‘Everything is grinding to a halt’: China digs in after Trump shock

 The Great War of China. Dollar wreckoning. This memes war.

You didn’t have to look far for puns last week after Donald Trump hiked tariffs on China to 145pc and accused Beijing of a lack of respect.

China’s commerce ministry hit back hard, branding the levies “a joke” and imposing its own tariffs of 125pc, blowing up half a trillion dollars of trade in the space of a week.

But on the ground in Shenzhen – China’s high-tech epicentre linking Hong Kong to the mainland – tariffs are no laughing matter.

Winston Xiao is one of the thousands of business owners here increasingly nervous about what lies ahead.

“Right now we’re having conversations with our US clients,” says Xiao, who owns an electrical goods business. “Most of them are withholding purchases, so we are adjusting by downsizing, scaling and seeing how long this trade war continues.

“Buyers are not going to commit to purchasing goods when they don’t know how much they’re going to have to pay in two weeks or two months. So the uncertainty is basically grinding everything to a halt.”

Xiao, who did not want to use his full name, is paranoid about what might happen next. “The last thing I need is being flagged by US border and customs for saying anything that might not line up with White House policy,” he says.

But he is also defiant. He is one of many Chinese business owners who say Trump’s blame game is unjustified.

“People like me have been doing business with the US for decades. All the offshoring done by American companies during that time was for profit,” he says.

“They take advantage of China’s low cost, hard work and ingenuity, they squeeze our margins in order to pad their quarterly profits, and now they’re blaming us for their socioeconomic problems? That’s just hypocrisy.”

Xiao, who generates more than half of his company’s revenues in the US, adds: “Let me give you an example. Let’s say a manufacturer sells their product for $10 [£7.60]. About $6.50 would be material; $1.50 for direct labour; that leaves $2 as gross margin to cover overhead rent, utilities, etc. By the end, the factory will be lucky to make 50 cents, net.

“That same item lands in the US for about $12.5 – at least, before tariffs – to cover shipping and insurance, then the importer sells it to a retailer like Walmart or Amazon for about $22. Walmart then retails the same item at $49.99.

“Tell me, who’s taking advantage of whom in this case?”

There are already signs that Trump realises that shifting away from the world’s factory will be tougher than he first thought.

In another major climbdown by the White House, electronics such as smartphones and laptops will now be excluded from reciprocal tariffs – exempting roughly 23pc of US imports from China from steep levies.

However, despite the concession, Xiao says his fellow factory owners are prepared to hang tough. “Among my peers in the manufacturing sector, they think Trump is a bully. And you cannot back down to a bully.”

The word “bully” has become a common term used to describe Trump and the US on Chinese social media sites, although censors were quick to bury any posts mentioning the high tariffs imposed on Beijing while drawing attention to recent food shortages.

“America is fighting a trade war while begging for eggs” was one popular hashtag started by CCTV, China’s state broadcaster.

Americans ‘really vulnerable to economic disruption’

Andy Xie, a former chief China economist at Morgan Stanley who is now based in Shanghai, insists the country will weather the storm.

“During the pandemic, the Chinese government didn’t hand out any money and people came through,” he says. “The thing is, Chinese people have savings. Look at the US: the national debt rose by 30pc of GDP to handle the pandemic.

“Chinese households don’t have short-term debt like credit cards either.

“On the other hand, many US households live pay cheque to pay cheque. They don’t have savings. That’s why, when there is a crisis, they need a handout from the government, meaning they are really vulnerable to any economic disruption.

“And then you look at the retirement savings, they are mostly in the stock market. I think it’s pretty obvious China will be pretty stable throughout this process.”

Others are less confident.

Goldman Sachs predicted last week that US tariffs would result in a 1.7 percentage point hit to GDP this year, dragging growth below 3pc for 2025 in the absence of any government stimulus measures.

Capital Economics believes China’s shipments to the US will more than halve over the coming years, reducing China’s GDP “by somewhere between 1pc and 1.5pc depending on the extent of re-routing”.

Both Goldman and Capital Economics believe stimulus measures will be unveiled shortly, which the Wall Street giant says will help China to bank growth of 4pc this year, compared to its previous forecast of 4.5pc. However, this is still shy of Beijing’s 5pc target.

Zak Dychtwald, founder of the Young China Group, a Shanghai-based think tank and consultancy that works with some of the biggest foreign companies operating in China, also believes the economy faces pain ahead.

“Acceptance is the right word,” he says. “I don’t hear despair. For average people on the street, it actually doesn’t feel significantly worse than a week ago.

“The restaurants are still full, people are still going for walks in the park. But the business community only sees this as destructive.”

“I have already heard of companies preparing to furlough workers in the next week or two, particularly those companies that primarily sell things to the US. Furlough is not a word I encountered often – even during Covid – but I encountered it twice today.”

Despite this, Li Daokui, at Tsinghua University, says China is unlikely to back down.

“First of all, people here say Trump is crazy,” he says. “Secondly, he backed China into a corner. And third, people now expect stimulus policies in the coming days.

“Trump understands the US, but he needs to understand the Chinese side. And the Chinese side believes he is a bully. And China is not a small country with a short history. We will fight back.”

However, he adds that fears of money fleeing the country mean it is unlikely that a fightback will come in the form of slashing interest rates or printing money.

While Beijing has allowed the yuan to drop slightly against the dollar, Li – a former central bank adviser – adds that a big devaluation is not on the cards.

“Devaluation may easily trigger momentum for further devaluation, which in turn will trigger capital flight,” he says.

He also believes China is not prepared to hit the so-called “nuclear option” by rapidly selling its vast stockpile of US treasuries.

“I believe that policymakers are super cautious because, frankly speaking, selling US Treasury bonds would really hurt the US and create a bigger problem for everybody,” he says.

“If this is a war, the two sides are using conventional weapons. I don’t think anybody wants it to go nuclear.”

Li has been lobbying the government for more fiscal stimulus in the form of more generous subsidies, in order to get China’s cautious consumers spending again.

He said one obvious policy to ditch a rule that requires people to scrap their motorcycles every 13 years or 76,000 miles to buy a new one. “That would bring forward 1 trillion of renminbi [£100bn] consumption, because they would ride their motorcycles on long trips. They would buy more knowing they could hold on to their bikes. One trillion is worth 0.6pc of GDP.”

Li is confident that a deal between the countries will be done eventually. “The two sides know each other very well. They will quietly negotiate so that they come up with a solution that allows both sides to tone down.”

Others are warning that the trade war will push China even further down the road of seeking technological supremacy.

Economist Keyu Jin says that just as the “China shock” pushed the US out of low-end manufacturing, the “Trump shock” is propelling China to reallocate resources into higher-value, advanced technologies that compete directly with the US, including DeepSeek – the budget AI tool that stunned global markets earlier this year.