for the stock market. So the government announced various programmes to try to get majority shareholders, if you like, to put more money into the stock market and give it a boost. And then on the other side, they were helping consumers with their mortgages by cutting rates. So all of this was aimed at essentially boosting the property market a little bit and giving a big boost to the stock market. 

Michela Tindera
Joe, what was your initial reaction when China’s central bank governor announced these measures? 

Joe Leahy
When the monetary package was first announced in September, I think everyone was a little bit surprised at the about-turn from the government because up until then, Xi had been, you know, saying that everything’s OK, the economy’s all right. Just a little bit of domestic demand that we don’t have. And then suddenly the government comes out and unleashes this sort of monetary kind of blitz. 

Michela Tindera
But Joe says that he quickly wondered, well, the economy’s received this monetary stimulus, that is these measures from the central bank. But what about a fiscal package? 

Joe Leahy
You’ve got the central bank pumping money into stocks and cutting interest rates and other things. I was waiting for, you know, are there any details on the fiscal stimulus? You know, because ultimately, what we really need to fix China’s economy is probably more of a fiscal impulse because people are not borrowing. So you can cut rates, but that doesn’t mean they’re gonna borrow. What you really need is money in people’s hands or cash that they can spend. And we haven’t had that yet. So even on that day, I have to say, I was sort of waiting for that extra leg of the stimulus. 

Michela Tindera
That fiscal package Joe’s talking about appears several weeks later in early November. 

Joe Leahy
When the fiscal package finally came, it ended up being more of a debt restructuring programme for local governments than really a spending programme. It was a big one. One of the biggest in recent years was a total of about Rmb10tn, or about $1.4tn. One of the ideas behind this, we think, is that by helping local governments solve their debt problems, Xi can set a stronger foundation for the overall economy before it ends up getting hit by tariffs that we expect Donald Trump to introduce next year when he enters office. Without strong local governments, it’s really very difficult in China to do stimulus spending, especially at the grassroots level. 

Michela Tindera
So what was the reaction to this announcement? 

Joe Leahy
It wasn’t exactly what investors were hoping for, at least foreign investors. There really was nothing there for consumers or households to get them spending again. And I mean, from my side, I wasn’t really expecting a big stimulus this time around. So this package made it look like, I think, that they were just trying to get all of their ducks in order while they waited to see what might come next year when Trump enters office. 

Michela Tindera
Yeah, Joe, I want to zero in on that point a bit more so we can pivot a bit and talk about the US and Trump’s win here. Trump’s, of course, talked about these significant tariffs on Chinese goods. But how does that actually impact China’s economy? 

Joe Leahy
You know, thinking broadly about Trump’s policies, if he implements a broad decoupling with China, if he really tries to follow that through and he’s able to do it in terms of, you know, domestic US policy, it’ll have an incredibly deep impact on China’s economy. China will have to try to get exports through other countries to the US. If that’s blocked, it’ll need other places to export to. And China is already doing that. The Belt and Road Initiative, that’s all about creating new markets for the Chinese products. We’re seeing a lot of Chinese companies investing abroad and setting up factories in south-east Asia and other places. We’ll probably also see China trying to mend ties with other trading partners around the world. It’s had a lot of tension with India, it’s had a lot of tension with Europe. We could start to see China working to repair that a little bit so that the impact of what Trump’s planning, if he actually does it, will be incredibly profound on China’s economy. 

Michela Tindera
So given all these restrictions that could be on the way, would you say that that was a big factor in why they didn’t go further with the fiscal stimulus? 

Joe Leahy
So I think a lot of people think that they’re waiting in Beijing to see a little bit more what the next Trump administration will look like and, you know, then they can implement the stimulus once they see what’s coming towards them. It might have to be a very big stimulus if Trump does everything he’s talking about and probably they’re holding back some dry powder getting ready. 

Michela Tindera
When will we know more? 

Joe Leahy
One of the key dates I think people will be looking for is around mid-December, when the Chinese leadership holds one of its principal economic meetings of the year. And at that meeting, people will be looking for indications of how China plans to go forward with the stimulus. I think one thing is for sure, there will be more stimulus. There’s no doubt about that. It’s just how big it will be. We’ll probably see some more monetary stimulus that will keep going. The central banks promised that. But we should also see a fair bit more fiscal stimulus as well. And that could be money spent to help the property market, which hasn’t completely stabilised yet. Certainly, in the lower-tier cities of China, property prices are still weak or falling. And we should see something for consumers. But the consumer stuff could be more just sort of subsidies to buy home appliances or things like this. It still might not be what the market’s looking for. 

Michela Tindera
So recently, Xi Jinping has been criticised for focusing too much on global competition and specifically competing with the US while kind of ignoring domestic issues. But given Trump’s election, I just wonder, could that global approach that he’s taken for a few years actually help him more now in reaching that 2035 growth target? 

Joe Leahy
Yeah, Xi Jinping has been balancing security with economic growth for some time now. And critics would say he’s been giving too much focus to security and not enough on economic growth. I think now there’s a realisation in China that without this, you know, a bigger role for the domestic economy, they are very exposed to trade and to exports. And with Donald Trump coming in, China’s probably gonna be forced in some ways to become an economy that does have a bigger role for domestic demand. Whether this will impede Xi’s goals of doubling per capita income by 2035, I think that’s a lot of headwinds. I mean, Trump’s election is certainly going to pose a massive challenge for that. And only time will tell whether China can come up with different ways of . . . or new engines of growth to replace some of the trade that it might lose with the US. And also, you know, the loss of the property sector as a big growth engine. 

[MUSIC PLAYING]

Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Sound design and mixing by Sam Giovinco and Joseph Salcedo. Special thanks to Mischa Frankl-Duval. Topher Forhecz is our executive producer. Cheryl Brumley is the global head of Audio. Original Music is by Hannis Brown. Thanks for listening. See you next week.