NEW YORK \u2014 As Wall Street\u2019s blockbuster rally shows signs of fatigue and gold loses some luster, many are connecting the dots to events 11,000 kilometers away.<\/p>\n
China\u2019s slowdown is garnering lots of attention in Manhattan boardrooms and trading pits. While Asia\u2019s biggest economy<\/a> isn\u2019t stumbling, its 4.8% growth rate in the third quarter, the slowest this year, is raising warning flags everywhere.<\/p>\n Even bright spots come with asterisks. For now, external demand is keeping China in the orbit of this year\u2019s 5% economic growth target. But amid mounting trade tensions \u2014 including a threatened 130% US tariff \u2014 it\u2019s easy to see why many think China is among the biggest downside risks to US growth.<\/p>\n Count Stephen Miran firmly in this camp. The newest Federal Reserve<\/a> governor isn\u2019t just worried about the deflation that Xi Jinping\u2019s economy is exporting. He also frets about the economic fallout from Beijing using its chokehold over rare earths to retaliate against US President Donald Trump\u2019s tariffs.<\/p>\n \u201cI had been operating under the assumption that the uncertainty had dissipated, and therefore I felt more sanguine about some aspects of the growth outlook,\u201d Miran told CNBC<\/a>. \u201cNow, potentially, this is back because the Chinese are reneging on deals that were already made. So I think it\u2019s incumbent on us as policymakers to think about the introduction of a new tail risk.\u201d<\/p>\n In this context, Miran, who was the Trump White House\u2019s chief economic adviser until putting himself on leave in September, is advocating for another 125 basis points worth of rate cuts.<\/p>\n \u201cTo the extent that I think policy is quite restrictive right now, that sets us up to be vulnerable to shocks,\u201d Miran noted. \u201cIf you hit the economy with a shock when policy is very restrictive, the economy will react differently than it would if policy were not as restrictive. I think it\u2019s even more important now than I did a week ago that we move quickly to a more neutral stance.\u201d<\/p>\n Analysts at Capital Economics noted that \u201cdeflation in China has added to disinflationary forces in advanced economies over the past few years, reducing the level of headline CPI<\/a> by around 0.3-0.5% on average. Tariffs are likely to reverse this trend in the US. But elsewhere, policymakers will probably seek to preserve some of the benefits of lower prices for consumers while protecting key sectors from mounting competitive pressures.\u201d<\/p>\n Yet the real risk may be knocking China off balance, at a moment when the US is not exactly thriving. Having the world\u2019s two biggest economies, worth a combined\u00a0US$50 trillion in annual output<\/a>,\u00a0at loggerheads is in no one\u2019s best interest. Least of all, developing nations sit on a total debt of $109 trillion as of the second quarter, according to the Institute of International Finance (IIF).<\/p>\n What\u2019s more, global debt hit a record high of $337.7 trillion at the end of June, partly as a side effect of easing global financial conditions, as many top central banks turned less hawkish. IIF reports that global debt levels rose by more than $21 trillion in the first half of 2025, with China, France, the\u00a0US, Germany, the UK and Japan posting the largest increases.<\/p>\n \u201cThe scale of this increase was comparable to the surge seen in the second half of 2020, when pandemic-related policy responses drove an unprecedented buildup in global debt,\u201d IIF said. Going forward, observed IIF economist Emre Tiftik, rising military spending will further strain government balance sheets amid increasing geopolitical strife.<\/p>\n Yet Tiftik also noted that bond market reactions have been more chaotic in the most advanced economies. Case in point: 10-year yields<\/a> among Group of Seven (G7) nations are almost at their highest since 2011.<\/p>\n Yet the wobbliness of the globe\u2019s biggest economies is hard to ignore. US employment is slowing at a worrisome pace. Goldman Sachs economist Jan Hatzius\u00a0thinks the US\u2019s 3.8% growth in the second quarter and 3.3% in the third quarter may be overstated based on softening job growth.<\/p>\n \u201cHousehold surveys are already very negative,\u201d Hatzius said. \u201cFor example, the expected change in the unemployment rate over the next year has never been this bad outside recessionary periods since the University of Michigan started asking the question in 1978.\u201d<\/p>\n Hatzius added that \u201csince job market indicators often provide\u00a0more reliable information\u00a0about current growth than the preliminary GDP estimates, this weakness adds to our conviction that second quarter and third quarter sends too positive a signal.\u201d<\/p>\n Over in the Eurozone, industrial production weakened in August amid growing uncertainty among manufacturing firms caught in the whipsaw of the global trade war.<\/p>\n Output slid 1.2% month-on-month versus a 0.5% increase in July. \u201cProspects for industry remain poor for the foreseeable future,\u201d said Capital Economics chief Europe economist Andrew Kenningham.<\/p>\n August buttressed the view that the Eurozone economy<\/a> barely grew in the third quarter, similar to the sluggishness seen in the second.<\/p>\n Japan \u201cis caught between a souring trade outlook and fragile home demand,\u201d said Stefan\u00a0Angrick,\u00a0economist at Moody\u2019s Analytics. \u201cExports and industrial production are slipping as tariffs bite and foreign rivals squeeze manufacturers. Domestically, sticky inflation and soft wage gains are sapping household spending power. And the government is dragging its feet on big-ticket capital expenditure plans.\u201d<\/p>\n Inflation will cool eventually, but progress will be slow because producers are still drip-feeding their cost increases through to consumers, Angrick noted. This will delay a pickup in real wages and, with it, a meaningful recovery in domestic demand. Policy uncertainty at home and abroad is an added concern.<\/p>\n \u201cAll told,\u201d he says, \u201cJapan\u2019s economic outlook appears challenging. Trade tensions, geopolitical rifts and the possibility of fresh supply-chain disruptions still top the list of risks.<\/p>\n China\u2019s\u00a0ambitious\u00a0\u201caround\u00a05%\u201d\u00a0growth\u00a0target\u00a0this\u00a0year\u00a0increasingly\u00a0has a Trump\u00a0problem. Every time the US president raises tariffs<\/a> for mainland goods \u2014 130%, at least for now \u2014 he makes it harder for Xi Jinping to avoid Beijing\u2019s fate in 2022 and 1990. Those are the only two times in the last 35 years China missed its gross domestic product\u00a0(GDP) growth target.<\/p>\n There\u2019s reason to think Xi can pull off the seemingly impossible in 2025. So long as his Communist Party marshals a dual-focused response to\u00a0Trump\u2019s one-man tariff arms race. The first is a burst of well-targeted stimulus to offset epically strong headwinds zooming China\u2019s way. The second is incentivizing Xi\u2019s 1.4 billion people to save less and spend more.<\/p>\n The only uncertainty about goal No. 1 is the scale of the stimulus Team Xi is willing to unleash to boost consumption, stabilize the housing market and end deflation. The urgency is rising.<\/p>\n China\u2019s\u00a0consumer spending, it\u2019s generally believed, amounts to roughly $7 trillion<\/a>. The nation\u2019s annual exports to the US are about $450 billion. If\u00a0Trump\u2019s tariffs erase, say, half that amount, Xi would have to rely mostly on domestic consumption to pick up the slack.<\/p>\n That\u2019s doable, many economists agree, so long as Beijing acts urgently and boldly. Increased fiscal spending could be complemented by cuts in official interest rates and reserve requirement ratios. In March, Beijing unveiled new fiscal measures, including a higher budget deficit\u00a0target\u00a0of\u00a0around\u00a04% of GDP, up from 3% in 2024.<\/p>\n \u201cThe wider deficit will support the economic outlook, but we think it is still uncertain as to how large the fiscal impulse will be, or whether it will sustainably lift underlying domestic demand,\u201d cautions Jeremy Zook, an analyst at Fitch Ratings.<\/p>\n Economist Zhiwei Zhang, president of Pinpoint Asset Management, added that China\u2019s \u201cdeflationary pressure is persistent.\u201d Making matters worse, he says, \u201cpolicy uncertainty in the US is still elevated.\u201d<\/p>\n Julian Evans-Pritchard, head of China Economics at Capital Economics, said that \u201cit seems unlikely that consumption support<\/a> will be sufficient to fully offset weaker exports. As such, overcapacity looks set to worsen, exacerbating downward pressure on prices.\u201d<\/p>\n All this adds to the drama surrounding this week\u2019s gathering of top Chinese Communist Party officials. The so-called \u201cFourth Plenum\u201d will devise development plans through 2030.<\/p>\n