The Daily - A Vulnerable China Comes to the Table

Episode Date: May 12, 2025

Over the weekend, top negotiators from the U.S. and China met for the first time since President Trump rapidly escalated a trade war between the world’s two economic superpowers.Keith Bradsher, the Beijing bureau chief for The New York Times, discusses the pressures facing China, as it came to the negotiating table.Guest: Keith Bradsher, the Beijing bureau chief for The New York TimesBackground reading: The U.S. said ‘substantial progress’ had been made in trade talks with China.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. Photo: Agence France-Presse — Getty Images Unlock full access to New York Times podcasts and explore everything from politics to pop culture. Subscribe today at nytimes.com/podcasts or on Apple Podcasts and Spotify.

From the New York Times, I'm Natalie Ketroef. This is The Daily. Over the weekend, the U.S. and China met for the first time since President Trump rapidly escalated a trade war between the world's two economic superpowers. The negotiations could have huge implications for a global economy rocked by Trump's tariffs. Today, my colleague, Beijing Bureau Chief Keith Bradshaw, on the pressures facing China as it came to the negotiating table, and why it so badly needs a deal. It's Monday, May 12th.

Keith, it's nice to have you back on the show. Thank you, Natalie. Good to be back. So, we on the show have talked quite a bit about the impact of tariffs on the U.S. economy. We've talked less about the impact of tariffs on China's economy. And as we enter a new phase in this trade war where the two sides are talking to one another, it seems important to understand something you've been reporting on, Keith, which is that the tariffs present a real nightmare scenario for China.

Tell me about that. President Trump, by early April, had raised tariffs on goods from China to 145%. That stopped all but the most essential imports coming in. Why was this terrible timing for this to happen to China right now? It was because China is already struggling with several severe economic problems. The biggest of them is the housing market crisis. problems. The biggest of them is the housing market crisis. Apartment prices have plummeted 30, 40, in some cases, some cities 50% drops in apartment prices since the high of the bubble in 2021. So this has been a huge blow to the household

finances of people in China. In turn, they've stopped spending money on consumer goods. And the tax finances of people in China. In turn, they've stopped spending money on consumer goods. And the tax revenues of the Chinese government are also way down, so they've got a huge budget problem. So when you've got a property crisis and an emerging budget near crisis, that's a very bad time to have a trade war. It's interesting. I think that analysis, that reality is going to come potentially as a real surprise to

a lot of our listeners because the last time we had you on the show, we were talking about what a powerhouse China was, what an exporting superpower this country had become. And what you're saying is that domestically, the economy doesn't actually look quite that strong. That's exactly right. This is an economy built for exports, built for manufacturing dominance, built for maximizing production. But it's not a good economy at consuming. It's not a good economy at having a population that is able, willing, eager, even like many Americans to spend money and have a better life.

So what ends up happening when you have this enormous excess of production, it has to be exported or the whole system gets in bigger trouble. Basically China over the last four years has made an enormous bet that it can dominate world markets in practically everything for manufactured goods. That only works as a strategy if you can export. So that is why even though the Chinese economy now leads the world in installations of new factory robots, leads the world in the quality of the infrastructure,

it leads the world in many categories of economic strength, but it has an enormous dependence on exports. Right. A hundred and forty-five percent tariff slapped on your goods by the world's largest consumer economy will make a bet on exports look a little risky, especially if your people aren't buying things. So let's get into that, Keith. Why is that? Why is China not a good economy for consumption, as you put it? For starters, China has a tax system that is based heavily on taxing consumption, not so much on taxing income. The burden instead hits you when you try to buy anything. So they have a national value added tax.

It's like a kind of sales tax that is twice as high as the typical sales tax in the United States and covers practically everything. Whether you want to buy a car, whether you want to buy a washing machine, or even there's a heavy tax on paying your rent. Wow. So these high consumer taxes are discouraging people from spending money. But this is not just about taxes. Even more important is that China has a very modest, threadbare social safety net.

The pensions, the equivalent of Social Security in the United States, are tiny. The unemployment insurance is very modest and a lot of people don't qualify, and they actually cut back further the number of people who qualified the moment the COVID pandemic ended to make sure that they went back to work immediately. It's a little confusing, Keith. This is the Communist Party of China, right? I mean, no welfare programs, no social safety net.

How do you square that? Not much of a social safety net. There was actually even a discussion 25 years ago in the Communist Party of China on whether to drop the word communist and they decided to keep it. They decided it had a lot of historical resonance for them. But this is really a very strongly capitalist system now. For example, when I mentioned to people in China

that there is rent control in some American cities, they are stunned. The idea that any government agency would tell somebody who owns an apartment how much they can charge to rent that apartment out is startling to them. And they say that socialism, somewhat jokingly to me. The Chinese calling the American socialist is just wild to imagine. And yet it's really the sentiment. That's exactly right. Xi Jinping has denounced what he calls welfareism,

which he says might erode the work ethic of the Chinese people. What he said in a speech four years ago was, even in the future, when we have reached a higher level of development and are equipped with more substantial financial resources, we still must not aim too high or go overboard with social security and steer clear of the idleness breeding trap of welfare ism. Whoa. And because there is very little in the way of a social safety net,

people in China save a lot. In fact, they save more than anyone else in the world. The savings rate is around 40% saving two out of every $5 of their paychecks. That's a lot. That is a tremendous amount. In the United States is 4% or less. So the Chinese are just saving a ton in part because there's just very little social safety net and they're not spending that much in part because of these really high sales taxes. What are they doing with all the money they put away? Well people in China really don't have as many options as savers in most of the rest of the world.

The stock market is very risky and full of dodgy companies. The Chinese government puts very stringent limits on their ability to invest outside of China. And so the alternative has been real estate. The result was that people in China put far, far more of their savings into real estate than in most countries. Okay, here's where housing comes in. You mentioned there was this huge housing crisis. Where does that story start? If you went all the way back to the 1980s, people in China were living in very small apartments, typically.

There was a tremendous shortage of housing. Starting in 1987, China began experimenting on transferring land to private developers and having them begin to build apartment buildings and sell them to the public. And then in 1998, the government transferred millions of apartments from state-owned enterprises and local governments to the people who were living in them for almost nothing. That created a very large market. And so then by the early 2000s, you had a completely new housing market like nobody had seen before. The local governments were selling enormous amounts of land each year to developers,

and the revenues from that were immense. And that was what paid for the terrific roads, bridges, highways, high-speed rail, ports. And the developers were putting up 30-story apartment buildings as far as the eye could see. Hundreds of millions of people benefited greatly. The number of square feet per person in apartments in Chinese cities quadrupled.

All of a sudden, you didn't have to have three generations crammed into a small apartment. But after meeting a lot of those housing needs, crammed into a small apartment. But after meeting a lot of those housing needs, this turned into a speculative mania that got out of control. How so? I'll give you an example. I know a sales manager at a small furniture factory,

who even though she earns a modest salary, has ended up buying five apartments. How do you end up with five apartments, I asked her when I first met her. Right. On a small salary. Yeah. And the answer was she'd bought one, it went up.

She sold it and bought two. They went up, she sold one of them, bought two. Little by little, she ended up with five apartments sold one of them, bought two. Little by little she ended up with five apartments, all of them with mortgages. So I said to her, what is going to happen if apartment prices go down? And what did she say? She said, I don't have to worry about that. The price will always go up. Wow. That's a bet.

Well, it was a bet that worked. From the late 1980s, the price always went up. The final skyward jump in real estate prices began in 2016. The banks in China were told by the government, essentially, give a mortgage to practically anybody with a pulse. We're doubling down on construction. We want everybody buying apartments. And the housing market just went nuts. It sounds like people poured their money into the real estate market because it was really

the only option they had to get a return. And the government is making it a lot easier to get a loan. And that creates this bubble, this classic real estate bubble. So when does that bubble burst? It began to burst in 2020 and 2021 when stricter rules started to be put on these real estate developers who were taking big deposits from many families and using that money not to build the building that they promised for the deposits but to finish the previous building they promised somebody else.

It was becoming in some ways even a Ponzi scheme. The government finally got concerned about this. It began imposing tighter and tighter borrowing and spending rules on the developers. And by the second half of 2021, real estate prices were falling quickly and many of the real estate developers were starting to collapse. The real estate collapse has been devastating for families across China. In fact, people don't even really want to talk about it. It's so painful for them.

Chinese families had twice as large a share of their household net worth in real estate as in the United States. So they were really heavily, heavily invested. They didn't have much else. It was all in apartments. And then the apartment prices have gone down faster in China than they did in the United States during the 2008 to 2009 real estate crash. So the total losses on apartment value in China are now twice as big as they were in the United States in 2008-2009. Wow.

And this is coming out of the savings of a country that's not as prosperous as the United States. So to lose twice as much of your savings is just devastating. It's amazing to think, Keith, that this had an even more damaging effect than the US housing crisis did in America. We think of that as one of the worst moments economically in this country in recent history. What's the government's response in China? The government's response has been to shift the priority of government lending away from real estate and towards building lots of factories.

The government's goal is to create a lot more jobs which they want to offset the loss of jobs in the construction sector. And their hope is that if people have well-paid jobs in the factories, they will begin to have the confidence to spend again. And does it work? I mean, do the factory jobs make up for all the losses in the housing sector? The very, very heavy lending by the state controlled banking system to build more factories and other industrial sites has helped some. A minority of all workers in China are factory and other industrial workers, and they have

benefited, but for the rest of the country, they're not benefiting. The demand is weak. If you go to hotels, the hotels are mostly empty, the restaurants are closing. So workers across the rest of the economy aren't doing very well out of all of this. And so the Chinese government strategy has been to double down on building even more factories for exports. And many of these factories have not yet been finished. In many ways, it looks as though they have replaced a housing bubble with a factory bubble. Wow. China is now trying to save itself, trying to save its economy by ramping up exports

to the rest of the world. And that has real consequences for any other country with a manufacturing sector, whether it's Brazil or Mexico or Germany or or South Korea, or the United States. We'll be right back. Keith, the impression that I'm left with is that as these Trump officials met with their Chinese counterparts this weekend, they confronted an adversary that was actually quite vulnerable, facing a lot of pressures of its own internally. So take me through a little bit what China had done up until this weekend to at least try to mitigate some of the damage of Trump's tariffs.

China has taken a lot of little actions, but the steps they've done haven't really fundamentally changed the situation. I'll give you some examples. They've cut interest rates a little bit. They've given the banks the freedom to lend more, but that doesn't make such a big difference when many companies are so worried about where they're going to be able to sell their products. Not in China where consumption is weak, and now not in the United States with the tariffs. The Chinese government is doing a little bit to strengthen the threadbare unemployment insurance

scheme. But many, many factory workers don't qualify for that at all. So that doesn't really solve the problem either. What you have not seen is a broad consumer stimulus program like we saw, for example, in the United States during the COVID pandemic, when the United States sent checks out to everybody. And that's because the Chinese government, to some extent, doesn't have the money. It's really facing very weak tax revenues. So all of these steps haven't been the really big measures

that would move the needle at a time when the key engine of China's growth, exports plus construction of factories to produce those exports, is under threat. What about China's direct response to the United States, the actions it's taken targeting the US economy? What do you make of those? China has put tariffs of 125% on American goods since mid April But the United States doesn't sell that much to China that's one of the reasons there's such a big trade imbalance

right China has tried even harder to switch purchases of agricultural goods like soybeans to other countries like Brazil. But to some extent that means American farmers just shipped to the other countries that Brazil used to supply instead of shipping to China. The most important step by far that China has made that could really create problems for a wide range of American manufacturers from aircraft manufacturers like Boeing to defense contractors like Raytheon and Lockheed Martin to automakers like General Motors and Ford is to halt the export of rare earth magnets and

that has already become a significant problem for many American companies and for that matter, even for European companies. But there are also big risks for China. The risk is that these big companies will decide that they can't trust China to be providing key components. That's the kind of disruption that complicated assembly plants in the West can't really handle. And if corporate boardrooms react to this interruption in rare earth magnet supplies by saying we're not going to buy from China anymore, that would be a disaster for China and a disaster for the Chinese families that depend on working

in factories, making these components to earn their livelihoods. Right. I mean, it sounds like there's these limits or potential obstacles to many of China's retaliatory measures here. I'm wondering, what about China turning around and selling to the EU, you know, the world's other real major consumer economy? I mean, the US is an important, perhaps the important consumer, but it is just one country. That's true.

The difficulty for China is that the European Union has been increasingly worried about the tsunami of goods coming out of China and has been moving to impose its own tariffs on those goods. You've seen that most noticeably already with Europe imposing tariffs on electric cars from China. And there is really an international move to raise tariffs on goods from China by countries that have industrial sectors and worry about becoming entirely reliant on China. So Brazil, Turkey, India, as well as the European Union have all moved to raise their tariffs. They just haven't done it in quite such an in-your-face style as Trump has. Right. These countries agree with some of the premise, if not the execution, of these

Trump tariffs. And it sounds like that may contribute to the bind that China could face, where it could become really difficult to avoid the pain of these tariffs. And so can you help me understand what that looks like, Keith, what that pain means both for the Chinese government and for the Chinese people? What I've already seen on the ground, for example, in Guangzhou, the commercial hub of southeastern China, is that some factories are already closing and the longer tariffs continue, particularly if they were to continue at high levels, the more factory closings, the more layoffs you would see. So China

has a big economic incentive to reach some kind of resolution, longer-term resolution, longer-term closure on this issue. However, while China may be experiencing more pain in the United States, China also has more ability to endure pain than the United States. How do you mean? Well, China has a very stringent security apparatus that has crushed dissent already in many ways. If you had these kinds of layoffs in other countries in the West, you would have large-scale protests by workers and in particular by labor unions.

China has no independent labor unions. China has no independent labor unions. China is quick to detain any workers who try to organize any independent protests. China heavily, heavily censors social media and blocks access to overseas websites so as to keep a very tight grip on the information that most people in China are able to access. And it tamps down or silences any discussion of job losses and economic pain and presents the whole dispute with the United States and with the world in very nationalistic terms. So through this spring, what we've seen has been rhetoric from China about how it would not bow down to or kneel before the United States. But China nonetheless decided to go ahead with the talks this past weekend, even though previously it had said it wouldn't

even talk to the United States unless the tariffs were removed first. Right. I wanted to ask you about that, Keith, because I hear you that while this pain is there, Beijing is doing everything possible to hide it from the world, to hide it from its own people, but the pain still exists, right? And I have to imagine that those dynamics are part of what potentially pushed China to the negotiating table this weekend. It's clear that they are highly aware of what the populace is experiencing on a day-to-day level. They

keep extraordinarily detailed information on, for example, how many people are going home from the factories and not coming back into the cities. And the last thing that China wants is for a repeat of the kind of public protests by workers and others that you saw in late 2022 against the COVID zero policies. Now if anything, many people in China have even more to be upset about because they've lost much or all of their life savings in the bursting of the housing bubble. And now they have faced through this spring job losses as exports declined to the main buyer of Chinese goods. Purchases by the United States have been what have really kept the Chinese economy going for the

last several years through this housing bust and the tariffs affected the extent to which that gravy train could continue for China. And so this has been a genuine worry for the Chinese leadership. So as these negotiations progress, what do you think is the best case and worst case scenario? Best case and worst case scenario? Best case or worst case for whom? Well, I'm wondering actually whether there is a best and worst case for both sides. Is there a compromise here that could work?

There are partial compromises that would work. For example, some reduction in tariffs makes sense for both countries because the tariffs right now are so high that they're almost at trade embargo levels. Right. But the difficulty is that the two sides have fundamentally different interests that are very hard to reconcile. The United States is saying that it refuses to be the main market for ever rising Chinese exports and would like to strengthen what's left of its industrial base and become a little bit more self-reliant

or at least reliant on countries other than China, countries that are not engaged in big military buildups aimed at the United States. On the other hand, China has a very strong desire and interest in ever rising exports. China didn't spend $1.9 trillion extra over the last four years on factory construction, factory robots, other automation, and so forth for nothing. They did that because they wanted to be able to sell all the goods coming out of these newly built factories that I see everywhere all the time as I travel around China.

To be as dominant as possible. They want to dominate as many markets as possible because they say China is the most efficient mass production place in the world and therefore it should be allowed to be the world supplier of practically all manufactured goods. And so in that environment, even though we may see short-term deals that reduce the pain on both sides of having very steep tariffs. The two sides have such different interests that it will be very difficult to find truly lasting solutions. Keith, thank you so much. Thank you, Natalie.

We'll be right back. Here's what else you need to know today. On Sunday, a fragile truce between India and Pakistan appeared to be largely holding after four days of escalating conflict between the two nuclear-armed neighbors. Earlier in the weekend, President Trump had announced the two sides had agreed to a ceasefire with the help of U.S. mediation. India has conducted strikes inside of Pakistan in retaliation for a massacre by armed militants that killed more than two dozen Indian civilians in the disputed territory of Kashmir.

And transportation secretary Sean Duffy warned that more U.S. airports could face disruptions as the busy summer travel season approached. I'm concerned about the whole airspace. Now I think the lights are blinking, the sirens are turning and they're saying, listen, we have to fix this because what you see in Newark is gonna happen in other places across the country. Duffy said he'd meet with the leaders of major airports to create a plan for scaling back flights at Newark Airport, which has struggled with radar outages and staffing shortages.

Today's episode was produced by Mary Wilson, Mujzadeh, Will Reed, and Shannon Lin. It was edited by Lisa Chow. Research Help by Susan Lee. Contains original music by Diane Wong, Rowan Niemesto, and Pat McCusker. And was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsberg of Wonderly. by Jim Brunberg and Ben Landsberg of Wonderly.

That's it for the daily. I'm Natalie Ketroff. See you tomorrow.