David Mahon reviews what is in store for China in the wake of the US election

By David Mahon*

The following is a Note to Clients by Mahon China Investment Management Ltd, Beijing, which they have allowed us to repost.

1.
The Chinese Government was unprepared for Donald Trump’s election in 2016 and misunderstood him to be a businessman whose indifference to geopolitics might slacken US military and economic constraints on their country. Beijing is better prepared for Trump’s second term.

2.
American companies’ consumers bore over 90% of the impact of the tariffs Trump launched in 2016, while China’s fall in growth has been due more to internal factors than trade disputes with the US. Chinese exporters have been working over the last eight years to diversify markets and finish manufacturing products in countries like Mexico and Vietnam to evade tariffs. Chinese exports to ASEAN increased from 13% in 2018 to 16% in 2024, while exports to Africa and South America rose by 4.2% and 6%.

3.
Chinese companies have also been diversifying and their exports will likely be comprised predominantly of or utilise advanced technology within the next three to five years. These businesses will not want to risk selling in any volumes to the US. Analysts seem to have forgotten that China is strongest when its domestic economy is less dependent on trade. Pre-pandemic, exports had been falling in their contribution to GDP to the extent that they counted for less than 1% of GDP growth. Most solutions to China’s economic woes lie within its borders.

4.
If Trump places 60% tariffs on all Chinese goods, exporters will suffer and unemployment increase in selected sectors. American consumers will suffer most, for Chinese made appliances, computers, smart phones, textiles and sporting goods dominate the US retail market. While manufacturers and distributors have absorbed much of the tariff driven price hikes to date, many will have no choice but to pass the next round onto US consumers already struggling with inflation.

5.
Leading analysts of China’s economy debate the impact of tariffs on Chinese GDP growth, with forecasts of reductions ranging between 0.4% to 2.5%. As long as Beijing maintains its stimulus programme it could be closer to 1%.

6.
Trump’s plan to place 10% or higher tariffs on all imports will depress global growth and increase inflation, undermining the belief that political and business leaders have rationally held for generations: in times of increased risk, the US economy presents a safe haven. Washington wants to reduce the threat that it imagines China poses to its primacy, but by pulling its trading partners into a wider trade war, it may struggle to maintain reliable allies in its containment of China and indeed push many countries closer to Beijing.

7.
US multinationals – especially those that manufacture in China or depend on Chinese consumers – will likely try to dissuade Trump from pursuing his more extreme protectionist aims. Any regime of tax cuts and deregulation would likely drive up US capital markets, bringing at least a short-term surge of confidence. Much depends on the make-up and stability of his cabinet. It is likely the US dollar will strengthen in the first quarter next year, and the renminbi could fall below 7.5 against the dollar by year’s end. With CPI below 1% China will be able to absorb import driven inflation from a weakened currency.

8.
The Chinese population followed the recent US election more out of curiosity than the fascination with which they had followed Trump’s first campaign. Some think of him simplistically as a strong man capable of bringing order to an increasingly disordered America, while others hope his win will weaken America, leaving it less able to bully China. Most cared little, having lost respect for the nation they once held in high esteem, and whose institutions and systems they had once aspired to emulate. A Chinese professor and alumnus of a US university where he had lectured for a decade said:

‘We may be astounded but should not be impressed by Trump’s negative charisma and his promises of economic relief to middle class Americans. Neither party has the ability to deliver on such promises, and I have come to believe they don’t intend to. The American political system has been geared to serve its economic elite backers for a long time.’

A Chinese economic historian holding US citizenship noted:

‘I thought Trump’s first win was the result of a distorted electoral system and an archaic electoral college, but this result shows the real America: exceptionalist, isolationist, yet seeking global primacy. I am confused as you cannot be all those things at once. China isn’t seeking primacy, but it does tend toward isolationism and exceptionalism. We would do better to learn from America’s weaknesses than simply judge it so we can feel better about our own system.’

‘Many in Chinese social media are saying that US voters wanted a bully and a racist as president. I don’t see it that way. In a time of insecurity people like strong leaders and Trump comes across as strong to a lot of people. He knows how to talk about the things that concern people, even if he has no rational solutions. US stocks may do well under Trump, but I worry that if he does a deal with Putin and ends the war in Ukraine, America will focus more on containing China. Although more good would come from a ceasefire than bad.’

9.
Trump’s tariffs will pressure Chinese policymakers to restructure the domestic economy, and may even force them to deal more urgently with social issues such as urban residency, education, and welfare, and to liberalise state bank funding of the private sector. Domestic economic trends are already encouraging. The government’s RMB 10 trillion stimulus is lifting corporate and consumer confidence and has the potential to unlock USD 20 trillion of household savings (75% of US GDP) to fuel China’s capital markets and increase public confidence in government policy.

10.
The IMF forecasts China’s GDP growth will reach 4.8% this year, compared to 2.7% in the US, 0.8% in the Eurozone, and 0.9% in Japan. China will account for 21% of global economic growth over the next five years, larger than all the G7 countries combined and it is already 32% of global manufacturing.

11.
The world faces four years of uncertainty and chaos from a far-right, nationalist American government dominated by an unpredictable, stubborn leader. China may have suffered more economically from a Harris presidency, but at least it would have been somewhat predictable. Beijing cannot wrangle with Trump’s Washington, but is likely to pursue its own economic and social interests with understated determination. Great powers in decline create an inordinate degree of uncertainty. If Trump’s chaotic approach to geopolitics reduces co-ordinated Western pressure on China, Beijing has an opportunity to show restraint and pursue its interests without jeopardising the interests of others. This would prove that although China may be a regional economic superpower, it does not seek to become a hegemon

*David Mahon was also a guest on an episode of our Of Interest podcast. You can listen here.

*David Mahon is the Executive Chairman of Beijing-based Mahon China Investment Management Limited, which was founded in 1985. This Note is here with permission.