Sinica: China Perspectives by Sinology

On the Ground in China: Sentiment is Improving

Andy Rothman — Wed, 01 Apr 2026 11:30:47 GMT

I would like to share my thoughts after spending two weeks in China in mid-March:

Sentiment is improving. Almost everyone I spoke with in Shanghai and Beijing said they are more optimistic about the economy than they were a year ago. This was my sixth trip to China since September 2024, when the political leadership announced a change in policy direction, and confidence among entrepreneurs, consumers and equity investors has been steadily, albeit slowly, improving.

The Chinese consumer is likely to bounce back. Since September 2024, Xi Jinping has switched his policy focus from regulatory control to supporting the return of consumption as the main driver of economic growth. Household savings have more than doubled since the start of 2020, a net increase equal to US$ 13 trillion, and as confidence returns I expect consumers and entrepreneurs to begin drawing on this to spend on goods and services and invest in small businesses.

Deeper government support to further accelerate tech advances. The new five-year plan, published during my visit, provides high-level guidance on an ecosystem to support tech self-reliance and innovation for industrial development. The government is pushing banks and equity markets to finance privately-owned tech firms. If successful, this would boost hiring and sentiment, which would stimulate consumption.

Rising oil prices re-enforce Beijing’s belief in green tech. China is already the world leader in batteries, renewables and electric vehicles, and I heard expectations that the war in Iran will accelerate foreign demand for these goods as the 1970s oil shocks boosted American appetite for fuel-efficient autos made in Japan.

Iran conflict less damaging to China than to the US and its allies. China is better prepared: it reduced its dependence on oil and gas, filled its strategic petroleum reserve, expanded renewable generation, and has lots of coal. Beijing is also able to limit the impact of higher oil prices on retail gasoline prices.

Xi will welcome Trump to Beijing but doesn’t trust him. I heard that China is prepared to receive Trump whenever the war is cooled down to the point where he feels he can travel. Beijing will give Trump the pomp and circumstance he craves but does not trust him enough to engage in serious negotiations. China’s objective is to maintain stability in the bilateral relationship. My contacts do not expect Xi to push Trump to make a significant change to long-standing US policy on Taiwan.

Xi doesn’t plan to invade Taiwan. As on past visits, I heard no domestic political pressure on Xi to use force and no talk of plans to use force to coerce unification. While I was in China, the US intelligence community published its assessment that “Chinese leaders do not currently plan to execute an invasion of Taiwan in 2027, nor do they have a fixed timeline for achieving unification.”

The Chinese economy is likely at an inflection point. It is difficult to predict when this will become consensus, but this is a good time for global investors to pay more attention to China, to visit the country, to look for opportunities in tech, as well as in the consumer sector, which is underowned and undervalued.

The Return of the Chinese Consumer

Andy Rothman — Fri, 09 Jan 2026 15:45:17 GMT

“Consumption is a crucial engine of my country’s economic growth.”

– Xi Jinping, December 2025

For short-term investors, the 2026 China story will be familiar: world-class innovation by tech and health care entrepreneurs. For investors with a long-term horizon, this year’s story will be more interesting, as Beijing’s policy pendulum swings towards supporting the return of the Chinese consumer and away from a focus on regulatory control. This will require patience, as Xi Jinping is taking an incremental approach to fixing the key obstacle to stronger consumption: a very weak housing market.

The 2025 China Macro Story Was Uninspiring . . .

Last year’s China macro data was uninspiring. For example, nominal retail sales rose by 4% YoY during the first 11 months of 2025, compared to 8% growth during pre-COVID, pre-regulatory crackdown 2019. Fixed asset investment fell 2.6% during the first 11 months of last year, vs. a 5.2% rise in 2019.

. . . But It Wasn’t A Collapse

The pace of economic growth was disappointing, but — despite what you may have read in the media — it was far from a collapse. The IMF, in its October update, forecast that China’s GDP growth rate in 2025 and 2026 would be the world’s second-fastest among major economies, surpassed only by India. This year, the IMF expects China’s economy to grow twice as fast as the U.S. The Fund’s Managing Director said in December that “China is contributing about 30% to global growth” and “over the next couple of years, very likely there would be around 30% contribution to global growth.”

And while the Chinese government’s macro data collection capabilities clearly can be improved, economists at the International Finance Division of the Federal Reserve Board in Washington concluded that “recent GDP growth figures, which have been in line with the stated target, appear to align closely with broader Chinese economic indicators and do not appear to be overstated.”

Consumer Confidence Is Weak . . .

Weak confidence among Chinese consumers and entrepreneurs is a key problem. The government’s own consumer confidence index fell sharply, from 113 to 87, during the 2022 Shanghai COVID lockdown. By November of last year, the most recent data available, the index had improved only marginally, to 90.3. (It is noteworthy that the Chinese government continues to publish this confidence data set monthly, despite its weakness.)

. . . But Chinese Investor Confidence Is Strong

In May 2022, JPMorgan’s tech analysts shook the global finance community by declaring that China was “uninvestable.” Last month, however, the bank’s head of global equity strategy said they had “fully flipped” to an overweight position on China.

That reversal by JPMorgan trailed strong China equities performance. In 2025, the MSCI China index rose by about 28% in dollar terms, handily beating the MSCI USA, which was up about 17%. The Shanghai Composite index was up a bit more than the S&P 500. The ChiNext tech stock index was up about 50% while the Nasdaq composite rose about 20%.

Why Is China’s Growth Uninspiring? Bad Policy Choices

When I first visited China as a student in 1980, it was very poor, with a per capita GDP less than that of Afghanistan and Haiti. Now it is the world’s second-largest economy, with a thriving middle class. This came about because the Chinese people are incredibly resilient, and because the Communist Party has been increasingly pragmatic about economics. The Party’s economic policy pendulum moved steadily towards support of entrepreneurs and markets. The private-sector share of urban employment has risen from approximately 0% when I was an American diplomat in Guangzhou in 1985 to approximately 90% today.

This pragmatism continued through the first seven years of Xi Jinping’s tenure as Party chief, but was interrupted in 2020 as he sent the policy pendulum in reverse, towards regulatory control. That began with misguided efforts to deal with real structural problems in the housing market. The “three red lines” policy of 2020 crashed new home sales and starts, leading to job losses and falling residential prices.

Government policy overall became increasingly focused on regulatory control, and efforts to fix problems only compounded them. A wide range of sectors were targeted, including internet platforms, online gaming, education, health care, electronic cigarettes, and coal mining. This weakened confidence among entrepreneurs running the small, private firms responsible for China’s innovation and wealth creation. The growth rate of private investment was 4.7% YoY in 2019, but stalled during 2022-2024 and fell by 5.3% YoY during the first 11 months of 2025.

With most urban Chinese either entrepreneurs or employed by entrepreneurial firms, consumer confidence weakened as well, especially after the government poorly handled the 2022 COVID lockdowns in more than 100 cities.

Sales and hiring slowed. Youth unemployment has been running at 15% or higher since July 2024. Income continued to grow, but at a slower pace, rising 5.2% YoY in real (inflation-adjusted) terms during the first three quarters of last year, down from 6.1% YoY during the same period in 2019.

Why Is China’s Growth Uninspiring? It’s Not About Ideology

It is important to recognize that the economic policy mistakes described above were not driven by an ideological opposition to entrepreneurs. Private firms have continued to thrive since Xi became Party chief in 2012, and have driven all net new job creation. The private sector share of total urban employment has risen from 82% in 2012 to 89% in 2024.

The number of private firms increased by more than fourfold since 2012. In the first half of last year, 4.3 million new private firms were established, an increase of 5% YoY.

Xi is clearly counting on the success of private firms, which account for 90% of China’s high-tech companies and which dominate the industries Xi is promoting: batteries, electric vehicles, and artificial intelligence. Thirteen of the 15 globally significant Chinese battery makers are privately owned; seven of the top 10 electric vehicle makers (by number of units produced) are privately owned; and the eight leading AI startups are privately owned.

Xi Began To Course Correct In September 2024

The policy pendulum started to clearly change course at a September 2024 meeting of the Party’s senior leadership, the Politburo. Xi effectively acknowledged that his emphasis on regulatory control had gone too far, and he began a gradual return to pragmatism. Most importantly, since the fall of 2024, there have not been any new, significant regulatory campaigns announced.

A February 2025 meeting between Xi and some of China’s leading tech entrepreneurs — including Alibaba founder Jack Ma and DeepSeek founder Liang Wenfeng — kicked off renewed political support for the private sector.

After three years of overly aggressive policies, entrepreneurs and consumers have responded cautiously. Retail sales and private investment have remained weak, but the consumer sentiment index has risen from 85.7 in September 2024 to 90.3 in November 2025. The positive equities performance last year was due in large part to the policy changes.

The consumption story has slowly begun to turn around. In 4Q24, final consumption accounted for only 30% of GDP growth, but that share has been rising, to 52% in 1Q and 2Q25, then 57% in 3Q25.

In December 2025 Xi Made Promoting Consumption A Political Goal

Recognizing that he had not yet done enough to rekindle confidence and consumption, Xi went all in on domestic demand in December. He is making clear that he understands that China can no longer rely on exports or investment to drive growth.

In widely publicized statements in China’s media, Xi is signaling that boosting consumption is a top political priority:

“We must accelerate efforts to address the shortcomings in domestic demand, especially consumption, making domestic demand the main driving force and anchor for economic growth.”

Xi is also acknowledging that industrial overcapacity means China cannot return to its old playbook of using investment stimulus to promote economic growth:

“In the past, my country’s production capacity lagged behind, so the focus was on expanding investment and improving production capacity. Now, with overall overcapacity, relying solely on expanding investment to boost growth has limited effect and diminishing marginal utility. While investment can be a significant driver of economic growth in the short term, final consumption is the sustainable engine of economic growth.”

And Xi is not proposing to use exports to boost growth. All of his rhetoric is focused on domestic demand:

“Expanding domestic demand is a strategic move . . . not a temporary measure to cope with financial risks and external shocks.”

Xi speaks about “investing in people,” as opposed to traditional investment in infrastructure and manufacturing, although he hasn’t yet provided details:

“The most fundamental way to expand consumption is to promote employment, improve social security, optimize the income distribution structure, expand the middle-income group.”

Reasons to Be Optimistic that the Chinese Consumer Will Return

The Chinese consumer has been lying flat recently, and while Xi is making boosting consumption a political priority, some people are skeptical of both his commitment and his ability to execute. This skepticism may be due to observers not remembering how strong consumption was earlier in Xi’s tenure, before the series of policy mistakes hit consumer confidence. Prior to the pandemic, consumption was the main engine of China’s economic growth.

In the five years before COVID, real final consumption accounted for 64% of China’s GDP growth, while net exports on average contributed only 1% of growth. (The balance was from investment and inventory changes.)1

Consumption weakened considerably in the next five years, as government policy mistakes (the regulatory crackdowns described earlier, especially on the housing market, and the COVID lockdowns) led to a collapse in confidence, rising unemployment, and slower income growth. Between 2020 and 2025, final consumption on average contributed only 47% of annual GDP growth, allowing the net export share to rise to a 16% contribution.

But there’s no evidence that Xi has been opposed to consumption. From 2012, when Xi became head of the Party, through 2019, consumption growth in China averaged 7.6% vs. 2.1% in the U.S. in real terms.

The collapse in consumer confidence and slower income growth dragged consumption growth down to an average annual pace of 4.8% from 2020 to 2024, but that was still significantly faster than the 2.7% rate in the U.S. during those years.

Consumption is weak in China today, which is why Xi is making boosting consumption a top political priority. But despite the current problems, China remains the world’s second-largest consumer market and the world’s fastest-growing consumer market.

The Biggest Risk: Real Estate

The biggest obstacle to the return of the Chinese consumer, and the reason this is likely to be a lengthy process, is the deep problems in the residential property market. This is a key factor behind weak consumer confidence, but Xi has not revealed any sense of urgency for solving those problems.

The decline in the housing market is stark. In the first 11 months of 2025, new home sales fell 8% YoY on a square meter basis, equal to only 47% of sales in the peak year of 2021.

Residential property prices in China have decreased by about 25% since mid-2021, and are down even more in some smaller cities.

Unlike in the U.S., this has not created a financial crisis, because of high cash downpayment requirements and strict mortgage due diligence processes, but it has had a significant impact on consumer spending.

A 2019 survey by China’s central bank found that housing accounted for almost 70% of assets for urban households. A 2025 study by economists at Bank for International Settlements (BIS), a think tank for global central banks, reported “a significant housing wealth effect” in China’s larger cities (Tiers 1 and 2, accounting for one-third of the total urban population), which “underscores that a considerable portion — over 37% — of China’s consumption is closely linked to the real estate market.”

China’s leadership has acknowledged the problem and pledged to deal with it. The September 2024 Politburo meeting we referenced earlier set a goal of “promoting the stabilization and recovery of the real estate market.” The December 2025 Central Economic Work Conference described the housing market as a key risk and called for “construction of a new model of real estate development.”

Xi, however, has not made this a priority. He has yet to announce (and fund) a detailed plan for stabilizing housing prices, preferring to watch and wait for the market to clear without major government intervention.

This will take time, which is why we expect the return of the Chinese consumer to be a gradual process.

When Confidence Does Return, Consumers Have Cash

Over time, I expect consumer and entrepreneur confidence to return. When confidence does return, it will be supported by the massive increase in family savings since the start of the pandemic and the regulatory crackdown. The net increase in household bank accounts since the start of 2020 is equal to US$11.6 trillion, which is more than double the size of Japan’s 2024 GDP.

This could be significant fuel for a consumer spending rebound, as well as a sustainable recovery in mainland equities, where domestic investors hold more than 95% of the market.

*[Note: A common way to measure GDP is the expenditure approach, which includes final consumption by households, non-profits, and the government; plus investment in capital goods; plus net trade (exports minus imports, or net exports). Final consumption excludes intermediate goods, which are consumed as inputs to produce other goods. In both China and the US, government consumption accounts for about 17% of GDP.]

Beijing Ups the Ante

Andy Rothman — Fri, 10 Oct 2025 12:48:02 GMT

The Chinese government today called Trump’s export control bluff and raised the stakes with new rare earth restrictions. This is all part of Beijing’s strategy to prepare Xi to meet with Trump later this month, and is intended to help the two reach a deal, not scuttle the negotiations.

On October 9, Beijing announced sweeping new restrictions on the downstream use of rare earth materials, including magnets, in global supply chains. Given China’s dominance in the processing and production of these materials, the restrictions could have a dramatic impact on foreign manufacturers of semiconductor, electronics, autos and weapons.

This is not, however, an effort to blow up the expected Xi-Trump meeting on the margins of APEC in Korea. Rather, it is a continuation of the negotiating strategy that Beijing believes is best suited to managing the mercurial and transactional US president.

In my meetings in Beijing last month, I heard that China feels its tough response to Trump’s “liberation day” tariffs has been successful. The view was that Trump admires strength and was impressed by China’s decision to push back harder than any other trading partner, with its own tariffs and export controls, to whatever Washington threw at them.

Chinese officials watched other leaders use flattery and grand ceremonies to woo Trump, only to see those efforts fail to result in any tariff cuts.

So, when the US Department of Commerce published on September 30 new rules designed to disrupt cooperation with Chinese companies in sectors such as semiconductors, biotech and aerospace, Beijing was prepared to call Trump’s bluff and up the ante.

On the first day back at work after the week-long National Day holiday, China responded with measures designed to grab Trump’s attention. It worked. A White House official told the FT that China’s action appears to be an “effort to exert control over the entire world’s technology supply chains.”

It is important to note that today’s move by Beijing is part of its strategy to close a trade deal with the US later this month by playing Trump’s game forcefully, and is not intended to disrupt a deal.

Andy.Rothman@SinologyLLC.com www.sinologyllc.com

Are You Ready for the World’s Greatest Deal?

Andy Rothman — Wed, 27 Aug 2025 22:54:31 GMT

“Deals are my art form. Other people paint beautifully or write poetry. I like making deals, preferably big deals. That’s how I get my kicks.”

Donald Trump, December 2014

[reposted by the White House, April 2025]

A trade deal between Donald Trump and Xi Jinping is increasingly likely in the coming months. This agreement will not solve most of the problems between the world’s two largest economies, but it will reduce tensions enough to restore confidence among China’s entrepreneurs, consumers and investors, as well as reduce inflation risks in the US. Global investors and corporate boards should take this opportunity to prepare for the coming change in climate, where the White House will replace talk of decoupling with encouragement for trade and investment flows.

On July 9, I wrote that “President Trump is famously unpredictable, but the odds of a trade deal with China – while still low – appear to be rising.” Those odds have improved substantially in recent weeks, as Trump is focused on meeting Xi to close a deal around the time of the APEC leaders summit in Korea at the end of October.

A deal is not a sure thing. But the odds are high enough that investors should think about how they would take advantage of the potential impact on China’s equity markets.

In this note I discuss why Trump wants a deal, and what both he and Xi would want to get out of an agreement.

Trump Promised 200 Deals But Doesn’t Yet Have One

Twenty days after his April 2 “Liberation Day” press conference, Trump said, “I’ve made 200 deals.” Asked when those deals would be announced, he replied, “I would say, over the next three to four weeks, and we’re finished, by the way.”

At this point, Trump has not announced even one comprehensive trade deal.

On August 21 Washington and Brussels announced a “Framework Agreement” which they said is “a first step in a process that can be further expanded over time to cover additional areas and continue to improve market access and increase their trade and investment relationship.” Progress, but not a final deal ready to be implemented.

Trump previously signed an executive order implementing a very limited agreement with the UK, covering only imports of British autos and airplane parts. There is a social media posting about an agreement with Vietnam, but no details have been released, so it’s hard to call that a deal.

The President is likely feeling pressure to fulfill his pledge of making real, binding trade deals, and China would be a big win.

Trump Must Be Starting To Worry About Inflation And Job Losses

As he promised, Trump quickly raised taxes on imported goods. American consumers now face an overall average effective tariff rate of 18.2%, the highest since 1934, according to the Yale Budget Lab.

Average US tariffs on goods imported from China are now 57.6% and cover all Chinese imports, according to Chad Bown at PIIE. These tariff rates are up 36.8 percentage points since the second Trump administration began.

Trump has maintained that foreigners pay this tax, but Treasury Secretary Bessent has publicly acknowledged the reality that tariffs are paid by the importer in the US. Bessent has presumably been trying to educate Trump on this in private.

At this point, the impact on inflation has not been dramatic. Core CPI (which excludes more volatile food and energy prices) rose 3.1% YoY in July, the fastest annual pace in five months.

But the minutes of the late July meeting of the Fed’s Open Market Committee stated that “Participants noted that tariff effects were becoming more apparent in the data, as indicated by recent increases in goods price inflation.”

“In terms of timing, many [FOMC] participants noted that it could take some time for the full effects of higher tariffs to be felt in consumer goods and services prices. Participants cited several contributors to this likely lag. These included the stockpiling of inventories in anticipation of higher tariffs; slow pass-through of input cost increases into final goods and services prices; gradual updating of contract prices; maintenance of firm–customer relationships; issues related to tariff collection; and still-ongoing trade negotiations.”

A few FOMC participants “observed that evidence so far suggested that foreign exporters were paying at most a modest part of the increased tariffs, implying that domestic businesses and consumers were predominantly bearing the tariff costs.”

The Atlanta Fed wrote on August 21 that a nationwide survey found that “business executives, on average, have ratcheted up their year-ahead price growth expectations since the end of last year. Firms with supply chains that rely on imported goods have revised up their year-ahead expectations markedly . . . As direct evidence on the potential for tariffs to broaden into a full-fledged inflationary shock, we find that firms with largely domestic supply chains that operate in industries heavily exposed to tariffs have increased their price growth expectations by roughly half of those firms that are directly exposed.”

Concern about inflation (and job losses) isn’t limited to Fed nerds. The University of Michigan consumer survey reported on August 15 that:

“Although CPI inflation has not surged, our data show that consumers are still bracing for an increase in inflation to come. Moreover, consumers are also concerned that labor markets will weaken. The share of consumers expecting unemployment to worsen in the year ahead was about 32% in 2022 and as recently as November 2024, but is now about 60%, a reading last seen in the Great Recession.”

The President is presumably being briefed about the impact of his tariffs on American companies. The CEO of Walmart, America’s biggest retailer, this month said, “as we replenish inventory at post-tariff price levels, we’ve continued to see our costs increase each week, which we expect will continue into the third and fourth quarters.”

Some companies are already passing higher costs on to consumers. Sony announced a price increase for its PlayStation 5 consoles that are sold in the US. Japanese automakers have also begin passing on tariff costs to American car buyers, according to The Nikkei. Home Depot announced it will be raising some prices to cover tariff costs.

For companies that choose to continue absorbing the new import taxes, margin compression may lead to job cuts. Caterpillar expects $1.5 billion in tariff-related costs this year, and Deere, the world’s largest farm equipment maker, expects $600 million. UPS announced plans to lay off 20,000 employees, calling tariffs the “biggest trade disruption in more than a century.”

Tariffs Are Polling Poorly, Even Before Inflation Bites

In early August, when asked if he would like to run for a third term in the White House, Trump replied, “Hey, Becky, I’d like to run. I have the best poll numbers I’ve ever had. You know why? Because people love the tariffs.”

Those tariff fans are clearly avoiding pollsters. In a survey conducted in mid-June by Politico-Public First, one-quarter of self-identified Trump voters said tariffs on China hurt American companies.

A Pew poll published in August found 61% of Americans disapprove of Trump’s tariff policies, with 32% of Republicans disapproving. One-quarter of Republicans said they expect the personal impact of tariffs to be mostly negative in the coming years.

Another August poll, by Navigator, found that 59% of Americans have an unfavorable view of the tariffs. Twenty-nine percent of Republicans don’t like tariffs, a share that jumped to 47% of those identifying as “non-MAGA” Republicans. Asked if Trump’s tariff policy is “making their costs go up,” 49% of Republicans said yes, with 62% of “non-MAGA” Republicans saying yes.

Trump Knows That Xi Holds Better Cards

Trump’s response to troubles with two commodities - rare earths and soybeans - suggests that he understands that Xi has significant leverage in the trade dispute.

When China raised its own tariffs on US imports in retaliation to Trump’s April announcement, Bessent called it “a big mistake . . . because they’re playing with a pair of twos. What do we lose by the Chinese raising tariffs on us? We export one-fifth to them of what they export to us, so that is a losing hand for them.”

Trump quickly realized that Xi was in fact holding a full house, as Beijing froze exports of rare earth magnets to US companies, scaring automakers and defense contractors.

China dominates global refining of critical minerals and has a 92% market share of global production of rare earth magnets, which are key components in many US weapons systems, from fighter jets to drones and submarines.

This led Trump to pare back his tariffs in May in return for China resuming magnet shipments to automakers and other civil-use manufacturers. A White House spokeswoman said in late July, “President Trump has publicly discussed his desire for a constructive relationship with China, who is sending rare earth magnets to the United States.”

In the case of soybeans, China simply boycotted American farmers. In an August 19 letter to Trump, the American Soybean Association pointed out that:

“Over the past five years, China has imported an average of 61% of the world’s available soybean supplies – more than the rest of the world combined. Historically, the US was the provider of choice for Chinese customers. However, due to ongoing tariff retaliation, our longstanding customers in China have and will continue to turn to our competitors in South America to meet their demand . . . China has not purchased any US soybeans for the months ahead as we quickly approach harvest.”

The letter was signed by Caleb Ragland, a Kentucky farmer and president of the Association, which represents 500,000 soybean farmers across the country. In a recent article, Ragland wrote, “Like many of my fellow farmers, I voted for President Donald Trump in the past three elections.” But, in his letter to Trump, Ragland said that today “US soybean farmers are standing at a trade and financial precipice. . . [and] cannot survive a prolonged trade dispute with our largest customer.”

Shortly before Ragland published his letter, Trump posted on Truth Social a direct plea to Xi to buy more beans. “I hope China will quickly quadruple its soybean orders. . . Thank you President Xi.” It is unlikely that Xi will take that step absent concessions from Trump.

Trump’s Rhetoric Is Leaning Towards A Deal

Trump talks like he really wants to do a “big deal” with Xi. On August 5, the President said:

“We’re getting very close to a deal. We’re getting along with China very well. . . My relationship with him is very good. I think we’ll make a good deal. It’s not imperative, but I think we’re going to make a good deal. . . I’ve had a great relationship with President Xi. We respect him a lot. They respect us a lot. They didn’t respect Biden. They thought he was a numbskull.”

Trump’s team is also speaking in more constructive terms about China.

Bessent said “we’re very happy” with the discussions with China. “I think right now the status quo is working pretty well.” And, when attacking Indian companies for buying Russian oil, Bessent declined to criticize Chinese purchases.

Even Peter Navarro, White House trade advisor and author of Death By China, held his tongue in a Financial Times Op-Ed criticizing India’s relationship with Putin. Navarro, who rarely misses an opportunity to criticize Beijing, only mentioned China once in the article, to note that India is “now cozying up to both Russia and China.” Presumably, the President asked both Navarro and Bessent to avoid rhetoric which could dampen the environment for a deal with Beijing.

Trump Isn’t Focused on National Security Issues With Beijing

Another reason I expect Trump is ready to do a deal is that he does not share his hawks’ concerns about the national security threat from China. And, unlike past presidents, Trump views export controls as a form of negotiating leverage, rather than as a critical tool to protect national security. Trump is likely to relax key export controls put in place by his hawks if they get in the way of reaching a trade deal with Xi.

During his first term, Trump cancelled serious sanctions imposed by his Commerce Department against ZTE, a Chinese telecommunications equipment maker. The Commerce Department had banned US companies from selling components to ZTE for seven years because it had violated the terms of a settlement deal for illegally shipping goods made with US parts to Iran and North Korea. The ban might have crippled ZTE.

Trump reversed it, saying, "ZTE, the large Chinese phone company, buys a big percentage of individual parts from US companies. This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.”

More recently, Trump has reversed course on his sanctions on TikTok. During his first term, Trump signed an executive order saying the US “must take aggressive action against the owners of TikTok to protect our national security.” Since returning to the White House in January, however, Trump has routinely deferred enforcement of a law banning TikTok or forcing sale of the app.

In May, rather than call the app a national security threat, Trump said, “I have a little warm spot in my heart for TikTok,” because it helped him win re-election. “No Republican ever won young people, and I won it by 36 points, and I focused on TikTok.” In August, the White House launched its own TikTok account.

Trump has also suggested he will allow Nvidia to ship to China a modified version of its top-end Blackwell AI GPU, which would represent a significant weakening of current export restrictions.

This is all consistent with the President’s national security philosophy. He basically told a reporter that “America First” means whatever he says it means. “Well, considering that I’m the one that developed ‘America First,’ and considering that the term wasn’t used until I came along, I think I’m the one that decides that.”

I assume that if Trump chooses to reposition China as an economic partner rather than as an adversary, his team, and most of his supporters across the country, will accept that.

Trump Likes Big Deals, But Not Necessarily Complicated Ones

As I noted in the opening paragraph of this note, while I think a deal is increasingly likely, it will not solve most of the problems between the world’s two largest economies.

This has been the case with deals that Trump has already reached in his second term, all of which are very limited in scope, and which leave many key points undefined.

Trump clearly emphasizes the pomp and circumstance of meetings with foreign leaders and would likely be happy with a limited “big deal” with Xi, accompanied by red carpets and shiny objects.

The best opportunity for this would be around the time of the APEC leaders summit in Gyeongju, Korea, on October 31-November 1. They could meet on the margins of that event in Korea, or Trump could travel to China before or after APEC, which would provide a grander backdrop.

It appears that Trump is aiming for a meeting with Xi at that time to close a big deal. "President Xi has invited me to China, and we'll probably be doing that in the not-too-distant future," Trump told reporters in the White House's Oval Office. "A little bit out, but not too distant.”

Xi is playing a strong hand, but Trump will want some concessions from him in order to close a deal.

What Might Make Trump Happy?

Looking back at the Phase One trade deal with China during Trump’s first term, it is likely that the President will again focus on sales and investment numbers rather than less-sexy but more important longer-term structural changes.

In January 2020, Trump announced that China agreed to purchase $50 billion worth of US agricultural products, and I expect a similar commitment this time, with a focus on soybeans. As noted earlier, Trump has already asked Xi to “quickly quadruple” soybean orders.

Aircraft sales commitments are another likely goal. According to an August 21 Bloomberg report, “Boeing Co. is heading closer toward finalizing a deal with China to sell as many as 500 aircraft . . . a transaction that would end a sales drought that stretches back to US President Donald Trump’s last visit in 2017.” If, as Bloomberg reports, the talks on aircraft sales are at an advanced stage, this would indicate that Xi is open to concluding a broader trade deal and meeting with Trump.

The President is also likely to ask Xi to commit to manufacturing investments in the US, which would require Trump to again override his hawks’ national security concerns. Last year, he said he was open to Chinese automakers building cars in the US. “We’re going to give incentives, and if China and other countries want to come here and sell the cars, they’re going to build plants here, and they’re going to hire our workers.

Trump might ask Xi to pledge investments by BYD, the world’s largest maker of new energy vehicles, and by CATL, the world’s leading battery maker. Robin Zeng, CATL’s founder and chairman, last year told Reuters, “Originally, when we wanted to invest in the US, the US government said no. For me, I’m really open-minded.”

While purchase and investment commitments like these may never be consummated, that’s beside the point for a White House focused on announcing big deals.

Xi Isn’t Desperate, But Would Welcome A Deal

I’ve explained why Trump is eager for a deal. But what about Xi?

Xi isn’t desperate for a deal with Trump, but I think he would be happy to sign a deal that would boost consumer and entrepreneur confidence without requiring significant concessions.

Exports to the US are not a major concern for Xi. Overall, exports are a relatively small part of China’s GDP, and between 2001, when China joined the WTO, and pre-pandemic 2019, net exports on average were a negative 2.2% drag on real GDP growth. Last year, exports to the US were only 15% of China’s total exports. Thus, in the first seven months of this year, while exports to the US fell 12.6% YoY, total exports rose 6.1% YoY.

Weak confidence, however, is a problem for Xi. His government’s own consumer confidence index fell sharply, from 113 to 87, during the 2022 Shanghai COVID lockdown and hasn’t recovered, registering only 88x in June. (It is noteworthy that the Chinese government continues to publish this negative data set monthly.)

The IMF forecasts GDP growth of 4.8% YoY for China this year (vs. 1.9% for the US), but this pace is disappointing to most of its citizens, and growth slowed sharply in July. Housing prices continued to fall, and retail sales growth slowed to 3.7% YoY, down from 6.4% in May. Families are saving rather than spending: household bank balances have risen by 10% YoY or more for 81 consecutive months.

The unemployment rate of young, urban people (aged 16-24, excluding students) was 17.8% in July.

Political tensions between Washington and Beijing are just one reason why confidence is low, but Xi must recognize that reducing those tensions via a deal with Trump would boost his ongoing efforts to promote domestic demand.

Confidence among retail equity investors in China has already begun to improve. Trading volume in Shanghai is up and almost 2 million new A-share accounts were opened in July, a 71% YoY increase. The Shanghai Composite Index is at the highest level since August 2015, and up 16% year-to-date.

When consumer confidence does return, they will be able to draw down on household savings which have risen 98% since the start of 2020, for a net increase in savings equal to $11.2 trillion.

What Would Make Xi Happy?

Politically, it is hard to envision Xi signing a deal which assigns US tariffs to Chinese exports which are higher than Trump’s baseline for the rest of the world, which seems to be 10-15%. Xi can’t stop Trump from implementing a higher rate (currently 57.6%), but he can refuse to sign such a deal.

Xi will also want a sharp relaxation in US export controls which are designed to constrain China’s tech sector. As noted earlier, this is feasible because Trump doesn’t share his hawks’ concerns about the national security threat from China, and because he views export controls as a form of negotiating leverage.

Xi’s third request will be for Trump to end his administration’s efforts to contain PRC exports to third countries. The White House has claimed, for example, that it wants to limit Chinese content in goods made in Vietnam and destined for US markets, although no details have been published.

Xi Would Make A Modest Request About Taiwan

Xi’s fourth request to Trump will be about Taiwan, but I expect this will be a modest request. I do not think Xi will ask Trump to abandon US support for Taiwan’s separate status, and I don’t think Trump would agree if asked. (There is no evidence that Xi Jinping intends to use force to coerce unification between the mainland and Taiwan.)

Instead, Xi is likely to ask Trump to publicly reiterate that the US does not support formal Taiwan independence (it currently has de facto independence).

The most likely formulation would be for Trump to repeat the language that President Clinton used in a June 1998 speech in Shanghai:

“We don’t support independence for Taiwan, or two Chinas, or one Taiwan-one China. And we don’t believe that Taiwan should be a member of any organization for which statehood is a requirement.”

Because this is a reiteration of previous policy and does not require the US to scale back its current relations with Taiwan, it wouldn’t be difficult for Trump to accept. And it would re-assure Beijing that Trump rejects efforts by some of his hawks to promote more formal ties between Washington and Taipei. Trump’s recent refusal of Taiwan President Lai Ching-te’s request to visit New York City is another indication that the White House is hoping for a deal with Xi.

Trump recently told Fox News that Xi told him that he would not use military force to coerce reunification with Taiwan during Trump’s presidency. Trump claimed, “He told me, ‘I will never do it as long as you’re president.’ President Xi told me that.”

It is impossible to believe that Xi actually said that to Trump. When asked about it, the PRC foreign ministry cleverly chose to neither confirm or deny that statement attributed to Xi, and instead just reiterated China’s longstanding Taiwan policy.

If there is a trade deal, Trump may repeat this spurious claim of a Xi pledge not to use force, and Beijing will likely continue to ignore it.

Xi Is Likely To Make More Domestic Policy Changes

Since last fall, Xi has been taking tentative steps to restore confidence and

boost consumption. It is likely that he recognizes that regardless of how the current tariff chaos plays out, Beijing must rely primarily on its own 1.4 billion customers - not foreign markets - to drive innovation and growth.

In the coming quarters, I expect Xi to accelerate and deepen his efforts to

fix his own policy mistakes, with modest, new programs to restore private sector and consumer confidence and encourage consumption.

I wrote about this in my June 17 report, “Trump Will Make China Great Again,” which is available at www.sinologyllc.com

I will be in China in September and will have an update on this topic after my visit. In the meantime, it is worth noting that regardless of how the trade talks play out, four things will remain constant:

I. China will remain the world’s second-largest and fastest-growing consumer market. Xi will continue to take modest steps to accelerate and deepen policies to support private firms, which will result in more investment and jobs, and stronger wage growth, boosting consumption.

II. World-class competitors will continue to come from China. DeepSeek won’t be the last Chinese company to surprise foreigners. BYD sells more electric vehicles globally than Tesla. CATL is the world’s top battery maker. DJI is the world’s leading drone manufacturer. And Mixue, which listed in Hong Kong recently, has more global beverage franchises than Starbucks.

III. China will remain a key part of global supply chains, for everything from rare earth magnets to pharmaceuticals. Last year, about 30% of big pharma deals with at least US$50 million up-front involved Chinese companies, up from none five years ago.

IV. China is likely to continue to account for more than 20% of global economic growth, larger than the combined share of growth from the US and its G-7 developed nation partners.

Andy Rothman

Andy.Rothman@SinologyLLC.com www.SinologyLLC.com

Trump Will Make China Great Again

Andy Rothman — Wed, 18 Jun 2025 08:20:42 GMT

Summary

Beijing’s economic policies need a reboot, and Donald J. Trump is here to help. The American president will provide Xi Jinping with the pressure and excuse to change his policies to make the Chinese economy great again.

China’s economy faces significant challenges but is far from collapse. Macro data for the first quarter of this year was, in fact, decent. Real (inflation-adjusted) household income and consumption spending both rose more than 5% year-over-year. China’s new energy vehicle sales were up 44% YoY during the first five months of 2025. These growth rates are high relative to most developed countries, but they are considerably slower than what China experienced a decade ago, so are disappointing to most Chinese.

The disappointing pace of growth has been due to several years of government policies which were well-intentioned but poorly thought out and chaotically implemented. Rather than fix socio-economic problems such as unequal access to housing and education, the policies damaged many small businesses, crashing entrepreneurial and consumer confidence.

Since last fall, Xi has been taking tentative steps to restore confidence and boost consumption. But, until Trump won the election, announced his historically-high tariffs and hired a team of China hawks with visions of kneecapping the world’s second-largest economy, it didn’t appear that Xi had the confidence to make the bold policy changes necessary to shift his economy into its next growth phase.

Xi must now recognize that regardless of how the current tariff chaos plays out, it is clear that Beijing must rely primarily on its own 1.4 billion customers — not foreign markets — to drive innovation and growth.

In the coming quarters, I expect Xi to accelerate and deepen his efforts to fix his own policy mistakes, with new programs to restore private sector and consumer confidence and encourage consumption.

Some foreign observers will be surprised by these moves because they believe Xi has developed an ideological aversion to the private sector and consumption. I don’t see evidence to support that view, and note that under Xi, private firms have continued to drive creation of jobs, innovation and wealth. The number of private firms increased more than four-fold since he became Party chief in 2012. Xi is clearly counting on the success of private firms, which account for 90% of China’s high-tech companies and which dominate the industries he is promoting: batteries, electric vehicles, and artificial intelligence.

The policy changes will also surprise those who believe Xi is opposed to consumption as an economic engine. Final consumption already accounts for 56% of China’s GDP, and, in the five years before the pandemic, consumption contributed an average of 64% of annual GDP growth. Consumption in China has grown far faster than in the US for many years.

Trump also makes it easier for Xi to fix his recent policy mistakes: when Xi course corrects, he can say he is responding to Trump, rather than acknowledging his own errors.

While we wait for the policy changes, it is important for investors and corporate directors to avoid the headline distractions about China and pay more attention to the country that generates more global economic growth than the US and its G-7 partners combined.

DISTRACTION I – China Doesn’t Intend to Attack Taiwan

Don’t be distracted by headlines predicting imminent war across the Taiwan Strait. There is no evidence that Xi Jinping intends to use force to coerce unification between the mainland and Taiwan.

There is no domestic political pressure on Xi to use force. The vast majority of people in China are satisfied with the current situation, with most countries treating Taiwan as part of China, and with Taiwan enjoying informal, de facto independence, but not formal, de jure independence. The political key for Xi is to not be the leader who allows Taiwan to gain de jure independence, rather than to be the leader who uses force to achieve unification.

Using force would raise unacceptable military risks for Xi, as highlighted by the stalemate in Ukraine, where Putin only had to cross a land border. Attacking Taiwan would require a massive amphibious assault – one of the more complex military operations – over 100 miles of difficult sea and would risk drawing the U.S. into a catastrophic conflict. Preparations for a modern D-Day would be readily visible via satellite, and the US intelligence community is not reporting this. Xi could use missiles to destroy much of Taiwan, but this would be a hollow victory and lead to debilitating economic sanctions by many countries. A naval quarantine is also possible but would create unacceptable military risks of intervention by the U.S. Navy.

U.S. Secretary of Defense Pete Hegseth stated in May that “Beijing is credibly preparing to potentially use military force to alter the balance of power in the Indo-Pacific. . . It’s public that Xi has ordered his military to be capable of invading Taiwan by 2027. . . The threat China poses is real. And it could be imminent. We hope not. But it certainly could be.” [emphasis added]

Hegseth’s remarks generated yet another wave of concern about the use of force by Beijing, but it is important to note that the Defense Secretary’s words were carefully hedged — “potentially . . .capable . . . could” — rather than declarative.

Other senior Trump administration officials have made clear that they do not believe the use of force by Beijing is imminent.

In March, the U.S. intelligence community published its Annual Threat Assessment, and did not forecast the use of force. The report, which is described as the intelligence community’s “official, coordinated evaluation,” stated simply that, “The PRC will continue trying to press Taiwan on unification.” The report was issued by the office of the Director of National Intelligence, run by Trump appointee Tulsi Gabbard.

In May, the senior American military commander in the Pacific, Admiral Samuel Paparo, addressed concerns — raised by Hegseth — about Xi ordering his military to be capable of using force against Taiwan by 2027. Paparo said this does not mean China intends to take action that year. “This is not a go-by date. It's a be-ready-by-date.”

Also in May, the U.S. Defense Intelligence Agency, in its Worldwide Threat Assessment, did not forecast the use of force by Beijing. DIA wrote that “China is likely to continue its campaign of diplomatic, information, military and economic pressure on Taiwan.” But, the report concluded that “China appears willing to defer seizing Taiwan by force as long as it calculates unification ultimately can be negotiated, the costs of forcing unification continue to outweigh the benefits, and its stated redlines have not been crossed by Taiwan or its partners and allies.”

The huge military risk of using force is matched by an equally daunting economic risk for Beijing. Starting a war across the Taiwan Strait would have devasting consequences for China’s economy.

Unlike Russia, China’s economy is globally integrated, and China depends on many strategic imports. Last year, over 70% of China’s oil and LNG consumption was imported. Over 80% of its iron ore and soybean (largely for animal feed) consumption was imported.

Even more importantly, last year, 72% of the semiconductors used in China (by value) were imported, with over one-third coming from Taiwan.

Starting a war with Taiwan would almost certainly lead to sanctions that would shut down most of these imports. And, even in the unlikely event that China were to capture TSMC’s semiconductor manufacturing facilities intact, operations would quickly cease as companies in countries like Japan, Korea, Holland, and the U.S. would halt shipments of critical materials such as process gases and other supplies and spare parts, as well as withdraw engineers responsible for the constant maintenance necessary to keep complex equipment at chip fabs running.

Many Taiwan companies appear confident of the future cross-Strait business environment. Last year, nearly 40,000 businessmen from Taiwan attended mainland conferences and trade fairs, according to a Taiwan-based research center.

Predictions of imminent war will remain in the headlines, but the probability of conflict is very low.

DISTRACTION II – Demographics

A second, frequent China distraction is demographics. While it is true that China’s population is aging, context is important. China won’t be as old as Japan is today until 2050. At that time, 30% of China’s population will be 65 or older, up from 16% in 2024. In 2050, 24% of the US population will be 65 or older. (Last year, 29% of Japan’s population was 65 or older.)

The Chinese government and Chinese companies are taking steps to mitigate the impact of the aging population. One measure is to invest in education, to prepare a smaller workforce for higher value-added jobs. Since Xi became head of the Party in 2012, central government spending on education has increased by 98%, with a compound annual growth rate (CAGR) of 6%. The number of university graduates has increased by 75%, and government R&D spending has increased by 251%, with a CAGR of 11%.

The Nature Index is a global ranking that measures research output based on the number of articles published in high-quality research journals. When it was first released in 2014, only eight Chinese universities made it into the top 100. Today, that number has increased more than fivefold, with 43 Chinese institutions now ranking among the world’s best, surpassing the 36 American and 4 British universities in the list.

Chinese companies are responding to a shrinking workforce, and to rising wages, with a rapid increase in automation. China’s share of global industrial robot installation has risen from about 20% to more than half in only 10 years. And, in 2023, almost half of industrial robots installed in China were produced by domestic firms, according to the International Federation of Robotics.

China’s robot density ranked third globally at in 2023, at 470 units per 10,000 manufacturing employees, behind Korea (1,012) and Singapore (770), and well ahead of the US (295), according to the IFR.

Another step by the government has been gradually raising the statutory retirement age, which will slow the decline in the working age population.

China’s aging population is a long-term challenge, but the near-term risks are often exaggerated.

DISTRACTION III – Trump Tariffs

Today, the biggest China distraction is Trump’s tariff chaos. It’s a distraction because China’s economy is not usually export-led, and because the US only takes a small share of China’s exports.

In a later section of this report, I will explain why the tariff chaos is likely to be more painful for the US than for China, which is likely to lead Trump to retreat. Another section will explain why Trump’s policies, even in retreat, are likely accelerate and deepen reforms by Xi which will strengthen China’s domestic economy.

Trump has received a lot of bad advice from his team about China’s economy. For example:

Treasury Secretary Scott Bessent said, “China has no business model. Their business model is predicated on selling cheap, subsidized goods to the US.”
Secretary of State Marco Rubio said, “China is an example. I mean, it’s outrageous. I mean, they don’t consume anything. All they do is export and flood and distort markets.”
Stephen Miller, deputy White House chief of staff for policy, said, “China’s economy is completely dependent on its exports to the US and to the West.”
Peter Navarro, senior advisor to Trump for trade and manufacturing, and author of the 2011 book, Death By China, said, “If the Chinese vampire can’t suck the American blood, it’s going to suck the UK blood and EU blood.” He called on China to “stop being a predator to the world.”

The data, in fact, shows that domestic demand, not exports, is the biggest part of the Chinese economy, and that China is the world’s second largest and fastest-growing consumer market.

Exports are a relatively small part of China’s GDP. Economists focus on net exports, the value of a country’s exports minus its imports (because GDP measures domestic production). The net export share of China’s nominal GDP peaked at 8.5% in 2007 and was only 1.7% in 2017, before the first round of Trump tariffs. In 2023, net exports accounted for 2.1% of China’s GDP, compared to 4% in Germany, -1.5% in Japan, -2.9% in the US and — 0.6% in the UK. Over the last five years, on average, final consumption accounted for 56% of China’s GDP.

Exports are a relatively small part of China’s GDP growth. Another way to look at it is that between 2001 (when China joined the WTO) and 2019 (pre-pandemic), net exports on average were a negative 2.2% drag on real GDP growth. During that period of time, there were only three years in which net exports provided a significant, positive contribution to China’s GDP growth (2005, 2006 and 2019).

The net export contribution to GDP growth has been more volatile recently, due to global supply chain disruptions and slower domestic demand at home. In 2023, net exports were a -11% drag on growth, with 86% of growth coming from final consumption. Last year, however, consumption slowed significantly, and net exports contributed 30% of China’s GDP growth.

In the first quarter of this year, consumption remained weak, and net exports accounted for almost 40% of GDP growth. Final consumption contributed 52% of GDP growth, down from a 74% share in the first quarter of 2024. (The balance of growth came from gross capital formation.)

If we look at the five years through 2019, when domestic demand was healthy, on average, final consumption accounted for 64% of GDP growth, while only 1% of growth came from net exports.

All the president’s men are also wrong when they say that China “doesn’t consume anything.” Last year, China accounted for 10% of global imports, while the US share was 14%. (China’s share of global exports was 15%, and the US share was 8%.)

Last year, Chinese consumers bought twice as many cars as Americans, and in the first five months of this year, new energy vehicle sales rose 44% YoY.

China is the world’s second-largest consumer market, behind the US, and is the world’s fastest-growing consumer market. (I’ll talk more about consumption later in this report.)

Trump recently posted, “Many years ago, we opened up the USA. Now, it’s time for China to open up – and that’s part of our deal.” Apparently, his staff has not told the president that China is the US’ third largest export market, after Mexico and Canada. And, while China has certainly not complied with all of its WTO commitments, it has opened its economy enough to be the fastest growing major market for American goods.

Since China joined the WTO in 2001, US exports to China are up 646%, while US exports to the rest of the world are up 171%.

American agricultural exports to China are up 1,200%, vs up 174% to the rest of the world.

During this period, US imports from China rose 329%.

Continued (and improved) access to China’s market is important to American farmers, ranchers and manufacturers, and to their employees.

Another reason why the tariff chaos is a distraction rather than a key obstacle for Beijing is that China ships relatively little stuff to America.

Last year, only 15% of China’s total exports went to the US, equal to 2.8% of China’s GDP.

Chinese companies have been diversifying their overseas markets for many years, shifting from developed to developing markets. In 2000, the G-7 took 48% of China’s exports, but that share has fallen to only 26% this year.

About 150 mostly developing countries participate in China’s Belt and Road Initiative (BRI), and those nations now account for about half of China’s exports.

In the first five months of this year, China’s largest trading partner was the 10 members of the Association of Southeast Asian Nations (ASEAN). Exports to those countries, which are also BRI members, rose 14% YoY.

The EU was the second-largest trading partner, and China’s exports to the EU rose 8% YoY.

This explains why although Chinese exports to the US fell 28% YoY during April and May in response to tariff chaos, overall Chinese exports increased 6% during that period.

AVOID BEING DISTRACTED BY SHORT-TERM TARIFF CHAOS AND UNCERTAINTY

The first part of this report has been intended to persuade investors and corporates to avoid being distracted by headlines and focus instead on the longer-term opportunities in China.

Later in this report I will explain why I expect Trump to retreat from his tariff chaos. But, even if Trump does choose to attempt to decouple from China, with tariffs and restrictions on exports and visas, I expect four things will remain consistent:

I. China will remain the world’s second largest and fastest-growing consumer market. As I will explain in the second part of this report, pressure from Trump will lead Xi to accelerate and deepen policies to support private firms, which will result in more investment and jobs, and stronger wage growth, boosting consumption.

II. World-class competitors will continue to come from China. DeepSeek won’t be the last Chinese company to surprise foreigners. BYD sells more electric vehicles globally, and recently in Europe, than Tesla. CATL is the world’s top battery maker. DJI is the world’s leading drone manufacturer. And Mixue, which listed in Hong Kong recently, has more global beverage franchises than Starbucks.

III. China will remain a key part of global supply chains, for everything from rare earth magnets to pharmaceuticals. Last year, about 30% of big pharma deals with at least US$50 million up-front involved Chinese companies, up from none five years ago.

IV. China is likely to continue to account for more than 20% of global economic growth, larger than the combined share of growth from the US and its G-7 developed nation partners.

TRUMP WILL BLINK AGAIN

Trump has surrounded himself with China hawks.

It is clear that Trump has filled the senior ranks of his administration with China hawks. But Trump himself is not a China hawk. Will his hawks control China policy, or will Trump restrain them and focus on doing deals?

One hawk is White House deputy chief of staff Stephen Miller, who on May 1 said, “The reality is that we can either surrender economically to China or we can reclaim and reshore our manufacturing base and our industrial needs.”

A couple of weeks later, Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer met in Geneva with Chinese officials to de-escalate tariff tensions. In a joint statement by the two governments issued on May 12, they said they would be “moving forward in the spirit of mutual opening, continued communication, cooperation, and mutual respect.”

Trump’s hawks, however, didn’t get that message.

After the Geneva meeting, Marco Rubio, who theoretically heads foreign policymaking, as Secretary of State and National Security Advisor, said, “The era of indulging the Chinese Communist Party as it abuses trade practices to steal our technology and floods our nation with fentanyl is over.” He also pledged to “aggressively revoke visas for Chinese students.”

CIA Deputy Director Michael Ellis said, “China is the existential threat to American security in a way we really have never confronted before.”

Defense Secretary Hegseth told Congress, “Beijing is preparing for war in the Indo-Pacific as part of its broader strategy to dominate that region and then the world.”

Homeland Security chief Kristi Noem, also speaking after the Geneva meeting, announced she would “continue to hold Harvard University accountable . . . for coordinating with Chinese Communist Party officials on training that undermined American national security.”

FBI Director Kash Patel said the root of America’s fentanyl problem is the Chinese Communist Party, and “their long-term game is… to kneecap the US.”

The most active of the hawks has been Commerce Secretary Howard Lutnick. In the weeks following the Geneva agreement to move “forward in the spirit of mutual opening… and cooperation,” Lutnick’s department has:

+ Disrupted US exports to China of the petrochemical feedstock ethane by requiring American producers to apply for licenses.

Suspended export licenses for the sale of parts and equipment used by Chinese nuclear power plants.
Halted sales (and support) to China of electronic design automation (EDA) software by American and European firms, by requiring new licenses for software used to develop and test semiconductors.
Issued guidance suggesting that global users of Huawei AI semiconductors could be subject to sanctions because those Chinese chips “were likely developed in violation of U.S. export controls.”
Halted shipments of US components and systems for China’s civilian aviation program.

Lutnick also told a U.S. Senator that even if Vietnam removed all of its tariffs and trade barriers, the Trump administration would not reciprocate, because Vietnam represents “a pathway from China to us.”

I still expect Trump ignore the hawks and blink again

Only six weeks after his April 2 self-proclaimed “liberation day,” Trump slashed his tariffs without any significant concessions from China. I expect him to blink again.

Trump presumably blinked in May because he understood that in the coming months, Republican households would rebel against rising prices for a wide range of consumer goods, and Republican factory owners would protest against high taxes for Chinese intermediate goods, which would lead to lower profit margins and layoffs.

The Geneva agreement cut the “liberation day” US tariffs on Chinese goods from 145% to 30% for three months, pending more negotiations. That still leaves US retailers and manufacturers (who use Chinese components and raw materials) facing continued uncertainty, and an effective, trade-weighted average tariff of about 40% on Chinese imports.

There are several factors which are likely to lead Trump to again back away from tariffs and export controls which would decouple the world’s two largest economies.

Tariffs and Decoupling Will Raise Inflation

It is clear that tariffs are taxes which will be borne by American consumers and companies, leading to higher prices and lower profits.

Ford has already raised prices on three of its models produced in Mexico, some by as much as $2,000. CEO Jim Farley noted that, “We have to import certain parts… like fasteners, washers, carpets… we can’t even buy those parts here.”

China is the top source of US imports of smartphones, laptops, lithium-ion batteries, toys and video game consoles. (Microsoft has already indicated it will raise the price of an Xbox Series X console from $499 to $599.)

“Virtually every car seat, stroller, bassinet and changing table sold in the US is made in China, making the children’s products industry among the most vulnerable to fast-rising costs and shortages,” the Washington Post reported.

Most syringes imported into the U.S. come from China, according to World Bank data. Nearly half of China’s exports to the U.S. are products for which the US has limited alternative external suppliers, according to the Australian central bank. Walmart CEO Doug McMillon warned investors that “even at the reduced levels, the higher tariffs will result in higher prices.”

The company’s CFO said, “We’re wired for everyday low prices, but the magnitude of these increases is more than any retailer can absorb. It’s more than any supplier can absorb. And so I’m concerned that the consumer is going to start seeing higher prices.”

The Fed, in its June 4 Beige Book report, found that “higher tariff rates were putting upward pressure on costs and prices. Contacts that plan to pass along tariff-related costs expect to do so within three months.”

The New York Fed said that it’s May survey found “nearly a third of manufacturers and about 45% of services firms fully passing along all tariff- 15 induced cost increases by raising their prices.” The NY Fed noted, “Consistent with textbook economics, tariffs generally resulted in higher prices to customers.” And, “Interestingly, a significant share of businesses also reported raising the selling prices of their goods and services unaffected by tariffs.”

Tariffs and Decoupling Will Lead to Lower Profits and Layoffs

Uncertainty about tariffs and the impact on the US economy is already having an impact on employment. ADP, the payroll processing company, reported that “the pace of hiring in May reached its lowest level since March 2023.”

Procter & Gamble, the world’s largest consumer goods company, announced in June that it will cut 7,000 jobs over the next two years.

The U.S. Bureau of Labor Statistics said that average monthly job gains in the first five months of this year was 124,000, down from an average of 168,000 in the same period last year.

An outplacement services firm reported that job cuts in May were up 47% YoY.

The June Fed Beige Book said “comments about uncertainty delaying hiring were widespread.”

The New York Fed said, “There were some signs that the sharp and rapid increase in tariffs affected employment levels and capital investments.”

GM said it anticipates tariff costs of $4-5 billion this year, potentially reducing its net profit by one-quarter. Apple CEO Tim Cook said tariffs will add $900 million to the company’s costs.

One factor that few recognize is that the tariffs hit industrial equipment and parts, as well as consumer goods.

China is the world’s largest exporter of machinery, and about 60% of its exports to the US are capital goods and parts, and industrial supplies. “China’s role as the dominant foreign supplier of industrial inputs to US manufacturing sectors is clear,” according to a 2023 study published by Brookings. This means that the Trump tariffs will raise costs for American factories.

The Richmond Fed recently identified 14 US counties that would suffer the most from the Trump tariffs (excluding retaliation by other countries), because they have higher employment in industries like textiles, agricultural support activities and apparel, “which are more reliant on imports from China.” I checked voting records from last November and found that Trump won all of those counties. Factory owners in those counties will soon be calling their representatives in Washington.

The tariff chaos explains why the World Bank on June 10 cut its forecast for US GDP growth this year sharply compared to six months earlier, to 1.4% from 2.3%. The Bank, however, left its China GDP growth forecast of 4.5% unchanged.

The Rare Earth Dilemma

Another issue that recently drew Trump’s attention, and which will cause him to blink again, is that U.S. industry, especially defense contractors, are heavily dependent on imports of critical minerals and key finished products such as magnets from China. At this point, there are few alternatives, foreign or domestic, for many of these items. Apparently, the Trump administration failed to consider that China might hold up shipments of the minerals, and the magnets made from them, to gain negotiating leverage with him.

The International Energy Agency reports that critical minerals are important to “a broad array of industrial and technological applications. From AI and robotics to high-performance materials and aerospace, these minerals’ contribution to industrial and technological development is increasing, with broad economic implications.”

The IEA also finds that “China is the dominant refiner for 19 of the 20 minerals analyzed, holding an average market share of around 70%.” To illustrate the importance of these minerals, let’s look more closely at two, dysprosium and gallium.

“Dysprosium is a rare earth metal that is used in the production of powerful neodymium iron boron (NdFeB) magnets, which are used in applications such as electric vehicle motors, wind turbine generators, consumer electronics, industrial motors,” according to the US Department of Energy. Dysprosium is also used to make high-performance alloys and advanced ceramics, which are used in applications requiring high thermal resistance and durability, like jet engines and space exploration equipment.

“Gallium plays a critical role in energy applications such as LEDs, solar panels, power electronics, and permanent magnets,” according to DOE. Gallium is used in the production of specialized semiconductors that are incorporated into missile defense and radar systems, including Patriot missiles, as well as electronic warfare and communications equipment.

DOE reports that China is responsible for 93% of global refining of dysprosium and 97% of global gallium refining.

China also dominates global production of rare earth element magnets, with a 92% market share. These magnets are, according to the US Department of Defense, “essential components in a range of defense capabilities, including the F-35 Lightning II aircraft, Virginia and Columbia class submarines and unmanned aerial vehicles.”

Overall, DOD requires about 9,200 pounds of rare earth materials for each SSN-774 Virginia-class submarine, and 920 pounds for each F-35 stealth fighter.

In response to the Trump tariffs, Beijing has established a new export licensing system for critical minerals and magnets, which has been used to retaliate against US export controls and which presents a huge problem for American manufacturing, including weapons production.

Some importers of these magnets, including American automakers, have reported recent problems with sourcing from China. Ford CEO Jim Farley on June 13 said “It’s day to day. We’ve had to shut down factories. It’s hand-to-mouth right now.” He said applications to import magnets “are being approved one at a time” by China’s Ministry of Commerce.

This explains why Trump raised the issue of rare earth element magnet exports in his June 5 call with Xi. Trump said that as a result of the discussion, “there should no longer be any questions respecting the complexity of rare earth products,” and he claimed Xi had agreed to resume exports. Trump didn’t provide any details, and Beijing has not commented, although there are reports that some licenses have been approved for exports of critical minerals and magnets. Clearly, Beijing will continue to use exports of these materials for leverage in negotiations with Trump.

Trump Doesn’t See China As A National Security Risk

Another reason I expect Trump to blink again on tariffs and decoupling is that he does not seem to share his hawks’ concerns about the threat from China.

Trump tends to speak in relatively positive and constructive terms about Xi and China:

We had a very good conversation with President Xi . . . I think we’re in very good shape with China and the trade deal . . . Trade can bring greater friendship with China . . . I have a very good relationship with President Xi, and I think it’s going to continue . . . The relationship is very good. We’re not looking to hurt China. . . Chinese students are coming, no problem. It’s our honor to have them, frankly.

The president’s rhetoric about China is the opposite of what his hawks say.

And, Trump says he is opposed to the U.S. imposing its ideas about governance on other countries. In Riyadh in May, Trump said,

“This great transformation [in the Middle East] has not come from Western interventionists… giving you lectures on how to live or how to govern your own affairs. Instead, the birth of a modern Middle East has been brought about by the people of the region themselves... developing your own sovereign countries, pursuing your own unique visions, and charting your own destinies… In the end, the so-called ‘nation-builders’ wrecked far more nations than they built — and the interventionists were intervening in complex societies that they did not even understand themselves.”

Presumably, Trump is also disinclined to use the sanctions, export controls and other tools at his disposal to promote democracy and regime change in China.

Trump Sees Export Controls As Negotiating Leverage

Finally, in my view, Trump — unlike past presidents — views export controls as form of negotiating leverage, rather than as a critical tool to protect national security. He is likely to retreat from key export controls put in place recently by his hawks, if they get in the way of reaching a grand trade deal with Xi.

During his first term, Trump also reversed course – albeit only temporarily – on Huawei, one of China’s leading tech companies, again highlighting sales by U.S. firms.

"One of the things I will allow, however, is, a lot of people are surprised we send and we sell to Huawei a tremendous amount of product that goes into the various things that they make. And I said that that's okay, that we will keep selling that product. . . I've agreed to allow them to continue to sell that product. So American companies will continue and they were having a problem, the companies were not exactly happy that they couldn't sell because they had nothing to do with whatever it was potentially happening with respect to Huawei, so I did do that."

More recently, Trump has reversed course on his sanctions on TikTok. During his first term, Trump signed an executive order saying the US “must take aggressive action against the owners of TikTok to protect our national security.” Since returning to the White House in January, however, Trump has twice deferred enforcement of a law banning TikTok or forcing sale of the app.

Now that Elon Musk is gone from the White House, it’s also possible that Trump will be influenced another American tech leader, Jensen Huang, founder and CEO of Nvidia. Recently, Huang has been an outspoken opponent of US export controls designed to handicap China’s tech industry.

Huang argues that these controls are counterproductive:

“The U.S. has based its policy on the assumption that China cannot make AI chips. That assumption was always questionable, and now it’s clearly wrong.”
“China’s AI moves on with or without U.S. chips. Export controls should strengthen U.S. platforms, not drive half of the world’s AI talent to rivals… I think all along the export control was a failure.”

Huang also says that blocking Nvidia and other US tech firms from the China market will have negative consequences for American innovation:

“Losing access to the China AI accelerator market, which we believe will grow to nearly $50 billion, would have a material adverse impact on our business going forward and benefit our foreign competitors in China and worldwide.”

The day after the U.S.-China talks in London concluded, Lutnick admitted (for the first time that I’m aware of) that he was using “national security” export controls as a bargaining chip. On CNBC, Lutnick said that when Beijing began “slow rolling” export licenses for rare earth magnets, “we started putting on our countermeasures, right? We cut planes, ethanol, Marco Rubio put out that students may not be able to come to America… we were at mutual assured annoyance, if you will.”

Export controls, which hurt US companies, for the purpose of “mutual assured annoyance,” according to Lutnick.

So much for the official statements that restrictions on exports to China and on visas for Chinese students were designed to address vital national security concerns. Clearly, Trump sees everything as part of a deal.

Finally, Trump must be feeling significant political pressure to sign a trade deal with someone. Anyone. Even China.

As of June 16, Trump had not announced even one comprehensive trade deal, although he did sign an executive order implementing a very limited agreement with the UK, covering only imports of British autos and airplane parts.

Of course, predicting what Trump will do on any issue on any day is difficult. But, for the reasons discussed above, I think it is likely that Trump will focus on being dealmaker-in-chief and try to reach a broad agreement with Xi.

However, as I will explain in the next section of this report, regardless of whether Trump and Xi sign a trade deal, the actions of Trump’s hawks will lead Xi to accelerate and deepen his policies to re-embrace China’s private sector and boost domestic demand.

Deal or no deal, Donald Trump will help Xi make China great again.

XI’S PROBLEMS

Part of Donald Trump’s “Liberation Day” strategy seems to have been based on the idea that China’s economy was tanking. In May, Trump said, “China’s getting killed right now. They’re getting absolutely destroyed. Their factories are closing. Their unemployment is going through the roof. I’m not looking to do that to China. . . And they want to do business very much. Look, their economy is really doing badly. Their economy is collapsing.”

China’s economy does face significant challenges, but it is not collapsing.

Macro data for the first quarter of this year was, in fact, decent. Real household income rose 5.6% YoY and real consumption spending was up 5.3% YoY. China’s new energy vehicle sales were up 44% YoY during the first five months of 2025. Electricity consumption, a good proxy for industrial activity, rose 3.1% YoY during the first four months, and was 38% higher than during the same period in 2019.

These growth rates are high relative to most developed countries, but they are considerably slower than what China experienced a decade ago, so are disappointing to most Chinese.

Even after Trump pushed tariffs up to extreme levels, the IMF forecasts that China will have the second-fastest GDP growth rate (after India) of all major economies this year and next, which will see China account for more than 20% of global growth, a larger share of global growth than from the US and the rest of the G-7 nations combined.

There is, of course, a long list of problems, starting with the residential property market. I estimate that home prices are down about 25% from their 2021 peak, and sales are anemic in most cities. Still, the property problems are not as severe as those during the US housing crisis, largely because most Chinese buyers were required to put down 30% cash, far from the median cash downpayment of 2% ahead of the US crash. (Since September 2024, the minimum downpayment in China was reduced to 15%.) Few Chinese homeowners are underwater on their mortgages. Nonetheless, the property market will not return to its leading role in China’s economy.

Another problem is that inflation is too low. In May, CPI fell 0.1% YoY, although falling energy prices (down 6.1% YoY) accounted for most of that weakness. Core CPI (excluding more volatile food and energy prices) was healthier, up 0.6% YoY in May, and improving. Core CPI was up an average of 0.12% MoM over the last six months, while in the prior six months, Core CPI fell by an average of -0.03% MoM. Nonetheless, weak inflation reflects weak consumer sentiment and spending.

A sky-high unemployment rate (16% in April) among young people (ages 16-24) is another important problem.

The root of all of these problems is that China’s entrepreneurs and consumers are pessimistic about the economic outlook and have low confidence in their government’s management of the economy.

A survey of consumer confidence, published monthly by China’s National Bureau of Statistics, is at all-time lows. (Figure 6 also illustrates that Beijing does release some quite negative economic data.)

Confidence among entrepreneurs has been weak for several years because of doubts about Xi’s support for private companies, tensions in the US-China relationship and, most importantly, because of a series of chaotic and counterproductive regulatory policy changes which upended many sectors.

The most important policy mistake was made in the summer of 2020, when Xi’s government announced new residential property policies, referred to as “the three red lines,” which inadvertently tipped the housing market into recession. New home sales (on a square meter basis) fell 27% YoY in 2022, then fell another 8% YoY in 2023, and dropped 24% YoY during the first four months of 2024, before Xi finally announced adjustments to his housing policies on May 17.

Waiting a few years too long to fix the property policy mistake caused house prices to fall, many developers to fail, and the loss of construction jobs as new home starts froze. These property policy failures have been a key factor behind the loss of confidence among consumers and entrepreneurs. Moreover, about 60% of household wealth is in family homes, so falling prices have undoubtedly left consumers wanting to save more and spend less.

Xi made similar policy mistakes in regulating internet platforms, the video gaming industry, and for-profit education companies.

The sectors hit the hardest by Xi’s policy mistakes were dominated by privately-owned companies. This damaged the confidence of most entrepreneurs, which had a dramatic effect on the economy, since small, entrepreneurial private firms account for almost 90% of urban employment, which means that most consumers are either entrepreneurs or work for a private company. When entrepreneurs didn’t have the confidence to invest in or hire for their businesses, wage growth slowed, as did consumer spending.

Between 2008 and 2019, the real compound annual growth rate (CAGR) of final consumption in China was 8.3% (vs. US consumption growth of 1.7%). But the collapse of confidence led the CAGR of consumption to fall by almost half, to 4.6% between 2020 and 2023 (while it accelerated in the US to 2.6% during that time).

This consumption slowdown is why net exports accounted for an unusually large share of China’s economic growth last year and in the first quarter of this year. Xi needs to get the composition of growth back to where it was before his policy mistakes, led by consumption.

Why Did Xi Make These Policy Mistakes?

In speeches introducing his new regulatory policies, Xi did not discuss ideology. Rather, he indicated that his policies were intended to address many of the same socio-economic concerns that democracies are wrestling with, from income inequality to unequal access to education and health care and housing affordability. These are increasingly serious problems in China.

Xi’s policies may have been well-intentioned, but they were poorly thought out and chaotically implemented. The socio-economic problems were not improved, and unintended consequences damaged many small businesses, crashing entrepreneurial and consumer confidence, dragging down the pace of economic activity.

Was It Ideological?

An important factor in assessing whether Xi can correct his policy mistakes and restore confidence is understanding why he made those mistakes.

As I just explained, my view is that Xi was attempting to address the socioeconomic problems that were the byproduct of decades of rapid economic growth.

Some foreign observers, however, believe Xi’s policy decisions were based on his ideological beliefs, not on solving problems. These observers argue that after becoming Party chief in 2012, Xi decided that markets and private companies had advanced too far in China, and needed to be scaled back and made more subservient to state-owned companies and central planning.

If an investor or corporate director takes that view, it is easy to reject the premise that Xi recognizes his policy mistakes and will course correct.

But, I do not believe there is evidence to support the view that Xi is ideologically opposed to private firms and markets.

Xi’s Political Career Rose With China’s Entrepreneurs

Xi surely understands that the success of China’s entrepreneurs and the rise of markets is why the Communist Party has remained in power for so long. In fact, Xi was present at the creation of markets, because he worked in some of China’s most entrepreneurial places during his long career, and his late father, Xi Zhongxun, oversaw the early reforms in Guangdong, from 1978 to 1980.

Observers who only started following China in recent years may not recognize how dramatic the changes have been since that time. When I first worked in China in 1984, as a junior American diplomat, there were no private companies – everyone worked for the state. (During that time, Xi was a Party official implementing reforms in a poor region of Hebei Province.) Today, as noted earlier, almost 90% of urban employment is in small, privately owned, entrepreneurial firms.

Rhetorical Support For Entrepreneurs

Xi often voices support for the remaining state-owned enterprises (SOEs). But he also says he wants to “enhance the ability to get rich,” and that “small and medium-sized business owners and self-employed businesses are important groups for starting a business and getting rich. . . It is necessary to protect property rights and intellectual property rights, and protect legal wealth.”

Xi has said that “we will see that the market plays the decisive role in resource allocation,” and “we will support capable private enterprises in leading national initiative to make breakthroughs in major technologies,” and that he wants to “promote entrepreneurial spirit.”

Private Sector Has Grown Under Xi

Talk is cheap. What is more convincing is that private firms have continued to thrive since Xi became Party chief in 2012.

Under Xi, private firms have continued to drive all net, new job creation. The private sector share of total urban employment has risen from 82% in 2012 to 89% in 2023.

Trade, too, is dominated by entrepreneurs. In the first five months of this year, domestic private firms accounted for 65% of the value of exports, up from a 38% share in 2012 and only 7% in 2001.

The number of private firms increased by more than four-fold since 2012. In the first quarter of this year, 2 million new private firms were established, an increase of 7% YoY, faster than the average growth rate over the past three years.

In 2012, private companies accounted for less than 50% of national tax revenue, a share that is now about 60%.

Xi’s New Economic Strategy Depends On Private Firms

Xi has recently promoted an economic strategy focused on “new-quality productive forces,” which depends on the success of China’s entrepreneurs. This strategy, Xi has said, depends on “disruptive technology . . . to give birth to new industries. . . that are characterized by high technology, high performance and high quality.”

Xi is clearly counting on the success of private firms, which account for 90% of China’s high-tech companies and which dominate the industries Xi is promoting: batteries, electric vehicles, and artificial intelligence. Thirteen of the 15 globally significant Chinese battery makers are privately owned; seven of the top 10 electric vehicle makers (by number of units produced), are privately owned; and all of the eight leading AI startups are privately owned.

If The Problem Isn’t Ideological, Why Hasn’t Xi Fixed It?

Over the last 12 months, some of Xi’s failed and disruptive policies have been reversed. Often quietly, sometimes partially. Some industries have recovered, such as internet platforms and video gaming. Real estate has stabilized a bit, although at a very weak level. Xi has also begun reembracing entrepreneurs, but has yet to reignite their confidence.

In my view, stubbornness, rather than ideology, has been the problem.

Xi has often demonstrated that he can be obstinate, taking too long to change failed policies. His “zero-COVID” policies, for example, were very effective during the early phase of the pandemic but failed as new variants of the virus began to circulate. Xi stubbornly refused to change his approach to COVID, including at the 20th National Congress of CCP in October 2022, despite strong public opposition and significant economic damage. Finally, a month after that meeting, with social tensions rising, he changed course and ended zero-COVID, reopening the economy.

What Xi Will Do Next

In the coming quarters, I expect Xi to overcome his stubbornness by taking the following steps:

Restore confidence in government policymaking, making clear that it will be more predictable so businesses can plan, invest and hire.
Announce plans to respond to the possibility that the Trump tariffs will remain in place at a prohibitively high level. Even though only 15% of China’s exports go to the US, a sudden and sharp decline in this trade will be disruptive and threaten a significant number of jobs. The government plans should focus on helping small businesses that export to the US avoid layoffs.
Re-embrace the private sector. Entrepreneurs must have confidence that Xi wants them to thrive.
Encourage consumption, with rhetoric and policies, ranging from a stronger social safety net to changes in the tax code. Promoting advanced production is fine, but the reality is that given the external political tensions, there must be domestic demand for EVs, batteries and AI, even if Trump retreats from his tariff push. Newer sectors cannot thrive on exports.

Why Xi Will Do It

Xi will take these steps in the coming quarters because he has no choice.

The current economic climate will not support enough growth and enough job creation. The economy is not collapsing, but it is growing at a pace which is disappointing for most Chinese. The longer Xi waits to make serious changes, the deeper this disappointment will become.

Unless Xi also makes these policy changes, he risks failing to accomplish the ambitious economic development (and political) goal he announced in 2020, to double China’s GDP or per capita income by 2035.

And forget about observers who claim that Xi is only interested in national security, not economics. It is impossible to believe that Xi doesn’t understand that the biggest threat to China’s security would be a weak economy. (This, of course, applies to most countries.)

Bold But Not Revolutionary

The policy changes outlined here are bold, but they are far from revolutionary. Appropriate for a Chinese Communist Party that long ago transitioned from a revolutionary organization to a ruling party focused on development and stability.

Xi is well aware that his predecessors in post-Mao China succeeded with bold economic policy changes. When I first visited China as a student in 1980, it was poor, with per capita GDP less than Afghanistan and Haiti. Now it is the world’s second largest economy, with a thriving middle class. This came about because the Chinese people are incredibly resilient, bouncing back from obstacles put in front of them by their own and foreign governments. And because the Party has been increasingly pragmatic with respect to economic policy.

The first bold, pragmatic step was in 1978, when Deng Xiaoping chose economic growth over class struggle by “seeking truth from facts.”

In 1992, when the economy was in terrible shape, Deng’s “southern tour” — a train trip to encourage entrepreneurs — boosted private firms, kicking off two decades of average annual double-digit GDP growth.

In the late 1990s, Jiang Zemin and Zhu Rongji sacked 46 million workers at state-owned firms, privatized the housing market and began serious negotiations to join the WTO.

In the early 2000s, Jiang invited entrepreneurs to join the Party, emphasizing that the Party’s primary goal is economic development.

Xi’s contribution will be bold, but evolutionary, rather than revolutionary, building on these earlier policies.

Alice Miller, a longtime analyst of China’s domestic politics, including at the CIA from 1974 to 1990, in an essay published this month, reminded us that the Party’s “legitimacy rests on its ability to deliver economic gains for all of society. . . The supposed bargain is that if the Party delivers economic progress, China’s society will acquiesce to the Party’s grip on power.” Miller explains that “the origin of this bargain actually reverts to the 1978 Third Plenum . . . [and] each successive leadership has not sought to over-turn the reform framework launched by Deng Xiaoping, but to sustain it by setting new goals and addressing side-effects of its success.”

For Xi, re-embracing entrepreneurs is relatively easy and uncontroversial, given that private firms already drive all of the growth in jobs, innovation and wealth.

Promoting consumption equally with production is also relatively easy and uncontroversial, given that final consumption already accounts for 56% of China’s GDP, and, in the five years before the pandemic, consumption contributed an average of 64% of GDP growth. For many years, consumption in China has grown far faster than in the U.S.

China’s leaders, including Xi, have been supporting consumption by raising the minimum wage more than fivefold over the last 20 years. (In comparison, the U.S federal minimum wage increased only 40% during that period.)

The Process Is Underway

As noted earlier, most Chinese consumers either work for entrepreneurial firms or are themselves entrepreneurs, so restoring confidence in the private sector is the most important step.

Xi has already begun re-embracing entrepreneurs.

On February 17, Xi held a high-profile meeting with leading entrepreneurs. Addressing an audience which included Alibaba’s Jack Ma, as well as leaders of DeepSeek, CATL, BYD, Tencent, Xiaomi, Huawei and Unitree Robotics, Xi said, “It is time for private enterprises and private entrepreneurs to show their talents” and that his government “must resolutely remove various obstacles” faced by private firms.

According to China’s official media, Xi seemed to acknowledge that recent regulatory policies were key obstacles, saying that they were “temporary rather than long-term, and can be overcome rather than unsolvable.”

In March, a joint statement by the leadership of the Party and the government announced a “special action plan to boost consumption.” There were few details, but the language suggested that promoting domestic demand has become Xi’s top political priority.

In May, a new Private Economy Promotion Law came into effect, after being passed on an accelerated timeframe by the National People’s Congress. One important element of the law is protection against abuse of power by local government officials, who, in recent years, have sought to collect unauthorized fees from private firms to compensate for declining tax revenue.

The law has been touted by the official media, and at a press conference, a Justice Ministry official said the law “fully demonstrates the Party Central Committee’s firm determination to promote the development and growth of the private economy.”

According Jamie Horsley, a senior fellow at Brookings and former executive director of the Yale China Law Center, the new law won’t “completely resolve the many challenges facing the private sector in China,” but “its impact lies in serving as a political statement of the CCP’s intent to better ensure China’s private firms continue to invest, hire, train, innovate and otherwise contribute to the country’s socioeconomic development.”

More Is Needed, And Trump Will Help

This progress is encouraging, but is far from sufficient. Confidence and economic activity has yet to rebound.

In my view, in the coming quarters, Xi will overcome his inherent stubbornness and take the steps necessary to persuade Chinese entrepreneurs that he supports them, as Deng did on his during his 1992 train trip.

Xi will not proclaim, “To get rich is glorious,” as Deng is reputed to have said, but I do expect Xi to say and do enough to restore confidence in his economic policy management. Xi has no alternative.

And Donald Trump will help him get the courage.

First, because Trump’s use of tariffs and restrictions on exports and student visas has made clear that China’s economic future must be based on domestic demand, not markets in countries where leaders are nervous about Beijing’s rising clout.

Even if Trump and Xi work out a deal that avoids economic and technological decoupling, the new global environment is clear.

Second, for a leader who may be reluctant to make policy course corrections to avoid appearing to acknowledge mistakes, Trump offers the opportunity to say that policy changes are designed to respond to Washington, rather than clean up at home.

Is Restoring Confidence Enough?

The collapse in confidence has led families to save rather than spend and invest in their own firms. Family bank balances have increased 95% from the start of 2020. The net increase in these household bank accounts, which include accounts for many small family businesses, is equal to US$ 10.8 trillion, which is more than double the size of Japan’s 2024 GDP, and almost double the value of China’s pre-COVID 2019 retail sales. This could be significant fuel for a rebound in hiring and investment by small firms, which could lead to a rebound in consumer confidence and spending, as well as a potentially sustainable recovery in mainland equities, where domestic investors hold more than 95% of the market.

Pragmatism Will Prevail

I understand that some will be skeptical about the policy changes that I’ve forecast in this paper, because they believe that since becoming Party chief, Xi has discovered an ideological aversion to the entrepreneurial firms that have made China rich and kept the Party in power. As I’ve explained, I don’t see evidence to support that perspective.

For me, the most compelling reasons to be optimistic are my belief in the resilience of the Chinese people, and in the economic policy pragmatism of the government.

Many of the entrepreneurs I’ve recently met in cities such as Xiamen, Hefei, Nanjing and Shanghai were struggling, but they had not given up.

Many of the government policies implemented since 2020 have created more problems than they solved.

Since last fall, however, the policy pendulum slowly began swinging back towards course correction.

I believe this process will accelerate and deepen for three reasons.

First, Xi Jinping has no choice. Bold policy changes are necessary to put the Chinese economy back on track, and a strong economy has been central to the Party’s rule since 1978. I think Xi understands this and is pragmatic enough to take steps sufficient to support private firms and consumption. He isn’t an ideologue.

Second, Trump’s efforts to constrain China’s growth and isolate its tech sector make clear that, even if Trump backs down from his tariff threats, Xi must rely on his own 1.4 billion consumers, not foreigners, to support economic development.

Third, Washington’s efforts to kneecap China’s economy provide Xi with a ready excuse for fixing his own policy mistakes — he can blame Trump.

Pragmatism indicates that these policy changes will be rolled out over the coming quarters, and resilience (as well as huge household savings) suggests the economic impact might be swift.

Andy Rothman

Andy.Rothman@SinologyLLC.com

www.SinologyLLC.com

Three Strikes Against Trump Tariffs

Andy Rothman — Sat, 31 May 2025 01:26:51 GMT

The Court of International Trade and the D.C. District Court have ruled against Trump’s use of the International Economic Emergency Powers Act (IEEPA) to levy tariffs. The third strike is coming from the Court of Economic Common Sense.

In response to the first judicial ruling, a White House spokesperson said, “It is not for unelected judges to decide how to properly address a national emergency.”

That “national emergency”?

According to the White House, persistent US trade deficits with other countries have created “a national emergency that has decimated American communities, left our workers behind, and weakened our defense industrial base – facts that the court did not dispute.”

The Court of Economic Common Sense is now in session, and is ready to rule on whether US goods trade deficits are in fact a national emergency.

The chief justice notes that the US has run trade deficits every year since 1976. Why is this suddenly a “national emergency”?

Since 1976, the size of the US economy has increased by 265% in real (inflation-adjusted) terms, US manufacturing output rose 151%, and real income increased by 139%. Does this constitute a national emergency?

The Court of Economic Common Sense is aware that as the size of the US trade deficit has increased, per capita real income has continued to rise.

The chief justice also understands that real per capita income in the US has continued to rise despite a steady decline in the manufacturing share of total non-farm employment. (Service sector wages are, on average, now higher than wages for workers in manufacturing.)

As a result, despite persistent deficits in goods trade, on a per capita GDP basis, the US is by far the richest major country in the world. Is this a “national emergency”?

As economists at the St. Louis Fed explain, “The US ran persistent trade deficits for large parts of its history, just as it does today. Trade deficits did not inhibit US development, however, and may have even facilitated industrialization as the US could import capital goods to improve its own manufacturing during its first phase of industrialization.”

In contrast, the court understands that Germany has run consistent goods trade surpluses since the 1950s. But, Germany's GDP growth and income growth rates have lagged behind that of the US, and current per capita GDP in Germany is one-third lower than in the US.

Some American communities are, as the White House spokesperson points out, in distress. But, that distress is not due to the US trade deficit.

The chief justice of the Court of Economic Common Sense hereby rules that the administration should be focused on solving problems that will actually help those communities in distress, not on raising tariffs, which are taxes that would be paid for by American consumers and companies in those communities, adding to, rather than alleviating their distress.

Andy Rothman

Andy.Rothman@SinologyLLC.com www.sinologyllc.com

Not Angry, Bewildered

Andy Rothman — Mon, 14 Apr 2025 20:00:34 GMT

Chinese entrepreneurs told me they aren’t mad at the U.S. after Trump imposed tariffs. They are bewildered.

On Friday and Saturday, I met with owners and managers of small private firms in Xiamen, a coastal city of five million people (bigger than LA). Walking on the beach before dinner, Kinmen, one of Taiwan’s outer islands, was visible about six miles away. No military was in sight, only couples posing for wedding photos. Xi Jinping served as Xiamen’s vice mayor in the mid-80s.

No one I met with in Xiamen expressed anger at the U.S. They had all followed Trump’s tariff talk since his first term, and sympathized with his desire to strengthen the American economy.

All of the entrepreneurs were, however, perplexed by Trump’s strategy.

One small business owner asked, “How does raising the price of imported consumer goods via tariffs would benefit Americans?”

Some of the businessmen export to the U.S. and said they enjoyed only single-digit margins, so would be unable to assume a significant share of the tariffs.

A company that makes components for light bulbs said that a majority of lighting sold in the US comes from China (or from Mexico with Chinese parts) so Americans would have to pay the new US tax or sit in the dark. (This may explain why, a day after that conversation, LED lights were on the list of goods that will be exempted from US tariffs. By some estimates, about one-quarter of all Chinese exports to the US will be exempted.)

A producer of nutritional supplements said no other country could supply the ingredients her company makes, so the American athletes and elderly who buy her products have no alternative source of supply. They will have to pay the full cost of the tariffs or do without the supplements. She did worry, though, that if there is a more than 100% tariff, many would choose to do without and her business would struggle.

A few entrepreneurs told me that their American clients asked them to pay half of the first round of Trump tariffs, but they all refused.

Several of the entrepreneurs noted that Trump’s decision on Wednesday to “pause” some of the tariffs suggested he finally understood that his new taxes would in fact be paid by American companies and consumers.

Chinese entrepreneurs told me that while they understood why Trump wants to promote high-end manufacturing in the US, they didn't understand why his tariffs covered a broad range of low-end intermediate and consumer goods.

Several had seen videos of Commerce Secretary Lutnick saying he wants an "army of millions and millions of human beings screwing in little screws to make iPhones" in the US. Chinese entrepreneurs laughed and said no one in Xiaman would take a job like that.

A factory manager pointed out that he had great difficulty finding staff to run his low-tech machinery. He relies on migrant workers from China’s poorest rural areas, and has to offer them a free dormitory room and meals in addition to an hourly wage. He asked how many Americans would want these low-wage, low-skill jobs.

One company told me that since Trump's first term, they had been reducing their exposure to the US and focusing on other markets, especially in Southeast Asia and the Middle East. This is consistent with data which shows that only 15% of China's exports go to the US, down from a peak share of 21% in 2002.

All of the entrepreneurs I spoke with said they agreed with their government's decision to push back with its own tariff hikes on American goods. They said Beijing had no choice, both because every government needs to be respected, and because Trump himself only seems to respect strength. They also supported their government's position that it continues to desire negotiations with Washington to resolve the dispute.

Everyone I met with also expressed sadness about the bilateral dispute and recent events in the US. Most of the entrepreneurs have family members in the US or relatives who had studied there and returned to China. "We used

to think we could learn from the US," I was told over dinner. "We used to look up to America." One businessman asked, "Why do Americans hate us?"

They were following reports of Chinese students having visas revoked, and said many students were afraid to return to China this summer for vacation, fearful that their visas would not be renewed, or they would be turned away at US airports when they returned. One businessman said a relative was unable to get his student visa renewed after returning to China for a family visit. Another businessman spoke of a relative who was giving up on completing a doctorate in the US after federal funding for his university's lab was terminated.

As I was leaving Xiamen for Beijing on Saturday night, the Trump administration announced tariff exemptions for consumer goods such as smartphones and laptops, as well as for semiconductors, suggesting that the president was severely shaken by the bond market’s reaction to his plans and was backing down. Hopefully, this will provide an opportunity for the two governments to begin looking for a sensible way out of this fight.

At this point, there don't appear to have been any high-level talks between the two governments, but on Sunday Lutnick said, "We all expect that the president of the US and President Xi of China will work this out. . . I am confident this is going to work out with China." In the same interview, Lutnick also said that the Saturday night tariff exemptions were only temporary and would be reinstated "in a month or two," because "we need to have these things made in America."

If the fight continues, everyone loses, but American companies and consumers are likely to lose more, given that exports to the US were equal to only 2.8% of China's GDP last year.

Andy Rothman

Andy.Rothman@SinologyLLC.com

www.sinologyllc.com

Navigating Chaos

Andy Rothman — Fri, 21 Mar 2025 09:01:57 GMT

“We will first stir up great chaos under heaven, then bring about great order under heaven.”
Mao Zedong, in a letter to his wife, Jiang Qing, July 8, 1966
It is easy to understand why some investors and corporate directors want to ignore China. Chaos in Washington over tariffs will continue. Xi Jinping may struggle to revive confidence and domestic demand. But, being unprepared for China is risky.
Despite the political chaos, several aspects of China’s role in the global economy are unlikely to change:
China will remain the world’s second-largest and fastest-growing consumer market. You may not have heard of Mixue, for example, but with 46,000 franchise stores across China, Southeast Asia, Japan, South Korea and Australia, the tea and ice cream company has more global outlets than Starbucks. Since its March 3 IPO in Hong Kong, which was 6,000 times oversubscribed, the share price has more than doubled.
World-class competitors will continue to come from China, where the government is expanding fiscal support for innovation while Washington is slashing spending on education and science. DeepSeek won’t be the last Chinese company to surprise us. Privately-owned Chinese companies are the leading global producers of EVs and batteries, and nearly one-third of molecules sourced by big pharma though licensing deals last year came from China, up from 10% in 2020.
China will remain a key part of global supply chains, regardless of tariffs and talk of decoupling. Since Trump first launched his trade war in 2018, China’s share of global exports has risen to 15% from 13%.
China is likely to continue to account for about 20% of global economic growth, larger than the combined share of growth from the US and its G-7 developed nation partners. Exports are a relatively small part of China’s GDP and GDP growth, so whatever Trump decides to do with tariffs will hurt American consumers and companies more than China.
Stock markets don’t necessarily reflect the health of an economy. But, since the start of this year, as well as over the last 12 months, the MSCI China index has significantly outperformed the MSCI all country world index and the S&P 500. At a minimum, this suggests paying more attention to the risks and opportunities in China’s economy.
A Course Correction Is Underway In Beijing
For China, the world’s second-largest economy, the greatest challenge comes from the Zhongnanhai leadership compound in Beijing, not from the White House.
First, it is important to recognize how entrepreneurial China has become over the past few decades. When I first worked in China in the early 1980s, shortly after China started its economic reforms, there were no private companies. Today, privately-owned, entrepreneurial companies account for about 90% of urban employment and about 90% of China’s tech sector. This means the majority of urban consumers are either entrepreneurs or employees of private firms.
Figure 1. China Is Entrepreneurial
Unit: Millions

Source: CEIC
Private firms drive China’s growth in jobs, innovation and wealth.
But, those firms have suffered in recent years, in large part because of regulatory chaos and doubts about Xi’s support for the private sector. That led to a collapse in confidence among China’s entrepreneurs and consumers.
Figure 2. Consumer Confidence Low

Source: CEIC
Last fall, however, Xi began to acknowledge his policy mistakes, with modest changes in rhetoric and policy designed to restore confidence.
In recent weeks, the pace of that return towards pragmatism accelerated. In a February meeting with leading tech entrepreneurs, including the founders of Alibaba (Jack Ma) and DeepSeek, as well as leaders of CATL, BYD, Tencent, Xiaomi, Huawei and Unitree Robotics, Xi said, “It is time for private enterprises and private entrepreneurs to show their talents” and that his government “must resolutely remove various obstacles” faced by private firms.
A couple of weeks later, during the March meeting of the legislature, Xi said, “I have always supported private enterprises, and I have worked in places where the private economy is relatively developed.” While this rhetoric may not impress western listeners, this is, for Xi, a strong signal of support for entrepreneurs.
At the same time, Xi’s deputy, Premier Li Qiang, delivered China’s version of a state of the union address, the government work report, which, for the first time, called for policies to stabilize the property and stock markets, where the bulk of middle-class household wealth is concentrated.
The work report also said the government’s top priority this year is “vigorously boosting consumption . . . and stimulating domestic demand across the board.” This is the first time consumption, rather than industrial production, is the policy focus.
The work report also set an ambitious 2025 GDP growth target of 5%, signaling that Xi is prepared to take additional steps to restore confidence – and respond to Trump tariffs – as necessary.
Another positive sign was that the typically conservative Ministry of Finance finally agreed to raise its fiscal deficit target from 3% to 4% of GDP, the highest level in decades, and said it has capacity for additional stimulus.
Revitalizing Consumption Is Now Xi’s Top Political Goal
Most importantly, on March 16, the leadership of the Communist Party (the CCP Central Committee) and the government (the State Council) jointly issued a “special action plan to boost consumption.” The document did not include policy details, but it did make clear that Xi’s top political objective is restoring confidence and domestic demand. This means he is likely to do whatever it takes to achieve that goal, although it may take a few quarters before the macro data reflects success.
Is This The Real Thing?
In recent years, the policy pendulum swung too far in the wrong direction, leading to disappointing growth rates. And Xi has been too stubborn to change direction. In my view, his recent words and policies - such as cutting the cash downpayment requirement for a new home from 25% to 15% of the purchase price - have signaled that he understands there is a serious confidence problem and he is ready to course correct back towards the pragmatism that led to a 150% increase in per capita household income since he became head of the Communist Party in 2012. (For context, during that period of time, per capita household income in the US rose 61%.)
This does not guarantee that he will do what it takes, but the odds are that he will. China is not a democracy, but its leaders still depend on popular support, which is, as in all countries, based largely on the health of the economy.
It is important to recognize that the recent regulatory chaos was not caused by an ideological opposition to entrepreneurs and markets. Rather, Xi was attempting to address the same socio-economic concerns that most democracies are wrestling with, from income inequality to unequal access to education and health care and housing affordability. Unfortunately, implementation of these policies was often poorly managed. Policy objectives were not accomplished, and unintended consequences damaged commercial activities and entrepreneurial confidence.
Xi has said he wants to “enhance the ability to get rich,” and that “small and medium-sized business owners and self-employed businesses are important groups for starting a business and getting rich.” He said, “It is necessary to protect property rights and intellectual property rights, and protect legal wealth.” Xi now needs to persuade his nation of entrepreneurs that he is serious about that.
This is critical because entrepreneurs are the engine of China’s economic growth, the reason China has become wealthy, and the reason the Chinese Communist Party has remained in power for so long. Xi must recognize this, because he worked in some of China’s most entrepreneurial places during his long career and his late father, Xi Zhongxun, oversaw the early market-oriented reforms in Guangdong, from 1978 to 1980.
It's also worth keeping in mind that while the economy is weaker than it should be, it is far from collapse. For example, last year, per capita household income rose 5% YoY. Electricity consumption, a good proxy for industrial activity, rose almost 7% YoY and was 35% higher than in pre-COVID 2019.
Xi’s Challenge
Xi’s objective should be to restore the composition of China’s economic growth back to its pre-pandemic state.
In the five years through 2019 – including the first two years of Trump’s first trade war – net exports (the value of a country’s exports minus its imports, because GDP measures domestic production) accounted for only 1% of average annual GDP growth. Final consumption contributed an average of 64% of GDP growth, with the balance from gross capital formation.
That model was disrupted when confidence collapsed and domestic demand softened, so that last year, net exports contributed 30% of China’s GDP growth.
Even without more Trump tariffs, last year’s mix is unsustainable. Only 15% of China’s exports go to the US, but exports can’t be China’s future. China already has the world’s largest share of global exports and manufacturing, so the country’s future growth will have to be sourced domestically.
To accomplish that, Xi must return to a regulatory and political environment that restores confidence among his country’s entrepreneurs and consumers.
When confidence does return, the resilience of Chinese entrepreneurs and consumers will be supported by a massive increase in savings. The net increase in household bank accounts since the start of 2020 is equal to US$10.7 trillion, which is more than double the size of Japan’s 2023 GDP.
This could be significant fuel for a consumer spending rebound, as well as a sustainable recovery in mainland equities, where domestic investors hold more than 95% of the market.
Figure 3. Household Deposits In Context
US$ Trillion

Sources: CEIC. China’s household bank deposits and A-share market cap are by February 2025.
Decoupling Isn’t Happening, So Don’t Ignore China
American politicians may talk about decoupling from China, but investors, companies and consumers can’t ignore China.
From consumer electronics to medicine and critical minerals, China will continue to be an important part of global supply chains. China is the world’s leading producer and exporter of active ingredients for pharmaceuticals, and Chinese companies dominate production of 16 of the 18 critical materials for energy identified by the US Department of Energy.
The China market is also an important opportunity. Since China joined the WTO in 2001, it has been the US’ fastest growing export market, supporting tens of thousands of American jobs. US exports to China have increased 646% over that time, while US exports to the rest of the world rose 171%. US agricultural exports to China are up 1,200%, compared to a 174% increase to the rest of the world.
Figure 4. Growth Rate Of US Goods Exports To Its 10 Biggest Markets, Since China Joined the WTO in 2001

Source: CEIC, data for 2001 to 2024
And DeepSeek won’t be the last Chinese company to surprise foreigners. BYD now sells more EVs than Tesla. CATL is the world’s top battery maker. About 30% of big pharma deals with at least US$50 million up-front involved Chinese companies last year, up from none five years ago.
The World Intellectual Property Organization (WIPO) ranks China as the 11th most innovative economy, ahead of France, Japan and Israel.
Chinese-born scholars and engineers working in the US are key to the ability of American AI companies to compete with firms in China. After completing a PhD in the US, the vast majority of non-American AI talent stays in the US, according to a study published last year by the Paulson Institute’s Macro Polo team. As a result, in 2022, of the top-tier AI researchers working in US institutions, 38% were born in China, compared to a 37% share who were born in the US.
Jay Powell Has The Last Word
“You would expect that expectations of inflation over the course of a year would move around because conditions change and in this case we have tariffs coming in. We don’t know how big. There are so many things we don’t know. But we kind of know there are going to be tariffs and they tend to bring growth down. They tend to bring inflation up in the first instance.”
[from Fed Chair Powell’s March 19 press conference]

A New Trump Memo Could Disrupt US-China Investment and Commercial Ties

Andy Rothman — Tue, 25 Feb 2025 14:44:57 GMT

Note from Kaiser: I’m delighted to present a new column that will appear regularly here: China Perspectives by Sinology from my good friend Andy Rothman, Founder and CEO, Sinology LLC.

Andy’s China journey began in 1980 when he arrived as a student in post-Mao China – just in time to witness Deng Xiaoping's reforms and, notably, the country's first rock concert by Wham! After 17 years as a US diplomat, including a front-row seat to China-Taiwan tensions in the '90s, Andy pivoted to the private sector in 2000. His 20+ years in China and subsequent role at Matthews Asia cemented his reputation as a leading China strategist. Now heading Sinology LLC, Andy brings 40 years of insights to institutional investors and corporate directors navigating the complexities of U.S.-China relations and the world's second-largest economy.

Investors and directors should pay careful attention to Trump’s new “America First Investment Policy,” which has the potential to significantly disrupt commercial connections between the world’s two largest economies.

It is possible that Trump intends to only use these measures, published on February 21, as leverage in upcoming negotiations with Xi Jinping. After all, last month Trump said, “I like President Xi very much. I’ve always liked him…. We always had a great relationship… and we look forward to doing very well with China and getting along with China.”

But, if Trump and Xi fail to reach agreement on a process for putting the relationship on a more constructive path, implementation of the ideas set out in Trump’s memorandum would have dramatic consequences for investors and a broad range of companies.

Let’s take a look at key language in Trump’s memo to his cabinet.

Trump describes the People’s Republic of China as an adversary. “PRC-affiliated investors are targeting the crown jewels of United States technology, food supplies, farmland, minerals, natural resources, ports, and shipping terminals. . . The PRC is also increasingly exploiting United States capital to develop and modernize its military, intelligence, and other security apparatuses…”

“The PRC exploits United States investors to finance and advance the development and modernization of its military. . . [by] selling to American investors securities that trade on American and foreign public exchanges; lobbying United States index providers and funds to include these securities in market offerings…”

“The United States will use all necessary legal instruments, including the Committee on Foreign Investment in the United States (CFIUS), to restrict PRC-affiliated persons from investing in United States technology, critical infrastructure, healthcare, agriculture, energy, raw materials, or other strategic sectors. . . [the Administration will seek to] restrict foreign adversary access to United States talent and operations in sensitive technologies (especially artificial intelligence), and to expand the remit of “emerging and foundational” technologies addressable by CFIUS.”

Trump wrote that his Administration will “consider new or expanded restrictions on United States outbound investment in the PRC in sectors such as semiconductors, artificial intelligence, quantum, biotechnology, hypersonics, aerospace, advanced manufacturing, directed energy, and other areas implicated by the PRC’s national Military-Civil Fusion strategy… my Administration will consider applying restrictions on investment types including private equity, venture capital, greenfield investments, corporate expansions, and investments in publicly traded securities, from sources including pension funds, university endowments, and other limited-partner investors. It is past time for American universities to stop supporting foreign adversaries with their investment decisions, much as they should stop granting university access to supporters of terrorism.”

“We will review whether to suspend or terminate the 1984 United States-The People’s Republic of China Income Tax Convention… United States investors will invest in the future of America, not the future of the PRC.”

The Administration will “determine if adequate financial auditing standards are upheld for companies covered by the Holding Foreign Companies Accountable Act . . . [and] review the variable interest entity [VIE] and subsidiary structures used by foreign-adversary companies to trade on United States exchanges.” [Note that this language suggests Trump is considering forcing the delisting of Chinese companies from US exchanges.]

“For purposes of this memorandum, the term “foreign adversaries” includes the PRC, including the Hong Kong Special Administrative Region and the Macau Special Administrative Region; the Republic of Cuba; the Islamic Republic of Iran; the Democratic People’s Republic of Korea; the Russian Federation; and the regime of Venezuelan politician Nicolás Maduro.”

Full text of Trump’s memo here.