If you thought the \u201cLehman shock\u201d of 2008 was scary, wait until the No. 2 economy with $14 trillion of annual output goes off the rails.<\/p>\n<\/blockquote>\n
The vice president seemed to confirm that Trumps trade war is more about tackling China than creating U.S. jobs. Worse, perhaps, taxing Beijing is shaping up to be a 2020 reelection strategy. Forget Russia, Pence suggested: China is the real election meddler. It \u201cclearly laid down an official marker for a much more competitive and contentious New Era of U.S.-China relations,\u201d said China analyst Bill Bishop.<\/p>\n
All this is throwing Xis domestic strategies into disarray \u2014 perhaps permanently.<\/p>\n
Six months ago, Beijing was throttling ahead with \u201cMade in China 2025,\u201d a multitrillion-dollar effort to dominate the future of self-driving vehicles, renewable energy, robots and artificial intelligence. Party bigwigs were also planning festivities to commemorate the 40th anniversary of Dengs reforms \u2014 and Xis steps to accelerate them.<\/p>\n
Now, Xis undivided attention is on making this years growth numbers. Trumps trade-policy grenades are sending a few too many market forces Beijings way for comfort. Chinas currency is down 6.4 percent this year. Shanghai stocks are down 22.3 percent this year as JPMorgan Chase and other investment banks turn cautious despite Chinas 6.7 percent growth.<\/p>\n
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U.S. President Donald Trump and Chinese President Xi Jinping | Saul Loeb\/AFP via Getty Images<\/p>\n
The headwinds heading Chinas way are unmistakable, particularly with Trump threatening to up the tariff ante to $505 billion. In August, export growth weakened to just under 10 percent from the previous month \u2014 crisis levels for a trade-reliant developing nation. Fixed-asset investment has stalled, falling to a record low in August. And the latest purchasing managers data from the government and Caixin is right at the 50-point mark \u2014 just a small step from contraction.<\/p>\n
Thats unleashed a frantic push to keep Chinas growth engine from crawling to a stop. Almost daily, Xis team rolls out new plans to cut taxes, boost business lending and ramp up infrastructure spending. Regulators are easing up on credit curbs and limits on property speculation. On October 7, the central bank slashed the amount of cash lenders must set aside as reserves for the fourth time this year. It is as clear an admission as any that Chinas 6.5 percent growth target is in trouble.<\/p>\n
So are Xis designs of raising Dengs upgrades to 11. In 1978, Deng set the most populous nation on a journey from impoverished backwater to surpassing Japans GDP on the way to Americas. Deng replaced Maoist egalitarianism with meritocratic forces. He loosened price controls, decollectivized agriculture, allowed entrepreneurs to start businesses, welcomed foreign investment and morphed China into a global manufacturing juggernaut.<\/p>\n
Xis Made in China 2025 gambit aimed to push the economy upmarket \u2014 making it more about tech companies like Alibaba and Tencent than sweatshops. Yet now Xi is engaged in all-hands-on-deck battle against Trumps ploy to turn back the clock on Chinas rising influence.<\/p>\n
A key element of moving China beyond boom-and-bust cycles and making growth more productive is tackling dueling bubbles in credit, debt and property prices. That means increasing transparency, policing an out-of-control $20 trillion shadow-banking sector and dropping support for state-owned enterprises to create a vibrant private sector. Such upgrades will necessitate slower growth \u2014 5 percent or below.<\/p>\n
Yet they are now largely on hold. Xi reverting to the stimulus-at-all-costs playbook that got China into financial hot water is a worrisome bookend for the Deng revolution. Xi is ensuring that when Chinas debt-excess reckoning comes, what economists call a \u201cMinsky moment,\u201d it will be bigger, more spectacular and more globally impactful. If you thought the \u201cLehman shock\u201d of 2008 was scary, wait until the No. 2 economy with $14 trillion of annual output goes off the rails.<\/p>\n
Beijing is well aware of its plight \u2014 and the air of panic and paranoia is manifesting itself in bizarre ways.<\/p>\n
\nFor decades, Americas grand strategy once was to usher China gently into the community of developed nations.<\/p>\n<\/blockquote>\n
The disappearance of a beloved actress, the detention of an Interpol bigwig and the visa troubles of a Western journalist wouldnt normally be big concerns for economists. But theres nothing typical about the lengths to which China is going to fend off Trumps escalating trade war.<\/p>\n
The first narrative involves \u201cX-Men\u201d star Fan BingBing, who resurfaced last week after vanishing from public view. She was detained for alleged tax evasion and ordered to cough up $129 million. Yet her case was a stark reminder about something else: President Xis paranoia about capital outflows as wealthy mainlanders spirit their fortunes abroad.<\/p>\n
The second concerns Meng Hongwei, the Chinese head of Interpol who went missing last month. Meng is being investigated for bribery. Yet Xis heavy-handed tactics highlight the lengths to which the Communist Party will go to maintain absolute control over its subjects, even those on the world stage. Couldnt Interpol deal with any credible allegations in-house? It hardly helps that Xis anti-graft drive often seems more about sidelining rivals than cleansing the system.<\/p>\n
The third narrative relates to Hong Kong-based Financial Times editor Victor Mallet, whose visa renewal was just rejected. Mallet is vice president of the Foreign Correspondents Club, which in August enraged Xi by hosting a pro-Hong Kong independence speaker. It may be the latest sign of Chinafication in a city that once stood as a financial green zone for investors tapping the mainland market.<\/p>\n
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Meng Hongwei | EPA via Interpol<\/p>\n
Taken together, these plotlines make a mockery of Xis market-forces pledge. Rather than creating a predictable rule of law on which trusted economies thrive, Xis China is regressing in ways sure to chill foreign investment. This imperils his efforts in the Trump era to portray China as a credible power ready to fill the global leadership void. Xi is engaged in his own Trumpian battle against the media \u2014 even outside the mainland \u2014 and going after high-profile rivals.<\/p>\n
Trump doesnt get all the blame. If Xi had worked with Deng-like determination to recalibrate growth engines and wean China off exports, the economy would be less vulnerable to Trumps attacks. By certain metrics, meantime, Xi, is dragging China backward. Its press freedom ranking from Reporters Without Borders worsened to 176th, three notches below 2013.<\/p>\n
Irony abounds, of course. Earlier this year, Xi convinced the party to effectively make him president for life rather than the traditional 10 years. Past U.S. presidents wouldve condemned the power grab; Trump was all compliments. Yet the stronger Xi becomes, the more he clamps down on the media and dissenting voices needed to police the government and corporate titans.<\/p>\n
Nor has Xi addressed a central paradox: how China increases innovation while walling off innovators from Google, Facebook and the big debates of the day. Those market forces Xi pledged to heed are coming from Silicon Valley, too. While Trump complains about fake news, Xis China has a \u201cfake reform\u201d problem, says Wang Yiming, deputy director of the State Council Development Research Center.<\/p>\n
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U.S. President Donald Trump (left) and Chinese President Xi Jinping (right) | Jim Watson\/AFP via Getty Images<\/p>\n