Amid all the extraneous noises of geopolitics, war, domestic political tensions, Warsh spoke of one over-arching strategic consideration: It is high time to declare an end to the emergency state of monetary policy. That means that it is no longer appropriate for the Fed to maintain the emergency settings that were established 17 years ago in the depths of the Global Financial Crisis. That is true of the Fed’s balance sheet strategy, as Warsh has stressed for some time, and it is also the case with respect to his views on forward guidance of a pre-designated policy trajectory

This is a long overdue development. Like Japan, balance sheet leverage was put into play as the Fed ran out of basis points in the face of mounting deflationary risks. Forward guidance became an instrument of determination and commitment to prospective policy actions in the depths of crisis. Crisis-torn economies have a special need for such actions, especially when pre-crisis policy interest rate settings are close to the zero-bound as they were in 2002-04. Market participants need the assurance that while the central bank may be close to running out of traditional policy options, there are plenty of non-traditional, or unconventional, actions that could be deployed. Ben Bernanke made this case in a series of speeches in 2002 after the bursting of the dotcom bubble.

Until Kevin Warsh, however, no Fed Chair has spoken forcefully of postcrisis policy normalization — even though the crisis in question , as well as its precarious aftermath, ended over fifteen years ago. The longer the Fed maintained its crisis-dependent stance, the harder it became to break the financial markets of old habits.

Warsh’s Jackson Hole speech emphasized the heroic assumptions that are required to maintain a credible guidance of future policy intentions. Not only does such an approach require accurate forecasts of the dual-mandate objectives of inflation and employment, but it also needs model-based linkages back to the policy interest rate. As the new Fed Chair implies, there is no mechanistic Taylor-like rule that “could be rigorously relied upon” to provide a provide a policy reaction function to guide markets with any degree of precision.

Warsh concludes his conceptual case for normalization with the “hall-of mirrors” paradox — of markets focusing too much on a Fed guidance that draws its support from market and asset prices that were themselves outcomes of the Fed’s own prior messaging. As he put it, such circularity can blind the central bank to unexpected developments, leaving it unprepared for exogenous shocks in the future and, as a result, prone to policy blunders. The inflation problem of 2021-22 was an especially egregious example of that tendency. These are all inarguably powerful points in support of the case for ending crisis-determined emergency policies and communication strategies as critical first steps on the road to normalization.

Strategy is one thing; practical application of that strategy is another. Warsh is very clear in sending the operational message that elevated inflation should be the Fed’s “predominant focus right now.” This is consistent with his third key principle of monetary policy — the least ambiguous of the seven principles he elucidated in his Jackson Hole Speech — that “… there should be no misunderstanding … it is the Fed’s job to deliver stable prices.” By going on to stress that recent trends in underlying inflation have not meaningfully improved, there can be no mistaking the policy bias of monetary tightening.

There was far more in the Warsh speech than the points I have stressed above. Market commentary focused on his hawkish assessment of inflation, and there was an upfront discussion of AI-related complications to the interplay between economic growth, inflation, and interest rates. But, in my view, his effort to clarify and simplify the approach to monetary policy in a non-emergency setting deserves special emphasis. At the same time, it is equally responsible for the Fed to admit that it no longer feels compelled to make future promises to financial markets as to what and when comes next.

To be honest, the biggest concern I had with Kevin Warsh as Fed Chair had to do with the politics of his appointment. President Trump has long been vocal in expressing his views on the need for lower US interest rates. He demands blind obedience from those who serve at his pleasure. He attacked Jerome Powell unmercifully and repeatedly for his failures to deliver the interest rates that he wanted. I was concerned that Warsh had cut some type of political deal with the President in order to secure his appointment. His reassuring message at Jackson Hole not only dispels that concern but it sets out a perfectly reasonable path for a long overdue normalization of Fed policy. Kevin Warsh deserves great credit for establishing his mark as a serious and independent policymaker. He was very much on point in doing so.

Intervening in financial markets is a fool’s game. And yet many seem incapable of internalizing that lesson. So it is with US Treasury Secretary Scott Bessent, as he seeks to manipulate currency and bond markets.

Bessent has the world’s most consequential markets in his crosshairs. In targeting the foreign-exchange market, he is going after the largest and most liquid financial market in the world; according to the Bank for International Settlements’ latest triennial survey, over-the-counter foreign-exchange turnover reached $9.6 trillion per day in April 2025. Daily trading volume in Bessent’s other target, the $31.5 trillion US Treasury market (the world’s largest individual security market), currently averages about $1.2 trillion.

Bessent somehow believes that he knows better than markets. He thinks that the Japanese yen should be stronger (and, by inference, the dollar weaker) and that long-term US interest rates should be lower. Accordingly, in partnership with Japan’s finance ministry, Bessent intervened to support a weakening yen on July 31. While the scale of the yen purchases was not disclosed, a photograph of Bessent’s to-do list suggests that the US spent $5–10 billion, with Japan reportedly chipping in another $53 billion. A few weeks later, Bessent announced an increased buyback of long-dated US Treasuries that potentially works out to about $32 billion per quarter.

These are puny amounts relative to the trading volume in these vast markets. The combined yen intervention represents about 0.6% of daily foreign-exchange turnover (and less than 4% of daily net yen trading, while the support measures for long-dated bonds is equivalent to only about 0.1% of the market per quarter. Bessent has hinted that there could be more to come but without meaningful policy changes by the Fed or the Bank of Japan, the impact of tiny interventions in huge markets will likely be negligible.

There is a myth that, in the 1980s, coordinated currency intervention was decisive in addressing extreme swings in the value of the dollar, which was too strong in the mid-1980s and too weak a few years later. But the Plaza Accord, the agreement reached by the then-G5 in September 1985 to weaken the dollar, came fully seven months after the greenback peaked. The next joint intervention, the Louvre Accord, followed in February 1987, aimed at stabilizing international currency markets after the dollar’s subsequent plunge in 1985–86. But it came about a year and half before the dollar started bottoming out in 1989–90.

In other words, joint currency interventions by the major advanced nations did not match up well with major shifts in foreign-exchange markets. While the Plaza Accord piled onto a trend that was already underway, the Louvre Accord struggled to have any impact. Significantly, these actions did not break the back of currency speculators, as George Soros famously did when he bet against the British pound in 1992.

Bessent, who worked for Soros at the time of his famous attack on sterling and was part of the team that planned it, may be guilty of conflating today’s circumstances with those more than 30 years ago. Fond memories, however, often mislead today’s compasses.

As for Bessent’s intervention in the bond market, there is a slight twist. The Treasury has not only pledged to increase buybacks of long-dated bonds, but also has indicated a willingness to issue more short-term securities. This is not a formal “Operation Twist” like those orchestrated by the US Federal Reserve in 1961 and 2011–12 as part of a conscious effort to flatten or tilt down the yield curve. Again, the best that can be said of the current operation is that it may be an attempt to signal a change in debt management that might lead to a reduction in longer-term financing costs.

The early returns in the currency and bond markets offer little encouragement that Bessent’s interventions have made much of a difference. Any momentary blips immediately following the measures have subsequently been reversed. The yen remains weak, and rates on long-term bonds are basically back to where they were before the buyback announcement. Meanwhile, the dollar has weakened, and gold prices—possibly a new safe haven—have risen sharply.

If Bessent is following former European Central Bank President Mario Draghi’s 2012 motto and doing “whatever it takes” (originally referring to the preservation of the euro), he clearly has a lot more “whatever” to do.

What strikes me about Bessent’s role in Trump’s administration of sycophants is how dramatically he has changed from the man I first met in the mid-1990s. For a few years, Bessent was a regular attendee at Morgan Stanley’s fabled Lyford Cay investment conference. He moved on, and so did I. We reconnected at Yale, where in 2011 he invited me to speak at an undergraduate seminar on financial crises that he was teaching at one of the residential colleges.

Scott Bessent’s character has been transformed in the political arena. A year ago, I questioned his willingness to support many of Trump’s most outrageous economic positions, on everything from tariffs and growth to the integrity of the US Bureau of Labor Statistics and the veracity of the Yale Budget Lab.

Trump’s mendacity reminds me of Zhao Gao, a famous eunuch of the early Qin Dynasty (221–206 BC). According to legend, Zhao was a ruthless master of factual distortion. He even convinced the emperor at the time, Qin Er Shi, and his court that a deer was a horse. The 2026 version of Bessent seems more than willing to embrace the deer as a horse. Markets don’t like fables.

Bessent doesn’t think these markets are providing a ”fair” signal of their underlying fundamentals — that long-term US interest rates should be lower, the yen should be stronger, and by inference, the dollar weaker. Accordingly, in partnership with Japan’s Ministry of Finance, he committed the US Treasury to between $5 and $10 billion in support of a long weakening Japanese yen, while Japan has chipped with small change of another $53 billion. A few weeks later, the treasury secretary announced an increased buyback of long-dated US Treasury securities that works out to about $32 billion per quarter.

These are puny numbers relative to the vast size of both markets. The foreign exchange market is the largest and most liquid financial market in the world. In 2025, global FX turnover averaged about $9.5 trillion per day. By contrast, in the $31.5 trillion US Treasury market, the largest individual security market in the world, daily trading volume currently averages about $1.2 trillion, or 13% of that in FX markets.

The yen support move of the US and Japan, combined, works out to about to about 0.6% of total daily FX turnover (or nearly 4% of daily yen trading) while the Treasury support action is equivalent to only about 0.1% of the market per quarter. Bessent has suggested that the Treasury buyback initiative could be expanded and there is a related possibility of additional joint yen intervention as well. Either way, these actions are tiny, at best, a signaling mechanism of more market intervention to come.

There is a myth that coordinated currency intervention was decisive in the 1980s in addressing the extremes of US dollar valuations — too strong in the mid-1980s and too weak a few years later. It turns out that that the Plaza Accord, aimed at weakening an overvalued US dollar, came in September 1985, fully seven months after the dollar peaked in February of that year. A different result followed the joint intervention of the Louvre Accord in February 1987 that was aimed at stabilizing international currency markets after the dollar’s subsequent plunge of 1985-86; this intervention came about a year and half before the dollar started bottoming in 1989-90. (BIS data on the dollar’s real effective exchange rate against a basket of 27 major economies.)

In other words, the joint currency intervention of major industrial powers does not match up well with major shifts in global FX markets. The Plaza Accord piled on to a trend that was already unfolding and the Louvre Accord struggled to have any impact. Significantly, these joint actions did not break the back of currency speculators, as George Soros famously did in betting against the British pound in 1992. Bessent, working for Soros at the time, and part of the team planning that famous attack on sterling, may be guilty of conflating today’s circumstances with those he was involved with nearly 34 years ago. Fond memories do not make for great forecasts all these years later. I can certainly attest to that myself!

The early returns in the currency and bond markets offer little encouragement that the latest interventions have made much of a difference. Any momentary blips at the time of the moves have subsequently been reversed. The yen continues to weaken and rates on long Treasures are back to where they were before the buyback announcement. Meanwhile, the dollar has weakened and gold prices — possibly, a new safe haven — have moved sharply higher. If Mario Draghi’s 2012 motto of doing “whatever it takes” to support a then beleaguered euro holds true this time, Bessent clearly has a lot more of the whatever to do. A lot more.

I first met Scott Bessent in the mid-1990s. For a few years, he was a regular attendee at Morgan Stanley’s fabled Lyford Cay investment conference. He moved on and so did I. We reconnected at Yale, and in 2011 he invited me to speak at a seminar on financial crises that he was teaching at one of the residential colleges.

He went on to bigger and better things, and I am still at Yale. No complaints but just a few observations: Back then, I was struck by Scott’s modest demeaner and humility. I don’t see that today in his current high-profile position as chief economist of the Trump Administration. A year ago, I raised questions about his new role as sycophant that bordered on mendacity in supporting many of President Trump’s most outrageous positions on the economy — tariffs, jobs, growth, and the integrity of the Yale Budget Lab and the US Bureau of Labor Statistics.

Bessent, the politician, took me back to the ancient Chinese tales of Zhao Gao, the most famous eunuch of the early Qin Dynasty (200 BC). According to legend, Zhao was a ruthless master of factual distortion in providing advice to the emperor of the time, Qin Er Shi. He even convinced the emperor and his court that a deer was a horse. In his attempts to manipulate markets, Treasury Secretary Bessent is most assuredly not a horse.

With the world media overflowing in well-deserved tributes, let me add a few first-hand experiences to try and bring the legend to life. My most memorable encounters with Zhu Rogji center on the China Development Forum — an event he established in 2000. It was a brilliant concept. Zhu believed that the ministers of China’s State Council — the government he headed as Premier — should have to defend and debate the policies that had just been enacted at the National People’s Congress. He established the CDF to convene what was initially a small group of outside experts from academia, think tanks, and the business community to engage State leaders a couple of weeks after the conclusion of China’s Two Sessions.

Engagement is exactly what he got — the vigorous give and take of debate between inside (Chinese) and outside (foreign) experts, the latter group of which I was proud to be a part of. I was invited to the CDF from the start — conflicted from the first meeting but beginning in 2001, I attended the event for 25 consecutive years. Before being banned in 2026 by a CDF that now discourages the debate originally envisioned by Zhu Rongji — another story — I was the longest attending foreign delegate to what was China’s first and, eventually, its most prominent international conference.

CDF 2001 was especially memorable. First, I was astonished with the vigorous participation of the home team. In one of my panel sessions, Professor Wu Jinglian, a well-known pro-reform economist, and something as an intellectual mentor to Zhu Rongji, was sitting prominently in the front row; Wu, who I had met earlier, was brimming over with enthusiastic reactions and questions at the mere mention of market-based corporate restructuring . I was relatively new on the China circuit at the time and contrary to my expectations of a tightly controlled discourse, the early years of CDF were delivering precisely the spirited engagement that Zhu Rogji was seeking. Sadly, those days are now over.

Second, I was offered a spot as the keynote lunch speaker for CDF 2001. I warned of a likely downturn in the world economy, triggered by the bursting of the US dotcom bubble a year earlier and the collateral damage it had taken on other segments of the equity market. The Chinese jumped in with vigorous questions, but what I remember the most was being challenged by a fellow American, C. Fred Bergsten founder and President of what was then called the Institute for International Economics, a Washington DC think tank. Fred, who I knew well at the time, took the other side of the outlook and was far more optimistic than me.

All this is preamble to the main event of the CDF — a closing session at the Great Hall of the People with the host, Premier Zhu Rongji. It started with Sir John Bond, Chairman of HSBC and co-chair of CDF 2001, reading a lengthy report of our three days of meetings. Being jet-lagged, I started to nod off in my soft chair. Zhu quickly cut Bond off and said something to the effect of, “Send me the report, I will read it later. I heard there was an interesting debate about the economy between Roach and Bergsten. I would like to hear about that.”

I jumped and was simultaneously startled by a sharp elbow in my side, urging me to stand up and offer a summary of my view, which somehow, I did. Bergsten did the same. The Premier had a few questions and then adjourned the meeting. On the way out, he came over to me and said in perfect English, “Roach, I hope you are wrong, but we will plan as if you are right.”

A year later at my second CDF, Premier Zhu reviewed the state of the global economy, where growth had slowed in 2001 to about 2.5%, right on the threshold of the global recession I had warned of. He turned to me and simply said, “thank you.” China had, indeed, adopted pro-active fiscal measures to shield its economy from the tough global climate I had predicted; it ended up growing a little more than 8% in 2001. Zhu added, “You are a good friend of China.” He repeated those comments at a smaller meeting at Zhongnanhai with senior Morgan Stanley executives later that year, and with a characteristic sense of humor added, “That’s why we didn’t ask Bergsten back.” He also invited me to speak at his alma mater, Tsinghua University.

I have told parts of this story several times over the years. That single comment from Zhu Rongji about being a good friend of China subsequently opened many a door for me in official Chinese policy circles. That included building strong relationships with several of Zhu’s protégés who went on to hold senior policy positions in China — like central banker Zhou Xiaochuan, Finance Minister Lou Jiwei, Vice Premier Wang Qishan, and senior financial regulator Guo Shuqing. But the endorsement of the Premier was more than just a door-opener — it was a sign of trust from the top that added considerable credibility to my reputation inside of China, especially regarding analysis of the Chinese and global economy.

There were several other occasions when I had the opportunity to see Zhu Rongji in action. An especially notable encounter was an April 1999 speech he gave to the Economic Club of New York. After a disappointing meeting with President Clinton in Washington, Zhu mixed both English and Mandarin together in making a compelling case for tying Chinese reforms to WTO accession. It was an amazing speech. The air was electric with enthusiasm — you honestly did not need a translator to understand his message. That speech, along with pressure from the US business community, turned out to be pivotal in getting Clinton to change his mind on China’s entry into the rules-based global trading system.

A more personal encounter came at a conference in Beijing in late 2000. A large group of attendees was standing around the perimeter of a reception room, and Zhu made the rounds personally greeting all of us. When he came to me, the Premier glanced at my name badge and called me “Stanley Morgan.” He smiled when I corrected him and then we chatted a bit about his memorable 1999 speech in New York. There was an unfortunate (unrelated) security incident shortly after that, but the conference was quick to resume, and an unruffled premier delivered another strong message.

Several years later in late 2006, I followed up on Zhu’s earlier invitation and gave a lecture at Tsinghua University’s School of Economics and Management (SEM). It was the first of many lectures I have since given at leading Chinese universities. With a demanding day job, Zhu had stepped down a few years earlier from his position as Founding Dean of SEM but still chaired the Advisory Board. An overflow audience of extraordinarily bright, well-informed students peppered me with tough questions for at least an hour after my formal remarks. Zhu Rongji was not in the room that night, but his spirit of engagement and the talent he attracted was on full display.

No leader is perfect, and that includes Zhu Rongji. Like others before him, as well as his senior leadership partner, Jiang Zemin, he endorsed hyper growth as the antidote to much that was still ailing China at the time. It fell to his successor, Wen Jiabao, to raise questions about a growth recipe that was increasingly “unstable, unbalanced, uncoordinated, and unsustainable.” Those questions, of course, remain unanswered today. Zhu is often cited as expressing regrets that he had only one five-year term to serve as premier. Count me as one who shares that regret. Zhu Rongji’s strength was at its greatest in answering China’s toughest questions.

Yet the Chinese leadership continues to march on, fixated on a growth model that draws unsustainable support from innovation, new technologies, and other trappings of what they now call “new quality productive forces.” Xi Jinping is the champion of this approach, paying lip service to Chinese consumption but unwilling to take the big steps required of consumer-led rebalancing. He warns , for example, that aggressive social safety net reforms — health care and retirement — will backfire; the excesses of fear-driven precautionary saving might decline and boost discretionary consumer demand, goes the argument, but at the cost of raising the corrosive risks of a western-style welfare state. Egad, who wants that?

Let me try a different angle that proved very accurate in foretelling the Japanese disease. Shown in the chart below are capital-output ratios for Japan and China. When the ratio rises, the economy experiences what economists call “capital deepening” — meaning that it takes ever larger increments of its capital stock to generate a unit of output (GDP). This, of course, is associated with progressively lower returns on the capital stock that presumably would set a self-corrective process in motion that would lead to a reduction of capital-intensive economic growth.

That was not the case for Japan in its first lost decade, when the capital-output ratio (shown in the green line) increased sharply by 24% from 1990 to 2000. As the stock market surged, Corporate Japan became convinced that capital deepening was the recipe for higher returns to shareholders. The bet ignored the bursting of the Japanese equity bubble in the early 1990s. Like all stock market implosions, denial was powerful in the early post-bubble period and investment-led capital deepening continued. For Fumio Hayashi and Edward Prescott, two of the earliest scholars of the Japanese disease, this was a powerful signal of the coming stagnation in the Japanese real economy; with one lost decade eventually turning into three, that forecast was very much on the mark.

By comparison, a more recent strain of Chinese capital deepening is very disturbing. From 2008 to 2023 (last data point available in the Penn World Tables), China’s capital-output ratio soared by 62% — over two and a half times the 24% increase in Japan during the 1990s. Moreover, by the end of this fifteen-year period, the Chinese ratio had basically converged on its Japanese counterpart. Unlike Japan where capital deepening continued in the face of post-bubble carnage in its equity market, China’s capital deepening took place in a more volatile equity market climate — three sharp run-ups in 2014-15, 2019-21, and again in 2024-26. Chinese capital deepening was driven less by the attraction of equity returns and more by the strong guidance of its leader, Xi Jinping, and his steadfast fixation on new quality productive forces.

(As an aside, I would venture the guess that China’s capital deepening has intensified in recent years beyond the period covered by the chart above (which ends in 2023). That’s because the AI-related data center construction frenzy is raising the capital stock at a time when Chinese GDP growth is slipping further, falling recently below its 4.5% to 5% target for 2026.)

There is a great read by Evan Osnos in the August 3 issue of The New Yorker that speaks to China’s glorious technology-led future if it stays its recent course. Entitled “The Future, Made in China,” his latest piece is loaded with anecdotal tales of wonder about China’s robots, “dark” (i.e., completely automated) factories, high-speed EVs, and everything you want to know about AI. Osnos is a wonderful writer in The New Yorker tradition, but I was left wondering if he hasn’t taken some of the CCP’s bait too far — hook, line, and sinker.

The subtext of this article is America’s looming competitive battle with a rising superpower, a topic I have also addressed repeatedly in my own work. Like Osnos, I worry about this a good deal, but less so if China stays its course and more if the US falls into a MAGA sinkhole dominated by underinvestment in basic research and higher education, along with an arrogant disdain for expert advice. In another sense, I have to confess that the Osmos piece has a familiar ring in similar tales we heard about the Japanese techno miracle in the late 1980s — books and articles by Sony founder Akio Morita, Ezra Vogel, and Clyde Prestowitz. It’s not that they under-estimated America — they all missed what was to befall Japan.

Michael Pettis and I are kindred spirits in this debate. We have both focused for years on the imperatives of Chinese rebalancing. Our frameworks are a little different, but our bottom-line conclusions are very much the same. We agree on Japan where the problem was not so much its technological successes but the sustainability of its growth model. We both share the view that the same lesson might be very much be applicable to China. My point on capital deepening is offered in that same spirit — the sustainability of the Chinese growth model, which is now showing unmistakble signs of sputtering.

Recently, I wrote a Project Syndicate op-ed, “Yes, the Hong Kong of Old is Over,” and also posted it on LinkedIn. It was a follow-up to a controversial piece I had published about two and a half years ago in the Financial Times (“It pains me to say that Hong Kong is over”). In the past few days, my LinkedIn pages have overflowed with largely one-sided critical responses. Several were laced with distortions and ad hominem attacks on me and my distant (presumably disqualifying) residency in Connecticut. But they were the exceptions rather than the rule.

The bulk of the feedback has been exactly what I am looking for — strongly worded, focused criticism that picked apart my arguments and made me think about the main assumptions of my thesis. The strength of the responses was indicative of the depth of conviction that most of these (presumably) Hong Kongers feel in defense of their city. I respect and understand that. As a former resident and still frequent visitor, I, too, have openly confessed my love for the Hong Kong of old — on the pages of the South China Morning Post, as well as in a 2024 speech before Hong Kong’s distinguished Foreign Correspondent’s Club. But I digress.

Several readers took the time to write lengthy, thoughtful articles challenging my views on Hong Kong. Three of them were especially impressive — one by Viginia Lee ( lawyer/ solicitor from the Greater Bay area and a China-appointed attesting officer), another by Adam Clermont (an American-born lawyer living and practicing law in Hong Kong), and a third by Michael Wong (Deputy Financial Secretary of Hong Kong). Ms. Lee’s article was published as an opinion piece by China Daily; Mr. Clermont’s is available on LinkedIn; and Mr. Wong’s op-ed was published in traditional Chinese by Sing Tao.

The thrust of these articles took issue with my core point on Hong Kong’s transformation from old to new. Wong wants us still to view Hong Kong through the “One Country, Two Systems” lens. Lee and Clermont speak eloquently and more directly to my key point — the changes that occur in any city; they argue that, in this respect, Hong Kong is no different than other dynamic financial centers such as New York, London, or Singapore. Their key premise is that Hong Kong is just as much a part of China as New York is of the US, or London is of Britain.

Fair point — but not the one I am making. Conveniently overlooked is that the timeline of a 50-year handover to China has basically been cut in half by Beijing’s aggressive takeover in 2020 following massive public demonstrations. Ergo, the transformation of Hong Kong has occurred in the middle of the period when the city was still largely guaranteed a “high degree of autonomy” under its Basic Law. That autonomy gave it the freedom, at least on paper, to operate independently outside the legal and political structures of the mother country, the PRC. As a Pew Research survey conducted in mid-2023 shows, Hong Kongers still overwhelmingly supported those democratic rights after Beijing stepped in.

That is not a trivial detail. Beijing’s actions, as condoned by a pro-Beijing Hong Kong government, resulted in a forceful takeover of the city rather than a spontaneous, organic evolution of a dynamic urban center. Would the large outflow of expats have occurred had there not been such a forced development? Would six foreign judges have not resigned? Would bookstores not have been closed? Newspapers not shut down? More so-called dissidents not rounded up?

It’s one thing to love your city for all its history and traditions. It’s another thing to conveniently look the other way and ignore a much bigger force that connects the dots. The questions I raise are not about normal occurrences, nor spontaneous coincidences, for any city. They all happened after Beijing’s takeover. Right before your eyes. Resilience is Hong Kong’s timeworn battle cry. To me, it looks more like forced capitulation.

The other points in my thesis — especially IPO leadership and economic linkages to China — speak for themselves and, despite the howls of protests from some social media commentators, are not worth re-litigating again in print. But there is one overarching aspect of the debate that I want to conclude with — the character of the city. As the questions above imply, the character of Hong Kong is now under assault.

Yes, the city looks the same, and to many, especially those who focus on fine restaurants and the sleek, efficient MTR, it feels the same. But it’s not. Steeped in denial, the questions I raise anger Hong Kongers, and their fear of Beijing-sponsored retribution silences the free and open debate that was once a core attribute of the character of Hong Kong.

You get what you ask for on social media. There is no way to control the quality of the feedback, which ranges from highly constructive to vitriolic. Over a year and a half ago, I pulled the plug on Twitter/ X when the balance shifted toward anonymous (often bot-driven) guttural soundbites. I struggled with Bluesky and Threads but then settled on LinkedIn as a higher-quality platform — more limited distribution but connectivity with peer-level counterparts who generally delivered the type of feedback I was looking for.

That approach worked this time. Many thanks to those of you who responded forcefully and in most cases with dignity and clarity. You may not like what you read, and I may not agree with your feedback. But in the end, respectful dialogue is what a thriving marketplace of ideas is all about. I will continue my best to try and uphold that lofty standard.

He can’t help himself in playing the tariff card and, as a duly certified economist, neither can I. As long as the President continues to act out his McKinleyesque infatuation with what he has dubbed the “most beautiful word” in the dictionary, you can expect more of the same from me.

Why bother? Three reasons: Firstly, the economics I practice continues to judge this as a policy blunder of historic proportions. Secondly, Trump’s political MO is repetition; he tries to beat us down with a steady drumbeat of misguided policies on a multitude of fronts — from tariffs and alliances to Iran and the “rigged” 2020 presidential election. I am just as stubborn as him. Lastly, the title of this Substack is “Conflict.” It still focuses mainly on the on the US-China conflict, but thanks largely to President Trump there are plenty of other opportunities to broaden the scope.

Most of the tariff debate has focused on the first point, impact — or lack thereof. The Golden Age spiel of the President claims the impact is zero. By his reckoning, a low unemployment rate and sustained GDP growth, to say nothing of record stock market froth, only add to the gilt that has now transformed the Oval Office. Never mind that inflation and long-term interest rates have moved higher as most conventional tariff modeling would suggest. In Trump’s view, those are nothing more than the blips of a temporary “excursion.” As Maggie Haberman and Jonathan Swan document in Regime Change, it infuriates him to hear anything else.

Academics have written numerous serious papers on the impacts — both theoretical and empirical — of Trump’s tariffs. Believe it or not, an LLM search of peer-reviewed journal articles and working papers (NBER and CEPR) puts the number of these papers since January 2025 also at 18. (For what it’s worth, in Chinese culture, the number 18 symbolizes great wealth and prosperity — or, alternatively, the 18 levels of hell! Take your pick on the hidden message from Trump’s tariff fixation.)

The research shreds Trump’s view that tariffs are paid by other nations. It generally concludes that about 95% of the costs of Trump’s tariffs are borne by US consumers and businesses, with the bulk of that falling on consumers. For a CPI inflation rate running 3.5% in the year ending this June, the annualized tariff impact is about 0.7 percentage point, costing the average American family about $1,100 per year, according to the latest (July 24) estimates of the Yale Budget Lab.

These are meaningful but not devastating impacts. They are significant enough to influence monetary policy and boost the inflation premium embedded in the term structure of longer-term interest rates. Moreover, with tariffs having been changed more than 50 times under Trump, the uncertainty factor weighs heavily on the decision making of businesses and consumers, alike. And, of course, they have an impact on affordability, the big issue in the upcoming midterm elections.

So far, the high-flying AI-driven equity market has been immune to any resulting valuation pressures arising from the recent run-up in bond yields. Moreover, the lack of serious retaliation from most of America’s trading partners has been important in tempering Smoot-Hawley-like comparisons with the global trade war of the 1930s. On that point, I plead guilty … at least, for the time being. There are, however, still good reasons to worry about the increasingly global risks of protectionism; while my recent concerns have focused more on China and the massive export-led imbalances of its producer economy, the latest round of Trump tariffs is also ground for concern.

That brings me to the second reason for writing yet another piece on tariffs. While July 23 was not another April 2, 2025, Liberation Day fiasco, it is a clear sign that the Trump Administration is far from giving up on its signature international economic policy gambit. True to its promise after losing the emergency IEEPA tariff battle in the US Supreme Court five months ago, the Trump team has opted for a Section 301 back-up; the US Trade Representative investigated over 60 economies for unfair trading trade practices related to their alleged failure “to impose and effectively enforce a prohibition on the importation of goods produced with forced labor.” Finding all 60 countries guilty as charged — a rather remarkable coincidence — the USTR has concluded that a new tariff of 10% to 12.5% is appropriate for the full sample of investigated economies.

By Yale Budget Lab calculations, this will bring America’s average statutory tariff up to 11.1% immediately and to 11.8% by the end of this year. This is close to six times the average tariffs rates relative to those prevailing at the end of the Biden Administration in late 2024 and, yes, the highest since the 20% effective tariff rates in the Smoot Hawley days of the early 1930s. The latest announcements do, however, fall well short of the initial Liberation Day threat of 22.5%.

We learned two important lessons from Liberation Day: One, Trump’s trade policy pronouncements are hardly set in stone. As the markets swooned in early April 2025, his TACO instincts took over and he chickened out; the combination of a tariff pause and partial rollback limited overall tariff rates to about 10%, less than half the original “bluster rate” of Liberation Day. The actions of last week, which replace the temporary (and now expired) Section 122 tariffs that were put in place after the SCOTUS rejection of IEEPA tariffs, ups the ante only slightly from overall tariff rates prevailing at year-end 2025. Two, his latest Section 301 actions are more serious than the ludicrous emergency attempts under IEEPA. While there will undoubtedly be court cases testing the slippery legality of the forced-labor violation that all 60 investigated countries are being charged with, the US judicial system has normally granted presidents broad authority on Section 301 actions.

Finally, my Substack speaks for itself. We live in a world in conflict — whether we want to admit it or not. It is not just the United States and China. The Uppsala Conflict Data Program indicates that in 2025 there were 65 active state-based kinetic conflicts in the world, the highest reading since 1946 (see chart above). That is not exactly a heart-warming comparison. There is more than enough food for thought to keep me going for a long time.

Hong Kong deserves credit for putting up a fight. In the nearly two and a half years since I expressed the apparently controversial opinion that Hong Kong is “over,” the city’s boosters have orchestrated a determined campaign to prove otherwise.

At first glance, this heroic defense seems to have some merit. Hong Kong’s economy has been relatively resilient, and a resurgence of the Hang Seng index has erased memories of the 2018–20 collapse stemming from political turmoil. Moreover, the city has reclaimed its position as the global IPO leader, giving it bragging rights as Asia’s premier financial center. Paul Chan, Hong Kong’s financial secretary, and other leading government officials consistently sing its praises.

Beneath the surface, however, the story is very different. Beijing’s hostile takeover following the pro-democracy demonstrations of 2019–20 has transformed Hong Kong into just another big Chinese city. Today, its Mandarin name, Xiānggǎng (香港, “fragrant harbor”), which celebrates the city’s pre-colonial Chinese heritage, seems more apt than Hong Kong, a phonetic translation from Cantonese, the city’s long dominant dialect.

This dramatic transformation into Xiānggǎng is the real story. Hong Kong’s defenders are in denial about this new chameleon-like identity, instead viewing it as another example the city’s inherent resilience. Nice try.

IPO leadership, long the most precious jewel in the city’s financial-services crown, is a glaring case in point. The city’s return to the top spot in 2025 was driven by listings of mainland Chinese companies such as CATL, Luxshare Precision, Z.ai, Momenta, and Montage Technology. By one estimate, they account for as much as 90–95% of recent funds raised. Hong Kong is less a thriving global IPO market than a major platform for Chinese issuers.

The rule of law, long regarded as one of Hong Kong’s greatest institutional advantages, has been severely compromised. In 2020, China bypassed the Hong Kong legislature and imposed a sweeping national security law. Four years later, Hong Kong’s lawmakers rushed through Article 23, an expansion of the 2020 security law that integrated China’s national security framework into the city’s legal system. These changes have stifled open debate, resulted in new arrests and harsh sentences for previously imprisoned activists, led to closures of independent bookstores, and destroyed any semblance of a free press.

Moreover, six foreign judges have resigned from Hong Kong’s Court of Final Appeal, calling the independence of the city’s highest judicial authority into serious question. Among the departures was Jonathan Sumption, one of England’s most brilliant jurists, who warned in the Financial Times that a Mainland strain of “judicial ‘patriotism’” was poisoning the city’s legal system.

Lastly, there are the people. While Hong Kongers remain understandably proud of their heritage, and the city’s overall population has held steady at around 7.5 million since 2020, there has been a dramatic shift in the composition of the workforce. The Hong Kong government does not publish official emigration statistics by nationality, but research points to a significant outflow of expats, including many mid- and senior-level professionals, since 2020, followed by a surge of Chinese workers from the mainland. Walking the streets of Hong Kong today, one is just as likely to hear Mandarin as Cantonese.

Taken together, this represents a fundamental transformation in Hong Kong’s character. The city’s stunning outward appearance remains. But that hardly justifies the tales of competitive innovation that the pro-China camp spins. Conveniently left out of this narrative is that this resilience has been largely made in China, not in Hong Kong. China’s stock-market stimulus of September 2024, for example, propelled equity markets upward, unleashing a torrent of Chinese IPOs that were consciously steered to Hong Kong’s sophisticated equity-distribution platform. And now the PRC’s “national team” is attempting to do it again.

It is obvious that Hong Kong’s economic performance is closely correlated with China’s. Thus, sluggish Chinese GDP growth, which slid below target to 4.3% in the second quarter of 2026, will undoubtedly weigh down Hong Kong’s growth.

The Hong Kong government seems to think that Chinese-style central planning offers new hope for its economy and recently launched its first five-year plan. But, as China is painfully learning, such plans can often over-promise and under-deliver. This suggests that until there is a meaningful test of the downside—for the economy or the equity market—any conclusions drawn about Hong Kong’s newfound resilience are at best premature.

To some extent, I have become a lightning rod in the “Hong Kong is over” debate. Hong Kong and Chinese officials are quick to pounce on my comments. Local journalists often ask if I am ready to admit that I was wrong (particularly after I conceded that a managed stock market has risen more than I had expected). Just the other day, a leading reporter messaged me: “‘Hong Kong is over’ seems over. What would you say about it?” Well, let me be clear: the Hong Kong of old is, indeed, over. Go to Xiānggǎng and see for yourself.

But as you learn quickly on Wall Street, the past invariably offers promises to be broken. That could finally be the case for China as it comes face to face with its unsustainable economic imbalances. The latest statistics hint at the severity of this problem. Not only did overall economic growth of 4.3 per cent in the second quarter of 2026 slip below the lower bound of this year’s modest 4.5 to 5 per cent target set just a few months ago, but an unfathomable dichotomy has opened up in the structure of its gigantic economy.

Midway through 2026, the only source of meaningful strength on the demand side of the Chinese economy was in exports, which rose 27 per cent year-on-year in June. By contrast, over the same period, overall economic growth was dragged down by paltry increases in consumer-driven retail sales (up only 1 per cent in June) and sagging fixed investment (down 5.7 per cent in the first half).

While this weakness on the domestic front has been only partly offset by resilience in external demand — reflected by a modest 5.3 per cent year-over-year increase in industrial production — the contrast between the moribund consumer economy and the resilient producer economy could not be any sharper.

Imbalances do not last forever. Former Premier Wen Jiabao’s famous 2007 warning about an unstable and unbalanced Chinese economy sparked a vigorous debate. That gave rise to several major domestic policy initiatives such as the Common Prosperity Campaign to address the unequal distribution of income and wealth, supply-side structural reforms to avoid a Japan-style productivity slump, and a deleveraging campaign to cope with a big crisis in the property sector. While the jury is still out on the ultimate effectiveness of these policies, Beijing at least deserves credit for trying.

Since the days of Wen, I have bemoaned subpar Chinese consumption. Over the years, China’s leadership has paid only lip service to this issue. Follow-through on the consumption policy front remains discouraging — especially the lack of social safety-net reforms to healthcare and pensions that would reduce the excesses of precautionary household saving and boost discretionary consumer demand.

Some in China try to explain away a low consumption share of GDP as the inevitable result of an arithmetic mismatch arising from its leapfrog development model, which has drawn disproportionate support from surging investment and exports. Another argument has been made that investment should be redefined to include capital invested in human and social improvement. These arguments conclude that investment-led Chinese growth, the essence of its producer model, is here to stay in one form or another.

This is tightly aligned with the views of Xi Jinping, who has thrown his support behind a strategy aimed at improving Chinese living standards and competitiveness through emphasis on “new quality productive forces” such as AI, green technology, electric vehicles and other areas of advanced manufacturing.

But with domestic demand weak and getting weaker, the producer model is a recipe for excess supply that will flood overseas markets. Consequently, China will be facing tough foreign pushback over the external implications of its unflinching support for a producer economy. This increases the likelihood of protectionist actions, not just in the US but also in Europe and the global south.

With good reason. China already accounts for about 30 per cent of value added in global manufacturing. UN data suggest this share could rise towards 45 per cent by 2030. This would rival the peak share of global manufacturing in the US in the aftermath of the second world war. But there is a big difference between today’s China and earlier industrial powers: those economies of yesteryear enjoyed solid support from domestic consumers.

China’s steadfast reliance on the producer model is not just a test of the character of its economy. It is a test of the future for the global economy. The country is demanding far too much of a world fixated on cheap consumer goods. Ever-mounting imbalances brought the US and the world economy to their knees during the great financial crisis of 2008-09. It could do the same for China. How long can it last? Not much longer.

As you learn quickly on Wall Street, the past invariably offers promises to be broken. That could finally be the case for China as it comes face to face with yet another major gambit — unsustainable economic imbalances. The latest statistics hint at the severity of this problem. Not only did overall economic growth at 4.3% in the second quarter of 2026 slip below the lower bound of this year’s modest 4 ½% to 5.0% growth target set just a few months ago, but an unfathomable dichotomy has opened up in the structure of its gigantic economy.

At midyear 2026, the only source of meaningful strength on the demand side of the Chinese economy was in the export sector, where the monthly numbers point to a 27% increase in the year ending in June. By contrast, over the same period, overall economic growth was dragged down by paltry increases in consumer-driven retail sales (+1%) and sagging fixed investment (-5.7%). While this weakness in domestic demand has been only partly offset by resilience in external demand — providing a modest 5.3% boost to industrial production — the contrast between China’s moribund consumer economy and the resilient producer economy couldn’t be any sharper.

Imbalances don’t last forever. At some point, as we discovered during the Global Financial Crisis, they signal a breaking point. Former Premier Wen Jiabao’s famous 2007 warning about an unstable and unbalanced Chinese economy sparked a vigorous rebalancing debate. That gave rise to several major domestic policy initiatives such as the Common Prosperity Campaign to address an unequal distribution of income and wealth, supply side structural reforms to avoid a Japanese-style productivity slump, and a deleveraging campaign to cope with a major property sector crisis. While the jury is still out on the ultimate effectiveness of these policies, Beijing at least gets credit for trying.

Since the days of Wen Jiabao, I have bemoaned the plight of subpar Chinese consumption. Over the years, China’s leadership has paid only lip service to this issue, although rhetorical support has increased somewhat over the past nine months. But the lack of discernible follow-through on the policy front remains discouraging. A recent article in the July 14 issue of Qiushi, the Party’s leading theoretical (ideological) journal that XI Jinping often uses as a platform for major pronouncements, attempts to explain why. Written by Xu Qiyuan, Deputy Director of the Institute of World Economics and Politics and fellow of the Chinese Academy of Social Sciences, the article (“Raising the Consumption Rate by Smoothing Economic Circulation”) draws a sharp distinction between the need for a new circular (or endogenous) model of household spending and timeworn transitory stimuli derisively dubbed “helicopter” money.

This doesn’t make much sense. Xu is not only contradicting China’s favored consumption policy initiative — an aggressive trade-in campaign for cars and other consumer durables — but he explains away a low consumption share of GDP as the inevitable outgrowth of an arithmetic “mismatch” arising from its leapfrog development model that drew disproportionate support from investment and exports. Curiously, Xu does not advocate abandoning this approach but merely offers a redefinition of investment to include human and social capital that “realign(s) investment with the requirements of high-quality development” intended to make society better off.

Xu Qiyuan is, in effect, arguing that investment-led Chinese growth, the essence of its producer model, is here to stay in one form or another. By inference, the same would apply to China’s rock-bottom share of household consumption.

This is tightly aligned with the views of Xi Jinping, who has thrown his full support behind a strategy aimed at improving Chinese living standards and competitiveness through emphasis on “new quality productive forces” such as artificial intelligence, green technologies, electric vehicles, and other areas of advanced manufacturing.

This points to an important shift in the China debate. With domestic demand weak and getting weaker, the producer model is a recipe for excess supply that will flood foreign markets. Consequently, unlike the internal deliberations that that took place in the years immediately following Wen Jiabao’s critique, China will now be facing tough foreign feedback over the external implications of its unflinching support for a producer economy. This increases the likelihood of protectionist actions, not just in the United States, but also in Europe and even the Global South (including India and the smaller ASEAN economies).

With good reason. China’s manufacturing sector already accounts for approximately 30% of value added in global manufacturing. A United Nations study suggests this share could rise toward 45% by 2030. This would surpass previous peaks of Britain in the mid 19^th century and the United States in the immediate aftermath of World War II. But there is big difference between today’s China and earlier industrial powers: Unlike China, both the British and American economies of yesteryear enjoyed solid support from their domestic consumers.

China has long excelled in its economic identity as a producer. This goes back to Mao’s penchant for Stalinist central planning. China’s leaders, however, know little of the aspirational characteristics of the consumer model. Staying the current course is no longer an option. It is not just a test of the character of its own economy, but a test of the future for the global economy. China is demanding far too much of a world fixated on cheap consumer goods. Upping the ante on its producer model without supporting domestic Chinese consumption, is a recipe doomed to failure. How long can it last? Not much longer.

On the surface, this heroic defense appears to have considerable merit. The economy has been relatively resilient, and a resurgence of the stock market has erased memories of the 2018-20 collapse associated with political turmoil. Moreover, Hong Kong has reclaimed its former position of global IPO leadership, giving it bragging rights as Asia’s premier financial center. “Hong Kong is back,” proclaims Financial Secretary, Paul Chan, and other leading government officials.

Beneath the surface, however, a very different story has emerged. The pre-2019 Hong Kong of yesteryear is gone. Beijing’s hostile takeover following the pro-democracy demonstrations of 2019-20, has transformed Hong Kong into just another big Chinese city. Its Mandarin name of Xiānggǎng (香港: fragrant harbor), which celebrates its pre-colonial Chinese heritage, now seems far more appropriate than the Cantonese nomenclature of Hong Kong.

This dramatic transformation back into Xiānggǎng is the real story of Hong Kong — in terms of the city’s capital raising function, the rule of law, freedom of the press, the composition of the workforce, and the language of daily life. Hong Kong’s defenders are in denial of this new chameleon-like identity, viewing it, instead, as yet another example of its inherent resilience. Nothing could be further from the truth.

IPO leadership, long cherished as the most precious jewel in the crown of financial services, is a glaring case in point. Finance-centric Hong Kong has always put great emphasis on its global rankings in capital raising for new companies, especially when compared with other major financial centers in larger cities such as New York, London, Tokyo, and even Mumbai. It turns out, however, that Hong Kong’s most recent IPO underwriting ascendancy back to #1 in 2025 and early 2026 was dominated by Mainland Chinese listings; by one estimate, they account for as much as 90% to 95% of recent funds raised, including Chinese companies like CATL, Luxshare Precision, Z.ai (Zhipu AI), Momenta, and Montage Technology. Reflecting deliberate support from Beijing, Hong Kong is now less a thriving global IPO market than China’s principal international fundraising platform.

The rule of law, long believed to be one of Hong Kong’s greatest institutional advantages, has been severely compromised in the years following the pro-democracy demonstrations of 2019-20. China’s imposition of its own National Security Law in June 2020, followed in 2024 by a middle-of-the night enactment of Hong Kong’s Article 23 version of a domestic security framework, has stifled free and open debate, resulted in new arrests and harsh sentences for previously imprisoned activists, led to closures of independent bookstores, and resulted in the elimination of any semblance of a free press. Moreover, five of Hong Kong’s foreign judges have resigned from the Court of Final Appeals, drawing the autonomy of the city’s highest court into serious question; departures include Lord Jonathan Sumption, one of England’s most brilliant jurists, who warned in the Financial Times of a Beijing strain of “judicial patriotism” that was poisoning the city’s judicial system.

While the city’s overall population has held steady at about 7.5 million since 2020, there has been a dramatic shift in the composition of Hong Kong’s work force; reflecting a sharp departure of ex pats in 2021-22 immediately after the protests, a surge in Mainland immigrants was quick to follow in 2023. While the Hong Kong government does not publish official emigration statistics by nationality, most research points to an outflow of Western expatriates of between 80,000 to 120,000 since 2020 — down between 20% and 30% from pre-2020 highs and concentrated in industries such as finance, corporate law, accounting and consulting, media, regional headquarters of multinational corporations, and NGOs and policy organizations. Walking the streets of Hong Kong, today you are more likely to hear Mandarin than Cantonese, a dramatic shift in the tone of the city from its pre-2020 past.

All this points to a seismic transformation in the character of Hong Kong. The city is not “over” in the physical sense of its stunning outward appearance. Moreover, the pro-Beijing government has made a determined effort to spin a tale of resilience and competitive innovation. But without the direct intervention of PRC authorities, this tale would ring hollow. China’s major stock market stimulus of September 2024 propelled both Mainland equities and the Hang Seng upward, unleashing a torrent of IPOs that Beijing consciously steered into Hong Kong’s relatively sophisticated equity distribution platform. Xi Jinping and Donald Trump’s determined efforts at short-term rapprochement have taken the negative impacts of the US-China conflict off the table for the moment. And the stability of a still sluggish Chinese economy has put a floor on relatively subdued Hong Kong GDP growth. However, until there is a meaningful test of the downside — for the economy or the equity market — any conclusions on the special resilience of Hong Kong are premature.

I have become the lightning rod in the “Hong Kong is Over” debate. Without naming names, Hong Kong government officials have been quick to pounce on my arguments in almost Trumpian style, and their sympathetic counterparts in Beijing have piled on, by stifling my freedom of expression in China. I am constantly inundated with requests from news reporters and other media outlets to atone for my sins and admit that I was wrong. As I have marked my views to market over the past two and a half years — conceding that a managed stock market has risen more than I had expected (yet remains about 20% below its February 2021 highs) — many locals have incorrectly characterized this as an apology or a concession. Just the other day, I received the following query from a leading (again unnamed) journalist: “Hong Kong is over” seems over. What would you say about it?” Well, let me make it crystal clear as to what I say about it: The Hong Kong of old is over. Go to Xiānggǎng and see for yourself.

NOTE: This is an edited version of my June 22 Substack post, “The Unbalancing of Chinese Rebalancing.” With apologies, it corrects an earlier exaggeration of my claim to be the first to write about Chinese rebalancing to read that I was the first Western economist to emphasize the Chinese perspective on its rebalancing imperatives. Others, including Ben Bernanke, Martin Wolf, and Larry Summers, addressed this issue from a broader perspective by focusing on the “global saving glut.”

China’s efforts to rebalance its economy have been an abject failure. Nearly two decades after former Premier Wen Jiabao bemoaned the Chinese economy’s excessive dependence on investment- and export-led growth, the problem has gone from bad to worse. The lack of meaningful consumer-led rebalancing implies increased reliance on these time-worn sources of economic activity, raising critical questions for China and the rest of the world.

As the first Western economist to stress China’s perspective on the need for such rebalancing, I am especially disappointed to write these words. I remember sitting in a Beijing meeting room in March 2007, watching Wen’s press conference following the conclusion of the National People’s Congress. There was a small group of us in attendance, including some senior Chinese officials, when Wen uttered his now-famous critique of China’s economic structure. While seemingly strong on the surface, he cautioned, the economy was becoming increasingly “unstable, unbalanced, uncoordinated, and unsustainable.”

There was an audible gasp from the Chinese officials present in the room, who translated the premier’s remarks and underscored their significance, presaging a vigorous internal debate in the nation’s policy community. I went back to my hotel room and wrote my first piece on China’s rebalancing imperative, which became the basis for my testimony before the US Senate Finance Committee nearly two weeks later.

I stressed China’s newfound sense of urgency to shift its development model from investment and exports to consumer-led growth. I underscored the other structural changes this shift would entail: moving from manufacturing to services, and from excess saving to saving absorption, which would lower the current-account surplus and fund a larger social safety net. I took Wen’s “four uns,” as I later dubbed them, as an important signal from the Chinese leadership of its readiness to do what was necessary rebalance the economy. I was convinced that it was a matter of when, not if.

But it’s high time to face reality. China’s retail sales fell 0.6% year on year in May 2026, an unexpected drop following an anemic 0.2% increase in April, and the first monthly decline in three and a half years. Meanwhile, the latest reading of household consumption as a share of GDP is just 39.9%—virtually identical to the 2005 level (39.8%), which Wen had in hand when lamenting the “four uns” in early 2007. Given that the latest reading of this share is from 2024, and that Chinese consumption showed continued weakness in 2025 and early 2026, there is good reason to believe that the economy’s current proportion of consumption has fallen below Wen’s 2005 benchmark.

Several explanations for this outcome have been put forward: a protracted property crisis, the low share of household income, post-COVID scarring, demographic shifts, and high youth unemployment. My favorite explanation has long been an inadequate social safety net, which boosts fear-driven precautionary saving, that, in turn, inhibits discretionary consumption. While all these factors could very well be at work, excess precautionary saving is, in my view, the most important longer-term structural impediment to Chinese consumer demand.

Whatever the explanation, these developments have not gone unnoticed by senior Chinese leaders. President Xi Jinping recently emphasized the strategic importance of boosting domestic demand, which Premier Li Qiang’s March 2026 “work report” also stressed. Unfortunately, this has been trotted out as a priority so often over the past two decades that it has lost all credibility. While it is encouraging that China’s State Council recently relaxed some hukou restrictions, making migrant workers’ access to social insurance more portable, much more is needed to reduce household insecurity and end the cycle of over-promising and under-delivering.

Some dismiss the failure of China’s consumer-led rebalancing as a statistical mirage, especially because it purportedly excludes government support for “social transfer in kind” like education, health care, cultural amenities, and subsidized food. While there may be some technical validity to this claim, it does not change the bottom line: household consumption as a share of Chinese GDP—whether adjusted or unadjusted—is no higher today than it was when Wen Jiabao first drew attention to the issue.

This inertia has two worrying implications. First, the Chinese people remain on the outside looking in. The state, state-owned enterprises, and private companies continue to reap a disproportionate share of the fruits of Chinese economic development. This calls into question the prospects for the continued growth of the middle class, long seen as the aspirational beneficiary of prosperity in the People’s Republic of China.

Second, subpar consumption suggests that China will continue to rely on exports and investment to drive growth, especially the technology-led “new quality productive forces” that Xi Jinping steadfastly underscores. Yes, China has set a lower GDP growth target of 4.5–5% for 2026, roughly half the spectacular 9.3% growth trajectory from 1980 to 2020. But with China’s share of world GDP (in terms of purchasing power parity) nearly ten times bigger than it was in 1980, its exports now have a far greater impact on global GDP. By some estimates, China’s share of global manufacturing (in terms of value added) will rise from around 30% today to an astonishing 45% by 2030. The rest of the world is unlikely to be receptive to such an outcome, broadening the prospects of anti-China protectionism, from the US to Europe.

Wen Jiabao may be China’s forgotten premier, but the contradiction he highlighted in 2007—growth without rebalancing—remains the country’s greatest macroeconomic challenge. I have warned about this for years. And now, amid all the talk of China’s global ascendancy, the country’s failure to address its rebalancing imperatives could well end up being its Achilles’ heel.

As the first western economist to stress China’s perspective on the need for such rebalancing, I am especially disappointed to write these words. I remember very well sitting in a meeting room in Beijing on March 17, 2007, watching a press conference by then Premier Wen Jiabao following the conclusion of the National People’s Congress. There was a small group of us in attendance, including some senior Chinese officials, when Wen uttered his now famous critique of the structure of the Chinese economy. While strong on the surface, he argued, there was good reason to be more concerned about problems beneath the surface that were causing the Chinese economy to become increasingly “unstable, unbalanced, uncoordinated, and unsustainable.”

There was an audible gasp from the Chinese officials in the room, who translated the premier’s remarks to me and underscored their significance in sparking what quickly became an important internal debate in China. I went back to my hotel room and wrote my first piece on the rebalancing imperatives of the Chinese economy that became the basis for my testimony before the Senate Finance Committee nearly two weeks later on March 28, 2007. I stressed the growing urgency of likely shifts from investment- and export-led growth to more of a consumer-led impetus and what that implied for other dimensions of Chinese rebalancing — from manufacturing to services, from excess saving to saving absorption that would lower the current account surplus and fund a larger social safety net. I took the “four uns” of Wen Jiabao, as I later dubbed them, as an important signal from the Chinese leadership that it was prepared to face structural rebalancing imperatives head-on. I was convinced it was only a matter of when, not if.

And now, as the traders used to say to me ever so delicately in my Wall Street days, “It’s time to wake up and smell the coffee.” China’s retail sales fell 0.6% year-on-year in May 2026, an unexpected drop following an anemic 0.2% increase in April and the first monthly decline in 3½ years. Moreover, and to the broader point stressed by Wen Jiabao nearly twenty years ago, this latest decline in retail sales comes in the context of a Chinese household consumption share that stood at just 39.9% of nominal GDP in 2024. That is virtually identical to the 39.8% ratio for 2005 that Wen had in hand when he made his now famous “four uns” remarks in March 2007. It is important to stress the long lags in the consumption share data noted above; given the protracted weakness in Chinese consumption in 2025 and early 2026, there is good reason to believe that the current ratio of household consumption to GDP has fallen below the Wen 2005 benchmark.

Explanations of this outcome are endless. Among the more widespread hypotheses: a protracted property crisis, a low household income share of GDP, post-Covid scarring effects, demographic shifts, and high youth unemployment. My favorite explanation has long been an inadequate social safety net that boosts the fear-driven excesses of precautionary saving that, in turn, inhibits the rise in discretionary consumption. I would be the first to concede that all the above factors could well be at work. But in diagnosing a structural problem, it is especially important to look at longer-term structural impediments to consumption; in my view, fear-driven saving still looms most prominent in that perspective.

Whatever the explanation, these developments have not gone unnoticed by the senior leadership of the Chinese government. Xi Jinping now places emphasis on the strategic importance of boosting domestic demand and Premier Li Qiang’s March 2026 “work report” underscored the high priority of this focus. Unfortunately, these views have become an all-too familiar part of the Chinese policy refrain over the past two decades and, as a result, have lost their credibility. Yes, I am encouraged that China’s State Council is now allowing portability to some social insurance benefits for some 300 million migrant workers, a step in the right direction for so-called hukou reforms. But far more is needed to temper worker and household insecurity. In the end, results are far more important than over-promising on reforms. Unfortunately, the results are consistent with the very definition of abject failure stressed in the opening sentence above.

Some dismiss China’s failed consumer-led rebalancing as a statistical mirage, especially since it purportedly excludes government support for “social transfer in kind” like education, healthcare, cultural amenities, and subsidized food. While there may be some technical validity to this claim, it does not alter the basic structural conclusion stressed above: the household consumption share of nominal Chinese GDP — whether adjusted or unadjusted — is no higher today than it was in 2005 when Premier Wen first drew attention to this issue.

Two broad implications of China’s failed consumer-led rebalancing concern me the most: First, the Chinese people remain on the outside looking in. The State, State-owned enterprises, and private companies continue to reap a disproportionate share of the fruits of Chinese prosperity. This raises a profound question about the aspirational value proposition of the rising middle class in the People’s Republic of China.

Second, subpar consumption implies that Chinese growth requirements will once again be satisfied through increased export and investment shares of its economy. Yes, China has lowered its overall GDP growth target to 4.5% to 5.0% for 2026, about half the 9.3% growth trajectory from 1980 to 2020. But with the current size of the Chinese economy more than eight times the size (in purchasing power parity) than it was in 1980, exports, in particular, are having a far greater impact on global GDP. That spells an ever-increasing share of Chinese manufacturing in the world economy — from a current share of around 30% of global manufacturing to a ratio that some estimates put at an astonishing 45% by 2030. How receptive is the rest of the world likely to be to such an outcome? Anti-China protectionism seems more than likely under such a scenario, especially in Europe.

Wen Jiabao is China’s forgotten premier. But the strategic paradox he raised in 2007 — growth without rebalancing — is alive and well as China’s greatest macroeconomic challenge. I have warned about this for years. And now, amid all the talk of Chinese ascendancy in a post-conflict world, that could well be China’s most serious risk. Beijing is paying only lip service to its rebalancing imperatives.

First of all, it is important to keep in mind that the USTR is no longer the serious independent negotiating authority that it used to be. Its origins date back to the early 1960s when President Kennedy concluded that the State Department was no longer best suited to conduct trade negotiations. An early version of the USTR, the Office of the Special Trade Representative (STR), took over US negotiations in what became known as the Kennedy Round of multilateral trade negotiations (1964-67). It was renamed the USTR in 1979, and under the leadership of Carla Hills successfully led US negotiations for the Uruguay Round (1986-94). Both the STR and its successor, USTR, have always been organizationally situated in the Executive Office of the President. Under President Trump, with his long-standing disdain for trade deals of almost any sort, the USTR has been repeatedly tasked with doing his bidding in waging losing battles with America’s trading partners.

An hint of the shifting role of the USTR from negotiator to combatant was evident in the trade skirmishes with Japan in the early 1980s. During that period, a young Deputy Representative of the USTR by the name of Robert Lighthizer discovered that Section 301 of the Trade Act of 1974 could be invoked to put pressure on Japan for alleged unfair trading practices. Trained as a lawyer, with no understanding of the macroeconomic context of trade issues, it was Lighthizer’s first attempt to try and address America’s gaping trade deficit by hopelessly focusing on the largest bilateral piece of a multilateral imbalance. When he was promoted to head of the USTR during the first Trump Administration, he took the same failed approach with China. Unsurprisingly, while the Chinese imbalance got smaller, the overall trade deficit widened: the total US trade deficit in goods went from $792 billion in 2017 to $901 billion in 2020 (and in 2025 hit $1230 billion).

Jamieson Greer, the current USTR, is cut from the same cloth — a trade lawyer that doesn’t do macro. He had the unfortunate experience of studying under Robert Lighthizer as his chief of staff during Trump 1.0, and was credited with playing a major role in the so-called Phase I trade negotiations with China, another failed deal. And now he is at again, playing the Section 301 angle to counter the Supreme Court’s recent ruling to strike the so-called Liberation Day tariffs that Trump rolled out on April 2, 2025, as an emergency remedy to America’s gaping multilateral trade deficit. When SCOTUS ruled that there was “no there, there” (i.e., no emergency under so-called IEEPA provisions), Trump Administration officials, including the USTR, smugly warned of a “more legal” end-around. The USTR report of June 2, followed by proposed actions of new 10% to 12.5% tariffs on 60 of America’s trading partners, purportedly delivers on that promise.

Don’t kid yourself. Greer’s legal strategy is just as deficient as the one concocted by Lighthizer in 2018 to address America’s China problem. In 2018, it was unsubstantiated allegations of forced technology transfer, intellectual property theft, cyberhacking, and so-called predatory acquisitions by outbound Chinese scavengers. In 2026, it is allegations of worldwide abuses of forced labor that the USTR claims to qualify as a legitimate Section 301 complaint.

On one count, the USTR has gone a bit further in 2026 than it did in 2018. This time, the allegations are closer to being multilateral in scope, covering some 60 countries that allegedly engage in forced labor practices (54 of the 60), or do not enforce the forced labor restrictions they have on the books (6 of the 60). And this time there is an effort to marshal some semblance of macro evidence in support of those charges, namely statistics from the International Labor Organization that attempt to decompose worldwide forced labor trends unto state-imposed efforts and those in the private economy. But, as the chart above hints, the USTR doesn’t go into the weeds in making the case that its new Section 301 tariffs will replace those that were illegally imposed under IEEPA. Nor does it address the seemingly technical “burden-of-proof” issues pertaining to forced labor that may fall on importers (the US) or on foreign governments (Europe).

Moreover, to compensate for the paucity of micro, or product-specific, data in support these charges, the USTR presents three detailed case studies where US exporters have supposedly been damaged by unfair competition from foreign goods produced by forced labor — tobacco from Malawi, rice from Burma, and frozen beef from Brazil. In all these cases, the USTR notes that information on the role of “forced labor is limited due, in part, to its illicit nature.” It takes a similar tack in accusing China of forced labor transgression in polysilicon (i.e., solar cells) and cotton, problems they claim are exacerbated by supply-chain linkages and transshipments from other nations that are being accused of violating forced labor standards.

The June 2026 USTR report concludes with a country-by country assessment of forced labor practices and the impact that such actions may have on burdening or restricting US commerce. Unsurprisingly, all 60 countries are found guilty as charged. The USTR makes especially dubious and highly provocative cases against Europe and Canada. Yet in no instance is any hard evidence offered to support these conclusions; the closest the USTR comes to that is in Appendix C which provides “yes” or “no” subjective answers of forced labor impacts on a country-by-country basis for selected US imports of aluminum, cotton, cocoa, fish, coffee, nickel, palm oil, peanuts, polysilicon, rice, and tobacco. Like the 2018 USTR report, the 2026 effort mistakes anecdotal evidence for evidentiary confirmation of its sweeping charges. Written by lawyers, both reports are loaded with innumerable footnotes (1,139 in 2018 and 217 footnotes in 2026) to impress readers by seemingly authenticating these charges. But don’t mistake legalese for veracity. The smoking gun of competitive damage to the US doesn’t have any bullets.

Forced labor practices are a sad testimony to the horrific abuses faced by the poor in many parts of the world. Yet are they really all that different from the extremely tough conditions faced by the some 8 to 10 million illegal workers in the United States? Not only is the pot close to calling the kettle black, but the USTR appears to be continuing in the fine recent tradition of concocting yet another pretext for Trump’s illegal tariffs. It didn’t work before and seems highly unlikely to work this time.

What does this mean for China’s other red lines that Xi insists the US must respect — control over its other territories (like Xinjiang, Hong Kong, and Tibet) , the ruling monopoly of the Chinese Communist Party, and its right to development by resisting any US containment efforts? By sharpening the Taiwan red line, is Xi effectively diminishing importance of the others? At a minimum, this is a very confusing message to send. More worrisome for China is that this approach may well undermine Xi’s his multiple red-line negotiating strategy with the US.

Ever the tough dealmaker, Donald Trump appears to have a congenital problem with red-line inflation. The red-line bluffs of TACO are one thing as I pointed out in my criticism if XI Jinping’s approach, but Trump’s multiple non-negotiable positions on Iran are another matter altogether. As of this writing, the President is insisting that Iran should have no nuclear weapons capability and that it must re-open the Strait of Hormuz. And he bounces back and forth between a third red line — that the US must oversee the removal of Iran’s stockpile of enriched uranium and/or that Iran must remove all mines in the Strait of Hormuz within 30 days.

And now, just as Xi did with Taiwan at the Beijing summit, Trump is singling out one red line over the others — that Iran must ever forswear its desire to possess nuclear weapons. Ironically, in the most widely telegraphed ceasefire negotiations in history, this looks like the one US demand that is not likely to be met in the current round of negotiations. The problem with red line inflation, as I pointed out in my criticism of China, is that it can lead to a destabilizing false hierarchy of demands. Iran seems like to respect some combination of Trump’s second and third most important red lines — but not his number one insistence on nuclear weapons capability, at least not now.

Game theorists have a field day with the concept of multiple non-negotiable red lines. Thomas Schelling’s Nobel-prize winning contribution to the strategy of conflict argues that the power of the red line comes from its credibility. In a multiple red line scenario, if your adversary forces you to back down one position, then your reputation suffers as a tough adherent to your other so-called non-negotiable positions. It follows that the more red lines you insist upon, the less each one signals. From TACO to Iran, the dealmaker US president is utterly clueless about strategy.

Chinese President Xi Jinping sent an unmistakably tough message on Taiwan to US President Donald Trump during their recent summit in Beijing. Xi warned that if the issue was handled poorly, China and the United States would “collide or even clash,” creating an “extremely dangerous situation.” He stressed that Taiwan holds the key to Sino-American relations.

This is a classic example of the bright red lines that Xi has grown fond of drawing in recent years. In 2022, on the sidelines of a G20 meeting in Bali, he warned US President Joe Biden of four red lines in US-China relations: Taiwan, democracy and human rights, China’s political system, and its right to development. Thus, in addition to stressing China’s claim over Taiwan, Xi asserted the country’s strict control of Xinjiang, Hong Kong, and Tibet, as well as the Communist Party of China’s political monopoly, while rejecting any US efforts to contain China’s rise.

While Taiwan is always mentioned first in China’s red-line hierarchy, the increased emphasis on it at the Beijing summit was clearly intended to sharpen the distinction between this warning and the others. But the ranking of red lines produces more questions than answers. If China successfully enforces the red line on Taiwan, would that allow Beijing to ease its vigilance on the others? If not, what’s the point of differentiating between them?

More than a messaging problem, this is a worrisome form of what I call “red-line inflation.” To be sure, drawing a red line can be an effective tool of coercive diplomacy, so long as it satisfies four criteria: First, the behavior or action that crosses the line must be clearly defined. Second, the person or agency determining whether it has been crossed should be specified. Third, the consequences of crossing the line must be severe. Lastly, whoever determines whether the line has been crossed should have the political authority to carry out the stipulated response.

Former US President Barack Obama famously demonstrated how a red line can backfire when he explicitly warned Bashar al-Assad’s Syrian regime in August 2012 against the use of chemical weapons on civilians. One year later, when evidence confirmed widespread deaths from sarin gas attacks near Damascus, Obama waffled, opting for congressional consultation instead of military action. Ultimately, the US agreed to a Russian-brokered deal with Syria to dismantle the regime’s chemical-weapons arsenal. Obama’s red line turned into a failed test of US credibility rather than a forceful tool of restraint.

Notwithstanding the bombing of Iran as part of “Operation Epic Fury,” Trump’s threats suffer from a similar credibility problem, especially given his so-called TACO penchant for “always chickening out.” America’s red lines typically pertain to foreign dominance of military-enabling technologies, countering nuclear threats, defending the security of allies, and standing up for democratic values. Unlike China’s red lines, however, America’s are more loosely defined and often express the country’s aspirations more than concrete achievements.

That can lead to allegations of hypocrisy when the US demands that China respect a red line that its own officials have side-stepped. For example, after then-US Secretary of State Antony Blinken made critical comments about China’s human-rights record at a high-level exchange in Anchorage, Alaska, in early 2021, senior Chinese officials called out the United States for its own human rights record in the aftermath of America’s Black Lives Matter protests.

Multiple red lines send mixed signals. Is the country drawing them determined to assert its global power, or is it in the grip of a national paranoia?

Red-line inflation makes compromise on one issue, while remaining unyielding on others, look like surrender. Claiming a profusion of existential threats may not only weaken credibility, thereby incentivizing adversaries to call a country’s bluff, but may also raise the risk of accidental conflict.

By increasing the number of non-negotiable positions, multiple red lines reduce the space for effective diplomacy, without which leader-to-leader dialogues become all but meaningless. Focused on threats rather than conflict resolution, China’s red lines tend to concern sovereignty, territorial integrity, regime security, and national rejuvenation. By contrast, in the pre-Trump era, America’s are related to rules, alliance credibility, deterrence, and non-coercion. As was the case in Anchorage five years ago, these different perspectives often result in the two sides talking past each other—and potentially misinterpreting strong rhetoric as something more dangerous.

Any effort to limit red-line inflation is complicated by an asymmetrical aspect of the problem: While the US has increasingly emphasized the military threats posed by advanced technology, Xi’s blunt recent remarks in Beijing suggest that China has now gone much further in sharpening its focus on Taiwan. Without conceding any ground on its other perceived existential threats, China, in my view, has a more serious problem with red-line inflation than the US does.

This phenomenon is at odds with Xi’s emphasis on “constructive strategic stability” at the Beijing summit. If left unaddressed, red-line inflation risks suffocating China’s aspirations to be seen as a responsible steward of global affairs.

Xi has become enamored of red-line messaging to the United States in recent years. In 2022, on the sidelines of a G20 meeting in Bali, he warned President Joe Biden of four red lines in US-China relations: Taiwan, democracy and human rights, China’s system, and its right to development. The red line on democracy and human rights pertained to China’s strict control of Xinjiang, Hong Kong and Tibet; by system, he was referring to the supreme role of the CCP in all aspects of Chinese governance; and the right to development was a strong rejection of any efforts by the US to contain the rise of China.

While Taiwan is always mentioned first in China’s red-line hierarchy, the increased emphasis at the recent Beijing summit was clearly intended to make an even sharper distinction between this warning and the others. But how are we to interpret this ranking of multiple red lines? Is it enough for China to successfully enforce the Taiwan red line on its own? Would that then allow it to relax its vigilance on the others? If not, what’s the point of separating one red line (Taiwan) from the others? This is not just a problem in messaging — it sends very confusing signals on China’s external projection of power. It is a worrisome example of red-line inflation.

The red line has become an increasingly prevalent tool of coercive diplomacy in a conflict-prone world. To be effective, it must satisfy several criteria. First, clarity — what type of behavior or action crosses the line? Second, attribution — who determines whether the line has been crossed? Third, consequences — what happens if the line is crossed? And fourth, authority — does the leader who issues the red line warning have the domestic political backing to carry out the stipulated response?

China is hardly alone in this. US President Barack Obama famously drew a red line against Syria in August 2012 when he explicitly warned the Assad regime against the use of chemical weapons on its civilian population. Yet a year later, when evidence of large-scale sarin gas attacks near Damascus was confirmed, Obama waffled on the consequences of this action and opted instead for congressional consultation, ultimately followed by acceptance of a Russian brokered standdown with Syria. The red line drawn in the sand had apparently shifted and Obama’s ultimatum backfired. It ultimately turned into a failed test of US credibility rather than a forceful tool of restraint. Notwithstanding America’s “Epic Fury” air attack on Iran, Trump’s penchant for TACO-related threats suffers from a similar credibility problem.

Like China, the United States has also stressed the multiplicity of its own set of red lines. These typically pertain to resisting foreign dominance of military enabling technologies, standing firm against coercion and security of allies, resisting nuclear threats and espionage, and ultimately, stressing the defense of democratic values. Unlike China, America’s red lines are more loosely defined and often stretched by the pressures of domestic politics. That can complicate US-China disputes with allegations of hypocrisy when the US demands red-line respect from China on an issue that it has side-stepped at home. That was certainly true at a high-level exchange in Anchorage, Alaska in early 2021, when senior Chinese officials made direct reference to America’s wave of “black lives matter” protests in response to critical comments made by then Secretary of State Antony Blinken directed at China’s human rights record.

Multiple red lines send mixed signals. They raise questions as to whether nations are going all out in an aggressive exercise of external power, or are in the grips of a contagion of national paranoia? Multiple red lines not only blur priorities, but they also make compromise on one issue, while holding firm on others, look like surrender. Claims of a profusion of existential problems can not only weaken credibility and, therefore, incentivize adversaries to call a bluff the next time a red line warning is issued but they can also raise the odds of accidental conflict escalation.

Multiple red lines essentially expand the perimeter of non-negotiability and thereby reduce the scope for diplomacy. Without effective diplomacy, leader-to-leader dialogues become all but meaningless. Focused more on threats than conflict resolution, China tends to define its redlines around sovereignty, territorial integrity, regime security, and national rejuvenation. The United States focuses more on rules, alliance credibility, deterrence, and non-coercion. As was the case in Anchorage some five years ago, these different perspectives often allow the two sides to talk past each other, potentially misinterpreting strong rhetoric as existential threats.

It is important to limit red-line inflation by narrowing the scope of this profusion of existential threats. This is complicated by an asymmetrical aspect of the problem: While the United States has increased its emphasis on threats to military applications of advanced technology, Xi’s blunt remarks at the recent Beijing summit suggest that China has now gone much further in sharpening its focus on the Taiwan red line. Nor has China conceded much ground on its other perceived existential threats. Hence, my conclusion that China has a more serious red line inflation problem than the United States.

For major central banks, inflation-control is the raison d’être of monetary policy. For a world in conflict, the imperatives of red-line inflation control take on far greater importance. Xi Jinping’s emphasis on “constructive strategic stability” as the watchword of the recent Beijing summit is at odds with China’s mounting red line inflation problem. It undercuts the aspirations of a nation that now wants to be seen as the responsible steward of a new global harmony.

Last week, I sat down with John (virtually) and recorded a podcast that was mostly about China , the US-China relationship, and the Summit — but also a little about me. For those of you with a little extra time (about 33 minutes), you can find it on this link .

It was good they met and equally good that both went into the summit with the same modest expectations — achieving stability. Apart from Xi’s unmistakable warning of a potential US redline violation in Taiwan, the summit ended with a shared sense of “mission accomplished.” Post-summit spin has been predictably enthusiastic by both sides — “historic” according to Trump and a “landmark” in the words of Xi. But without deliverables, those words ring hollow.

As background for a new book that I am writing, I have reviewed the preceding 22 leader-to-leader summits between the US and China, dating back to the historic Mao Zedong-Richard Nixon meeting of 1972. Updating a taxonomy of such summitry originally developed by David Shambaugh many years ago, US-China summits can be put into six buckets: world changing, bilateral institutionalization, celebratory, place holding, crisis management, and dashed expectations (see table below). Only two summits are at the top in the “world changing” bucket — Mao-Nixon and Deng-Carter (1979) — while six fall into the bottom category, “dashed expectations,” including both Trump-Xi summits of 2017; these were glitzy gatherings — one in Mar-a-Lago and the other in Beijing — that gave the impression of celebrating a budding bromance between the two leaders but were quickly followed by the onset of the US-China trade war in 2018-19.

I would place the just competed summit in the “place holding” category — mid-range in terms of impact but leader-to-leader meetings that basically go through the motions of maintaining high level contact, as well as stabilizing the bilateral relationship during times of domestic uncertainty in either or both nations. This is not a bad result but is hardly worthy of the post-summit celebratory spin coming out of Beijing and Washington. It is also a tentative assessment that could improve if new deliverables are announced, or weaken, if new problems arise — including but not limited to the Taiwan problem that Xi highlighted.

Based on experience, there are always risks to a place holder summit. That is very much the case today. On the upside, are hints of a new collaborative working group on AI safety, as well as new bilateral boards of trade and investment. Having just published a piece with Max Baucus, former US ambassador to China, recommending that the US and China restart negotiations on a bilateral investment treaty, I found the possibility of a joint investment board especially intriguing — even though it would be considerably narrower by apparently focusing on non-sensitive sectors and have less room for negotiating leverage with the Chinese than a full-blown BIT.

Taiwan is the clear wildcard on the downside. It is not just that Xi Jinping uses the “red line” analogy as a hands-off warning to the United States. He has done that repeatedly in official speeches dating back to 2016. It’s that his latest reference explicitly spells out the consequences of a potential violation, as an “extremely dangerous situation” that, “if handled poorly,” could lead to “clashes and even conflicts” between the two superpowers. Donald Trump responded to this warning by, yes, handling it poorly — treating the latest $14 billion Taiwan arms proposal, following last year’s $11 billion sale, as something to be negotiated with Beijing. This is in direct violation of the third of the so-called Six Assurances of 1982, established during the Reagan Administration, which promises that “The United States would not consult with China in advance before making decisions about U.S. arms sales to Taiwan.” Ignoring this long-standing commitment, Trump stated on the return flight back to Washington that this arms agreement is, instead, a “very good negotiating chip.”

That leads me to conclude that the downside risks to my place-holder verdict on the May 14-15 Trump-Xi summit outweigh those on the upside by a considerable margin. It’s not just a misreading of Taiwan risks by President Trump that worries me. The real problem is with the US Congress, where there is broad bipartisan support for Taiwan independence, the most egregious violation imaginable of Xi’s red line. Trump has not only threatened the sanctity of the “Three Communiques and the Six Assurances” that have long anchored America’s Taiwan policy but in doing so he has opened the door for congressional interference in one of the most important tenets of US foreign policy — the “strategic ambiguity” of a One China Policy. Artfully crafted by Henry Kissinger some 45 years ago, this framework was always intended to allow for flexibility in dealing with China’s most sensitive problem. That is, until Trump — and his blatant disregard for history and strategy.

While the pundits have been quick to conclude that Xi Jinping came across as the stronger of the two leaders during the summit, I found one aspect of his performance disturbing: Once again, he tried to affix a special name to the US-China relationship and elevate it above other bilateral relationships in the world. In this summit, he dubbed it a “constructive strategic stability.” This is very reminiscent of his effort at the so-called Sunnnylands Summit of 2013, when he tried to draw US President Barack Obama into endorsing the idea of “a new model of major country relationships.” Obama came close to buying this idea from Xi, who was then in his first year of Chinese leadership. But he ultimately balked just as the US-China relationship headed downhill. It’s worth noting that the Sunnylands Summit also falls in the dashed expectations bucket in the taxonomy above, as Xi blatantly misled Obama on China’s territorial ambitions in the South China Sea.

Xi, of course, has also tried a similar approach with Russia, as China’s “partner without limits.” It’s as if he needs validation of his great-power ambitions by creating lofty images of shared global leadership. Xi even went out of his way to equate MAGA with the rejuvenation aspirations of the Chinese Dream, not the most comfortable comparison for many Americans but one that several, including yours truly, has also taken note of.

Diplomats are always relieved when a summit does no harm. That’s especially the case in a conflict-torn world like the one we live in today. In that respect, there is some sense of relief in a place holder summit. But going through the motions is hardly enough to shift the trajectory of the Sino-American relationship from conflict escalation to resolution. Maybe no harm for now — but still room for plenty of regret.