Trump Trade War: How China’s Growth Model and Gold Strategy Challenge Dollar Dominance

President Trump is pushing for a new trade deal with China during his upcoming meeting with Xi Jinping. However, the deeper issue lies beyond tariffs and negotiations. China’s economic model is focused on investment rather than consumption. This approach is disrupting global trade, fuelling financial imbalances, and threatening the dollar-based monetary system.

China’s Growth Model: Investment Over Consumption

For the past 25 years, China has relied on an investment-led growth model. This strategy suppresses wages and household consumption, allowing elites to accumulate savings and reinvest them in infrastructure and industrial development.

The chart below shows that China’s labour share of GDP has been in long-term decline. This trend reinforces the view that wage suppression has fuelled an investment-heavy model at the expense of household spending.

China has also invested heavily in unproductive sectors, leading to waste and rising debt. The country has 40,500 km of high-speed rail, far more than Europe (12,500 km) or the U.S. (750 km). Despite this, it continues to push investment while discouraging further rail expansion.

This is clearly reflected in the chart below, which shows that private-sector fixed capital formation has remained above 35% of GDP for decades, peaking near 40% during the height of China’s infrastructure boom.

The Real Estate Collapse and Shift to Manufacturing

The heavy investment in new infrastructure has resulted in a drop in property prices. The chart below shows that the property prices have been dropping since 2019 and reached 6.4%. Moreover, the credit flows into real estate have been restricted, triggering a controlled collapse.

Now, China has shifted its focus to manufacturing dominance. The country leads the world in industrial robots, with a 54% global share, compared to 16% in Europe and less than 10% in the U.S.

Moreover, the heavy investment in the renewable energy sector has started global price wars. Many foreign firms have exited or been forced to consolidate. A similar dynamic is unfolding in the electric vehicle (EV) sector.

China’s EV Boom and Price Wars Trigger Global Trade Friction

The chart below shows that China is also leading in EV sales, accounting for over 70% of global EV output. Moreover, Chinese firms are dominating the global EV industry. EV companies in China are cutting prices to boost sales both domestically and internationally. These price cuts have intensified trade tensions. The U.S. has imposed new tariffs, and the EU market is also under pressure, following the same path.

Meanwhile, Chinese exports to Japan, South Korea, and Canada are dropping. However, exports to Vietnam, India, Brazil, and Mexico are surging. Some Chinese companies are moving their manufacturing operations to Vietnam and other Asian countries to produce goods for export to global markets. Despite trade pressures, China’s trade surplus has surged in 2025, as shown in the chart below.

China’s massive trade surplus would normally lead to a stronger Chinese Yuan, but that hasn’t happened. Instead, Beijing appears to be suppressing its currency by directing surplus funds into foreign investments. At the same time, it is increasing purchases of gold (XAU) and silver (XAG) to prevent appreciation of the Yuan and reduce dependence on the US dollar..

The Shift to Gold: China Diversifies Reserves Beyond the US Dollar

China continues to add to its gold reserves. According to the World Gold Council, China’s gold reserves increased to 2,298.53 tonnes in Q2 2025, up from 2,292.31 tonnes in Q1 2025. Moreover, the People’s Bank of China (PBoC) reported its 11th consecutive monthly gold purchase, adding 1.2 tonnes in September and pushing the Q3 total to 5 tonnes.

At the same time, other central banks are also reducing their exposure to US Treasuries. Official reserves are increasingly shifting away from dollars toward gold.

Hedge funds have now become the largest marginal buyers of US Treasuries, often using highly leveraged trades. In response to declining demand for longer-term bonds, the US Treasury is exploring the use of stablecoins backed by short-term T-Bills.

Despite over $2 trillion in quantitative tightening (QT), the Federal Reserve’s balance sheet still holds a substantial number of long-dated Treasuries. This highlights the persistent structural stress in the U.S. debt market.

Conclusion: How China’s Economic Strategy Is Reshaping Global Finance

The surge in gold prices over the past two years reflects growing stress in the global financial system. China’s economic strategy is centred on investment-led growth, manufacturing capacity expansion, and rising gold reserves. These elements are increasingly shaping the international monetary order.

While President Trump’s trade discussions may focus on tariffs and bilateral deficits, there are deeper economic concerns at play. These include currency management, sustained trade surpluses, and the ongoing diversification of global reserves away from the U.S. dollar.

China’s evolving role in the global economy is driven by structural imbalances and highly competitive pricing in sectors like EVs and renewables. These dynamics are contributing to shifts that may challenge the long-term stability of the dollar-based monetary system.