U.S.-China Rivalry Intensifies: Tariffs, Trade, and a Population Crisis | Digging into China

Hi, I'm Dong Shong. Welcome to Digging into China, where we explore China in depths to review unique perspectives. The relationship between the United States and China resembles a seessaw. When one side prospers, the other inevitably struggles. Currently, the US is enjoying a string of positive developments. President Trump's tariff strategy is concluding successfully with even the formidable European Union yielding to American interests, agreeing to zero tariffs and committing over $100 billion to investments in US markets, energy, and defense. The US treasures tariff revenue this year is projected to reach an unprecedented $300 billion, prompting Congress to consider distributing some of its windfalls to American citizens. Meanwhile, on the other side of the geopolitical seessaw, President Xi Jinping faces mounting challenges. Europe's concessions to the US may lead to offset may lead it to offset losses by increasing pressure on China, sparking a formal China EU trade war. Consequently, China risks losing access to its two largest export markets, the US and Europe, casting a shadow of its economic prospects. Compounding these issues, China's Ministry of Finance reported its first half financials revealing escalating fiscal strength. Non- tax revenue growth has stagnated and the recent events reflected this pressure. Entrepreneurs facing ruin and even the reverb Shy Yong of Shaolin Temple being called upon to contribute to national debt relief. After targeting numerous high-profile entities, she has reluctantly introduced the child care subsidies, a modest gesture at 300 yen per child per month, $42 a month. This initiative will cost the central government 100 billion yen annually. A historic move for the Communist Party, which has rarely provided such welfare to ordinary citizens. However, this is not a sudden act of generosity, but a desperate response to China's looming population crisis. Raising children is a long-term investment with no immediate returns, adding further strength to she's already burdened fiscal outlook. In this discussion, we will explore the three major challenges confronting Xiinping. The export crisis, the fiscal deficit, and the demands of public welfare. First, let us address China's export crisis. The trajectory of Trump's trade war has become clear with a China bearing the brunt of its impact. We can analyze this from two perspectives. The primary goal of the US trade strategy is to reduce its substantial trade deficit, particularly with China, its largest export partner. This is evident in a sharp decline in US China trade figures. According to Chinese customs data, China's trade surplus with the US in the first half of this year was $142 billion, down from 160 billion the previous year and $360 billion for the entire of last year, signaling a significant contraction in bilateral trade. Moreover, the US seeks to narrow its trade deficit not only with China but globally, doubly impacting export-driven nations like China, which maintains surplus with many countries. For instance, as US China trade has declined, China has intensified its export to Europe, achieving a 6.6% increase in EU bound exports this year. The EU has now s surpassed the US as China's second largest export market behind Assa. Previously, the EU could sustain large imports from China because it earned a trade surplus with the US using those dollars to purchase affordable Chinese goods. However, with the EU's US surplus set to shrink, how can it continue to fund the substantial Chinese imports? Would the EU resort to issuing bonds or printing money to sustain this imbalance? Ultimately, every nation seeks a strategic trade balance. Even the US, despite its ability to print a dollar for global purchases, is nearing the limit of its reserves. Europe, with a less robust economic foundation, cannot indefinitely print money to maintain China's trade surplus. Reducing its trade deficit with China is an inevitable step for the EU. In 2024, the EU recorded a $235.6 billion trade surplus with the US, its largest surplus source, while running a $247 billion trade deficit with the China, its largest deficit source. From an international balance of payment perspective, the EU maintains a delicate equilibrium. The dollars earned from the US are spent on Chinese goods. If Europe's US surplus diminishes significantly, it follows that its trade deficit with China must also contract. Additionally, the EU's commitment to invest $600 billion in the US over the next three years will likely reduce its investment capacity in China. European companies have historically relied heavily on the Chinese market and the EU remains one of China's few sources of significant foreign investment. In 2024, EU firms invested over 150 billion in China compared to 60 compared to 76 billion in the US. With the EU now pledging $600 billion to the US, annual investment there will rise to 200 billion. The additional $130 billion must come from somewhere, likely at the expense of China. Based on last year's figure, the EU might need to nearly eliminate its investments in China to meet this US commitment, a sobering prospect. It is evident that EU China relations have reached a low point. Investments are being curtailed, the trade deficits are narrowing, and the tariffs on Chinese goods are likely to rise. The EU is aligning closely with the US, reaffirming their strong alliance. Does Xiinping share responsibility for this deterioration? Has China's foreign policy under his leadership faltered? Instead of fostering goodwill with the EU to counterbalance the US, she has adopted a dismissive stance treating Europe as a lesser partner. Consequently, the EU finds it more advantageous to align with the US. Time will tell if this assessment holds, but emerging China EU trade conflict may prove even more intense than the US China trade war. Next, let us examine China's fiscal crisis. The first high fiscal data paints a stock picture when compared to the government's debt balance. In principle, government borrowing for investment should yield tax revenue. Yet this year, despite the record debt issuance, mostly in the first half, tax revenues have declined, indicating the poor tax generating capacity of these loans. Non- tax revenue grew by only 3.7% in the first half of this year. One might assume local governments have eased the fines, but the reality is that they can no longer sustain such measures. Last year, non- tax revenue surged by double-digit percentages, an unsustainable pace. Maintaining a 3.7% increase on such a high baseline is already challenging as there is a limit to how much can be extracted from citizens before their resources are depleted. With the fiscal sustainability faltering and borrowing failing to generate returns, she has resorted to targeting wealthy entities. The Shaoling Temple, for instance, is a highly profitable institution operating almost like an industry with a market segmentation. Some temples specialize in matchmaking, others in academic success or fertility blessings, all the while enjoying tax exemptions. Such wealth makes them an attractive target for revenue hungry authorities. Following the Shaolin Temple controversy, attention may turned to two listed companies, Mount and Mount Joe, the only publicly traded religious sites in China. Others like Shaolin, Mount Pour, and Mount Utai were poised to go public, but were halted by the Communist Party due to concerns of appearance. Investors should approach these stocks cautiously as recent events suggest they could face audit due to their substantial assets. The recent death of Easy Homes founder who took his own life underscores these fiscal pressures. His company's 2019 backdoor listing involved a collusion with Wuhan state officials to misappropriate state assets. A case now being revisited as the government scour decades of records for funds. Such incidents are directly tied to China's fiscal constraints. Finally, we turn to she's third challenge, addressing public welfare. After much anticipation, child care subsidies have been implemented with the central government pledging 300 y per month for children under three. fully funded nationally, though local governments may choose to supplement this. This marks the Communist Party's first significant welfare program in its 70-year history. During the early days of the one child policy, a nominal only child subsidy existed, but it was negligible, often just a few dozen yen annually. Offering 300 yen monthly per infant is a groundbreaking step, especially when rural pensions are barely over 100 yen a month. However, this move stems not from generosity, but from the urgent need to address China's population crisis. The annual cost of 100 billion yen adds significant pressure to an already strained budget. Historically, the Communist Party has res resisted the welfare programs. Xi Jinping himself has argued that welfare creates dependency leading to demands that could push the nation toward fostering idleness as he perceives in western systems. The decision to introduce subsidies reflects the severity of the population crisis. Without the birth, there will be no population to sustain. In the face of such an existential threat, previous principles have been set aside. However, based on global experience, the current subsidy level is unlikely to significantly boost birth rates, a fact that will become evident in future data. While a step forward compared to past policies, it remains insufficient. Estimates suggest a single individual contributes approximately 2 million UN in taxes over their lifetime. If a person's long-term value is 2 million yen, how much should be invested upfront? The party's answer is 10,000. In contrast, Taiwan provides at least 5,000 Taiwan dollar monthly per child under six, totaling 360,000 Taiwan dollars, about 80,000, from the central government alone. Yet, its birth rate remains among the world's lowest. Thus, she may find that these subsidies yield limited results due to their modest scale. China's finances cannot support Taiwan's level of investment as the treasury is already a stretched thing. Allocating 100 billion yen annually has likely required significant sacrifices. Yet few entitles in China possessed the wealth to bridge this gap. In summary, Trump's trade war triumphs have placed the Xiinping in an increasingly precarious position. Maintaining the status quo with the US already entails tariffs exceeding 50% contributing a third of US tariffs revenue. The trade war initially USdriven has shifted to a global effort targeting China as nations offset US trade losses by reducing surplus with China. The EU is withdrawing investments to fulfill its $600 billion US commitment. This intensifies China's economic strength as declining exports further erode the fiscal revenue, rendering even the seizure of vast assets insufficient to close the gap. The new 100 billion yen child care subsidy unless offset by budget cuts elsewhere. While this subsidy may not significantly boost the birth rates, it does provide some financial relief to citizens, modestly stimulating consumption. For ordinary Chinese, this represents a small but welcome step forward. 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