Most commentaries about China are a maze of statistics. I want to take readers behind those figures into what is really happening in China and why America’s Trumpism is arguably a product of events in China.
The great danger for the world is we have not isolated the Chinese consumers as a key cause of the tariff wars just as in Australia we are not isolating our bad energy policies as the main cause of higher costs.
We need to start by looking at China prior to the presidency of Xi Jinping, which started 12 years ago. His predecessors, President Hu Jintao and Premier Wen Jiabao, are now forgotten but in their two terms of office there was further emergence of a consumption-driven Chinese middle class.
The Hu-Wen Chinese governments expected China to emerge as one of the great consumer nations of the world.
But, under Xi Jinping it did not happen. China failed in its efforts to replace its exports with domestic consumption, so its industrial base now relies on exports to the US and the rest of the world.
Under the original plan, by now, exports should have been greatly reduced in importance by local consumption.
Instead, the Chinese population just saves and saves. The adverse consequences within China are dire, because most Chinese industrial enterprises are now desperate for every export sale they can achieve.
It is not made easier by the emergence of Vietnam and others as rival sources of low cost goods.
The US believes it must defend itself against Chinese low pricing and the result is the election of Donald Trump as President. At least in part the new tariff world is a symptom of China’s problems rather than America’s.
So why didn’t the massive China industrial base create a great consumer nation as had been envisaged by Hu and Wen?
I don’t know the full story but there are clear signals which explain why the Chinese save rather than spend.
China’s industrial base did not convert into a well-paid Chinese workforce. Many segments of the population found other income sources, but they do not put said income on display with high consumer spending. Meanwhile, the West enjoyed inflation relief because Chinese business was left to drop pricing to survive, continuing low payment of employees. It is a vicious cycle.
While there was a property boom the Chinese saw their property paper gains as a saving security. When the property market collapsed many were left with overhanging debt and it had a severe impact on consumer spending.
It was a duplication of what happened in Japan, which depressed the Japanese economy for two decades. Australia’s iron ore exports to Japan were hit by the Japanese slump, but then rescued by the resurgence in China. Chinese infrastructure spending has helped us but in the decade ahead we need Chinese consumers to spend, especially as we face major iron ore competition from Africa
Sadly, there also appears to be a hidden force holding back many Chinese consumers. Anecdotal evidence (always denied by the administration) suggests China has a hidden cancer in some parts of the country which did not exist in Japan. If it is widespread, it is very serious.
In the absence of proper salaries, bureaucrats rely on bribery payments. Everyone has to pay.
If any citizen complains there is an institutionalised system to eradicate them because the whole public service is at risk. Where it exists, the cancer creates a distrust in the administration which is compounded by the fact most aspects of a person’s affairs are known by the government.
The bottom line? Chinese factories can’t afford to pay the Trump tariffs, so Xi may be fighting for his life
Is a war with Taiwan the political diversion he needs? Is another Tiananmen Square protest a prospect? Maybe Trump and Xi will do a deal which achieves Trump objectives without tariffs.
If Australia does not honour its ANZUS obligations, then we have no defence should the Chinese look this way as the Japanese did in 1940.
Maybe Xi could order the sale of US bonds and have the proceeds distributed to consumers?
But, the base dilemma is the Trump tariffs are seen in China as the problem, when it’s the Chinese consumer refusing to spend which is the real problem.
More Coverage
Vague lawmaking risks creating ‘thought crimes’
Freedom of communication in Australia is dying because of unrelenting attempts to control what we say and what we think.
Trade war will test US exceptionalism, says Orbis CIO
Contrarian investor Alec Cutler thinks US exceptionalism will be put to the test as markets increasingly realise that Donald Trump now cares less about the stock market and economy.
In a few years when we look back on 2025 we may conclude that the hidden drama in China was the main cause of the amazing events now taking place in the US.