Red alert: Xi’s plan to protect China from the worst of Trump

What will President Xi Jinping do to try to “Trump-proof” China’s economy? This week, we might get some insights into his plans.

Just as US President Donald Trump doubles his new tariffs on China’s exports on Tuesday – from 10 per cent to an effective 20 per cent – China will start its annual “Two Sessions” meetings of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC).

Xi Jinping is very aware of just how unpredictable Donald Trump can be. Credit: AP

The CPPCC is a group of more than 2000 members, drawn from across China’s society, which supports and advises the Communist Party. The NPC is China’s most senior legislative body, in effect its national parliament. The CPPCC meets on Tuesday, with the NPC starting its sessions on Wednesday.

With an increasingly export-driven economy exposed, not just to Trump’s tariffs but to increasingly protectionist sentiments in China’s other major markets, there is an expectation that the NPC will pivot even more strongly towards trying to revive its weak domestic consumption and respond to the disinflation that threatens to trap the economy in a deflationary spiral.

Any shifts in economic policies are likely to be modest, as has been the case in recent years. Beijing needs to keep something up its sleeve because, so far, Trump has justified his tariffs on China by linking them to China’s production of the precursor chemicals for fentanyl rather than trade imbalances.

With an all-encompassing Trump administration review of trade issues due next month, there is still potential for the president to impose the 60 per cent duty on imports from China that he threatened during his election campaign, or at least use that threat as leverage to do a trade deal with China on his terms (even though China didn’t deliver on its side of the deal he did in 2020 to end his first trade war).

In any event, Xi knows China is heading into a new trade war more trade-exposed than it was during the 2018-19 episode and with a US administration filled with China hawks who are committed to implementing Trump’s every desire, misconceived (he doesn’t seem to understand trade or tariffs) or not.

The NPC meeting will set the party’s economic strategy and spending plans for the next year, the final year of the 14th five-year plan and the decade of Xi’s “Made in China 2025” economic manifesto. The next five-year plan will be unveiled in March next year.

The NPC is expected to set a target for economic growth of about 5 per cent, as it has for the past two years. It achieved that last year, or at least that is what the official numbers said (there are Western economists and some Chinese economists who believe the real growth rate was somewhat lower).

There’s also an expectation that to drive greater domestic growth, the NPC will target an increased deficit, lifting it from 3 per cent of GDP to 4 per cent, lower the inflation target from 3 per cent to 2 per cent, and increase local government bond issues.

China’s economy continues to struggle.Credit: Getty Images

The People’s Bank of China has been loosening monetary policy and may lower interest rates again, but that hasn’t had any material effects on borrowing activity to date.

There is likely to be a continuation of the cautious and limited efforts to boost domestic consumption that Beijing implemented last year – mainly subsidies for trade-ins of old appliances and for upgrades of equipment – and there may also be some increases to pensions and some increases in social welfare benefits.

It is also possible that there could be more measures to try to clear the overhang of uncompleted properties and projects that still weigh on the economy.

Xi has shown a reluctance towards any large-scale stimulus to boost domestic consumption – he sees it as wasteful and unproductive – preferring to focus on “high quality” development and “productive forces”, which is a technology-led strategy that seeks global technology leadership and self-sufficiency and which was central to the Made in China 2025 plan that has dramatically closed the gap between the United States and China in key technologies.

Nevertheless, with its property market still depressed, albeit seemingly stabilising at very low levels, and property investments at the heart of middle-class wealth in China, the economic authorities may have to contemplate doing more to boost consumer confidence and spending and steer the economy away from the deflationary trap.

A key theme of the NPC meeting is again likely to be technology, with the success of Huawei in developing relatively advanced semiconductors in the face of ever-tightening bans by the US on access to advanced chips and that of DeepSeek in releasing highly efficient and very low-cost artificial intelligence models generating confidence that China can match the US in advanced technologies.

Enlisting the support from a private sector battered by Xi’s rolling crackdowns on entrepreneurs over the past four years will also be vital if the growth target is to be met and the contest with the US for technological supremacy is to be maintained.

Last month, Xi took the unusual step of meeting with China’s key private sector leaders as part of a relatively recent effort to bring them back into the fold and compete on a level playing field with the state-owned enterprises Beijing had previously favoured. The companies are being offered Beijing’s support, including financial support if required.

Xi knows that China is heading into a new trade war more trade-exposed than it was during the 2018-19 episode and with a US administration filled with China hawks who are committed to implementing Trump’s every desire, misconceived or not.

Delegates at the NPC are expected to ratify the new Private Economy Promotion Law that will provide equal treatment and protection. Beijing hopes it will generate increased investment, innovation and employment from a sector that has provided a disproportionate share of China’s growth.

It’s also where the big investments and developments in technology, and AI in particular, are being made.

Xi sees the integration of AI across the economy, which has already begun, as a potential edge in the technology race with the US. Adoption of AI within the layers of government and industry is more easily mandated in China than in Western, market-driven democracies.

Xi needs the NPC meeting to develop measures to strengthen his domestic economy because China has become too reliant on exports and faced pushback from its key trading partners even before Trump regained the White House.

With significant excess factory capacity, the prospect of punitive tariffs in the US, potentially US tariffs on other countries within its region that it has been using for backdoor entries of large Chinese-manufactured goods into the US market and rising protectionism in Europe, China needs a stronger domestic economy to compensate for reduced demand from offshore.

This week’s meetings will provide some understanding of how Xi plans to navigate what could be even more turbulent times for his economy and insulate it, to the degree possible, from the worst conceivable of Trump’s unpredictable intentions.

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