While China has left its official growth target unchanged at around 5 per cent, the tone of the work report from this year’s “two sessions” was different. The balance has shifted from a standard recapitulation of notable accomplishments to an unusually candid assessment of the multiplicity of problems that China now faces.
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This was buried in the middle of a long report prepared by China’s National Development and Reform Commission, which emphasised “the negative impact of the external environment” while recognising domestic foundations are not strong enough for sustained growth in the Chinese economy. That message needs to be taken seriously.
Conflict escalation with the United States is obviously at the top of China’s external concerns. The good news for China is that it has travelled this road before. The bad news is that it is facing a new round of US tariff hikes and sanctions when its economy is weaker than it was during the first phase of the trade war in the late 2010s.
China has been hit hard by the bilateral trade conflict with the US. While the US is still China’s largest nation-state export market, its share of total Chinese exports fell to 12.8 per cent by 2023, well below the 19.8 per cent average for the five years to 2018, when the first phase of the trade war started.
Meanwhile, the multilateral impacts have been minimal. China executed an impressive export diversification strategy – drawing on significantly increased export exposure to Vietnam, Russia and India, as well as Germany, the United Kingdom, South Korea, Thailand, Indonesia and Mexico.
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With US export demand likely set to decrease due to the Trump tariffs, China must intensify export diversification to cushion the external shock. That may be very difficult to achieve considering prospects for a renewed contraction in the global trade cycle over the next several years. Moreover, as Trump escalates his tariff campaign to multilateral “reciprocal” measures, likely retaliation poses added risks to baseline trade projections.