NEW YORK — As Wall Street’s blockbuster rally shows signs of fatigue and gold loses some luster, many are connecting the dots to events 11,000 kilometers away.
China’s slowdown is garnering lots of attention in Manhattan boardrooms and trading pits. While Asia’s biggest economy isn’t stumbling, its 4.8% growth rate in the third quarter, the slowest this year, is raising warning flags everywhere.
Even bright spots come with asterisks. For now, external demand is keeping China in the orbit of this year’s 5% economic growth target. But amid mounting trade tensions — including a threatened 130% US tariff — it’s easy to see why many think China is among the biggest downside risks to US growth.
Count Stephen Miran firmly in this camp. The newest Federal Reserve governor isn’t just worried about the deflation that Xi Jinping’s economy is exporting. He also frets about the economic fallout from Beijing using its chokehold over rare earths to retaliate against US President Donald Trump’s tariffs.
“I had been operating under the assumption that the uncertainty had dissipated, and therefore I felt more sanguine about some aspects of the growth outlook,” Miran told CNBC. “Now, potentially, this is back because the Chinese are reneging on deals that were already made. So I think it’s incumbent on us as policymakers to think about the introduction of a new tail risk.”
In this context, Miran, who was the Trump White House’s chief economic adviser until putting himself on leave in September, is advocating for another 125 basis points worth of rate cuts.
“To the extent that I think policy is quite restrictive right now, that sets us up to be vulnerable to shocks,” Miran noted. “If you hit the economy with a shock when policy is very restrictive, the economy will react differently than it would if policy were not as restrictive. I think it’s even more important now than I did a week ago that we move quickly to a more neutral stance.”
Analysts at Capital Economics noted that “deflation in China has added to disinflationary forces in advanced economies over the past few years, reducing the level of headline CPI by around 0.3-0.5% on average. Tariffs are likely to reverse this trend in the US. But elsewhere, policymakers will probably seek to preserve some of the benefits of lower prices for consumers while protecting key sectors from mounting competitive pressures.”
Yet the real risk may be knocking China off balance, at a moment when the US is not exactly thriving. Having the world’s two biggest economies, worth a combined US$50 trillion in annual output, at loggerheads is in no one’s best interest. Least of all, developing nations sit on a total debt of $109 trillion as of the second quarter, according to the Institute of International Finance (IIF).
What’s more, global debt hit a record high of $337.7 trillion at the end of June, partly as a side effect of easing global financial conditions, as many top central banks turned less hawkish. IIF reports that global debt levels rose by more than $21 trillion in the first half of 2025, with China, France, the US, Germany, the UK and Japan posting the largest increases.
“The scale of this increase was comparable to the surge seen in the second half of 2020, when pandemic-related policy responses drove an unprecedented buildup in global debt,” IIF said. Going forward, observed IIF economist Emre Tiftik, rising military spending will further strain government balance sheets amid increasing geopolitical strife.
Yet Tiftik also noted that bond market reactions have been more chaotic in the most advanced economies. Case in point: 10-year yields among Group of Seven (G7) nations are almost at their highest since 2011.
Yet the wobbliness of the globe’s biggest economies is hard to ignore. US employment is slowing at a worrisome pace. Goldman Sachs economist Jan Hatzius thinks the US’s 3.8% growth in the second quarter and 3.3% in the third quarter may be overstated based on softening job growth.
“Household surveys are already very negative,” Hatzius said. “For example, the expected change in the unemployment rate over the next year has never been this bad outside recessionary periods since the University of Michigan started asking the question in 1978.”
Hatzius added that “since job market indicators often provide more reliable information about current growth than the preliminary GDP estimates, this weakness adds to our conviction that second quarter and third quarter sends too positive a signal.”
Over in the Eurozone, industrial production weakened in August amid growing uncertainty among manufacturing firms caught in the whipsaw of the global trade war.
Output slid 1.2% month-on-month versus a 0.5% increase in July. “Prospects for industry remain poor for the foreseeable future,” said Capital Economics chief Europe economist Andrew Kenningham.
August buttressed the view that the Eurozone economy barely grew in the third quarter, similar to the sluggishness seen in the second.
Japan “is caught between a souring trade outlook and fragile home demand,” said Stefan Angrick, economist at Moody’s Analytics. “Exports and industrial production are slipping as tariffs bite and foreign rivals squeeze manufacturers. Domestically, sticky inflation and soft wage gains are sapping household spending power. And the government is dragging its feet on big-ticket capital expenditure plans.”
Inflation will cool eventually, but progress will be slow because producers are still drip-feeding their cost increases through to consumers, Angrick noted. This will delay a pickup in real wages and, with it, a meaningful recovery in domestic demand. Policy uncertainty at home and abroad is an added concern.
“All told,” he says, “Japan’s economic outlook appears challenging. Trade tensions, geopolitical rifts and the possibility of fresh supply-chain disruptions still top the list of risks.
China’s ambitious “around 5%” growth target this year increasingly has a Trump problem. Every time the US president raises tariffs for mainland goods — 130%, at least for now — he makes it harder for Xi Jinping to avoid Beijing’s fate in 2022 and 1990. Those are the only two times in the last 35 years China missed its gross domestic product (GDP) growth target.
There’s reason to think Xi can pull off the seemingly impossible in 2025. So long as his Communist Party marshals a dual-focused response to Trump’s one-man tariff arms race. The first is a burst of well-targeted stimulus to offset epically strong headwinds zooming China’s way. The second is incentivizing Xi’s 1.4 billion people to save less and spend more.
The only uncertainty about goal No. 1 is the scale of the stimulus Team Xi is willing to unleash to boost consumption, stabilize the housing market and end deflation. The urgency is rising.
China’s consumer spending, it’s generally believed, amounts to roughly $7 trillion. The nation’s annual exports to the US are about $450 billion. If Trump’s tariffs erase, say, half that amount, Xi would have to rely mostly on domestic consumption to pick up the slack.
That’s doable, many economists agree, so long as Beijing acts urgently and boldly. Increased fiscal spending could be complemented by cuts in official interest rates and reserve requirement ratios. In March, Beijing unveiled new fiscal measures, including a higher budget deficit target of around 4% of GDP, up from 3% in 2024.
“The wider deficit will support the economic outlook, but we think it is still uncertain as to how large the fiscal impulse will be, or whether it will sustainably lift underlying domestic demand,” cautions Jeremy Zook, an analyst at Fitch Ratings.
Economist Zhiwei Zhang, president of Pinpoint Asset Management, added that China’s “deflationary pressure is persistent.” Making matters worse, he says, “policy uncertainty in the US is still elevated.”
Julian Evans-Pritchard, head of China Economics at Capital Economics, said that “it seems unlikely that consumption support will be sufficient to fully offset weaker exports. As such, overcapacity looks set to worsen, exacerbating downward pressure on prices.”
All this adds to the drama surrounding this week’s gathering of top Chinese Communist Party officials. The so-called “Fourth Plenum” will devise development plans through 2030.
“Consumption is likely to be a nominal focus in the 15th Five-Year Plan, especially given the government’s continued attention to boosting consumption in 2025,” said Jonathan Czin, an economist at the Brookings Institution think tank. “But the key indicator of the leadership’s seriousness will be whether the five-year plan moves beyond rhetoric to present a viable plan to boost consumption.”
The confab could be make-or-break for Xi’s desire to move China decisively upmarket into higher-value-added industries. A key element of that transition is building bigger social safety nets to encourage households to spend more and save less.
Xi’s inner circle has been telegraphing moves to do everything from reducing regulations, boosting the birthrate, upping subsidies for some exports and devising a stabilization fund to shore up its stock market. But the real focus must be on creating the social safety nets that the central government and municipalities have been promising for years.
In the interim, China’s vulnerabilities are adding to the reasons why officials around the globe are bracing for downside risks as 2026 approaches. Including officials at Federal Reserve headquarters in Washington.
Follow William Pesek on X at @WilliamPesek
