Photo taken on January 17 shows the container terminal at the Longtan Port area of Nanjing Port in Nanjing, Jiangsu province, China. According to data released by the National Bureau of Statistics on the same day, China's gross domestic product (GDP) in 2024 will reach 134.9 trillion yuan, an increase of 5.0% over the previous year at constant prices.
CFOTO/Future Publishing via Getty ImagesIf you think you’re having a bad spell at work, spare a thought for economist Gao Shanwen.
A month ago, he was the high-profile chief economist at state-owned SDIC Securities, and a serious player in mainland financial circles. Today, he’s arguably as high-profile an economic villain as you’ll find in President Xi Jinping’s orbit. And he’s since been silenced, according to the Wall Street Journal and South China Morning Post.
Gao’s sin? Saying that China may have grown just 2% over the last two or three years, less than half the rate Xi’s government claims. The reason Gao is allegedly being silenced is for shining a brighter-than-usual spotlight on one of the biggest perception problems facing Xi’s Communist Party: that China routinely cooks the GDP books.
Claims on Friday that China grew 5% in 2024, exactly as Xi’s government said it would, probably had many economists thinking about Gao’s warnings.
Beijing’s statisticians point to rising exports and private-sector investments in new sectors, factories and equipment. But the giant headwinds slammed the economy — especially a property crisis fueling deflation — can make China’s official growth data seem fanciful.
The chilling effect from Team Xi actively muzzling negative or contrarian views might only intensify Wall Street debates on whether China is “uninvestable.” Nor has the Xi era been good to local and international journalists trying to tell the real story about China Inc.
It’s harder, though, to censor the messages coming from the bond market. Since January 1, yields on Chinese sovereign 10-year debt dropped to all-time lows. That opened an unprecedented 300-basis-point rate gap with U.S. Treasuries despite a slew of economic stimulus measures from Beijing.
There are two takeaways from bond market dynamics. One, traders aren’t buying Team Xi’s reassurances that deflation isn’t a problem. Not with China experiencing its longest falling-price streak since the 1997-1998 Asian financial crisis. Two, markets wonder if Xi might resort to a currency devaluation to battle deflation.
The last time Xi engineered a sharply lower yuan was in 2015. Back then, a nearly 3% devaluation shook markets everywhere. Yet the risk of such a move now echoes what might’ve happened in the late 1990s had China devalued.
Beginning in July 1997, Thailand, Indonesia and South Korea abandoned dollar pegs, sending currencies tumbling. The fear was that China might also enter the race to the bottom, kicking off a new round of competitive devaluations and supersizing the crisis.
Today, the global financial system is in a far more polarized state as trade and geopolitical tensions surge. If President-elect Donald Trump makes good on his trade war threats, 2025 will be the year of the tariff arms race. China would almost certainly retaliate early and often.
That could slam China in unpredictable ways, particularly if Gao and his ilk are right that it’s only growing around 2%. For a 1.4-billion-person economy facing daunting challenges, this is recessionary territory.
At his U.S. Senate confirmation hearing this week, Treasury Secretary nominee Scott Bessent said China has “the most imbalanced economy in the history of the world.” Added that China might be suffering a “severe recession/depression.”
We can debate whether Bessent, a hedge fund manager by trade, is right or if he’s way off. What’s not in dispute is that Xi’s party absolutely loathes such bearish views making global headlines, never mind dreaded “D” words like deflation or depression.
And if we’re thinking of the good-cop-bad-cop dynamic surrounding the economic team Trump is building, Bessent is perceived to be the former. The bad cops, in this context, include advisor Peter Navarro, who co-wrote a book titled Death By China. And trade czar Robert Lighthizer, who’s hinted at Trump 2.0 considering its own currency devaluation gambit.
Yet all this speaks to the risk the incoming Trump administration might overplay its hand on China. Trump tends to play up China’s growing dominance in zero-sum, they’re-eating-our-lunch terms. China’s fragilities also should preoccupy Trump World.
Xi’s $18 trillion economy is being weighed down by a giant property crisis that some compare to Japan’s 1990s bad-loan debacle. China’s local governments, meanwhile, are struggling with multi-trillion-dollar debt burdens that add to deflation woes and leave little money to invest in innovation, education and new growth opportunities.
Youth unemployment is near record highs, while China’s labor pool ages rapidly. Nor has Team Xi acted rapidly enough to build a robust social safety net that encourages households to save less and spend more.
China can defend itself. Providing cover for Team Xi isn’t the goal of this column. That said, the Trump 2.0 White House might want to be careful shoving the second-biggest economy as hard as it threatens to given its pre-existing conditions.
If Bessent is even partly right that China’s economy is the “most imbalanced” in history, is now a good time to slap a 60% tax on its all-important export engine? If Gao is even half right that China is growing just 2%, Trump might want to consider how tipping the second-biggest economy further into turmoil might boomerang back on America, and fast.
