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Denial is, without a doubt, one of the most potent defense mechanisms known to humanity, and it is particularly troublesome for governments that are grappling with complex economic challenges, as is the case with China’s current struggles.
I witnessed an unflinching propensity for denial during my recent post-US-election tour of Asia, with stops in Hong Kong, Shenzhen, Beijing, and Singapore, where the economic mood was characterized by a mix of apprehension and wishful thinking, with many people making a concerted effort to downplay both domestic and international problems.
Nowhere is the prevailing climate of denial more palpable than in China, where President Xi Jinping has long emphasized his preference for disseminating only positive news about the country, an approach that has been reinforced by the government’s efforts to put a favorable spin on the nation’s economic outlook, downplaying the serious challenges it is facing, including the most severe economic slowdown in nearly half a century.
It is worth noting, however, that equity markets are notorious for sending misleading signals, as evidenced by the phenomenon of bear markets, which Nobel laureate economist Paul Samuelson once wryly observed had been predicted by economists with great regularity, leading to numerous false alarms, including the famous “nine of the last five [US] recessions.” Furthermore, Japan’s experience with “dead-cat bounces” serves as a cautionary tale, where the Nikkei 225 index experienced four rallies with an average gain of 34% before eventually succumbing to a cumulative decline of 66% between December 1989 and September 1998.
The Japan comparison struck a raw nerve in China, as I discovered in a particularly disheartening conversation with a senior Chinese regulator who, despite acknowledging concerns about sharp declines in property and equity markets, the country’s mounting debt, the first signs of deflation, and the headwinds arising from weak productivity and an aging workforce, was quick to dismiss the possibility that China might be experiencing a similar balance-sheet recession.
I refrained from mentioning the warning issued in May 2016 by an “authoritative Chinese person” in the state-run People’s Daily, which cautioned that China could fall into a Japan-like quagmire, nor did I bring up Premier Wen Jiabao’s prescient 2007 description of the Chinese economy as “unstable, unbalanced, uncoordinated, and unsustainable.” Given the experience of being silenced at the China Development Forum earlier in the year, I chose to exercise restraint in the conversation.
However, there is more to the current wave of Asian denial than China’s unwillingness to confront the severity of its economic problems; I was particularly struck by the prevailing inclination to ignore the potentially disastrous consequences of a trade shock should President-elect Donald Trump make good on his pledge to raise US tariffs by as much as 20% on all imports and 60% on imports from China, a promise he has reiterated, and which has ominous implications for the entire region.
In Asia, the prevailing view holds that Trump is bluffing to secure an early deal, pointing to his similarly aggressive stance in the 2018-19 trade war, which culminated in the ill-fated “phase one” trade deal of 2020, and speculating that the Chinese government will be even more compliant in the current economic climate, leading to hopes for an early 2025 summit between Trump and Xi that could lay the groundwork for another US-China deal.
This prevailing optimism about a new deal is reminiscent of what transpired in 2017, when Trump and Xi engaged in two lavish summits, including a dinner at Mar-a-Lago and another in Beijing, which created an atmosphere of bonhomie, as Trump showered praise on Xi, declaring, “My feeling toward you is an incredibly warm one,” leading many to believe that they would be able to broker a deal once again.
However, memories are apparently short in Asia, as these sumptuous gatherings were soon followed by a trade war that has continued unabated to this day, spearheaded by then-US Trade Representative Robert Lighthizer’s 2018 report on unfair Chinese trading practices, which provided a blueprint for Trump’s tariff agenda.
I have long employed a quasi-psychological framework to analyze the US-China rivalry, which, I believe, exhibits all the classic symptoms of codependency, a view that is reinforced by my observations during my most recent visit to Asia, where the comportment of leaders and officials betrayed an unmistakable inclination towards denial, a defense mechanism that psychologists generally regard as the most powerful of all.
