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    A Crisis of Confidence Is Gripping China’s Economy

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    China’s economy, which once seemed unstoppable, is plagued by a series of problems, and a growing lack of faith in the future is verging on despair.Earlier this year, David Yang was brimming with confidence about the prospects for his perfume factory in eastern China.After nearly three years of paralyzing Covid lockdowns, China had lifted its restrictions in late 2022. The economy seemed destined to roar back to life. Mr. Yang and his two business partners invested more than $60,000 in March to expand production capacity at the factory, expecting a wave of growth.But the new business never materialized. In fact, it’s worse. People are not spending, he said, and orders are one-third of what they were five years ago.“It is disheartening,” Mr. Yang said. “The economy is really going downhill right now.”For much of the past four decades, China’s economy seemed like an unstoppable force, the engine behind the country’s rise to a global superpower. But the economy is now plagued by a series of crises. A real estate crisis born from years of overbuilding and excessive borrowing is running alongside a larger debt crisis, while young people are struggling with record joblessness. And amid the drip feed of bad economic news, a new crisis is emerging: a crisis of confidence.A growing lack of faith in the future of the Chinese economy is verging on despair. Consumers are holding back on spending. Businesses are reluctant to invest and create jobs. And would-be entrepreneurs are not starting new businesses.“Low confidence is a major issue in the Chinese economy now,” said Larry Hu, chief China economist for Macquarie Group, an Australian financial services firm.Mr. Hu said the erosion of confidence was fueling a downward spiral that fed on itself. Chinese consumers aren’t spending because they are worried about job prospects, while companies are cutting costs and holding back on hiring because consumers aren’t spending.In the past few weeks, investors have pulled more than $10 billion out of China’s stock markets. On Thursday, China’s top securities regulator summoned executives at the country’s national pension funds, top banks and insurers to pressure them to invest more in Chinese stocks, according to Caixin, an economics magazine. Last week, stocks in Hong Kong fell into a bear market, down more than 20 percent from their high in January.From its resilience to past challenges, China forged a deep belief in its economy and its state-controlled model. It rebounded quickly in 2009 from the global financial meltdown, and in spectacular fashion. It weathered a Trump administration trade war and proved its indispensability. When the pandemic dragged down the rest of the world, China’s economy bounced back with vigor. The Global Times, a mouthpiece for the Chinese Communist Party, declared in 2022 that China was the “unstoppable miracle.”China’s president, Xi Jinping, speaking at in Shanghai in 2018, when he gave a rousing defense of the economy: “You have every reason to be confident.”Pool photo by Johannes EiseleOne factor contributing to the current confidence deficit is the prospect that China’s policymakers have fewer good options to fight the downturn than in the past.In 2018, with the economy in a trade war with the United States and its stock market nose-diving, Xi Jinping, China’s leader, gave a rousing speech.Mr. Xi was addressing an international trade fair in Shanghai and sought to quell the uncertainty: No one should ever waver in their confidence about the Chinese economy, despite some ups and downs, he said.“The Chinese economy is not a pond, but an ocean,” Mr. Xi said. “The ocean may have its calm days, but big winds and storms are only to be expected. Without them, the ocean wouldn’t be what it is. Big winds and storms may upset a pond, but never an ocean. When you talk about the future of the Chinese economy, you have every reason to be confident.”But in recent months, Mr. Xi has said little about the economy.Unlike past crises that were international in nature, a convergence of long-simmering domestic problems is confronting China — some a result of policy changes carried out by Mr. Xi’s government.After the 2008 financial crisis, China unleashed a huge stimulus package to get the economy moving again. In 2015, when its real estate market was teetering, Beijing handed out cash to consumers to replace run-down shacks with new apartments as part of an urban redevelopment plan that gave rise to another building boom in smaller Chinese cities.Now, policymakers are confronting a far different landscape, forcing them to rethink the usual playbook. Local governments and businesses are saddled with more debt and less leeway to borrow heavily and spend liberally. And after decades of infrastructure investments, there isn’t as much need for another airport or bridge — the types of big projects that would spur the economy.China’s policymakers are also handcuffed because they introduced many of the measures that precipitated the economic problems. The “zero Covid” lockdowns brought the economy to a standstill. The real estate market is reeling from the government’s measures from three years ago to curb heavy borrowing by developers, while crackdowns on the fast-growing technology industry prompted many tech firms to scale back their ambitions and the size of their work forces.When China’s top leaders gathered in July to discuss the rapidly deteriorating economy, they did not deliver a bazooka-style spending program as some had anticipated. Coming out of the meeting, the Political Bureau of the Chinese Communist Party presented a laundry list of pronouncements — many rehashed from previous statements — without any new announcements. It focused, however, on the need to “boost confidence,” without detailing the measures that showed policymakers were ready to do that.“Whether you have confidence in the Chinese economy is actually whether you have confidence in the Chinese government,” said Kim Yuan, who lost his job in the home decoration industry last year. He has struggled to find another job, but he said the economy was unlikely to worsen significantly as long as the government maintained control.

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    China consumer confidence index
    Source: China National Bureau of Statistics via CEIC DataBy The New York TimesConfronted with dwindling confidence, the government has fallen back on a familiar pattern and stopped announcing troubling economic data.This month, China’s National Bureau of Statistics said it would stop releasing youth unemployment figures, a closely watched indicator of the country’s economic troubles. After six straight months of rising joblessness among the country’s 16- to 24-year-olds, the agency said the collection of those figures needed “to be further improved and optimized.”The bureau this year also stopped releasing surveys of consumer confidence, among the best barometers of households’ willingness to spend. Confidence rebounded modestly at the start of the year, but started to plummet in the spring. The government’s statistics office last announced the survey results for April, discontinuing a series it began 33 years ago.Instead of giving people less to worry about, the sudden removal of closely followed data has left some on Chinese social media wondering what they might be missing.Laurence Pan, 27, noticed that something was beginning to go awry in 2018 when customers at the international advertising agency in Beijing where he worked started to scale back budgets. Over the next few years, he hopped from one agency to another, but the caution from clients around spending was the same.He resigned from his last employer three months ago. Mr. Pan said that he had secured new jobs quickly in the past, but that he was struggling to find a position this time. He has applied for nearly 30 jobs since last month and has not received an offer. He said he was considering part-time work at a convenience store or a fast-food restaurant to make ends meet. With so many uncertainties, he has cut back on his spending.“Everyone is having a hard time now, and they have no money to spend,” he said. “This might be the most difficult time I’ve ever been through.”The Shanghai skyline. Consumers in China are holding back on spending, and businesses are reluctant to invest and create jobs. Alex Plavevski/EPA, via Shutterstock More

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    Biden Incentives for Foreign Investment Are Benefiting Factories

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    Early data suggest laws to increase semiconductor production and renewable energy technology have shifted the makeup of foreign direct investment — but not increased it.Lucrative new tax breaks and other incentives for advanced manufacturing that President Biden signed into law appear to be reshaping direct foreign investment in the American economy, according to a White House analysis, with a much greater share of spending on new and expanded businesses shifting toward the factory sector.Data that include the first months after the enactment of two pieces of that agenda show that a key measure of foreign investment fell slightly from 2021 to 2022, adjusted for inflation.The numbers suggest that, in the early months after the bills were signed, the hundreds of billions of taxpayer dollars that Mr. Biden is directing toward manufacturing have not increased the overall amount of foreign direct investment in the economy. Instead, the laws appear to have shifted where foreign investment is being directed.A new analysis by the White House Council of Economic Advisers shows the composition of what’s known as capacity-enhancing spending on new structures or expansions of existing ones shifted rapidly toward factories, in line with one of Mr. Biden’s top economic goals.The analysis shows that two-thirds of foreign direct investment, excluding corporate acquisitions, was in manufacturing in 2022. That was more than double the average share from 2014 to 2021.The surge is small in the context of the overall economy. But administration officials call it an encouraging sign that multinational companies are being enticed to America by Mr. Biden’s industrial policy agenda. In the last year, the analysis notes, construction spending on new manufacturing facilities in the United States has increased significantly faster than in England, continental Europe or other wealthy Group of 7 nations.Administration officials say a Commerce Department survey of new foreign investment suggests investors pouring money into America’s factories are largely concentrated in Britain and continental Europe, along with Canada, Japan and South Korea. Half of 1 percent of the investment appears to be associated with China.That foreign investment is flowing largely to computer and electronics manufacturing, particularly of semiconductors, which were the centerpiece of a bipartisan industrial policy bill that Mr. Biden signed into law last summer. He also signed a climate, health and tax bill later that summer that included large new subsidies for renewable energy technology manufacturing.Since those laws were signed, companies have announced a flurry of planned investments in the United States. The administration tallies them at more than $500 billion. They include semiconductor plants in Arizona, advanced battery facilities in Georgia and much more. Many of the announced projects are from foreign companies, like Taiwan Semiconductor Manufacturing Company.Administration officials say shifting investment toward factories — even if the overall level of investment does not change — can produce positive spillovers for the economy. The White House analysis cites higher wages in manufacturing jobs and potential increases to productivity from foreign firms sharing knowledge with existing domestic manufacturers.“Foreign direct investment in manufacturing doesn’t just help us build up this critical sector in key focal areas of Bidenomics, such as semiconductors and clean energy,” said Jared Bernstein, the chair of the Council of Economic Advisers. “It also allows us to learn valuable production lessons from international companies in these and other areas.” More

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    Could U.S. Toughness on Chinese Business Have Unintended Consequences?

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    Businesses fear that efforts to look tough on Beijing, which have the potential to be more expansive than moves by the federal government, could have unintended consequences.At a moment when Washington is trying to reset its tense relationship with China, states across the country are leaning into anti-Chinese sentiment and crafting or enacting sweeping rules aimed at severing economic ties with Beijing.The measures, in places like Florida, Utah and South Carolina, are part of a growing political push to make the United States less economically dependent on China and to limit Chinese investment over concerns that it poses a national security risk. Those concerns are shared by the Biden administration, which has been trying to reduce America’s reliance on China by increasing domestic manufacturing and strengthening trade ties with allies.But the state efforts have the potential to be far more expansive than what the administration is orchestrating. They have drawn backlash from business groups over concerns that state governments are veering toward protectionism and retreating from a longstanding tradition of welcoming foreign investment into the United States.Nearly two dozen mostly right-leaning states — including Florida, Texas, Utah and South Dakota — have proposed or enacted legislation that would restrict Chinese purchases of land, buildings and houses. Some of the laws could potentially be more onerous than what occurs at the federal level, where a committee led by the Treasury secretary is authorized to review and block transactions if foreigners could gain control of American businesses or real estate near military installations.The laws being proposed or enacted by states would go far beyond that, preventing China — and in some cases other “countries of concern” — from buying farmland or property near what is broadly defined as “critical infrastructure.”The restrictions coincide with a resurgence of anti-China sentiment, inflamed in part by a Chinese spy balloon that traveled across the United States this year and by heated political rhetoric ahead of the 2024 election. They are likely to pose another challenge for the administration, which has dispatched several top officials to China in recent weeks to try to stabilize economic ties. But while Washington may see a relationship with China as a necessary evil, officials at the state and local levels appear determined to try to sever their economic relationship with America’s third-largest trading partner.“The federal government in the United States, across branches with strong bipartisan support, has been quite forceful in sharpening its China strategy, and regulating investments is only one piece,” said Mario Mancuso, a lawyer at Kirkland & Ellis focusing on international trade and national security issues. “The shift that we have seen to the states is relatively recent, but it’s gaining strength.”One of the biggest targets has been Chinese landownership, despite the fact that China owns less than 400,000 acres in the United States, according to the Agriculture Department. That is less than 1 percent of all foreign-owned land.Such restrictions have been gathering momentum since 2021 after Fufeng USA, the American subsidiary of a Chinese company that makes components for animal feed, faced backlash over plans to build a corn mill in Grand Forks, N.D. The Committee on Foreign Investment in the United States, a powerful interagency group known as CFIUS that can halt international business transactions, reviewed the proposal but ultimately decided that it did not have the jurisdiction to block the plan. However, the Air Force, citing the mill’s proximity to a U.S. military base, said this year that China’s involvement was a national security risk, and local officials scuttled the project.Since then, states have been developing or trying to bolster their restrictions on foreign investment, in some cases blocking land acquisitions from a broad set of countries, including Iran and North Korea. In other instances, they have targeted China specifically.The state moves, some of which also include investments coming from Russia, Iran and North Korea, have raised the ire of business groups that fear the rules will be too onerous or opponents who view them as discriminatory. Some of the proposals wound up being watered down amid the backlash.This year, Texas lawmakers proposed expanding a ban that was enacted in 2021 on the development of infrastructure projects funded by investors with direct ties to China and blocking Chinese citizens and companies from buying land, homes or any other real estate. Despite the support of Gov. Greg Abbott of Texas, a Republican, the proposal was scaled back to prohibit purchases of just agricultural land, quarries and mines by individuals or companies with ties to China, Iran, North Korea and Russia. The bill ultimately expired in the Texas Legislature in May.In South Dakota, Gov. Kristi Noem, a Republican, has been pushing for legislation that would create a state version of CFIUS to review and investigate agricultural land purchases, leases and land transfers by foreign investors. Ms. Noem has argued that the federal government does not have sufficient reach to keep South Dakota safe from bad actors at the state level.The legislation failed amid pushback from farming groups that were concerned about restrictions on who could buy or rent their land, along with lawmakers who said it would hand too much power to the governor.One of the most provocative restrictions has been championed by Gov. Ron DeSantis of Florida, a Republican who is running for president. In May, Mr. DeSantis signed a law prohibiting Chinese companies or citizens from purchasing or investing in properties that are within 10 miles of military bases and critical infrastructure such as refineries, liquid natural gas terminals and electrical power plants.“Florida is taking action to stand against the United States’ greatest geopolitical threat — the Chinese Communist Party,” Mr. DeSantis said when he signed the law, adding, “We are following through on our commitment to crack down on Communist China.”Gov. Ron DeSantis of Florida, a Republican presidential candidate, signed into law one of the most provocative restrictions against Chinese investments.David Degner for The New York TimesBut the legislation is written so broadly that an investment fund or a company that has even a small ownership stake from a Chinese company or a Chinese investor and buys a property would be violating the law. Business groups and the Biden administration have criticized the law as overreach, while Republican attorneys general around the country have sided with Mr. DeSantis.The Florida legislation, which targets “countries of concern” and imposes special restrictions on China, is being challenged in federal court. A group of Chinese citizens and a real estate brokerage firm in Florida that are represented by the American Civil Liberties Union sued the state in May, arguing that the law codifies and expands housing discrimination. The Justice Department filed a “statement of interest” arguing that Florida’s landownership policy is unlawful.A U.S. district judge, who heard arguments about the case in July, said last week that the law could continue to be enforced while it was being challenged in court.The restrictions are creating uncertainty for investors and fund managers that want to invest in Florida and now must decide whether to back away from those plans or cut out their Chinese investors.“It creates a lot of thorny issues not just for the foreign investors but for the funds as well, because some of these laws try to make them choose between keeping investors and being able to invest in those states,” said J. Philip Ludvigson, a partner at King & Spalding. “It’s really a gamble for the states that are passing some of these very broad laws.”Mr. Ludvigson, a former Treasury official who helped lead the office that chairs CFIUS, added: “You might want to get tough on China, but if you don’t really think through what the second- and third-order effects might be, you could just end up hurting your state revenues and your property market while also failing to solve an actual national security problem.”The state investment restrictions also coincide with efforts in Congress to block businesses based in China from purchasing farmland in the United States and place new mandates on Americans investing in the country’s national security industries. The Senate voted overwhelmingly in favor of the measures in July, which still need to clear the House to become law.The combination of measures is likely to complicate diplomacy with China and could draw retaliation.“Officials in Beijing are quite concerned about the hostility to Chinese investments at both the national and state levels in the U.S., viewing these as another sign of rising antipathy toward China,” said Eswar Prasad, a former head of the International Monetary Fund’s China division. “The Chinese government is especially concerned about a proliferation of state-level restrictions on top of federal limitations on investments from China.”He added, “Their fear is that such actions would not just deprive Chinese investors of good investment opportunities in the U.S., including in real estate, but could eventually limit Chinese companies’ direct access to American markets and inhibit technology transfers.” More

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    Biden Orders Ban on New Investments in China’s Sensitive High-Tech Industries

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    The new limits, aimed at preventing American help to Beijing as it modernizes its military, escalate a conflict between the world’s two largest economies.President Biden escalated his confrontation with China on Wednesday by signing an executive order banning new American investment in key technology industries that could be used to enhance Beijing’s military capabilities, the latest in a series of moves putting more distance between the world’s two largest economies.The order will prohibit venture capital and private equity firms from pumping more money into Chinese efforts to develop semiconductors and other microelectronics, quantum computers and certain artificial intelligence applications. Administration officials stressed that the move was tailored to guard national security, but China is likely to see it as part of a wider campaign to contain its rise.“The Biden administration is committed to keeping America safe and defending America’s national security through appropriately protecting technologies that are critical to the next generation of military innovation,” the Treasury Department said in a statement. The statement emphasized that the executive order was a “narrowly targeted action” complementing existing export controls and that the administration maintained its “longstanding commitment to open investment.”Narrow or not, the new order comes at perhaps the most fraught moment in the U.S.-China relationship since President Richard M. Nixon and Secretary of State Henry A. Kissinger opened a dialogue with Beijing in the early 1970s. A series of expanding export controls on key technologies to China has already triggered retaliation from Beijing, which recently announced the cutoff of metals like gallium that are critical for the Pentagon’s own supply chain.Mr. Biden has stressed that he wants to stabilize relations with China following a Cold War-style standoff over a spy balloon shot down after crossing through American airspace and the discovery of a broad Chinese effort to put malware into power grids and communications systems. He has sent Secretary of State Antony J. Blinken, Treasury Secretary Janet L. Yellen and other officials to renew talks with Chinese officials in recent months. Gina Raimondo, the commerce secretary, is expected to go to China in coming weeks.Indeed, the president seemed intent on not antagonizing Beijing with Wednesday’s order, making no comment about his action and leaving it to be announced through written material and background briefings by aides who declined to be identified.Still, China declared that it was “very disappointed” by the order, which it said was designed to “politicize and weaponize trade,” and it hinted at retaliation.“The latest investment restrictions will seriously undermine the interests of Chinese and American companies and investors, hinder the normal business cooperation between the two countries and lower the confidence of the international community in the U.S. business environment,” Liu Pengyu, a spokesman for the Chinese embassy, said in a statement.Administration officials said the president’s order is part of their effort to “de-risk” the relationship with China but not to “decouple” from it. Wednesday’s announcement, though, takes that effort to a new level. While export bans and concerns about Chinese investment in the United States have a long history, the United States has never before attempted such limits on the flow of investment into China.In fact, for the past few decades, the United States has encouraged American investors to deepen their ties in the Chinese economy, viewing that as a way to expand the web of interdependencies between the two countries that would gradually integrate Beijing into the Western economy and force it to play by Western rules.U.S. government reviews in recent years, however, concluded that investments in new technologies and joint ventures were fueling China’s military and its intelligence-collection capabilities, even if indirectly. American officials have been actively sharing intelligence reports with allies to make the case that Western investment is key to China’s military modernization plans — especially in space, cyberspace and the kind of computer power that would be needed to break Western encryption of critical communications.Administration officials cast the effort as one motivated entirely by national security concerns, not an attempt to gain economic advantage. But the order itself describes how difficult it is to separate the two, referring to China’s moves to “eliminate barriers between civilian and commercial sectors and military and defense industrial sectors.’’ It describes China’s focus on “acquiring and diverting the world’s cutting-edge technologies, for the purpose of achieving military dominance.”(The text of Mr. Biden’s order refers only to “countries of concern,” though an annex limits those to “the People’s Republic of China” and its two special administrative areas, Hong Kong and Macau.)Mr. Biden and his aides discussed joint efforts to limit high-tech investment with their counterparts at the recent Group of 7 summit meeting in Hiroshima, Japan. Several allies, including Britain and the European Union, have publicly indicated that they may follow suit. The outreach to other powers underscores that a U.S. ban may not be that effective by itself and would work only in conjunction with other major nations, including Japan and South Korea.The executive order, which also requires firms to notify the government of certain investments, coincides with a bipartisan effort in Congress to impose similar limits. An amendment along those lines by Senators Bob Casey, Democrat of Pennsylvania, and John Cornyn, Republican of Texas, was added to the Senate version of the annual defense authorization bill.Several Republicans criticized the president’s order as too little, too late and “riddled with loopholes,” as Senator Marco Rubio, Republican of Florida and vice chairman of the Senate Intelligence Committee, put it.“It is long overdue, but the Biden administration finally recognized there is a serious problem with U.S. dollars funding China’s rise at our expense,” Mr. Rubio said. “However, this narrowly tailored proposal is almost laughable.”Representative Michael McCaul, Republican of Texas and chairman of the House Foreign Relations Committee, said the new order should go after existing investments as well as sectors like biotechnology and energy.“We need to stop the flow of American dollars and know-how supporting” China’s military and surveillance apparatus “rather than solely pursuing half measures that are taking too long to develop and go into effect,” Mr. McCaul said.The United States already prohibits or restricts the export of certain technologies and products to China. The new order effectively means that American money, expertise and prestige cannot be used to help China to develop its own versions of what it cannot buy from American companies.It was unclear how much money would be affected. American investors have already pulled back dramatically over the past two years. Venture capital investment in China has plummeted from a high of $43.8 billion in the last quarter of 2021 to $10.5 billion in the second quarter of this year, according to PitchBook, which tracks such trends. But the latest order could have a chilling effect on investment beyond the specific industries at stake.In a capital where the goal of opposing China is one of the few areas of bipartisan agreement, the only sounds of caution in Washington came from the business community. While trade groups praised the administration for consulting them, there was concern that the downward spiral in relations could speed a broader break between the world’s two largest economies.“We hope the final rules allow U.S. chip firms to compete on a level playing field and access key global markets, including China, to promote the long-term strength of the U.S. semiconductor industry and our ability to out-innovate global competitors,” the Semiconductor Industry Association said in a statement.Gabriel Wildau, a managing director at the consulting firm Teneo who focuses on political risk in China, said the direct effect of the executive order would be modest, given its limited scope, but that disclosure requirements embedded in the order could have a chilling effect.“Politicians increasingly regard corporate investments in China as a form of collusion with a foreign enemy, even when there is no allegation of illegality,” he said.The Treasury Department, which has already consulted with American executives about the forthcoming order, will begin formally taking comments before drafting rules to be put in place next year. But American firms may alter their investment strategies even before the rules take effect, knowing that they are coming.A series of expanding export controls on key technologies to China has already triggered retaliation from Beijing.Florence Lo/ReutersChina’s own investment restrictions are broader than the new American rules — they apply to all outbound investments, not just those in the United States. And they reflect a technology policy that in some ways is the opposite of the new American restrictions.China discouraged or halted most low-tech outbound investments, like purchases of real estate or even European soccer clubs. But China allowed and even encouraged further acquisitions of businesses with technologies that could offer geopolitical advantages, including investments in overseas businesses involved in aircraft production, robotics, artificial intelligence and heavy manufacturing.The latest move from Washington comes at a rare moment of vulnerability for the Chinese economy. Consumer prices in China, after barely rising for the previous several months, fell in July for the first time in more than two years, the country’s National Bureau of Statistics announced on Wednesday.While Chinese cities and some businesses have declared 2023 a “Year ›of Investing in China” in hopes of a post-Covid revival of their local economies, President Xi Jinping has created an environment that has made many American venture capital firms and other investors more cautious.Western companies that assess investment risk, like the Mintz Group, have been investigated and in some cases their offices have been raided. A Japanese executive was accused of espionage, and a new anti-espionage law has raised fears that ordinary business activities would be viewed by China as spying.The Biden administration’s previous moves to restrain sensitive economic relationships have taken a toll. China’s telecommunications champion, Huawei, has been almost completely blocked from the U.S. market, and American allies, starting with Australia, are ripping Huawei equipment out of their networks. China Telecom was banned by the Federal Communications Commission, which said it “is subject to exploitation, influence and control by the Chinese government.”At the same time, the United States — with the somewhat reluctant help of the Dutch government, Japan and South Korea — has gone to extraordinary lengths to prevent China from building up its own domestic capability to manufacture the most high-end microelectronics by itself.Washington has banned the export of the multimillion-dollar lithography equipment used to produce chips in hopes of limiting China’s progress while the United States tries to restore its own semiconductor industry. Taken together, it is an unprecedented effort to slow an adversary’s capabilities while speeding America’s own investment.Keith Bradsher More

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    China’s Second-Quarter G.D.P. Shows Post-Covid Rebound Faltered

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    The NewsChina’s economy slowed markedly in the spring from earlier in the year, official numbers released on Monday showed, as exports tumbled, a real estate slump deepened and some debt-ridden local governments had to cut spending after running low on money.The new gross domestic product data for the second quarter — from April through June — underlined what has been apparent for weeks: China’s recovery after abandoning its extensive “zero Covid” measures will be harder to achieve than Beijing and many analysts had hoped.The NumbersCovid not only still hangs over China’s economy; it also skews some of its official data. The main G.D.P. number reported by Beijing on Monday, comparing this year with the same quarter last year, showed that the economy expanded 6.3 percent. But that reflected improvement from a sharp slowdown in 2022’s second quarter, a period when China’s largest city, Shanghai, was in a two-month lockdown. More

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    Chips Make It Tough for the U.S. to Quit China

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    Chipmakers are finding it increasingly hard to operate in China but say doing business in the country is still key to their survival.In May, Micron Technologies, the Idaho chipmaker, suffered a serious blow as part of the U.S.-China technology war. The Chinese government barred companies that handle crucial information from buying Micron’s chips, saying the company had failed a cybersecurity review.Micron said the change could destroy roughly an eighth of its global revenue. Yet in June, the chipmaker announced that it would increase its investments in China — adding $600 million to expand a chip packaging facility in the Chinese city of Xian.“This investment project demonstrates Micron’s unwavering commitment to its China business and team,” an announcement posted on the company’s Chinese social media account said.Global semiconductor companies are finding themselves in an extremely tricky position as they try to straddle a growing rift between the United States and China. The semiconductor industry has become ground zero for the technology rivalry between Washington and Beijing, with new restrictions and punitive measures imposed by both sides.U.S. officials say American products have fed into Chinese military and surveillance programs that run counter to the national security interest of the United States. They have imposed increasingly tough restrictions on the kind of chips and chip-making equipment that can be sent to China, and are offering new incentives, including grants and tax credits, for chipmakers who choose to build new operations in the United States.But factories can take years to construct, and corporate ties between the countries remain strong. China is a major market for chips, since it is home to many factories that make chip-rich products, including smartphones, dishwashers, cars and computers, that are both exported around the world and purchased by consumers in China.Overall, China accounts for roughly a third of global semiconductor sales. But for some chipmakers, the country accounts for 60 percent or 70 percent of their revenue. Even when chips are manufactured in the United States, they are often sent to China for assembly and testing.“We can’t just flip a switch and say all of sudden you have to take everything out of China,” said Emily S. Weinstein, a research fellow at Georgetown’s Center for Security and Emerging Technology.The industry’s reliance on China highlights how a close — but extremely contentious — economic relationship between Washington and Beijing is posing challenges for both sides.Those tensions were reflected during Treasury Secretary Janet L. Yellen’s visit to Beijing this week, where she tried to walk a fine line by faulting some of China’s practices while insisting the United States was not looking to sever ties with the country.Ms. Yellen criticized punitive measures China has recently taken against foreign firms, including limiting the export of some minerals used in chip making, and suggested that such actions were why the Biden administration was trying to make U.S. manufacturers less reliant on China. But she also affirmed the U.S.-China relationship as strategic and important.“I have made clear that the United States does not seek a wholesale separation of our economies,” Ms. Yellen said during a roundtable with U.S. companies operating in China. “We seek to diversify, not to decouple. A decoupling of the world’s two largest economies would be destabilizing for the global economy, and it would be virtually impossible to undertake.”The Biden administration is poised to begin investing heavily in American semiconductor manufacturing to lure factories out of China. Later this year, the Commerce Department is expected to begin handing out funds to help companies build U.S. chip facilities. That money will come with strings: Firms that take funding must refrain from expanding high-tech manufacturing facilities in China.The administration is also weighing further curbs on the chips that can be sent to China, as part of a push to expand and finalize sweeping restrictions it issued last October.These measures could include potential limits on sales to China of advanced chips used for artificial intelligence, new restrictions for Chinese companies’ access to U.S. cloud computing services, and restrictions on U.S. venture capital investments in the Chinese chip sector, according to people familiar with the plans.The administration has also been considering halting the licenses it has extended to some U.S. chipmakers that have allowed them to continue selling products to Huawei, the Chinese telecom firm.Japan and the Netherlands, which are home to companies that make advanced chip manufacturing equipment, have also put new restrictions on their sales to China, in part because of urging from the United States.China has issued restrictions of its own, including new export controls on minerals used in chip manufacturing.Amid tighter regulations and new incentive programs from the United States and Europe, global chip companies are increasingly looking outside China as they choose the locations for their next major investments. But these facilities will likely take years to construct, meaning any changes to the global semiconductor market will unfold gradually.John Neuffer, the president of the Semiconductor Industry Association, which represents the chip industry, said in a statement that the ongoing escalation of controls posed a significant risk to the global competitiveness of the U.S. industry.“China is the world’s largest market for semiconductors, and our companies simply need to do business there to continue to grow, innovate and stay ahead of global competitors,” he said. “We urge solutions that protect national security, avoid inadvertent and lasting damage to the chip industry, and avert future escalations.” More

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    U.S. and China, by the Numbers

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    From movie theaters to military spending, here’s how one of the world’s most important economic relationships stacks up.China and the United States are locked in an increasingly intense rivalry when it comes to national security and economic competition, with American leaders frequently identifying China as their greatest long-term challenger.Yet the world’s two largest economies, which together represent 40 percent of the global output, remain integral partners in many ways. They sell and buy important products from each other, finance each other’s businesses, provide a home to millions of each other’s people, and create apps and movies for audiences in both countries.As Treasury Secretary Janet L. Yellen meets with top Chinese officials in Beijing this week, her challenge will be to navigate this multifaceted relationship, which ranges from conflict to cooperation. Here are some figures that illustrate the links between the two nations.Economic and military powerThe U.S. economy continues to outstrip China’s by dollar value: In 2022, Chinese gross domestic product was $18 trillion, compared with $25.5 trillion for the United States.But China’s population is more than four times America’s. And the economic picture looks different when adjusted for local prices: Based on purchasing power parity, China’s share of world G.D.P. is 18.9 percent, according to the International Monetary Fund, surpassing the United States at 15.4 percent.China has provided more than a trillion dollars for global infrastructure through its Belt and Road Initiative, which analysts see as an effort to project power around the world.The rapid growth and modernization of China’s military have sparked concerns in the United States. China has more naval vessels than the United States and more military personnel, with 2.5 million in 2019.But American armed forces are far better equipped, and the United States still spends more on defense than the next 10 countries combined — $877 billion in 2022, compared with $292 billion in reported spending by China.Trade relationsDespite the rising tensions, trade between the countries remains extremely strong. China is America’s third-largest trading partner, after Canada and Mexico.U.S. imports of goods and services from China hit a record $563.6 billion last year. But the share of U.S. imports that come from China has been falling, a sign of how some businesses are breaking off ties with China.China is also a major export market, with half of all soybeans that the United States sends abroad going to China. The U.S.-China Business Council estimated that U.S. exports to China supported nearly 1.1 million jobs in the United States in 2021.China dominates supply chains for both critical and everyday goods. It is the world’s largest producer of steel, solar panels, electronics, coal, plastics, buttons and car batteries, and it has quadrupled its car exports in just two years, becoming the world’s largest auto exporter through its growing clout in electric vehicles.The United States has steadily expanded sanctions against Chinese companies and organizations because of national security and human rights concerns, placing 721 Chinese companies, organizations and people on an “entity list” that restricts their ability to buy products from the United States, according to the Commerce Department.Financial and corporate tiesChina is one of America’s largest lenders and holds nearly $1 trillion of U.S. debt.Members of the S&P 500 index, which tracks the largest public companies in the United States, generate 7.6 percent of their revenue in mainland China, the biggest source of international sales by far, according to FactSet. The revenue that large U.S. firms derive from China is more than their revenue from the next three countries — Japan, Britain and Germany — combined.But the outlook for American companies doing business in China has turned grimmer. In the American Chamber of Commerce in China’s most recent survey of U.S. companies in China, 56 percent described their business as unprofitable in 2022, with some blaming China’s strict Covid-19 lockdown measures.Also in the survey, 46 percent of American companies thought that U.S.-China relations would deteriorate in 2023, while only 13 percent thought they would improve.Personal and cultural connectionsThe United States is home to nearly 2.4 million Chinese immigrants, making it the top destination for Chinese immigrants worldwide. Chinese immigrants in the United States are more than twice as likely as U.S.-born adults to have a graduate or professional degree.In the 2021-22 school year, 296,000 students from China attended U.S. institutions of higher learning, nearly a third of all international students in the United States.Roughly three in four Chinese Americans experienced racial discrimination in the previous 12 months, and 9 percent were physically intimidated or assaulted, according to a survey by Columbia University and the Committee of 100, a Chinese American leadership organization.Long considered a low-end manufacturer, China has become more of a source for innovation and cultural creation. TikTok, the popular social media app whose parent company is China’s ByteDance, says it has more than 150 million users in the United States.Last year, 20 American movies opened in China, and their box office total was roughly $673 million, according to Comscore. China had more than 80,000 movie screens by late 2021, compared with roughly 39,000 in the United States.Pandemic restrictions have made it much harder to travel between the countries. Air carriers are running only 24 flights a week between the United States and China, compared with about 350 before the pandemic.Sapna Maheshwari and Nicole Sperling contributed reporting. More

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    Yellen’s China Visit Aims to Ease Tensions Amid Deep Divisions

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    Mutual skepticism between the United States and China over a wide range of economic and security issues has festered in recent years.The last time a U.S. Treasury secretary visited China, Washington and Beijing were locked in a trade war, the Trump administration was preparing to label China a currency manipulator, and fraying relations between the two countries were roiling global markets.Four years later, as Treasury Secretary Janet L. Yellen prepares to arrive in Beijing, many of the economic policy concerns that have been festering between the United States and China remain — or have even intensified — despite the Biden administration’s less antagonistic tone.The tariffs that President Donald J. Trump imposed on Chinese goods are still in effect. President Biden has been working to restrict China’s access to critical technology such as semiconductors. And new restrictions curbing American investment in China are looming.Treasury Department officials have downplayed expectations for major breakthroughs on Ms. Yellen’s four-day trip, which begins when she arrives in Beijing on Thursday. They suggest instead that her meetings with senior Chinese officials are intended to improve communication between the world’s two largest economies. But tensions between United States and China remain high, and conversations between Ms. Yellen and her counterparts are likely to be difficult. She met in Washington with Xie Feng, China’s ambassador, on Monday, and the two officials had a “frank and productive discussion,” according to the Treasury.Here are some of the most contentious issues that have sown divisions between the United States and China.Technology and trade controlsChinese officials are still smarting at the Biden administration’s 2022 decision to place significant limitations on the kinds of advanced semiconductors and chip-making machinery that can be sent to China. Those limits have hampered China’s efforts to develop artificial intelligence and other kinds of advanced computing that are expected to help power each country’s economy and military going forward.The government of the Netherlands, which is home to semiconductor machinery maker ASML, on Friday announced new restrictions on machinery exports to China. On Monday, China placed restrictions on exports of germanium and gallium, two metals used to make chips.The Biden administration is mulling further controls on advanced chips and on American investment into cutting-edge Chinese technology.Semiconductors have always been one of the biggest and most valuable categories of U.S. exports to China, and while the Chinese government is investing heavily in its domestic capacity, it remains many years behind the United States.The Biden administration’s subsidy program to strengthen the U.S. semiconductor industry has also rankled Chinese officials, especially since it includes restrictions on investing in China. Companies that accept U.S. government money to build new chip facilities in the United States are forbidden to make new, high-tech investments in China. And while Chinese officials — and some American manufacturers — were hopeful that the Biden administration would lift tariffs on hundreds of billions of dollars of Chinese imports, that does not seem to be in the offing. While Ms. Yellen has questioned the efficacy of tariffs, other top officials within the administration see the levies as helpful for encouraging supply chains to move out of China.The administration is employing both carrots and sticks to carry out a policy of “de-risking” or “friend-shoring” — that is, enticing supply chains for crucial products like electric vehicle batteries, semiconductors and solar panels out of China.President Biden during a visit to a Taiwan Semiconductor Manufacturing Company plant under construction in Phoenix. The Biden administration’s efforts to assist the U.S. semiconductor industry has rankled Chinese officials.T.J. Kirkpatrick for The New York TimesDeteriorating business environmentsCompanies doing business in China are increasingly worried about attracting negative attention from the government. The most recent target was Micron Technology, a U.S. memory chip maker that failed a Chinese security review in May. The move could cut Micron off from selling to Chinese companies that operate key infrastructure, putting roughly an eighth of the company’s global revenue at risk. In recent months, consulting and advisory firms in China with foreign ties have faced a crackdown.American officials are growing more concerned with the Chinese government’s use of economic coercion against countries like Lithuania and Australia, and they are working with European officials and other governments to coordinate their responses.Businesses are also alarmed by China’s ever-tightening national security laws, which include a stringent counterespionage law that took effect on Saturday. Foreign businesses in China are reassessing their activities and the market information they gather because the law is vague about what is prohibited. “We think this is very ill advised, and we’ve made that point to several members of the government here,” said R. Nicholas Burns, the U.S. ambassador to China, in an interview in Beijing.In the United States, companies with ties to China, like the social media app TikTok, the shopping app Temu and the clothing retailer Shein, are facing increasing scrutiny over their labor practices, their use of American customer data and the ways they import products into the United States.CurrencyChina’s currency, the renminbi, has often been a source of concern for American officials, who have at times accused Beijing of artificially weakening its currency to make its products cheaper to sell abroad.The renminbi’s recent weakness may pose the most difficult issue for Ms. Yellen. The currency is down more than 7 percent against the dollar in the past 12 months and down nearly 13 percent against the euro. That decline makes China’s exports more competitive in the United States. China’s trade surplus in manufactured goods already represents a tenth of the entire economy’s output.The renminbi is not alone in falling against the dollar lately — the Japanese yen has tumbled for various reasons, including rising interest rates in the United States as the Federal Reserve tries to tamp down inflation.Chinese economists have blamed that factor for the renminbi’s weakness as well. Zhan Yubo, a senior economist at the Shanghai Academy of Social Sciences, said the decline in the renminbi was the direct result of the Fed’s recent increases in interest rates.At the same time, China has been cutting interest rates to help its flagging economy. The interest rate that banks charge one another for overnight loans — a benchmark that tends to influence all other interest rates — is now a little over 5 percent in New York and barely 1 percent in Shanghai. That reverses a longstanding pattern in which interest rates were usually higher in China.The Fed’s rate increases have made it more attractive for companies and households to send money out of China and invest it in the United States, in defiance of Beijing’s stringent limits on overseas money movements.China pledged as part of the Phase 1 trade agreement with the United States three years ago not to seek an advantage in trade by pushing down the value of its currency. But the Biden administration’s options may be limited if China lets its currency weaken anyway.Global debtChina has provided more than $500 billion to developing countries through its lending program, making it one of the world’s largest creditors. Many of those borrowers, including several African nations, have struggled economically since the pandemic and face the possibility of defaulting on their debt payments.The United States, along with other Western nations, has been pressing China to allow some of those countries to restructure their debt and reduce the amount that they owe. But for more than two years, China has insisted that other creditors and multilateral lenders absorb financial losses as part of any restructuring, bogging down the loan relief process and threatening to push millions of people in developing countries deeper into poverty.In June, international creditors including China agreed to a debt relief plan with Zambia that would provide a grace period on its interest payments and extend the dates when its loans are due. The arrangement did not require that the World Bank or International Monetary Fund write off any debts, offering global policymakers like Ms. Yellen hope for similar debt restructuring in poorer countries.Human rights and national security issuesTensions over national security and human rights have created an atmosphere of mutual distrust and spilled over into economic relations. The flight of a Chinese surveillance balloon across the United States this year deeply unsettled the American public, and members of Congress have been pressing the administration to reveal more of what it knows about the balloon. Mr. Biden’s recent labeling of China’s leader, Xi Jinping, as a “dictator” also rankled Chinese officials and state-run media.American officials continue to be concerned about China’s human rights violations, including the suppression of the democracy movement in Hong Kong and the detention of mainly Muslim ethnic minorities in the Xinjiang region of northwestern China. A senior Treasury Department official, speaking on the condition of anonymity before Ms. Yellen’s trip, said the United States had no intention of shying away from its views on human rights during the meetings in China.Chinese officials continue to protest the various sanctions that the United States has issued against Chinese companies, organizations and individuals for national security threats and human rights violations — including sanctions against Li Shangfu, China’s defense minister. The Chinese government has cited those sanctions as a reason for its rejection of high-level military dialogues. More