As one of the largest holders of US government debt, China has often been quick to criticise US financial decisions or policies that it perceives as detrimental to its interests — such as highlighting the role of America’s “toxic financial products” in the 2008 global financial crisis.
With an eye on the value of its US assets, China’s concern centres on the value of the dollar and the risks of a US debt default.
Just six months into Donald Trump’s second term as president, the dollar has slipped to a three-year low against a basket of currencies of the US’s major trading partners. And the One, Big, Beautiful Bill Act (OBBBA) passed by Congress last week is set to add an estimated $3.4-trillion to America’s $37-trillion federal government debt over the next decade.
This prompted Ray Dalio, billionaire founder of the world’s largest hedge fund, Bridgewater Associates, to warn that he is “confident that the [US] government’s financial condition is at an inflection point”. If not dealt with now, debts will build to levels where they cannot be managed without “great trauma”.
And yet China has remained largely silent. State media has limited observations to the “increasing polarisation” of US politics but has otherwise refrained from publicly criticising Trump’s signature piece of legislation.
The most obvious reason for China’s uncharacteristic restraint is that Beijing is already struggling to revive economic growth. It faces sluggish consumer spending, a real estate sector in crisis and declining foreign investment. It can ill afford an extended trade war with the US, which remains its largest export market. Having successfully de-escalated trade tension earlier this year and negotiated a fragile truce, Beijing has little to gain by antagonising Trump.
More importantly, Chinese authorities may have concluded that the economic policies of Trump’s second term in general, and the measures included in the OBBBA in particular, look set to undermine the US’s long-term growth potential.
Of particular concern in the OBBBA are the cuts of more than $1-trillion from Medicaid and nearly $300bn from food benefits over the next 10 years. The Congressional Budget Office estimates that as a result of these cuts, 11.8-million more Americans will lose access to health insurance, while some rural hospitals and nursing homes will have to close. And another 3-million vulnerable Americans will no longer qualify for food stamps.
Aside from the questionable morality of partially funding tax cuts by slashing welfare spending, the likely impact of cuts to health insurance and food assistance will be a long-term economic cost by reducing both the size and productivity of the US workforce.
The negative impact will be worsened by the OBBBA’s focus on mass deportation. It provides for an additional $350bn for Trump’s border and security agenda, including the hiring of 10,000 new Immigration & Customs Enforcement officers and creating 100,000 beds in migrant detention centres — with the aim of deporting a million people per year.
The surge in US immigration over the past three years has been a net positive for the US labour force, with economists at Barclays estimating that migrants filled about 75% of the average private job gains in the US over the past two years. This translates to roughly 180,000 new jobs each month, with immigrants taking most of those positions, particularly in agriculture, construction and services.
The dramatic drop in immigration this year, coupled with the steady ageing of existing workers, could result in labour shortages and rising wages. That could muddle things for the US Federal Reserve. A slowdown in job creation could be the result of a weakening economy or fewer available employees — or both. A shrinking labour force could add to price pressures from tariffs, further complicating the Fed’s task of determining the appropriate timing of interest rate cuts.
The real economic cost of the OBBBA will be the damage it is likely to cause to future growth, as the Trump administration takes a sledgehammer to the country’s global competitive edge in fields such as renewable energy, AI and quantum computing.
The US National Science Foundation (NSF) funds much of the fundamental research at US universities. It provides support for the early-stage research that underpins future tech advances and US competitiveness. Research by the Fed estimates that government-backed research from the NSF and other agencies has delivered an average return of 150%-300% over the past 75 years.
Yet Trump’s bill includes a 56% cut to the $9bn NSF budget and a 73% reduction in staff and fellowships. Economists warn that cutting federal funding for scientific research could, in the long run, damage the US economy by an amount equivalent to a major recession.
China is set to become the world’s first ‘electrostate’, with a growing share of energy coming from increasingly renewable electricity
However, it may be Trump’s decision to double down on fossil fuels that proves most destructive.
Cheap, renewable energy is acknowledged to offer a path to address climate change, improve global health and create new economic opportunities. The renewable energy sector is rapidly growing, creating jobs and reducing the costs of energy — which, as noted in a recent New York Times article by Thomas L Friedman, is increasingly important “as the world enters an era of energy-intensive AI”.
What Trump’s OBBBA makes clear is that the US plans to rely on oil, gas, coal and nuclear to meet its growing energy needs. To achieve this, the act phases out $488bn in renewable energy subsidies, while providing incentives to fossil fuel industries, including giving the oil, gas and coal industries historic access to federal lands.
The one major Biden-era tax credit the act retains until 2036 is for other lower-emissions technologies including nuclear reactors, hydroelectric dams, geothermal plants and battery storage.
In contrast, China — which lacks easily accessible oil and gas of its own — is betting on cheap, renewable electricity generated by its own affordable hi-tech solar panels and turbines. The shift to renewables will eliminate China’s dependence on imported fossil fuels from politically unstable regions, as highlighted by the recent Israel-Iran war, which threatened Iran’s oil exports to China.
In 2000, China produced just over 1,300 terawatt-hours (TWh) of electricity while the US produced nearly 3,800 (a terawatt-hour is equal to a million megawatt-hours). Today, China produces over 10,000TWh while US output has increased by just 13% to 4,300. Initially, China’s electricity growth came from expanded coal-fired generation, but in recent years production has shifted to renewable sources, which are cheaper and quicker to build.
Ember, an independent global think-tank, estimates that China is electrifying its economy at a rate of 10 percentage points a decade. At over 30% of final energy consumption, China is well ahead of both the US and the EU, where the proportion of electricity in total energy use has remained unchanged at about 22% in recent years.
This, according to a recent Financial Times article, means that China is set to become the world’s first “electrostate”, with a growing share of energy coming from increasingly renewable electricity.
While the US could generate additional electricity using abundant natural gas, there is a five-year supply chain backlog for new gas turbines needed to convert gas to electricity.
Energy Innovation, a nonpartisan climate policy think-tank, estimates that US reliance on fossil fuels will limit its ability to electrify energy, depriving America of 340GW of electricity over the next decade. It also calculates that undermining the US renewable energy industry will cause wholesale electric power prices to increase by about 50% by 2035, while about 830,000 renewable energy jobs will either be lost or not created by 2030.
As the cost of renewables keeps falling, the US decision to champion a fossil fuel economy may leave China poised to capitalise on the world’s growing appetite for cleaner, cheaper power.
China already manufactures 80% of the world’s solar panels, 75% of its batteries and 70% of its electric vehicles. More wind turbines and solar panels were installed in China last year than in the rest of the world combined. With nearly 7,000 renewable energy patents, more than half the world’s total, China continues to widen its technological lead.
China’s renewable energy boom is going global as it invests billions in clean tech factories and exports renewable technologies to Europe, Asia and the Americas.
As former Trump ally Elon Musk recently noted, the OBBBA gives “handouts to industries of the past, while severely damaging industries of the future”.
In an unstable world that is dealing with wars, AI, climate change and an unravelling of the post-World War 2 international order, the shift in the clean energy future from the West to the East may prove to be the most seismic of all.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.