China Has Another Lever to Pull in Showdown With Trump: Factory Lines

With trade hostilities between the world’s two economic superpowers back on, China has sent the unmistakable message that it is ready to fight. A week ago, it invoked its grip over virtually the entire world’s supply of critical materials, breaking a delicate trade détente between the two countries.

Beijing feels it has another ace card: its booming factories. Even in the face of sky-high tariffs by President Trump, China’s manufacturing sector is helping to maintain growth and give the country’s top leader, Xi Jinping, a stronger hand to face down the United States.

The strength is on display in the city of Yiwu, home of the world’s biggest wholesale market, where sellers peddling toys, home electronics and drones are stuffed into complexes that span multiple city blocks. Last week, Yiwu unveiled another trade center, a facility the size of hundreds of football fields to house exporters and “showcase China’s hard-core manufacturing power to the world.”

Like many vendors in Yiwu, Gong Hao used to sell his plastic Hawaiian leis, party streamers and bunny ears to Americans. This year, he lost his U.S. customers but gained new buyers in Europe and Southeast Asia.

“American customers have little impact on us,” Mr. Gong said.

China’s factory prowess, helped by the government, is part of a tectonic shift taking place in the economy and hitting shores near and far as China sends more of what it makes to more places. Its trade surplus with the world this year — over $875 billion — is marching toward a record. Those exports accounted for as much as one third of China’s economic growth over the past year, a development that experts say will be hard to sustain.

The strategy is both necessary and perilous. The surging exports are flashing a warning sign about the broader Chinese economy, which is going through what economists call a deflationary shock. Data released on Monday showed that growth was stagnant over the summer as retail sales faltered. And China’s strategy to trade more with the rest of the world comes with the risk that other economies throw up their own barriers.

“Trade is effectively what’s keeping the lights on for China’s economy,” said Han Lin, the country director for the Asia Group, a consulting firm, and a former senior Wells Fargo banker in China.

Nearly a quarter of Fiona Zhou’s rubber chickens, ducks and other squeeze toys go to the United States. Her company, Kaqu Toys, delivered full-year orders for American importers in July and August, when Mr. Trump’s record-high tariffs on China were on a 90-day pause. She said she had given her customers a 5 percent discount to soften the blow of the higher costs caused by the tariffs. Now, with tariffs back on, Ms. Zhou is redirecting products once popular with Americans to Southeast Asia and South Africa.

At the Global Digital Trade Center, where she and dozens of other toy companies recently moved in, officials let vendors use internet that bypasses China’s Great Firewall so they can hawk their goods on platforms that are banned everywhere else in China, like TikTok and YouTube, Ms. Zhou said.

China needs to keep exporting overseas because it can’t find buyers at home.

Ye Chaoli sells snaggletoothed Labubu dolls, plush cartoon character toys and Hello Kitty rhinestone paraphernalia. Half of her business is devoted to selling in China, the rest to foreign markets like Russia.

“Business is getting worse,” Ms. Ye said. “Because of the current economic downturn, especially after the Covid-19 pandemic in China, the economy has been struggling.”

A grinding property crash in China that began four years ago has destroyed most household savings and continues to weigh heavily on sentiment. To soften the blow of the economic downturn, the government is subsidizing manufacturing.

The signs of stress are everywhere. People are anxious about their incomes and cautious about spending money. Households instead have been saving nearly as much as they did during the pandemic, when people faced indefinite lockdowns with no end in sight.

China’s renminbi currency, tightly managed and pegged to the U.S. dollar, has also weakened against many of its trading partners this year, though last week China’s central bank boosted the currency by setting its benchmark rate at its highest level in a year. The cost of capital is down as the central bank continues to cut rates.

Yet while these are all bad signs for the economy at home, they are making China’s exports overseas even more attractive.

“As things get worse at home, their exports get more competitive,” said Christopher Beddor, deputy director of China research at Gavekal Dragonomics. “The bottom line is that between the deflationary shock and depreciation in currency, China’s exports are just mechanically becoming way more competitive compared to many other countries.”

China’s exports in September grew at the fastest pace in six months to $328.6 billion, the largest monthly total this year, according to data released last week by the General Administration of Customs. Shipments to the United States dropped 27 percent, but they are surging just about everywhere else.

But China’s dependence on the rest of the world for its resilience in the trade war hangs on other countries’ staying open to its exports. It is already being met with resistance in some countries, including in Southeast Asia, where Chinese shipments have increased more than anywhere else in the world.

Among the chaos, Rhoda Nghelembi, 26, an entrepreneur from Tanzania, was looking at metal bangles and earrings. She has visited the city from her hometown, Dar es Salaam, seven times over the past three years, taking back goods to sell not just at home but in Kenya, Uganda and Congo.

“I see my future growing so big and rich because of China,” Ms. Nghelembi said. “China has many many opportunities.”

Li You contributed research.