China's Finance Ministry on Tuesday reiterated its intention to increase public spending by focusing on consumption to support the economy in 2025. Beijing must support growth on the eve of the introduction of tariffs by the United States on its products. In fact, the Chinese economy lives on a model based on industry and exports in which the investment component of the GDP is disproportionate to that of consumption; in the Chinese system it was consciously chosen to subsidize production and industry to the detriment of family consumption.
This model worked for decades in a phase of globalization in which goods, services and capital moved from one part of the globe to another without problems. The United States, if Trump follows through on what he promised during the election campaign, has deployed tariffs to rebalance trade and balance of payments imbalances and this undermines the model on which China has built its economy. .
The Beijing Government therefore decides to push consumption to replace “American” demand with national demand, but the transformation is not a given. In addition to time, it is a question of changing a consolidated mentality among Chinese families who put saving or buying houses before consumption. It is not certain that the Chinese government's programs will be successful, especially in the short term.
It is a delicate phase because Trump's plan also involves risks; to rebalance the American economy it must take into account the risk of higher prices given that the same product made in China or America does not have the same price. China, the “factory of the world” for a generation, has exported deflation and allowed the United States to contain prices despite the explosion of the Fed's balance sheet and zero rates after the bankruptcy of Lehman Brothers. Today the United States is already running at very high deficit levels and, recessions excluded, the risk that Trump finds himself in a situation similar to that of Biden, with prices rising, is real.
There has been speculation for months that China and the United States could resolve the uncertainty with an agreement that makes it possible to drive change without excessive backlash. Even in the hypothesis of an agreement, the risks of a phase that involves structural changes for the two largest economies in the world remain. Any relief valve the two economies can imagine to cushion the impacts of this transition becomes precious. Everything points to Europe as a possible clearing house to absorb Chinese and American exports and as a market from which to draw savings in a phase of higher interest rates.
The Chinese government's decision to push the deficit to stimulate consumption shows that changes are coming and that this is a negotiating phase in which we are preparing for a possible agreement. Negotiations will come to a head soon after Trump takes office. Once the agreement between Beijing and Washington has been signed, if this is the case, the European space for maneuver is destined to narrow and the Union will have to play with rules decided by others.
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