In any case, a combination of slower growth, debt defaults and inflation will continue to weaken the yuan and reduce capital inflows. Foreign reserves, which grew for decades, have declined since 2014. The Chinese elite are cognizant of these problems, hence their increasingly desperate attempts to smuggle wealth out of the country.
In this environment, the Chinese regime could fracture or lose popularity. That is a scary prospect for Beijing, which already faces other major challenges, such as an aging population, a lack of pension funding to support the elderly, and life-threatening levels of pollution. Despite the regime’s autocratic nature, protests directed at its shortcomings are becoming common. The government is not immune to public pressures.
Negotiations between China and the U.S., which are now beginning in earnest after the uneventful retreat at Mar-a-Lago, may actually bear fruit. Chinese leaders cannot afford a significant drop in exports to the U.S., which would be interpreted at home and abroad as evidence that the bellicose American president got the better of them.
Mr. Trump has been dealt a stronger hand than he could have asked for on trade with China, which has more incentive to negotiate than ever.
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