Three Reasons Why Xi Faces Bigger Challenges Than Trump’s Tariffs

1. Lingering Property Crisis
   China’s ongoing property crisis is one of the primary factors holding back economic growth. Overleveraged property developers, coupled with slowing demand for housing, have led to a market slowdown. Major real estate firms like Evergrande continue to struggle with debt repayments, which has triggered a wider financial crisis, impacting everything from construction to consumer spending. The government’s attempts to stabilize the market through stimulus measures have so far been insufficient to fully resolve the issue, causing ripple effects across the economy.
2. High Local Government Debt
   Local governments in China face significant financial strain due to excessive debt accumulation. Much of this debt is tied to infrastructure projects, which have not provided the expected economic returns. As revenues decline and debt obligations rise, local governments have been forced to scale back investments, affecting public services and stalling vital regional economic development. This fiscal pressure limits Beijing’s ability to implement further stimulus measures without exacerbating the national debt.
3. Youth Unemployment and Low Consumer Confidence
   The rising unemployment rate among China’s youth is another major hurdle. With a growing number of young people struggling to find jobs, the government faces increasing pressure to provide employment opportunities. At the same time, low consumer confidence is preventing domestic consumption from fueling growth. Despite stimulus efforts to boost the economy, Chinese consumers remain cautious, keeping their spending low. This lack of economic confidence is exacerbated by the rising cost of living and the uncertain economic climate, affecting both household budgets and business investments.

Together, these factors present deeper, more structural challenges for Xi Jinping’s administration than the threat of Trump’s tariffs, which, while significant, are just one element in a much larger and more complex economic landscape.

1. Tariffs Are Already Hurting Chinese Exports

China’s reliance on manufacturing and exports to fuel its economic recovery is now at risk, with tariffs continuing to hurt the nation’s trade. Last year, China achieved significant growth through record exports of electric vehicles, 3D printers, and industrial robots. However, key markets such as the U.S., Canada, and the European Union have imposed tariffs on Chinese goods to protect their own industries and jobs.

These tariffs have already started to affect the competitiveness of Chinese products in these major markets. In response, Chinese exporters may increasingly shift their focus to emerging markets, where demand is weaker and purchasing power is not as high as in North America and Europe. This shift could have negative implications for Chinese businesses hoping to expand globally, particularly as it could impact industries tied to energy and raw materials.

Moreover, Xi Jinping’s long-term goal of transforming China into a high-tech manufacturing powerhouse by 2035 is in jeopardy. The question remains: How can China continue to depend on its manufacturing sector as a primary engine of growth when tariffs undermine its ability to compete on the global stage? The transition from cheap goods to advanced technology might take longer and face more hurdles than anticipated due to these trade barriers.

2. People Are Just Not Spending Enough

In China, household wealth has traditionally been tied to the property market, which accounted for almost a third of the economy before the real estate crisis. The collapse of this sector has had a profound impact on consumer spending, as millions of Chinese people have seen their wealth tied up in unsold properties and falling real estate prices. While the government has introduced several policies to stabilize the market and its broader economy, the effects of overbuilding and the resulting oversupply of both homes and commercial properties continue to depress property prices.

The downturn in the property sector is expected to persist for several years, creating a prolonged drag on the country’s economic recovery. This has already been evident in the most recent economic data: in the final quarter of 2024, household consumption accounted for only 29% of China’s GDP, a significant drop from 59% before the pandemic. This decline in domestic spending on goods like cars, luxury items, and home appliances has prompted Beijing to focus on boosting exports as a compensatory measure. Initiatives such as trade-in programs for consumer goods—where people can exchange old household appliances—have been introduced, but experts remain skeptical about the effectiveness of such short-term measures.

To revive consumer spending, deeper structural issues need to be addressed. Many economists, including Shuang Ding, Chief Economist at Standard Chartered Bank, emphasize the need for China to rekindle the “animal spirit” of its population. Without significant improvements in wages, employment prospects, and overall economic confidence, it seems unlikely that consumer spending will return to pre-COVID levels anytime soon. The ongoing high youth unemployment rate and stalled wage growth only add to the uncertainty, further dampening the outlook for domestic consumption.

Until these underlying challenges are addressed, the sluggish domestic spending will continue to weigh heavily on China’s economic recovery, leaving the government with limited tools to stimulate growth without risking deeper financial instability.

3. Businesses Are Not Flocking to China Like They Used To

While China remains a leader in certain cutting-edge industries such as renewable energy, electric vehicles (EVs), and solar panels, the broader economic picture has become less appealing to foreign businesses. Despite President Xi’s promises to invest in high-tech industries, uncertainty over tariffs and geopolitical tensions has led to subdued interest from international companies looking to invest in China. This shift in business sentiment is exacerbated by a lack of confidence in the country’s long-term economic prospects.

In recent years, China has successfully positioned itself as the world’s largest car exporter, overtaking Japan, and EV exports have been a significant driver of growth. However, the overall business climate is far from vibrant. Foreign investors no longer see China as the “go-to” destination for growth opportunities. Stephanie Leung from StashAway highlights that businesses are seeking a more diversified pool of investors and are hesitant to invest in an economy with increasing risks and declining prospects.

Experts argue that China’s economic challenges are deeper than tariffs alone. According to Goldman Sachs’ Chief China Economist Hui Shan, Beijing will need to implement bold and comprehensive measures to stabilize the economy or face a slower growth trajectory. These measures should include stabilizing the property market, which continues to be a source of strain, and creating jobs to ensure social stability.

Social unrest is also on the rise, with more than 900 protests reported between June and September 2024. These protests, driven by workers and property owners facing economic hardship, signal growing dissatisfaction. The erosion of wealth and the widening gap between expectations and reality could pose a serious risk to the social contract that has helped maintain stability for China’s ruling Communist Party.

As explosive growth becomes a thing of the past, the challenge for the Chinese government is not just economic but political. If businesses continue to pull back and public unrest grows, China may face a more difficult road ahead in maintaining both its economic dominance and political stability.

Courtesy: Firstpost

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