More is at stake for China’s economy than America’s this week

This week, China’s economy stands on shifting ground, hinging on the U.S. presidential election. Analysts believe that Beijing’s upcoming stimulus package could expand significantly depending on who wins.

While China’s standing committee of the National People’s Congress (NPC) wraps up its meeting on Friday, just after the U.S. election results come in, everyone is waiting to see how China’s economic strategy will adjust to the new American leadership.

The NPC’s meeting is expected to announce fiscal support to offset China’s mounting economic challenges. Last year’s meeting saw China push up its fiscal deficit—an unusual move at the time. This year, it is faced with tougher choices.

If Donald Trump takes office, Nomura’s China economist, Ting Lu, predicts that China’s stimulus package could be 10-20% bigger than if Kamala Harris wins. Lu’s insight is grounded in Trump’s aggressive stance on trade.

Trump has threatened a 60% increase in tariffs on Chinese imports—possibly even higher, at 200% in a worst-case scenario. This raises the stakes for China as it would have to boost its internal economy to counteract the loss in trade.

For Harris, the outlook isn’t as extreme. As vice president, she’s supported measures that restrict China’s access to cutting-edge tech but hasn’t pushed for the same tariff hikes. That means less immediate pressure on China’s exports, but the tech limitations would still impact China’s long-term growth strategies.

China’s stimulus size and trade pressures  

China’s economy has a few bright spots, but exports have been critical in propping up a real estate slump and sluggish consumer demand. If Trump gets elected and doubles down on tariffs, exports will likely take a hit. To balance this, Zhu Bin, chief economist at Nanhua Futures, believes China would need an even larger stimulus package.

Zhu, speaking in a recent presentation, stated, “If Trump wins the election, China’s domestic stimulus will only be larger, not smaller.” He anticipates Trump has better odds of winning and sees this as putting downward pressure on the Chinese yuan against the dollar.

The likely impact of a Harris win is less clear-cut. Political analysts suggest that China’s leaders may prefer her approach due to its predictability. Liqian Ren, who leads quantitative investment at WisdomTree, shared her view: “Probably from China’s view, a potential president Harris makes it easier to expect what policies are likely coming.”

Ren argues that under Harris, China could avoid extreme tariff hikes, although tech limitations would still push Beijing to increase domestic innovation.

China’s tech sector has already faced substantial obstacles, especially under the Trump and Biden administrations. Harris might continue in that direction, pressing China to focus on self-reliant technology upgrades.

However, according to Ren, Beijing’s priority is technological independence. This internal focus could mean that large-scale stimulus remains limited, despite the competitive pressure from the U.S.

While Beijing’s stimulus approach will vary depending on the election outcome, Ren notes another important factor: stock market volatility. China’s stock market swings could push Beijing to boost stimulus to boost economic confidence.

“Market volatility in China, but not the United States, is likely to make China feel more obligated to counter this volatility,” she explained. Unlike three or four years ago, the impact of stock market fluctuations now weighs more on China’s overall economic outlook.

Chinese President Xi Jinping recently called for stronger fiscal and monetary policy support to prevent further declines in the real estate sector. However, despite interest rate cuts from the People’s Bank of China, the Ministry of Finance has yet to release detailed stimulus measures.

Finance Minister Lan Fo’an hinted at a potential increase in the deficit last month, but final decisions require approval processes that slow down any immediate announcements.

How large will the stimulus be?

There’s speculation about the potential size of this year’s stimulus. Some analysts forecast additional debt issuance in the range of 10 trillion yuan over the next few years, according to a Reuters report.

The NPC hasn’t committed to specific figures, but Zong Liang, chief researcher at the Bank of China, expects a minimum of 4 trillion yuan—matching the 2008 financial crisis relief. He suggests the deficit could go beyond 4%, exceeding China’s current target of 3% for the year.

A report by WisdomTree points out that regardless of the election results, the anticipated stimulus numbers are converging around similar estimates.

According to Ren’s analysis, projections range between 10 trillion yuan spread over several years and 2 trillion yuan in a single year, averaging around 2 trillion yuan annually.

However, analysts argue that focusing only on top-line figures misses the broader picture. Local governments have enforced tax collection strictly in some areas, discouraging business activity.

Ren explains, “Local authorities are doing a lot of things that actually counter stimulus.” She suggests that these local policies could limit the overall impact of central government stimulus.

Numerous companies in China reported receiving back-tax notices this year, some dating as far back as 1994. Local governments, once heavily reliant on revenue from land sales to real estate developers, now face tighter budgets.

The finance ministry has made it clear that it’s prioritizing local debt issues. Analysts think any extra stimulus will likely support banks, rather than provide direct aid to consumers.

Some consumption support could come indirectly through property sector assistance, according to Citi analysts. However, they believe more decisive moves to stimulate consumer spending might only happen if tariffs worsen. They suggest that more aggressive consumer support could become a realistic choice if the U.S. implements harsher tariffs on Chinese goods.

The American economy’s growth mask

Meanwhile, the American economy appears strong on the surface, but cracks are visible. The U.S. has enjoyed nearly 3% growth for nine consecutive quarters, attracting foreign investment that’s pushed its global stock market share above 60%—a record high.

Despite these figures, American voters remain wary of their economic futures. The U.S. economy’s growth, analysts argue, is propped up by rising wealth for the wealthy and booming corporate profits, with little benefit for ordinary citizens. As wealth disparity widens, the richest Americans drive discretionary spending, leaving less for the rest.

According to Oxford Economics, America’s spending gap is now at its widest, with the bottom 40% accounting for 20% of spending while the richest 20% account for 40%. Essentials like food consume most budgets, leaving little room for extras.

Consumer confidence, which plunged during the pandemic, has only bounced back for the wealthiest third of the population. The rest are still struggling, with debt rising and optimism limited.

Financial markets have added an eye-popping $51 trillion to U.S. wealth this decade, most of which went to wealthy millennials, widening the wealth gap.

The economic disparity doesn’t stop at individuals. Corporate America is also seeing the rise of a small elite. The ten largest companies now represent 36% of the U.S. stock market’s value—the highest since records began in 1980.

Stocks of the largest firms trade at staggering multiples compared to smaller companies, the most significant difference since the early 1930s. This concentration of power creates anxiety for small businesses and signals an unsustainable trend, as small business confidence hovers at levels usually only seen during recessions.

Analysts largely view dominant tech companies as beneficial for the U.S. economy. Massive capital flows drive growth and justify soaring stock prices. In the 2010s, foreign investment in U.S. stocks averaged around $30 billion annually, but this year, it’s expected to hit $350 billion.

Booms typically rely on private sector debt, but this time, government borrowing has taken the lead, with the deficit now topping 6% of GDP. Public debt is surging, up $17 trillion in the last decade.

This borrowing has turbo-charged corporate profits, a phenomenon linked to a century-old economic principle, the Kalecki-Levy equation, which ties government deficits to private savings and corporate profits. This has been especially true recently, with rising deficits fueling record corporate earnings.

America’s borrowing binge and global risks

Democrats and Republicans rarely agree, but both sides have brushed off concerns about the growing deficit, which could rise further regardless of Tuesday’s election result. With capital inflows at an all-time high, some see little reason to stop borrowing.

Yet the return to higher interest rates could spell trouble. Two years ago, the era of zero-interest rates ended, and “bond vigilantes” have since reemerged, pushing back against fiscal irresponsibility.

These market forces have already punished smaller economies, moving from frontier markets to emerging and now developed markets like the UK and France.

Though demand for the dollar protects the U.S. for now, history shows no nation is immune forever. Rising deficits are inflating America’s growth, but with interest rates ticking upward, the U.S. could face a hard reckoning.

Empires that can’t sustain their debts often collapse, and the next American president could be dealing with this stark reality sooner than expected.