The US-China Thucydides Trap

China: the liquidity trap and the Thucydides trap

Summary: Mounting U.S. Tensions With China

China’s economy is faltering despite repeated attempts at stimulus. Declining money supply growth, plummeting loan demand, and a housing market stuck in freefall highlight a liquidity trap that even aggressive monetary easing has failed to resolve. Barclays' “Japanification Index” now ranks China ahead of Japan, underscoring the severity of its stagnation.

While stimulus efforts temporarily boosted equities, gains have been uneven, and structural challenges persist. Analysts estimate these measures will mitigate only half the economic drag, leaving China’s recovery fragile.

Meanwhile, tensions with the U.S. escalate on multiple fronts. The December 2024 hack of the U.S. Treasury, attributed to Chinese state-sponsored actors, epitomizes Beijing’s growing cyber capabilities. The breach adds to a long list of Chinese espionage campaigns targeting U.S. infrastructure, defense, and private industries. Over 90 documented campaigns since 2000 highlight China’s unparalleled hacking operations, often aligned with its “Made in China 2025” priorities.