Slowing Growth, Rising Debt May Force Xi's Hand

Heightened scrutiny of China's economic challenges underscores pressure on Beijing to defuse the trade war at the G20.

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On Friday, Xi Jinping and Donald Trump are expected to meet on the sidelines of the G20 in Osaka, Japan, and discuss trade. Talks between Beijing and Washington broke down in May, and the US has threatened to impose tariffs on an additional $300 billion in Chinese imports if a deal is not reached. Stock markets have gained on expectations that the two leaders will make an agreement in Osaka.

Predata signals give added reason to think Xi Jinping is motivated to make a deal. First, ahead of the G20, popular concern about China’s economic growth has resurfaced. The IMF has projected that the trade war stands to cost China 1.6 percentage points in GDP growth this year. As the make-or-break meeting in Osaka approaches, online audiences showed more interest in China’s GDP growth than at any point this year except when official government data projected the country’s slowest economic expansion in three decades.  

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Beijing has attempted to mitigate the effects of the trade war with increased domestic stimulus, which is in turn pushing up the country’s already massive debt. China’s debt stands at 254 percent of GDP, one of the highest levels in the world. Outstanding corporate loans increased by three percent of GDP last quarter, the greatest rise since 2015. As the chart below shows, concern about China’s debt among online audiences leapt yesterday to a near year-high.

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As part of its stimulus, Beijing has also eased spending restrictions on subnational governments, including allowing risky off-the-book borrowing by localities to fund new infrastructure projects. The highest spike in online interest in government debt in China in more than a year may speak to rising concerns about the sustainability of local government debt growth.

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Taken together, this heightened focus on slowing economic growth and mushrooming debt in China underscores the rising pressure on Xi Jinping to ameliorate the trade war. That bodes well for the prospects that some kind of detente will be reached in Osaka.