China's Mr. Big has squandered his most powerful trade war weapon

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The tables have turned. As U.S. President Donald Trump reignites his trade war with China, he's got all the bargaining chips.

The growth trajectories of the world's two-biggest economies have diverged sharply since Trump's first term. While global investors are doubling down on U.S. exceptionalism, keeping faith that the dollar and American equities will continue to outperform, the Chinese economy is limping along and might not be able to shake off deflation, perhaps for decades to come.

This could use some introspection. Knowing that the U.S. wanted an ugly divorce as early as 2018, when Trump first started slapping tariffs on Chinese imports, did President Xi Jinping mismanage the economy somehow, or was it pure bad luck?

In a global trade war, the economy with a powerful consumer base wins. Trump can throw insults at foreign heads of state and coerce big businesses to reshore in the U.S., because he is able to block access to the world's most resilient spenders. Selling goods and services to Americans is just that much more profitable, thanks to robust demand.

That insight seems to have gone missing in Beijing. Instead of encouraging consumption, Beijing has doubled down on industrial policy. It's fostering high-end manufacturing, such as electric vehicles, semiconductors and robotics, with subsidies and cheap financing. State-owned banks have been offering low-interest loans to industrial companies, while reining in lending to the real estate sector, which arguably triggered a deep property downturn.

At the same time, the welfare of China's middle class has been ignored. As they stumbled out of pandemic-related lockdowns in late 2022, they discovered an economy that suffers from long COVID. "Rotten tails," or residential projects distressed developers had sold but were unable to finish, are peppered across the country. A harsh big tech crackdown has left fresh college graduates jobless and their middle-aged parents anxious. Between 2018 and 2024, the number of births tumbled by more than a third, hard evidence of the economic pressure couples are facing.

Consumers are hunkering down. Household savings more than doubled from 2018 to about 151 trillion yuan ($20.7 trillion) last year, even as banks repeatedly cut deposit rates. Instead of slavishly buying European luxury goods, until recently a symbol of aspiration and economic success, people are opting for self-care and engaging in activities that don't cost much, such as camping and road trips.

What this has resulted in is an economy that's even more imbalanced than before. Last year, consumption contributed only about 30% to economic growth, versus 68% at the onset of 2018. Most of the 5% gross domestic product growth came from net exports, as the likes of EV maker BYD Co. took the world by storm.

It's a dismal report card; boosting consumption would have been a low-hanging fruit. Private consumption is relatively low in China. It accounts for just about 40% of the economy, versus around 55% in Japan and Germany, and 63% in Brazil.

This also puts Xi in a tight spot as he jostles with a mercurial Trump, who has a knack for finding pain points. As an example, the U.S. Postal Service is temporarily suspending inbound international packages from China and Hong Kong, potentially delaying or blocking shipments from retailers like Shein and PDD Holdings Inc.'s Temu. That would hurt: Textile and apparel that the two e-commerce platforms sell are the third-biggest category of U.S. imports from China after computers and electrical equipment. Without exporters, Xi can kiss his 5% growth target goodbye.

After Trump's win, perhaps in a nod to its vulnerability, Beijing signaled to the public in December that boosting consumption would be its top priority this year. Is that a real pivot, or mere lip service? Only time will tell. But one thing is certain: Xi squandered his most powerful trade war weapon — his people.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.

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