Another round of U.S. tariffs on Chinese products from the incoming Trump administration may not be Beijing’s most significant economic problem in 2025, as Chinese companies could circumvent them by reallocating production to low-cost Asian countries. Instead, it is a list of structural problems that includes the three D’s—demographics, debt, and deflation—that threaten to push China to a prolonged stagnation, counting lost decades as Japan did in trying to cope with similar problems since the early 1990s.
“There is no doubt that Chinese companies will get very creative attempting to sidestep President Trump’s promised tariffs,” Timothy D. Calkins, chartered financial analyst and co-chief investment officer at New York-based Nottingham Asset Management, told The Epoch Times via email.
“That is expected, and international coordination (voluntary or coerced) will be needed to battle these attempts.”
Dr. Ryan M. Yonk, an economist at the American Institute for Economic Research, believes a prolonged U.S.-China trade war will exacerbate China’s fundamental economic weakness but not cause it.
Demographics
Demographics, including the plunging marriage and birth rates, are at the top of the list of structural problems. According to Statista.com, the number of reported marriages dropped to a record low of 4.8 new marriages per 1,000 people in 2022, more than 50 percent below the level of a decade earlier.
As expected, the drop in marriages was followed by a similar drop in birth rates, which hit a record low in 2022. This added to the decades-long low birth rate due to the country’s one-child policy.
That has created several problems for China’s economy.
“The demographic shifts are resulting in a shrinking workforce, rising pressures on social services, and headwinds for long-term growth,” Shawn DuBravac, CEO of Avrio Institute, told The Epoch Times via email.
In addition, the shrinking labor force makes it harder for China’s economy to overcome the Lewis point. In this situation, emerging market economies run out of excess labor to power their labor-intensive industries, limiting the Middle Kingdom’s bet to become a developed country.
“China will be the first country in history to become an old country before becoming rich. Markets will shrink as costs rise—older people need health care and other associated costs for which provincial governments are ill-prepared,” Usha Haley, W. Frank Barton Distinguished Chair in International Business & Kansas Faculty of Distinction at Wichita State University, told The Epoch Times via email.
“Years of the one-child policy and a preference for male children have skewed population characteristics including gender breakdowns.”
The Chinese Communist Party (CCP) has noticed, placing the demographic problem at the top of its policy agenda. “The demographic issue has been plain to both outside observers and the CCP for at least a decade, and the CCP has made numerous attempts to increase birth rates to correct past policy failures,” Ryan said.
Debt
Next on the list of China’s structural problems is debt. Officially, the size of China’s debt is low, 83.6 percent of GDP, well below that of 255.20 percent of Japan, 122.30 percent of the US, and 87.40 percent of the eurozone.Unofficially, the size of China’s debt is anyone’s guess due to the extensive government (central, provincial, and local) ownership of banks, construction, manufacturing, mining companies, and pension funds. This web of state ownership makes the government both the lender and the borrower, as one branch of the government lends money to another branch.
Deflation
The third structural problem is deflation, which takes two forms. One is wholesale price deflation, as evidenced by a precipitous decline in the Producer Price Index (PPI), which dropped from 114.30 in May 2022 to 105.5 in October 2024.Wholesale price deflation indicates excessive competition due to imitation across companies and industries, which pressures prices and profits and constrains private investments and growth.
Then, asset deflation, as evidenced by a decline in property values and equities. The average prices of new homes in 70 Chinese cities declined at an annual rate of 5.9 percent in October 2024, following a 5.8 percent decline in September. It marked the 16th consecutive month of decrease and the steepest pace since April 2015.
Meanwhile, the iShares China Large-Cap ETF (FXI) has been down close to 27 percent over the last five years, during which the S&P 500 has gained 86 percent.
China’s three structural problems are not independent from each other. A large debt has been used to finance property purchases, inflating apartment prices and making it hard for younger people to afford to purchase a home and raise a family. Thus, debt is one of the sources of China’s decline in marriage and birth rates, which are at the core of its demographic problem.
All three problems negatively impact consumer spending, which could hurt the country’s efforts to shift from an investment-driven to a consumption-driven economy, as other emerging market economies did in transitioning to development status.
“These issues, combined with the usual negative effects of planned economies, widespread regulation, and inept management of key industries by CCP party leadership, all point to a China with weak overall economic fundamentals, where increased U.S. tariffs will add to the economic pain but will not be the primary cause of it,” Yonk, the economist at the American Institute for Economic Research, said.
Japan has encountered these problems over three lost decades, even after settling its trade disputes with the United States in the 1980s, and it has yet to return to sustainable growth.
