Quite Aside From the ‘Trade War,’ China’s Economy Continues to Struggle

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As Beijing does its best to cope with its “trade war” with Washington, it must address significant domestic economic concerns.

Long before President Donald Trump began to threaten and impose tariffs, since the COVID-19 pandemic lifted, a number of retrograde forces have plagued the Chinese economy, of which the continuing property crisis is only the best known. These issues demand as much attention from the Chinese authorities as anything Trump does and will continue to do so, even if by some miracle, China and the United States can sort out their trade differences.

Chinese consumers are a big part of the country’s more general economic challenge. To sustain growth, China needs a more robust consumer sector, not the least because Beijing, not unreasonably, looks for a rise in this area of the economy to substitute for waning exports, once China’s primary engine of economic growth.

This need has long predated America’s tariffs and has been urged on Beijing for years by the International Monetary Fund (IMF). Beijing has acknowledged this need and tried to stimulate consumption activity for at least the last two years. So far, it has failed to get the response it wants and needs.

The country’s property crisis is undoubtedly the most significant but not the only force holding the consumer back. The crisis broke in 2021, when major residential property developers began to fail. Those failures not only halted activity in a sector that had been a major contributor to China’s economic advance but also had ill effects elsewhere.

Most immediately, they limited the ability of Chinese finance to support other sectors of the economy, most importantly investment spending and the economic support once offered by local governments. These failures hit Chinese households in two ways.

Immediately, the halt on building activity meant that millions of Chinese who had prepaid for apartments would never be able to take possession. These households immediately cut back on their spending, while their refusal to pay on their mortgages compounded the burdens on Chinese finance.

But these are not the only weights on the Chinese consumer. The lockdowns and quarantines of the COVID-19 pandemic, especially those imposed by Beijing’s zero-COVID policy for years after the emergency lifted, interrupted incomes and work arrangements across the country, leaving a legacy of job and income insecurity that persists today.

Many, accordingly, are simply afraid to spend aggressively. Reinforcing this cautious attitude is the general slowdown in the pace of Chinese growth. Of late, that pace has fallen to about half of what it once was, and it has thoroughly destroyed the former confidence among Chinese that the future would bring more jobs, more income, greater wealth, and greater opportunities to spend and save.

So far, Beijing’s efforts to get household spending back on track have met with limited success at best. The pace of growth in consumer spending has ticked up recently from last year and this year’s earlier months, but May’s 6.4 percent rise from year-ago levels, though better than the 4.7 percent pace averaged during the first four months of the year, remains well below much more robust figures from before the pandemic and certainly what Beijing needs if the Chinese consumer is to take over from the economy’s export growth engine.

Exports, of course, have suffered. Earlier this year, there was a false start as American buyers sought to build up an inventory before Trump’s promised tariffs could raise costs. But that surge has now run its course, not the least because the Americans presently have a huge unsold inventory of Chinese goods.

Even if, by some miracle, the whole tariff mess can reach an amicable solution, Beijing is well aware that the old export growth engine will not return. Long before Trump took office and began to talk about high tariffs on China, American buyers were moving away from Chinese sourcing. Some of that trend reflected Washington’s long-intensifying hostility toward China trade.

European governments, though less vocal than the Americans, have also shown increasing levels of suspicion toward China and an increasing reluctance to trade. No doubt, such developments made American and European buyers look elsewhere. The legacy of Beijing’s COVID-19 policy also factored into this equation. The lockdowns and quarantines imposed during the pandemic and while the zero-COVID policy prevailed in the years following so interrupted trade flows that they managed to undermine China’s former reputation for reliability, further convincing Western buyers to diversify their sourcing.

Yet efforts to increase activity in this sector face an uphill battle. Uncertainties surrounding trade have kept Chinese businesses, especially private businesses, reluctant to commit funds for expansion and modernization. There has also been a general slowdown in the pace of Chinese growth. The legacy of the disruptions caused by the pandemic and the zero-COVID measures that followed has had similar ill effects in this area.

There is something more, something that gets little media attention. Not so long ago, Chinese leader Xi Jinping berated private business owners for caring more about profits than the agenda of the Chinese Communist Party (CCP). That implicit and serious threat immediately caused a rethink of expansion plans.

Xi, feeling the pinch of his country’s economic problems, has since changed his tune, referring to these businesspeople as “our own people.” But the memories of these businesspeople are long, and, knowing that Xi could easily return to his former way of thinking, they remain reluctant to put assets at risk.

Especially since Beijing has in the past failed in its efforts to turn any of these problems around, it has found itself at a disadvantage in its trade negotiations with Washington. It must see itself beleaguered even in the absence of the tariffs and other pressures brought by Trump and the U.S. government. The CCP faces challenges clearly on many difficult fronts.