Yin Jianfeng: Trump 2.0: False alarm?

Yin Jianfeng is the Chief Economist of China Zheshang Bank and a member of the China Chief Economist Forum. This article is a transcript of Yin Jianfeng's speech at the 2025 China Chief Economist Forum Annual Meeting: Yin Jianfeng: The title of my speech is "Trump 2.0: Much Ado About Nothing?" Why "Much Ado About Nothing"? Firstly, Trump is a businessman, and businessmen can talk about anything. Secondly, the US economy also has problems. Most importantly, the Third Plenary Session of the 20th Central Committee has introduced a series of reform measures. If these reform measures can be effectively implemented, we don't need to be afraid of Trump no matter how much he disrupts. Of course, the big drop in the stock market the day before yesterday and yesterday inevitably makes people doubt life. Didn't they say they wanted to stabilize the stock market? Didn't they say they would inject another 500 billion if the first 500 billion wasn't enough, and another 500 billion after that? So there are question marks about what will happen next. First, Trump 2.0 version seems quite intimidating, primarily because it is attempting to unify the legislative, judicial, and executive branches, and its team members generally hold anti-China views, with J.D. Vance being particularly prominent. Vance's book "Hillbilly Elegy" vividly portrays the decline of the manufacturing rust belt in Ohio. As a child from a single-parent household, whose mother had struggled with addiction, Vance attributes the struggles and hardships of white Americans mainly to their own ignorance and laziness. However, once he entered politics, he shifted the blame towards China. Therefore, these members all exhibit extreme anti-China sentiment. The second worrying factor of Trump 2.0 is that its policies not only fully inherit the policies of the Trump 1.0 era but also expand and deepen them significantly. For example, in terms of tariffs, Trump once threatened to impose a 10% tariff on all imported goods, and a special 60% tariff on Chinese goods, while imposing a 100% tariff on countries that do not use the dollar. These measures are undoubtedly shocking. Trump 2.0 is actually a continuous process with 1.0, with the Biden administration bridging the two. Since taking office in January 2021, the Biden administration not only continued the policies of Trump 1.0 but also took more aggressive measures against China in certain aspects. So, are these policies effective? For China, we can see that China's share of global manufacturing value-added and trade has been continuously increasing, and the pace of upgrading and transformation in the manufacturing industry is accelerating. These policies have not had the anticipated negative impact on China, and for the United States, the effects remain to be seen. A US think tank report examined whether Biden's industrial policies have brought about a revival of American manufacturing. The conclusion is simple: to a large extent, they have not. For example, comparing changes in non-farm employment and manufacturing employment since Biden took office, non-farm employment increased by 5.8%, but manufacturing employment only increased by 1%. Looking at manufacturing output as a percentage of GDP from the start of the Biden administration, it has been declining. The conclusion of this think tank report is very simple: these policies are ineffective, neither for China nor the US. Regarding the imminent Trump 2.0, the Peterson Institute for International Economics estimated the impact of different policies on the US and other countries, especially China and the US. According to this report, if Trump 2.0 imposes a 10% tariff on all imported goods, China's GDP in 2025 is expected to decrease by about 0.5 percentage points, and if an additional 60% tariff is imposed, China's GDP could decrease by 1-1.2 percentage points. As of October 2024, the RMF forecasts China's 2025 economic growth rate at 4.5%. So, in a worst-case scenario, China's growth rate in 2025 could be only slightly over 3%. Of course, policies like Trump's are harmful to others and themselves, and the US will also be greatly affected, especially by the promise of expelling illegal immigrants. Based on assumptions about the prospect of expelling illegal immigrants, ranging from 1.3 million to 8.3 million, the US economy will significantly decline and inflation will soar. The economic scenario for the US in 2025 under Trump 2.0's policies is likely stagflation. In addition to the economic scenario, US asset prices now seem to be excessively high. As mentioned earlier, there are concerns about US stocks. We know that US stocks have reached historic highs, but these are mainly driven by the big tech sector. The overall increase in the US stock index is not as high. What about the valuations of these big tech companies? There is currently a divergence of opinions in the economic and scientific communities about this tech sector driven by AI. For example, in October or November 2024, an article published in Nature magazine by several MIT scientists argued that based on large language models, AI could be on the wrong path. This is because various experiments in neuroscience show that language is not just a tool for communication but not a tool for thought. Even if the language model hasn't gone wrong, the tax cuts will still be a factor supporting the US stock market. However, according to a report in December 2024 by Goldman Sachs, these favorable factors have already been factored in, meaning that the US stock valuations fully reflect the positives. This report suggests that in 2025, attention should be paid to the tail risks of the US stock market. In addition to the possibility of overvaluation in the US stock market, US housing prices also seem to be high. US housing prices have reached historic highs. Looking at the price-to-income ratio, there have been three high points in the past half-century: First, during the two oil crises. Second, during the subprime crisis. Third, the current situation. For the first two high points, we saw housing prices plummet. It is difficult to say whether this will be the case in 2025. Its asset prices could be overvalued, and the economy could be in stagflation. Here is a question: why can Americans be so overbearing, sanctioning one country today and another tomorrow? Their overbearing power comes from ... [the text ends here]From where? This image reflects that the United States is the only country among the major economies that has consistently maintained a trade deficit. It has been in a trade deficit since 1976.We know that a market economy depends on supply and demand, so which is more important, supply or demand? Demand is more important. One important reason behind this is the dominance of the US dollar. The US dollar dominance was formed in 1976, and it is supported by the fact that the US economy model is relatively healthy on the supply side, relying on overall factor productivity improvement, and on the demand side, relying on household consumption, which accounts for 70% of GDP. In addition, the US dollar dominance can exist because of active or passive cooperation from others. In 1975, the OPEC organization and the US reached an agreement to trade oil using the US dollar, hence the US dollar obtained support once again - the petrodollar. After the 1998 Asia Financial Crisis, the so-called Asian dollar area was formed, with Japan as an early leader, followed by China. Both Japan and the surrounding countries use the US dollar, making the US dollar a major currency in the global manufacturing trade. With support from both the oil industry and manufacturing, the US dollar dominance is sustained. Why does China support the US dollar? The reason is simple - from the perspective of supply and demand, China is strong on the supply side but lacks on the demand side. As emphasized in the recent Central Economic Work Conference, our demand, especially consumption, is insufficient. Our relationship with the US is akin to that of a chef and a diner. When we go to a restaurant, who decides what to order and how much - the chef or the diner? It's simple, the one paying the bill decides. Our manufacturing value added ranks behind the sum of the United States, Japan, and Germany. It's like a chef boasting about cooking more and better meals than a hundred or a thousand men in a year, but you're just a chef, busy in the kitchen like a dog. You can't stop and go home to cook a delicious meal for your family, and have a warm weekend. We have insufficient demand. The US dollar dominance is a double-edged sword for the US as well. It allows the US to print dollars to buy products from other countries, but it also means that the US must maintain a continuous trade deficit, resulting in a continuous accumulation of net external debt. Since 1989, the US has been in net debt, becoming a net debtor country, with accumulated net debt nearing $20 trillion, equivalent to over 90% of US GDP. Whether the US net debt compared to GDP will further rise, and when it will be a concern, I think needs to be questioned. To deal with Trump, for ourselves, we need to focus on stabilizing our domestic market: stabilizing the stock market and the housing market. Comparing nine countries from 2015 to 2023 in terms of GDP growth, stock market growth, and housing market growth, China is the only one where the stock market fell despite the highest GDP growth. When talking about China's stock market, it reminds one of China's football - excelling in Olympic gold medals but lagging in football, reflecting the state of China's stock market. I mentioned the housing market in the last Chief Economist Forum. The biggest issue in the housing market is the lack of population growth. For example, in 2023, the number of new urban households is less than 4 million, while the number of new completed housing units is over 7 million, indicating a gap between supply and demand, with the core issue being population. The stock market relies on the central bank's commitment to stabilizing the market, but more crucially, it depends on the economy's fundamentals. As over half of China's A-share market is made up of manufacturing companies, the valuation of these companies has the greatest impact on the stock market. The graph shows that the PE of manufacturing companies and the Producer Price Index (PPI) align in trend. If the PPI goes down, the valuation of manufacturing companies decreases, which affects the stock market downwards. The key lies in the economic fundamentals. The economic fundamentals are affected by structural issues on both the supply and demand sides. On the demand side, China's share of investment exceeds the global average by 18 percentage points, while the percentage of household consumption is below the global average by 18 percentage points, representing insufficient consumption. The 2024 Central Economic Work Conference has proposed a significant boost to consumption by 2025, through special initiatives. On the industry structure side, China's service industry is 13 percentage points below the global average, while our manufacturing-focused industry is 13 percentage points above the global average. With the development pattern from agriculture to industry, in the post-industrialization era, the development of the service industry is essential. Structural issues on both ends of supply and demand interact with each other. Insufficient consumption on the demand side can lead to surplus production capacity on the supply side. In particular, insufficient supply of services will impact the upgrade and replacement of consumption, as consumption follows Engel's Law - with rising incomes, the proportion spent on food decreases while that on manufactured products increases, and with further income growth, after meeting basic needs, the proportion spent on services rises - this is Engel's Law. A recent interesting case is the game "Black Myth: Wukong". The game industry belongs mainly to the service industry. Developing the game only cost less than 1 billion, but it generated billions in direct sales revenue and nearly a trillion in manufacturing industry sales revenue, indicating that the service industry can become the leading industry, solving issues of manufacturing overcapacity. The 2023 Central Economic Work Conference has two slogans that I think are worth quoting. The first is to stimulate the potential of consumption. Our statistics show the Consumer Willingness Index, indicating a sharp decline during the Trump 1.0 era, with consumer willingness hovering around 0 during the Biden administration, due to the enduring "scarring effect" of the pandemic. Why is consumption not picking up? It's simple, consumption is linked to income.Function is a function of current income and future income. Where does income come from? The decision of the Third Plenary Session of the 20th Central Committee for the first time proposed to increase the proportion of residents' income in national income. National income is distributed among residents, enterprises and government. To increase residents' income, whose income needs to be reduced? It is self-evident. Our finance needs to support residents in old-age, medical, and education through transfer payments, and increase the proportion of residents in national income through secondary distribution.The second meaningful slogan of the Central Economic Work Conference in 2023 is to expand effective and beneficial investments. Currently, our investment efficiency is very poor, and there are three reasons for this declining investment efficiency: First, negative population growth affecting investment, which has a macroscopic impact on investment from the perspective of growth theory. Second, consumption is artificially suppressed, leading to overcapacity formed by investments. Third, problems in industrial structure. From 2010 to 2023, comparing the GDP industrial structure with the investment industrial structure in China, we can see what issues exist in investments. If the proportion of investment in a certain industry exceeds the proportion of GDP it creates in the total GDP, it means that the industry is using excessive investment to generate minimal income, indicating poor investment efficiency. Which industries fall under this category? Including manufacturing, industrial, financial, real estate, construction, and infrastructure industries. Infrastructure investment efficiency is particularly poor, with investment accounting for nearly 20% but only contributing less than 5% to GDP. In the era of negative population growth, rapid industrialization and urbanization have already been completed, so why is there still so much investment being made? Japan faced a similar issue in the last century when Hokkaido no longer needed so many roads but the government continued to invest in infrastructure projects. The reason is simple: infrastructure investments, including questionable ones, are used to subsidize childbirth, upbringing, and education, yielding minimal benefits. Expanding effective and beneficial investments implies that we need to focus on which industries to develop. These include consumer services such as "Black Myth: Wu Kong", producer services, information technology, scientific research, and especially expanding education and healthcare in the public service sector. China's fiscal expenditure on education as a percentage of GDP is lower than that of India among major economies, so investments in these areas need to be increased. Lastly, to implement a more proactive fiscal policy, the Central Economic Work Conference in 2024 clearly stated that 2025 would see a more proactive fiscal policy. Two points were highlighted in the more proactive fiscal policy: First, maintain sufficient fiscal expenditure intensity. Second, optimize the fiscal expenditure structure. For over-invested industries, especially industrial and infrastructure sectors, it is suggested to shift focus from infrastructure to welfare programs such as elderly care, medical care, education, childbirth, and upbringing. On one hand, maintaining sufficient fiscal expenditure intensity means that the fiscal deficit ratio should reach a certain level in 2025. How is the situation of the deficit ratio? According to the Ministry of Finance, the deficit ratio is calculated by comparing the fiscal deficit to GDP. However, the publicized deficit ratio overlooks the actual fiscal deficit, which has been increasing since 2015 and is projected to exceed 5% by 2024. Therefore, discussions about the deficit ratio exceeding 3% or 4% in 2025 are meaningless as a deficit ratio of 5% is already higher than that of 2024, indicating that the fiscal policy is not becoming more proactive. To ensure a more proactive fiscal policy, how high should the deficit ratio be? On January 10th, we will release our macroeconomic report discussing this issue. Simply put, to maintain sufficient fiscal expenditure intensity, the deficit ratio must be above 8% in 2025, which is not alarming considering that during the global crisis and the COVID-19 pandemic, countries like the United States and Japan had deficit ratios exceeding 10%. In conclusion, we believe that 2025 should still be an optimistic year, and with the introduction of a series of policies, we believe it will be a good year. Thank you! This article is a reprint from the "Chief Economist Forum"; GMTEight editor: Wenwen.