China Insider | Xi Jinping Visits Shanghai, US-China Reciprocal Tariffs, and China’s Economic Distress
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Welcome to China Insider, a podcast from the Hudson Institute's China Center. I'm Miles Yu, Senior Fellow and Director of the China Center. Join me each week for our analysis of the major events concerning China, China threat, and their implications to the U.S. and beyond. ♪

It's Wednesday, May 7th, and we have three topics this week. First, we discussed Xi Jinping's visit to Shanghai last week as China seeks to affirm its role in the global south. Second, we revisit the ongoing tariff war between the U.S. and China and the consequences of a sustained economic conflict for China. Lastly, we take a deeper look into China's trade policy and economic growth in the face of these continued U.S. tariffs and whether current strategies have yielded any results.

Miles, great to be with you again this week. Nice to be with you again, Colin. So we start things off with Xi Jinping's visit to Shanghai last week, his first since November of 2023, in a reported show of strength in the face of U.S. tariffs. Xi visited several facilities, including the New Development Bank, which serves as the multilateral financial hub for BRICS member nations, and the

and spoke about efforts to accelerate AI development and innovation at Shanghai-based incubation labs for AI startups. So, Miles, what are the reasons behind Xi's trip to Shanghai this time and why now? Well, there is a political reason, there is a specific economic reason, but mostly it's a gesture. I mean, you mentioned about Global South. Yes, this is the 10th anniversary of the

the bank called the New Development Bank, NDB, which is basically created by China and with the participation of the BRICS country in 2015. This one is based in Shanghai. And so the member nations

initial five, Brazil, Russia, India, China and South Africa. Now they added several of them, Bangladesh and other countries of less significance. However, the whole purpose of having this bank under China's control in Shanghai is to create a major narrative. That is the existing global financial and economic system under the Bretton Woods framework

is fundamentally unfair it's fundamentally anti-development developing countries this is China's uh major narrative therefore China wants to create an alternative to the existing international financial institutions symbolized by the World Bank and the International monetary funds

So this meeting is particularly important, this anniversary meeting in Shanghai, because this was the indirect response to the just concluded the IMF and the World Bank annual meeting in Washington, D.C. So China fancies this NDB as a counterweight to the West. It's a major tool of China's

a way to basically to create global dominance. So this is the major reason Xi Jinping went to Shanghai. I mean, this NDB is, you know, in reality is not really that powerful because it is pretty much like it tried to create a market under China's control. It has a $100 billion objective, so sort of authorized capital.

but they know in reality china has not the foot the bill as a promise and also china say you know the world bank and imf is not fair because the voting power is determined by how much each country contributed china said okay in this new system this ndb and we're going to have equal power in other words you know uh every member would have a you know

essentially a vehicle power. That would create a problem. China, even though say this is based upon the principle of equality, but countries like India will never let China dominate institutions like this. So that's one reason why in reality, this is not really that effective. But most importantly, China wants to use this

break back based in Shanghai as a conduit to internationalize its uh inconvertible currency the the mean B the UN and that basic effort has uh has not really worked out well as uh at all because

Even though this is bank is back under Chinese control, but the major settlement currency under this bank is predominantly still US dollars because you cannot deny reality. So for many reasons, I mean, this is not a really good institution effort.

despite Xi Jinping's constant sort of encouragement and attempted to boost the efficacy of his bank. So I think this is one of the most important reasons he went to Shanghai. Of course, there is a particular timing that is also worth noting that this is a time when China's economy is under serious distress, if not a crisis in the current tariff war between China and the United States.

Yeah. And while it seems like you could wrap this whole trip up into the umbrella topic of show of strength, and Xi's remarks also seem to focus on international development and FDI goals via NDB, like you mentioned, but I was also noted that in other speeches, he was able to promote domestic AI innovation and artificial intelligence development, but didn't exactly pose any tangible strategies or policy initiatives to do so outside of

of general promotion, especially within the Shanghai network of hubs. So Miles, what exactly were the key messages Xi wanted to convey on this trip and how did they come across from the perspective of Chinese citizens? Well, he wanted to deliver a message of resiliency, confidence, and the effect is almost minimal if it's negative because

this huge hoopla about his visit to Shanghai. It's supposed to boost the market and the market barely reacted either way at all. So there's a basically fell flat. And during his visit,

China is still in the nationwide closing down of the shops, factories, and there's an increasing amount of protest of workers, unemployed and demanding

their the employers to pay off the iou so you got the you got this uh uh this major problem so the one of the major issues that Xi Jinping could not really have control is the mounting unemployment numbers Goldman Sachs estimated in the

current tariff war, China might lose somewhere between 15 million to 16 million jobs. And this is amazingly devastating because most of the jobs will be focused, will be in the sort of export oriented major coastal areas in China. And you have right now, you have basically the wave of factory closings and

and confident customer confidence continues to drop now the PMI the purchasing managers index has really uh dropped down under 50 which is a indication of a Chinese economic vitality is gone so um you uh you have that uh that situation and also uh because of this

capital flight increased dramatically. A lot of money in China to get the hell out of the country. So it is in this background that Xi Jinping went to Shanghai and make a lot of really high profile shows, performances. And as I said, all these efforts really didn't amount to much. And the government

has not really responded very decisively and drastically to the crisis caused by the tariff war because anything that Chinese government is doing in that direction will be constituted by Washington DC as retaliation and that's why the

If retaliation continues, China is in no position to counter. Yeah. So just to kind of summarize everything that was mentioned here. So Xi focused principally on strengthening cooperation with the New Development Bank across member countries in the global south, as actually he quoted, an important force in safeguarding world peace, end quote.

and coupled this with domestic calls for expansion in AI innovation and development, particularly in Shanghai, with national level policies that would support the diffusion of this technology across various economic and social sectors. But with all of this, all well and good, but let me ask you, Miles, do you believe this messaging will work in achieving any of these outcomes desired? And will it at least be successful in mitigating any losses due to the ongoing trade war?

I doubt it. I think the government might achieve some kind of immediate goal by fusing some capitals into the market. But in the long run, what really ails China is not temporary stimulus plan. It is really institutional structural. I mean, your currency is not convertible and you pretty much still command the economy.

all the major economic, financial and currency decisions are not made in response to markets, but by the party bureau for political purposes. I mean, that's why I think consumer confidence and the investments are all done. So I don't think you have to recure China's economic problem from the root, not from just the surface.

Yeah, and that's going to be an important development to track as we see what happens over the next couple of weeks in regard to the ongoing tariffs. But kind of transitioning into our next topic for today and building off of something that you brought up. Last week, Treasury Secretary Scott Besant delivered remarks as the U.S.-China trade war intensified and noted that China stands to lose 10 million jobs if the current tariff levels were to continue.

Some additional experts have said this could actually be as high as 16 million jobs, depending on how things unfold. But even with potential lower tariffs on the horizon, Secretary Besant mentioned China would still stand to lose at least 5 million jobs as a result.

Wall on confirmed prior rumors about secret talks between the US and China hinted at potential trade deals being discussed. So Miles, what should we make of this analysis from the Secretary of the Treasury? And could China really lose up to 10 to 15 million jobs here if things continue as they are?

I think China's unemployment rate has been going on for a long, long time, even before the tariff war. I mean, look at this. The Chinese government, their official number two years ago for youth unemployment, that is people from age 16 to 24, somewhere in that range, was close to 20%. It's 19.5%, I believe that's the number.

And that's the official number. That's really, really high. Now, the real number, many economists estimate much higher than that. Sometimes people say it's as high as 45%. So the unemployment was structural. It was actually not necessarily the result of a tariff war.

this terrible aggravated that situation so I think you know China's problem is really structural uh it has something to do with the fact that that Chinese economy is a fundamentally number one non-market number two anti-market the economic America we have been witnessing for the last 20 some years is not because of the Chinese Communist Party is in spite of it that is the non-state sector

that was heavily involved with the international free trade system. Those were the sectors that could produce almost the entire growth of economic development in the last 20, 30 years. So the state-owned enterprises barely make any difference, any gross contribution at all. So that's one of the reasons why you see the unemployment number

10 million, 50 million, 60 million should not be surprising at all to a lot of people. Yeah. And as far as we're aware, no formal discussions for bilateral trade agreements have been announced or made public yet. But since Secretary Besant announced that the US was close to deals with both India and South Korea,

China said it's evaluating US requests to initiate trade negotiations. And at the very least, you know, any such talks could lead to a potential resolution of this trade war. But Miles, let me ask you, what exactly is the current dialogue between the US and China regarding the trade war? And have there actually been further secret talks?

well china says it's going to fight to the end with the with donald trump i mean with what china is a surplus country in terms of trade china's trade globally is huge over trillion dollars close to 40 percent of the entire chinese international trade is with the united states that's the leverage u.s has so the china is the only country

that retaliate against Donald Trump's reciprocal global tariffs. And when the United States is negotiating with probably every country that has trade relations with the United States, China said, "We're not going to negotiate at all unless the United States gets rid of all tariffs." That's the Chinese demand. You read this on a daily basis from Chinese official media.

and so China basically tried to project the image of acting tough but in reality they have been doing something they know they cannot win which is sort of something sub Rosa without the open announcement but they don't want Chinese people know the government really is dependent on the US market so for example

there are high officials that have been negotiating with the Secretary of State and his people in the US Treasury about two weeks ago. This is on occasion of Chinese finance minister attending the IMF and the World Bank annual meeting. So there

move around have been documented by journalists, but they don't want people to know in poverty. On the other hand, China also makes some unannounced adjustment about tariffs. They have reduced

several key items of U.S. export to China to zero tariff that these items that China is heavily dependent on, including semiconductor components, medical equipment with high precision nature, and most importantly, certain part of agriculture and energy products.

These were big China usually use agriculture and energy as a major weapon against the United States. But now they have yielded. This is a major concession. So I think, you know, in other words, as I said before, as much as U.S. depends on the Chinese market, China

is much more dependent on the U.S. market. In other words, China needs the U.S. much more than the other way around. So I think this is basically almost suicidal for China to continue on without engaging with the United States in a very constructive manner.

yeah it seems like if China's facing structural issues in addition to external pressures from ongoing trade tensions it seems like they're almost purposefully fighting a war on two fronts of their own on an economic standing and you know kind of piggybacking off what you just said there I'd like to continue on this economic thread in the ongoing trade war with uh as we shift to our final topic for today to discuss more or less the greater impact the trade war has had on the Chinese economy to date

The reciprocal tariffs levels have remained at an effective 125% for both sides for several weeks now. And despite various exemptions and potential talks of rolling back current tariff levels from both sides,

This has resulted in significant economic impacts for both the US and China. And like you mentioned, last week, China quietly announced exemptions and zero tariffs on select US imports where China has really struggled to procure alternative sources for those goods. Like you mentioned, US made semiconductor chips, medical supplies, energy and agriculture, even aircraft components from Boeing while they look to source elsewhere.

Miles, what really is the impact that the trade war has had on the Chinese economy overall to date? And do you believe they will roll back any exemptions if they are able to procure alternative sources for essential goods? I mean, I don't think that they can really procure a lot of alternative sources.

uh imports from united states the u.s has some unique uh products china heavily depends on um you mentioned about china the aircraft uh uh products china order

the suspension or accepting deliveries of Boeing aircraft service and parts. I mean, that's basically, again, it's not really good. It's suicidal because China already has a lot of Boeing aircraft. If Boeing stop delivering parts and services

many of the Chinese aircraft would be grounded, including Xi Jinping's own presidential aircraft, their Chinese version of Air Force One, which is a gigantic Boeing 747-8. So that's basically is reality. On the other hand, most of the Chinese imports to the United States

Americans, you know, yes, they're cheaper because China does have the labor cost advantage. But most of the items for average Americans are discretionary. You don't buy 30 cheap

uh bikes made in China you don't buy 100 shirts uh cheaper than most of the um uh project managers from other countries from Walmart or from Costco so what I'm saying is uh you do have this uh different kind of products that both countries need uh and they have a different kind of demand

China imports a lot of American products that really is crucial for Chinese economy. And they must have. While most of the Chinese products in the United States are necessarily everybody must have. They're discretionary. On the other hand, China does have one advantage, that is

Many of the American big corporations have transfer big portion of their manufacturing capability to China, like Apple, like Tesla. However, as the tariff war continues, virtually all those companies

are considering getting out of china uh at least a portion of partially apple for example is has already announced they're going to move a significant portion of its iphone manufacturing capability equipment away from china to india and i think tesla is uh doing pretty much a similar way in similar ways so what i'm saying is

tariff war is bad for China. And China has to accept the fundamental premises of the Trump administration argument that more or less, Americans trade

relationship with the majority countries in the world particularly China has been unfair has not been reciprocal because China has been imposing much higher tariffs on the United States as well as uh so does so does the uh the EU so that's why uh tariff rate is less relevant here than the major

argument by the Trump administration. That's why the rate sometimes can be scarily high, but that's not the purpose itself. The purpose is to use this high

tariff rate to force other countries with unfair trading relations with the United States to negotiate, to make compromise. And that's the way the US government has been doing. I think China has to be reciprocal and at least it should be more acceptable to that kind of treaty.

Yeah. And then I guess to kind of close out this week with one final question, I want to flip the script a little bit and kind of approach this from the U.S. perspective. You know, at least to date, the Trump administration in various capacities has at least indicated it would like to achieve a trade deal, perhaps bilateral trade deal with China, and at least reduce current tariff levels back down to prior levels if possible.

and potentially even further, but thinking strategically, and I guess in the context of the US-China strategic competition umbrella, given that China seems to have much more going on here, at least it seems like the US has a little bit of a strategic advantage, at least in the economic context, would there be a continued strategic advantage, let me ask then, for the US to continue with these tariffs if China stands to lose that much more?

the us yes obviously but i think china will lose more uh now secretary scott besan made a very interesting point when he was talking to the world bank people a couple weeks ago he said

The issue with China is not just about those cheap labor, intellectual property thefts. Those are all true. The fundamental issue is that China has the overcapacity of production. That's because China's economy is heavily, heavily toward export orientation. And so the only way to solve that problem is to make China's economy profitable

with a focus on domestic consumption. In other words, you can make stuff, but then you can make Chinese people buy. Well, that actually is not a bad prescription of the problem with China. I think it's more political than financial and economic in my view, because the Chinese government has been enriched by international trade.

but not every Chinese person enjoys this kind of benefit of economic growth. Don't forget, the Chinese people, many of them are very poor. Over 40% of the Chinese population makes less than $5 a day. That's according to Chinese state statistics. Now, also according to Chinese statistics, about 92 to 93%

of the Chinese population, more than 13 billion, more than 13, 1.3 billion people are making 5,000 yuan a month. That translates to about 25 to $27 a day. Now that's not a really big consumer purchasing power.

So in order to make this Chinese overcapacity go away, you must develop a very big and strong consumer market within China. And that's a very, very big, big historical shift. United States developed its consumer market, which is the largest in human history hundreds of years ago, since you might say since the administration of Thomas Jefferson, President Jefferson

had this seemingly disastrous policy of embargo in 1807. But it did achieve a very unintended consequence. That is, that Jefferson embargo forced America's commercial capital to become industrial capital, to make manufactured goods inside the United States

for domestic consumption. And so this is economic history 101. But I think, you know, China does not have that. Chinese government wants to make money from international economic

J. And to enrich itself to basically to build up his military to build up with repressive police state they all have done that, but the people of China, the people who create as well actually are not the beneficiary of the economic miracle that's.

what the Secretary Besant is trying to say. But I don't think that it really is purely an economic problem. It's purely a political and ideological institutional problem. So we'll see what happens over the next couple of weeks as the trade war continues and then the tariff levels continue to unfold. But we've unfortunately reached our time for today. Miles, as always, thank you for this week's conversation and lending us your perspective on these critical issues. And we'll check back with you again next week. All right. See you next week.