Trump's love-in with China has far to run

China's President Xi Jinping (L) and US President Donald Trump 
Making Chinese-US relations great again? The US President Donald Trump leans-in towards President Xi Jinping on his recent visit to China Credit: JIM WATSON/AFP

It was a “very, very great honour”, said Donald Trump, to visit Xi Jinping last week. The US president watched a “magnificent” military display in Beijing – all stiff-legged marching and eight-cannon salutes – before “an absolutely terrific dinner”.

During his 2016 election campaign, Trump compared China’s trade practices to “rape” and “the greatest theft in the history of the world”. Now, he says Sino-American relations are “great”. Some portray Trump’s new affection for Xi as a sign of America’s strength. Others say he is bowing before, to echo The Economist, “the world’s most powerful man”. However you look at it, whether the diplomatic mood music is nasty or nice, China and America are clearly now vying for global hegemony.

The US is still the bigger economy in dollar terms – weighing in at $18,600bn, compared to China’s $11,200bn. Adjusting for living standards, though, or “purchasing power parity”, China has been in top spot since 2015.

President Xi commands the bigger army – boasting 2.5m active personnel, rather than 1.5m in the US. But America spends $650bn (£495bn) a year on defence – outstripping China fourfold. And, crucially, the US has over 5,000 nuclear warheads and 19 aircraft carriers, compared to 300 Chinese nukes and just two aircraft carriers, the second launched earlier this year.

While Trump is buffeted by politics, though – often unable to get his way in Congress – Xi is a dictator, so can broadly do what he wants. That’s why China’s leader is sometimes viewed as more powerful. And Xi, in particular, has sought to consolidate his grip, removing rivals under the guise of an anti-corruption programme.

As China forges ever-closer ties with India, Russia and across Africa, it is taking on a global leadership role

Last month, he even wrote himself into the Chinese constitution, inviting comparison with Mao Zedong. As such, Xi is undoubtedly China’s most powerful leader in a generation.

Trump has responded warmly, calling Xi “the King of China”. He has also become more emollient on trade. Instead of lashing out, as he did on the campaign trail, blaming China for “stealing American jobs”, Trump has praised his hosts for depreciating their currency to gain competitive export advantage. “Who can blame a country for taking advantage of another country for the benefit of its citizens?” gushed Trump, as Xi looked on smiling. “I give China great credit,” he added, blaming America’s massive $347bn trade deficit with China on previous US governments. 

Trump also avoided discomforting Xi. Three previous US presidents publicly raised human rights issues and demanded the Chinese premier take questions alongside him from independent journalists. Not this time. 

Trump supporters would say his approach has yielded results. Some $250bn in US-Chinese business deals were signed during the trip. When it comes to North Korea, too, there were signs of progress. In July, Pyongyang conducted two missile tests proving that the American heartland was within reach of its nuclear weapons. In response, the US flew two B-1 bombers over the Korean peninsula, with Trump directing his ire at Beijing. “I am very disappointed in China,” he tweeted. “They do NOTHING for us with North Korea, just talk. We will no longer allow this to continue.”

Since Trump began his Chinese charm offensive, Xi has gone further than ever in sanctioning North Korea and backing the US-led pressure campaign. Crucially, China has signed new UN Security Council sanctions against Pyongyang, but only after the White House delayed launching an investigation into alleged Chinese intellectual property theft.

China poses many threats, of course. There is much uncertainty surrounding Xi’s ability to deliver as an economic reformer. Will he finally liberalise China’s semi-closed financial markets, while dealing with excessive leverage and a bloated shadow banking system? Chinese growth has averaged an astonishing 9pc a year for four decades – and is on course for a still punchy 7pc this year. But if China’s old guard reasserts its muscle under Xi, stymying reform, doubling down on debt, state patronage and policy distortion, we could see a systemic crisis. Such is China’s size, and its links to global trade, that a sharp capital outflow and a plunging yuan would deliver a serious jolt to global markets.

Trump seems to have calculated that China’s large bilateral trade surplus with the US gives Beijing an incentive to bargain. Washington is extremely vulnerable, though, to a Chinese retort against US corporates doing business in China.

Xi could also initiate further depreciation, turning the competitive screw, or – much worse – start unloading, or threatening to unload, China’s vast holdings of US Treasuries. America is the world’s most indebted country and China is its biggest creditor. An aggressive move in global bond markets and Beijing could send yields on US debt spiralling, threatening America’s recovery. 

The emerging markets now account for 55pc of world economy and rising. As China forges ever-closer ties with India, Russia and across Africa, it is taking on a global leadership role. China – and the economies across south and central Asia associated with its One Belt, One Road initiative – will account for a massive 46pc of global growth over the next five years, according to the economist John Ross. The US and EU numbers are, respectively, 24pc and 10pc. 

The four largest emerging markets control between them an estimated $4,150bn of foreign exchange reserves, much of it held in the form of the IOUs of West­ern governments. G7 nations control just $2,100bn of such reserves, falling below $900bn without Japan. The weight of global growth and raw eco­nomic power is shifting eastwards. Trump’s new conciliatory approach to China is raising Western eyebrows. But there’s plenty more to come.