China’s plan will fail for the same reason that its previous efforts failed.

Other than exports, no country wants to be like China.

Facing Trump Tariffs, China Outlines Plan to Bolster the Economy

The New York Times reports Facing Trump Tariffs, China Outlines Plan to Bolster the Economy That’s a free link.

The Chinese government and the Communist Party jointly issued a lengthy list of planned initiatives on Sunday to encourage people to spend more, in yet another move by Beijing to offset potential harm from its escalating economic warfare with Washington.

Their road map for economic stimulus included larger pensions, better medical benefits and higher wages — measures that could bolster China’s lagging domestic consumption. But it assigned many of these tasks to the country’s local governments, a large number of which are struggling under enormous debts and plummeting revenues from a decline in the sale of state land.

Part of the document released on Sunday seemed aimed at reassuring the Chinese public that their investments were safe, so that they would start spending money again. The authorities promised to undertake “multiple measures to stabilize the stock market” and to underpin the real estate market, which has been marred by falling property prices.

A housing market crash in the past three years has wiped out much of the savings of China’s middle class. Chinese households have responded by curtailing their spending on hotels, restaurants and other services and putting their savings into bank accounts, despite earning very little interest.

Data released by China’s National Bureau of Statistics on Monday confirmed the trend, showing that consumer spending remains weak while manufacturing, which produces goods in large part for export to foreign markets, stayed strong. 

The “Special Action Plan to Boost Consumption” was issued in the name of two of the highest organs of power in China: the General Office of the cabinet and the General Office of the Central Committee of the Communist Party. The unusual step showed that Beijing’s leaders want to signal that they are serious about addressing lackluster domestic spending.

Seriously Wrong Approach

China may be serious, but the approach is seriously wrong.

China needs to write of bad debts in housing, write off bad debts in State Owned Enterprises (SOEs), and stop ridiculous export subsides that benefit US consumers at the expense of Chinese consumers.

But the political class does not want to take a hit in SOEs, and consumers are angry enough over housing already.

So China is doing the only thing it knows how to do, boost exports and make announcements that do little.

Michael Pettis addresses this in a 12-Point Thread on X.

Pettis 12 Points

• Good article by @KeithBradsher: ” The Chinese government and the Communist Party jointly issued a lengthy list of planned initiatives on Sunday to get people to spend more, including larger pensions, better medical benefits and higher wages.”
• “But,” he continues, “it assigned many of these tasks to the country’s local governments, many of which are struggling under enormous debts and plummeting revenues from the sale of state land.” This is the problem with every attempt to boost the consumption share of GDP.
• The sustainable way to do it is to increase the share of GDP retained by households. But increasing their share requires explicit or implicit transfers from either businesses or government. If the household share rises, after all, someone else’s share must decline.
• Beijing clearly wants local governments to absorb the transfers, but given their precarious cashflow positions, for now they can do so mainly by placing new burdens on households or businesses, e.g. through taxes, layoffs, fees, or cutbacks on existing services.
• In that case, the net impact on households is reduced, and the remaining costs absorbed by businesses. The former doesn’t help boost consumption, and the latter, by indirectly forcing businesses to absorb the costs, is bad for the economy.
• The only other way to do so involves forcing local governments either to transfer to households a large part of the substantial assets they control, or to liquidate those assets in order directly or indirectly pay for higher household income.
• This of course implies a radical transformation of the relationship between Beijing and local governments and between local governments and the households and businesses in their jurisdiction, and given the sheer extent of the needed transfers, it will be very difficult.
• This is why, for all years of promising to boost consumption, it has been so hard for China to make much progress. It has to raise the household share of GDP by ten percentage points at the very least, which of course means an equivalent reduction of someone else’s share.
• Many analysts insist that China will choose to avoid rebalancing altogether, but they miss the point. These levels of imbalance simply cannot be sustained if neither China nor the rest of the world can absorb the growing gap between consumption and production.
• China will rebalance one way or another. The important question is how it rebalances: whether an increase in the household share of GDP will occur in the form of a debt crisis and a sharp contraction in GDP, as occurred in the US in the early 1930s, or of many years of…
• stable consumption growth and much lower GDP growth, as occurred in Japan after 1990, or of a surge in consumption that keeps GDP growth stable (which would be historically unprecedented). These are arithmetically the only three ways to rebalance.

The Japanification of China

Like Japan, China is refusing to write down unproductive assets and take losses on bad debt.

China’s setup is a little different than Japan due to SOEs, but the path looks similar.

How many bridges to nowhere did Japan build? And how many SOEs and housing developments in China are bankrupt?

China desperately needs to kill export subsidies (paid for by Chinese consumers). That’s the place to start.

Instead, China is doubling down on EVs and solar panels that the EU doesn’t want and Trump vows to never let happen.

The Pettis Paradigm and the Second China Shock

Noahpinion has a great article covering some aspects of this discussion in his January 16 2025 post The Pettis Paradigm and the Second China Shock

Noah covers reasons why Pettis may right and may be wrong. This was not in relation to the above 12 points (which I think are flawless but Noah hasn’t stated).

In general, I tend to side with Pettis on matters. He taught me most of what I know about trade.

However, I disagree with the savings glut theory that Pettis mostly espouses although he calls it a savings imbalance.

Savings = Production – Consumption.

And crumbling housing is China is savings destroyed even if there are many billionaires made in process.

China takes credit for GDP that is now worthless. And in the US, government spending adds to GDP as well.

Whether the Government spends $20 billion building a road or $200 billion for the same road, the production is the road, not the dollars printed. The difference between the two is an extra $180 billion that’s sloshing around in someone’s bank account, mistakenly referred to as “savings”.

I have had email exchanges with Pettis and I believe he agrees with what I just stated, but that point is often missing in his articles.

That aside, I tend to agree with Noah that “Pettis needs to think harder about the downsides of tariffs.“

Trump’s Reaction

If we are going to have tariffs, a more much more sensible approach would be coordinated efforts against China rather than starting out with 25 percent tariffs on Canada and Mexico.

This is more difficult than it sounds because China has circumvented tariffs with methods that make it appear the imports are from Vietnam, Mexico, or elsewhere.

US importers try to do the same.

Years of Repeat Central Planning Mistakes Have Doomed China’s Economy

On January 1, I commented Years of Repeat Central Planning Mistakes Have Doomed China’s Economy.

For decades, China depended on property bubbles for growth. With building now crumbling, all of that growth was a mirage.

I have been writing about China’s “ghost cities” where no one lives for a decade. They are a result of malinvestment.

Building those cities added to GDP, but it was really 100 percent waste.

China now has a debt to GDP ratio of nearly 300 percent. So where the heck is the net saving either in China or here?

Do we have a savings glut, an imbalance, or a pile of debt that is destroying the middle class and any savings it once had?

Regardless of what one calls the result, the rich are getting richer while the poor and middle class is shrinking.

Massive Printing Ponzi Scheme

Inflation benefits those with first access to money: The banks, the already wealthy, the asset holders, politicians, and the politically connected.

So, it’s no wonder China wants to hide the insolvencies in SOEs.

Step back. What’s going on is a massive printing Ponzi scheme to protect the banks, and the politically connected.

The only way interest is paid on debt is by printing more money and issuing still more debt.

People confuse this monetary printing with savings.

How Can Tariffs Fix This?

Since what’s going on is a massive printing Ponzi scheme to protect the banks and the politically connected, someone please tell me how the H tariffs are going to fix anything.

Tariffs will not stop printing in the US, China, or EU now that it has a newfound love of debt and military spending.

Forget about EU debt brakes until the whole thing blows up.

No Constraints on Spending

There are no practical constraints on government spending and there hasn’t been ever since Nixon ended gold convertibility in August of 1971.

This is what enabled China’s and Germany’s export mercantilism.

Prior to 1971, a country that spent too much lost its gold or needed to jack up interest rates enough to keep it.

Now, every nation on the planet has discovered they can print at will, especially the US, because dollars are always in demand.

Q: Why are dollars in demand?
A: US consumers are the global consumers of last resort. That the reserve currency curse. Everyone want to sell to the US and exporter will willingly take dollars in return, converted into local currencies by foreign central banks.

The result isn’t a glut of savings, but rather a glut of dollars, yen, yuan, and euros.

Trump wants to end this via tariffs, but tariffs cannot fix a problem caused by a lack of an enforcement mechanism.

That enforcement mechanism has always been gold. There has been no constraints on monetary spending since August of 1971.

Trump Wants a Weak Dollar But Needs a Strong One

Fore more discussion of the Reserve Currency Curse, the BRICS nations, and Trump’s very conflicting economic goals, please see Trump Wants a Weak Dollar But Needs a Strong One.

Trump wants the Fed to cut interest rates to weaken the dollar and boost exports. But that’s not what helped him get elected.

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