As Wall Street’s rally shows signs of fatigue and gold loses some of its shine, many are connecting the dots with events taking place 11,000 kilometers away.
The slowdown of China’s economy is attracting intense interest in Manhattan’s boardrooms.
Although the largest economy in Asia is not faltering, the 4.8% growth rate in the third quarter — the lowest this year — is sending warning signals everywhere.
Even the positive indicators come with (serious) asterisks.
For now, external demand keeps China within reach of this year’s target of 5% economic growth.
However, amid rising trade tensions — including a threatened 130% tariff from the USA — it’s easy to understand why many see China as one of the biggest downward risks to growth in the USA — and all Western economies.
Stephen Miran, an economist with a prominent role on Trump’s team, firmly belongs to that category.
The newest member of the Federal Reserve’s Board is not only worried about the deflation that Xi Jinping’s economy is exporting — due to its excess production capacity and moderate consumption.
He also fears the economic consequences if Beijing wields its control over rare metals as a weapon in retaliation for U.S. President Donald Trump’s tariffs.
“I had operated under the assumption that uncertainty had dissipated, and therefore I felt more optimistic about certain aspects of growth prospects,” Miran told CNBC.
“Now, potentially, that is coming back because the Chinese are backing away from deals that had already been concluded.
So, I believe it is our duty as policymakers to consider introducing a new extreme risk (tail risk, from the ‘tail’ of the probability distribution curve — that is, extreme, improbable but very serious events).”
In this context, Miran, who served as Chief Economic Advisor to the White House under Trump, supports new interest rate cuts totaling 125 basis points, notes William Pesek in his article in the Asia Times.
“To the extent that I consider policy to be quite restrictive right now, that makes us vulnerable to shocks,” Miran noted. “If you experience a shock when policy is too restrictive, the economy will respond differently than it would if policy weren’t so tight.
I believe it is now even more important than I thought a week ago to move quickly toward a more neutral stance,” meaning a swift end to the Federal Reserve’s monetary tightening process.
Analysts at Capital Economics observed that “deflation in China has strengthened deflationary forces in developed economies in recent years, reducing the Consumer Price Index (CPI) by around 0.3–0.5% on average.
Tariffs will likely reverse this trend in the USA.
But elsewhere, policymakers will likely seek to maintain some of the benefits of lower prices for consumers while simultaneously protecting key sectors from growing competitive pressures.”
The monster of over-indebtedness
However, the real danger may be that China loses its balance at a time when the USA is not exactly on a positive path.
Having the two largest economies in the world — with a combined annual economic output of $50 trillion — in confrontation benefits no one.
Particularly not the developing countries, whose total debt amounted to $109 trillion in the second quarter, according to the Institute of International Finance (IIF).
Moreover, global debt reached a historic high of $337.7 trillion at the end of June, partly as a result of the easing of global financial conditions, as many central banks became less aggressive.
The IIF reports that global debt levels increased by more than $21 trillion in the first half of 2025, with China, France, the USA, Germany, the United Kingdom, and Japan recording the largest increases.
“The scale of this rise was comparable to the surge observed in the second half of 2020, when pandemic-related policy measures led to an unprecedented accumulation of global debt,” the IIF stated.
Looking ahead, IIF economist Emre Tiftik observed that the increase in military spending will further strain government budgets amid escalating geopolitical tensions.
However, Tiftik also noted that bond market reactions are more chaotic in the more advanced economies.
Indicatively, 10-year bond yields among G7 nations are now near their highest levels since 2011.
The only constant… Instability
The instability of the world’s largest economies is hard to ignore.
Employment in the USA is slowing alarmingly.
Goldman Sachs economist Jan Hatzius believes that U.S. growth of 3.8% in the second quarter and 3.3% in the third quarter may be overestimated given weakening employment.
“Household surveys are already very negative,” said Hatzius.
“For example, the expected change in the unemployment rate over the next year has never been this bad outside recession periods since the University of Michigan began asking this question in 1978.”
Hatzius added that “since labor market indicators often provide more reliable information about current growth than preliminary GDP estimates, this weakness reinforces our belief that second and third quarter data send an overly positive message.”
In the Eurozone, industrial production weakened in August, amid growing uncertainty among manufacturing firms hit by the global trade war.
Output fell 1.2% month-on-month, compared to a 0.5% rise in July.
“The outlook for industrial production remains poor for the foreseeable future,” said Andrew Kenningham, Chief Europe Economist at Capital Economics.
August reinforced the view that the Eurozone economy barely grew in the third quarter, showing a slowdown similar to that of the second.
Japan’s double trap
Japan “is trapped between a deteriorating outlook for its trade relations and fragile domestic demand,” said Moody’s Analytics economist Stefan Angrick.
“Exports and industrial output are falling as tariffs hit and foreign competitors pressure manufacturers.
Domestically, persistent inflation and weak wage growth are undermining households’ purchasing power.
And the government is delaying major investment spending.”
Inflation will eventually ease, but slowly, because producers continue to gradually pass cost increases on to consumers, Angrick noted.
This will delay real wage growth and, with it, a meaningful recovery in domestic demand.
Policy uncertainty both at home and abroad adds to concerns.
“Overall,” he notes, “Japan’s economic outlook appears difficult.
Trade tensions, geopolitical rifts, and the potential for new disruptions in supply chains remain at the top of the risk list.”
China’s problem
China’s ambitious growth target of “around 5%” this year increasingly faces one problem named Trump.
Every time the U.S. President raises tariffs on mainland Chinese products — 130%, at least for now — it becomes harder for Xi Jinping to avoid the fate of Beijing in 2022 and 1990, the only two times in the last 35 years that China missed its GDP growth target.
There are reasons to believe that Xi may achieve the seemingly impossible in 2025, provided the Communist Party mobilizes a two-pronged response to Trump’s unilateral “tariff war.”
The first component is a wave of targeted fiscal stimulus to offset the strong headwinds approaching.
The second is to encourage China’s 1.4 billion citizens to save less and consume more.
The only uncertainty surrounding the first goal is the scale of the measures Xi’s team is willing to implement to boost consumption, stabilize the housing market, and end deflation. Pressure is mounting.
China’s consumer spending is generally estimated at around $7 trillion.
Annual exports to the USA are roughly $450 billion.
If Trump’s tariffs eliminate, say, half of that amount, Xi will have to rely mainly on domestic consumption to fill the gap.
That is feasible, many economists agree, provided Beijing acts swiftly and boldly.
Increased fiscal spending could be supplemented by interest rate and reserve requirement cuts.
In March, Beijing announced new fiscal measures, including a higher budget deficit target of about 4% of GDP, up from 3% in 2024.
“The broader deficit will support economic prospects, but it remains uncertain how large the fiscal stimulus will be or whether it can sustainably boost domestic demand,” warned Jeremy Zook, analyst at Fitch Ratings.
Economist Zhiwei Zhang, President of Pinpoint Asset Management, added that “deflationary pressures in China remain persistent.” Furthermore, as he says, “policy uncertainty in the USA remains elevated.”
Julian Evans-Pritchard, Chief China Economist at Capital Economics, stated that “it seems unlikely that consumption support measures will be sufficient to fully offset weaker exports.
Thus, negative consequences from excess production capacity appear ready to worsen, intensifying downward price pressures” and the deflation problem.
All this adds drama to this year’s summit of senior officials of the Communist Party of China.
The so-called ‘Fourth Plenum’ will outline development plans through 2030.
“Consumption is likely to be the centerpiece of the 15th Five-Year Plan, given the government’s ongoing emphasis on boosting spending in 2025,” said Jonathan Czin, economist at the Brookings Institution.
“But the key indicator of the leadership’s seriousness will be whether the Five-Year Plan goes beyond rhetoric, presenting a realistic plan for strengthening consumption.”
This summit could prove pivotal for Xi’s ambition to shift China decisively toward high value-added industries.
A central element of this transition is the construction of stronger social safety nets, to encourage households to spend more and save less.
Xi’s inner circle has signaled moves ranging from deregulation and higher birth rates, to subsidies for certain exports, and even the creation of a stabilization fund to support the stock market.
But the real priority must be the creation of the social safety networks that the central government and municipalities have been promising for years.
Meanwhile, China’s vulnerabilities add to the reasons why officials worldwide are preparing for downward risks as 2026 approaches — including officials at the Federal Reserve in Washington.
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