TOKYO \u2014 Xi Jinping\u2019s inner circle in Beijing has had a busy couple of months popping the champagne corks. Along with China growing 5%-plus as the US economy hits a rough patch, President Xi\u2019s team just scored yet another extension on trade talks from Donald Trump.<\/p>\n
That means another 90 days of stringing along a US leader who\u2019s increasingly anxious for a deal, any deal at all, with Asia\u2019s biggest economy.<\/p>\n
Only a \u201cgrand bargain<\/a>\u201d with Xi\u2019s Communist Party could give Trump scope to convince his supporters that the tariff-driven inflation, market chaos and extreme uncertainty his tariffs have unleashed are all worth it.<\/p>\n Xi knows this desperation will likely enable China to give Trump World very little in the end \u2014 just like Japan.<\/p>\n \u201cChina believes momentum is on its side because Trump has a stronger desire to sign a deal with Beijing so that he can claim victory and secure a summit with Xi in the fall,\u201d says analyst William Yang at the International Crisis Group.<\/p>\n Yet domestic events are catching up with Beijing, suggesting Xi\u2019s inner circle might want to keep the champagne on ice for a while.<\/p>\n China\u2019s 5.3% growth rate<\/a> in the first half of 2025 masks signs that the nation\u2019s property crisis continues to fester below the surface. In June, prices\u00a0of new homes fell 0.27% from May, the most in eight months. It suggests Beijing\u2019s stimulus efforts<\/a> back in September have run out of steam.<\/p>\n What\u2019s more, China\u2019s 100 biggest developers saw new-home sales plunge by more than 20% for two consecutive months now, according to China Real Estate Information Corp.<\/p>\n And from an economic confidence standpoint, it\u2019s never good when China Evergrande Group<\/a> returns to the news. The developer that came to symbolize China\u2019s deflation-causing real estate bust announced that its Hong Kong stock will be delisted this month.<\/p>\n An optimistic take might be that it marks the end of an era China wants to forget. Evergrande\u2019s stumble, after all, had Lehman Brothers overtones. Along with distress among builders, the turmoil Evergrande represented had many worrying that China might be headed for a Japan-like malaise.<\/p>\n It\u2019s hardly comforting that one of the first major economists to see the crisis coming back in 2021 is waving a warning flag about China\u2019s next several months.<\/p>\n UBS Group\u2019s John Lam tells Bloomberg that \u201cthe sales momentum has become tepid in recent months. If that continues, a recovery will occur later than expected.\u201d Lam notes that home inventory turnover in tier-one cities across China had dropped to an average of 14 months. That\u2019s the same level as 2015.\u00a0<\/p>\n The headwinds from\u00a0Trump\u2019s trade war are<\/a>\u00a0making things even tougher for\u00a0China, amplifying the effects of\u00a0its\u00a0pre-existing\u00a0conditions. These include the property crisis, high youth unemployment, local governments struggling under the weight of crushing debt burdens and demographic decline.<\/p>\n In\u00a0China, the real estate sector plays a pivotal role in shaping domestic sentiment due to significant household exposure to this asset class, notes Carlos Casanova, an economist at Union Bancaire Priv\u00e9e.<\/p>\n The sharp decline in real estate activity from May to July, he notes, may have dampened consumer confidence, potentially weighing on retail sales and other sectors.<\/p>\n In July, China\u2019s\u00a0official gauge for manufacturing activity<\/a>\u00a0saw a worse-than-expected contraction amid slower domestic growth and increased uncertainty over US trade tensions. The Manufacturing Purchasing Managers\u2019 Index came in at 49.3 in July, below the 50 mark signaling expansion.<\/p>\n Poor weather may have been a partial factor, some economists argue. But there\u2019s little doubt Beijing\u2019s \u201canti-involution\u201d efforts to battle cut-throat price competition and address overcapacity are hurting the economy.<\/p>\n \u201cThe manufacturing PMI featured lower output, lower inventory but higher price sub-indices, whereas the construction PMI fell notably on high temperatures and heavy rainfalls,\u201d Goldman Sachs analysts write in a note.<\/p>\n Chi Lo, senior market strategist at BNP Paribas Asset Management, notes that supply-side reforms alongside demand-side stimulus can pull the economy out of deflation.<\/p>\n \u201cCreative destruction,\u201d he says, \u201cis inherently contractionary because the old sectors decline more quickly than new ones are created and develop.\u201d<\/p>\n Lo argues that the \u201canti-involution<\/a> campaign focuses on measures and regulations to cut production capacity and curb disorderly pricing schemes. These policies could be self-defeating, hurting employment and the economy in general, and overwhelming any positive impact on pricing power and profitability.\u201d<\/p>\n And with China\u2019s \u201ceconomy stuck in a liquidity trap, fiscal policy must do the heavy lifting and revive public confidence and demand,\u201d Lo says. \u201cMonetary easing is a facilitating tool. The recent recovery of the credit impulse marks a start on the road to recovery.\u201d<\/p>\n But a shift toward a more vibrant domestic demand-led economic model continues to be slow-going.<\/p>\n The need for a recalibration from over-investment to consumption was well known even before Xi rose to power in 2012 and 2013. So is the need to create broader\u00a0safety\u00a0nets<\/a> across sectors. A robust network of safety nets is becoming more important as the property crisis drags on.<\/p>\n Why would the average mainland household have the confidence to\u00a0consume or invest after losing their shirts in the property market, and with no recovery in sight?\u00a0<\/p>\n Building a bigger network of stable and trusted\u00a0safety\u00a0nets would pay\u00a0the biggest dividends<\/a>. As Boston University economist Laurence Kotlikoff argues, the key is crafting a \u201cmodern version of Social Security\u201d that\u2019s \u201cfully-funded, transparent, efficient, fair, and progressive\u201d and \u201cfeatures personal accounts that are collectively invested by the government at zero cost to workers.\u201d<\/p>\n The goal, Kotlikoff says, is to devise a social\u00a0safety\u00a0net\u00a0that\u2019s not \u201cincomprehensible, inefficient, inequitable, and, most important, insolvent.\u201d<\/p>\n Economists at the International Monetary Fund argue\u00a0that the \u201cprioritization of the spending of households over investment would also deliver larger stabilization\u00a0benefits<\/a>. For example, means-tested transfers to households would boost aggregate demand 50% more than an equivalent amount of public investment. To ensure consistency across policies, fiscal policy should be undertaken within a medium-term fiscal framework.\u201d<\/p>\n Failure could mean that China won\u2019t escape the dreaded middle-income trap after all. In China\u2019s case, it could be more of an upper-middle-income funk, but still a painful one.<\/p>\n Yet as New York University economist Nouriel\u00a0Roubini points out, if a shock like Trump ratcheting up tariffs against China happened, \u201cChina will indeed find itself in the middle-income trap.\u201d<\/p>\n China\u2019s problems, Roubini argues, \u201care structural, rather than cyclical. Among other factors, its slowdown is due to rapid aging, a busted real-estate bubble, a massive overhang of private and public debt (now close to\u00a0300% of GDP<\/a>), and a shift from market-oriented reforms back toward\u00a0state capitalism.\u201d<\/p>\n In general, Roubini says, credit-fueled\u00a0investment\u00a0has grown excessive as state-owned banks lend to state-owned enterprises and local governments.<\/p>\n At the same time, Xi\u2019s government has spent too much time over the last five years \u201cbashing the tech sector and other private enterprises, eroding business confidence and private investment. In this new period of deglobalization and protectionism, China appears to have hit the limits to export-led growth.\u201d<\/p>\n That\u2019s particularly so as Trump\u2019s tariffs continue to do economic damage everywhere and sow distrust in Beijing and beyond. Take the White House\u2019s latest chips gambit<\/a>, which puts Nvidia, the globe\u2019s most valuable company, in the role of pawn as Trump and Xi jockey for advantage.<\/p>\n Both Nvidia and AMD have agreed to give Trump\u2019s government a 15% share of revenues from semiconductor sales to China. The tax is the price for US licenses to export their technology to the second-biggest economy.<\/p>\n Nivida seems to be taking an ends-justify-the-means approach to the tax. As analysts at Melius Research note: \u201cNow Nvidia can better compete with Huawei \u2014 not only in the China market, but globally, making sure more Chinese artificial intelligence developers can create applications on a US-friendly Nvidia AI stack.\u201d<\/p>\n