1 US-China trade war escalates with both sides levying steep tariffs
China, US levy additional tariffs
April 7
1. President Donald Trump wrote in a post on Truth Social that the U.S. will impose additional tariffs on China if it does not withdraw its retaliatory tariffs.
“Therefore, if China does not withdraw its 34 percent increase above their already long term trading abuses by tomorrow, April 8th, 2025, the United States will impose ADDITIONAL Tariffs on China of 50 percent, effective April 9th,” Trump wrote. He added that “all talks with China concerning their requested meetings with us will be terminated! Negotiations with other countries, which have also requested meetings, will begin taking place immediately.”
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Additional tariffs of 50 percent will hike the total U.S. tariff rate on most Chinese imports to 104 percent, with goods subjected to Section 301 tariffs potentially seeing rates rise to 126 percent.
2. U.S. Treasury Secretary Scott Bessent told Fox News that “almost 70 countries” have reached out to the Trump administration to negotiate tariffs. “So it’s going to be a busy April, May, maybe into June,” Bessent said.
April 8
1. Responding to Trump’s tariff post, the PRC commerce ministry said, “The U.S. side’s threat to escalate tariffs against China is a mistake on top of a mistake, once again exposing the American side’s blackmailing nature. If the U.S. insists on having its way, China will fight to the end.”
2. White House press secretary Karoline Leavitt said the new China tariffs that Trump announced would “be going into effect at 12.01 am” eastern time.
April 9
1. The PRC responded to Trump’s additional 50 percent tariffs on Chinese imports by imposing an additional 50 percent tariff on all U.S. imports, effective April 10. This takes the PRC’s total tariff on U.S. imports to 84 percent.
Separately, the PRC commerce ministry put six U.S. companies on its unreliable entity list. The companies are Shield AI, Sierra Nevada, Cyberlux, Edge Autonomy Operations, Group W, and Hudson Technologies.
2. U.S. Treasury Secretary Scott Bessent told Fox Business Network that the new PRC tariffs are a losing proposition for Beijing. “I think it’s unfortunate that the Chinese actually don’t want to come and negotiate, because they are the worst offenders in the international trading system,” he said.
3. Trump announced in a post on Truth Social that U.S. tariffs on China would be raised to 125 percent “effectively immediately” due to the PRC’s “lack of respect … to the world’s markets.”
Trump also said that tariffs on other countries would be paused for 90 days because more than 75 countries have reached out to the U.S. on tariff negotiations. He added that reciprocal tariffs during the 90 day period would be lowered to 10 percent, effective immediately.
When asked about increasing China tariffs beyond 125 percent at the White House, Trump said he “can’t imagine it” and that he does not think he would have to do so.
China, HK stock market crash
April 7
Many mainland Chinese stock indices fell sharply on the first trading day after China’s Qingming Festival holiday period in the wake of Trump’s sweeping tariffs. The Shanghai, Shenzhen, and ChiNext indices recorded their largest single-day drop in recent years:
- Shanghai Composite Index: Closed down 7.34 percent to 3,096 points. The index fell 11.2 percent compared to the peak of 3,489.78 points on Oct. 4, 2024 (following a sharp rally after the National Day holiday period and Beijing’s announcement of economic support measures).
- Shenzhen Component Index: Closed down 9.66 percent to 9,364.50 points.
- ChiNext Index: Closed down 12.50 percent to 1,807.21 points.
Hong Kong’s Hang Seng Index closed down 13.22 percent to 19,828 points, marking one of the largest single-day declines since 1997.
On the same day, three major central state-owned enterprises — Central Huijin, China Chengtong Holdings, and China Reform Holdings — each issued statements expressing confidence in the development prospects of China’s capital market, announcing increased holdings in stocks and exchange-traded funds, and pledging to firmly support the stable operation of the capital market. None of the three SOEs disclosed the specifics of their increased holdings.
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The U.S. stock market also saw declines on April 7 amid volatile trading. The S&P 500 closed down about 0.18 percent (about $75 billion in market capitalization) and the Dow Jones about 0.9 percent. The total market cap drop on April 7 was estimated at about $93.6 billion if the broader market mirrored the S&P 500’s decline.
PRC scholars slam Beijing’s tariff countermeasures
April 6
He Bin, the former deputy director of the Chinese Academy of Social Sciences’ Public Policy Research Center, wrote on Chinese social media that Beijing’s countermeasures to Trump tariffs were “completely misguided.” He gave an analogy, “It’s like saying, ‘If you dare hit your wife, I’ll hit my wife.’” He Bin added, “The U.S. raising tariffs is like lifting a rock only to drop it on its own feet. We shouldn’t be doing the same to ourselves.”
He argued that the most effective countermeasure is not tit-for-tat retaliation, but a comprehensive policy of economic openness, namely, unilaterally eliminating tariffs on imports from all countries.
Beijing confident in handling tariff fallout?
April 7
Bloomberg News reported that the CCP top leadership and senior officials across government entities met during the Qingming holiday weekend to discuss measures to stabilize the economy and markets in the face of Trump’s tariffs. The measures, some of which were planned before the tariffs, including boosting consumer spending, birth rate, and subsidies for exports, according to people familiar with the matter. Financial regulators also discussed details of a stabilization fund to support the stock market.
The people said that PRC officials concluded that China has a “sufficient arsenal of tools” to prop up the economy and tide over present troubles. They added that the scale and timing of the stimulus have not been finalized and the plan is still subject to change.
April 9
Reuters reported that the PRC’s top leaders are expected to hold a meeting as early as that day to discuss measures to boost domestic consumption and stabilize capital markets, citing people familiar with the matter.
2. The State Council released a 28,000-character white paper titled, “Some Issues Concerning China-U.S. Economic and Trade Relations” (關於中美經貿關係若干問題的中方立場).
In a press conference introducing the white paper, an official from the PRC commerce ministry said that China and the U.S. are “highly complementary” in areas such as natural endowments, human resources, markets, capital, and technology, and can fully achieve “mutual benefits and win-win cooperation.” However, U.S. “unilateralism and protectionism” have been on the rise in recent years, and America’s continuous introduction of economic and trade restriction measures such as additional tariffs on China have “severely disrupted normal China-U.S. economic and trade cooperation.” This has left China with “no choice” but to take “legitimate countermeasures.”
The official added that “there are no winners in a trade war.” While China does not want to fight a trade war, the PRC government “will never sit by while the legitimate rights and interests of the Chinese people are harmed or taken away.” The official said if the U.S. “insists on further escalating economic and trade restrictions,” then China, which “possesses resolute determination and a wide range of measures,” will “resolutely counter such actions and see it through to the end.”
Our take
1. The CCP authorities likely responded to Trump’s tariffs with countermeasures instead of rushing to negotiate with the United States in an attempt to preserve its “great, glorious, and correct” image (i.e. save “face”), appease domestic nationalistic sentiments, and signal the PRC’s “strength” in the hopes of gaining leverage for subsequent tariff negotiations with the United States. Beijing’s response, however, has only worsened its situation given the willingness of other nations to quickly seek tariff negotiations with Washington instead of lashing out with retaliatory levies and the Trump administration’s seeming intended design of using tariffs to counter the CCP threat (among other stated reasons).
Beijing also appears to have lost an opportunity to advance its global domination agenda. To demonstrate that it is a genuine “defender of globalism” and the “multipolar” order, the CCP could have dropped its tariffs with the U.S. and other countries and “expose” what it has long decried as “hypocrisy” on Washington’s part. Such a move would have likely enticed Trump to rapidly enter into negotiations with the PRC and make the CCP regime’s “community of shared future for mankind” seem like more than a cover for promoting its own hegemonic interests, thereby rallying developing countries and the Global South to Communist China. Instead, the CCP showed that it was just as “petty” as the U.S. by imposing retaliatory tariffs and ceding the “moral high ground,” while revealing its grandiose statements about “multipolarism” and safeguarding the international trade order as mere sloganing.
Given Trump’s commitment to tariffs, rebalancing the international trade order, and dealing with the CCP threat, he will likely deal with PRC countermeasures in an escalatory manner. Trump would also likely factor in China’s current economic weaknesses and problems in deciding to apply greater tariff pressure. Trump’s likely response to Beijing’s future countermoves puts Xi Jinping and the CCP between a rock and a hard place. Xi and the CCP cannot act cowed in the face of U.S. “bullying” lest their “quan wei” (authority and prestige) and “strongman” image take a hit. Meanwhile, lower level PRC officials and scholars do not have the incentive to directly advise Beijing to make compromises lest they are purged amid a strengthening “self-rectification” campaign. Unless there is a change in priorities, incentives, and world views on either side, the Sino-U.S. trade war is set to intensify — with no end in sight.
2. The U.S. tariffs on Chinese imports are already impacting China. Notably, the stock market gains that the CCP painstakingly achieved since it introduced economic support policies in September 2024 have been nearly wiped out in the market plunge on April 7. Hong Kong’s stock market losses also highlights the concerns of foreign investors about China’s economic future amid an escalating trade conflict with the United States.
The CCP is projecting confidence that it can handle the fallout of worsening Sino-U.S. trade relations with a “sufficient arsenal of tools” and measures. However, we believe that the PRC is unlikely to be able to offset the damage caused by the trade war regardless of what “tools” it brings out once U.S. tariffs become too steep.
Below are some takeaways:
i) Citigroup Inc. assessed that U.S. tariffs of 54 percent on Chinese imports will lower China’s GDP by 2.4 percent in 2025. Extrapolating from this, tariffs of 125 percent could see China’s GDP decrease by between 6.7 percent to 8.3 percent, or figures larger than the CCP’s projected growth target of “around 5 percent” in 2025. Setting aside potential data falsification, Beijing is highly unlikely to make up for a drop in the GDP of between 6.7 percent and 8.3 percent with the economic measures that it has floated thus far.
ii) In 2024, China’s GDP was 134.9 trillion yuan. GDP losses of 6.7 percent to 8.3 percent equate to about 9.04 trillion yuan to 11.20 trillion yuan. Assuming that the CCP authorities attempt to spur the economy through infrastructure investment and using a conservative infrastructure investment multiplier of 0.8 (where GDP loss is divided by required investment), Beijing would have to allocate between 11.3 trillion yuan to 14 trillion yuan. In a more pessimistic scenario with a multiplier of 0.5, the required investment could escalate to between 18.08 trillion yuan to 22.40 trillion yuan.
These figures pose a formidable challenge. The CCP authorities have planned to issue nearly 12 trillion yuan in bonds for 2025, an amount insufficient to cover even the conservative estimates. Funding such investments would consume 54 percent to 67 percent of China’s fiscal revenue, pushing government debt to potentially unsustainable levels. To bridge the gap, Beijing could resort to monetary easing, as evidenced by the recent injection of over 500 billion yuan into major state-owned banks. However, this approach risks exacerbating financial vulnerabilities, including asset bubbles and banking sector strain. With fiscal and monetary constraints tightening, China’s ability to stimulate growth through traditional infrastructure spending appears increasingly limited, raising concerns about long-term economic stability.
The CCP authorities also do not have the fiscal capacity to invest in large-scale infrastructure construction. In 2024, China’s total fiscal revenue was 28.5 trillion yuan (down 1.98 percent from a year ago) and its total expenditure reached 38.6 trillion yuan (up 2.7 percent from the previous year), leaving a fiscal deficit of 10.4 trillion yuan (up 17.9 percent year-on-year). China’s fiscal revenue is likely to drop even further and the deficit is likely to balloon in 2025 with the ongoing Sino-U.S. trade war, making it hard for Beijing to support infrastructure investment.
iii) Massive U.S. tariffs on Chinese products would accelerate the relocation of supply chains out from mainland China, resulting in lost production capacity and tax revenue. China’s loss of manufacturing capacity cannot be quickly recovered through stimulus policies alone. Meanwhile, small and medium-sized export enterprises, which typically have profit margins below 10 percent, would be rendered unprofitable by high tariff rates, leading to widespread business failure. Enterprises that are heavily reliant on the U.S. market like electronics, apparel, and manufacturing would bear the brunt of the tariffs.
iv) China’s export sector directly and indirectly supports about 180 million jobs, or approximately 25 percent of the workforce. Massive U.S. tariffs will inevitably affect those jobs and lead to a sharp rise in unemployment.
For instance, assuming that China’s exports to the U.S. drop by 50 percent in 2025 and that every $1 billion in exports is supported by 10,000 jobs, then as many as 26.23 million jobs would be affected (taking China’s exports to the U.S. at $524.656 billion in 2024). Factoring in the supply chain multiplier effect (between 1.5 to 2 times), between 39.35 million jobs to 52.47 million jobs could be affected by the U.S. tariffs.
Rising unemployment in China will reduce consumption, further driving up unemployment in the service and non-export manufacturing sectors. All in all, China’s unemployment rate could enter the double digits.
v) Beijing may boast of having a “sufficient arsenal of tools” to prop up the economy and tide over present troubles, but its economic support measures over the past two years have produced lackluster results and appear to have limited effectiveness. The Xi leadership will likely struggle to devise effective policies to deal with the tariff shock from the U.S. and hedge against various risks.
We believe that the impact of the U.S. tariffs on China — and the potential for further escalation — could bring an economic crisis to China that would reach or even surpass the level of the global financial crisis in September 2008 or the three years of “zero-COVID” lockdowns. Such an economic crisis would place tremendous pressure on Xi and the CCP, and coupled with Beijing’s intensifying “rectification” efforts, raise the probability of political Black Swans emerging in China.
2 Analyzing recent rumors and news of top level purges
Liu He’s son probed?
April 6
Financial Times reported that the CCP authorities are investigating Liu Tianran, the son of former PRC vice premier and Xi confidant Liu He, citing seven people familiar with the matter.
Per the report:
- Two people said that the investigation of Liu Tianran concerns suspected financial-related corruption.
- A former colleague of Liu Tianran said he had been “under investigation for a while” and “might have lost his freedom,” that is, he may have been arrested. Another person said Liu was already detained, while two others said he had been investigated for at least six months.
- A person who said that Liu Tianran was being probed over suspected corruption said that the CCP authorities first looked into him in connection with Ant Group’s $37 billion IPO, which Beijing stopped from going ahead in 2020. The probe of Liu turned up unrelated cases of corruption, and Xi had been given a report on the claims.
- A person said that Liu He “has been on a very tight leash,” adding that some people who were aware of the probe into Liu Tianran had assumed that Liu He had been keeping a low profile because of it. The FT said that Liu He regularly met foreigners after retiring in 2023, including former Treasury Secretary Janet Yellen in April 2024. However, Liu He’s meetings were “severely curtailed over the past year.”
- One person close to Liu Tianran rejected the FT’s allegations about him as being “not based on facts and totally untrue.”
Liu Tianran founded Skycus Capital, an investment company, in 2016 and served as its inaugural chairman. The FT said that Liu formally stepped down as Skycus chairman in April 2017, or six months before Liu He was elevated to the CCP Politburo.
He Weidong denies allegations against him?
April 7
Yuan Hongbing, an Australia-based Chinese dissident and jurist, told overseas Chinese media outlet Kanzhongguo that Central Military Commission vice chairman He Weidong allegedly wrote a “blood oath” recently pledging his loyalty to Xi Jinping, citing sources inside the CCP system. In the “blood oath,” He denied all allegations made against him by former CMC Political Work Department head Miao Hua and vouched that Eastern Theater Command commander Lin Xiangyang had exhibited no disloyal behavior.
Yuan claimed that Miao Hua had “frantically exposed and implicated others” after his arrest in November 2024. This resulted in the naming of around 1,300 individuals, including active-duty and civilian officers across all levels and even officials from the Central Commission for Discipline Inspection. Yuan noted that it is unclear if Miao Hua’s sweeping accusations was a deliberate campaign to confuse the public and create wrongful cases, and added that both the CCP and the Soviet Union have a long history of political purges following mass implications.
Yuan Hongbing said that He Weidong and Lin Xiangyang had commanded the People Liberation Army’s April 1 military drills targeting Taiwan under the close supervision of the CMC’s security forces. Also, the drills were allegedly halted abruptly after just two days because Xi Jinping had received an internal warning expressing concern that He and Lin might suddenly issue orders to open fire on Taiwan.
Backdrop
Rumors that CMC vice chairman He Weidong is being investigated have been circulating since the conclusion of the Two Sessions in March 2025. The most public sign that He could be in trouble is his absence from an annual tree-planting event on April 2 that was usually attended by both CMC vice chairs.
Our take
1. It is not unusual that Liu Tianran would be investigated even though his father Liu He is a Xi confidant and a former Politburo member. The Xi leadership’s “self-rectification” campaign appears to have been ratcheted up several notches after the 20th Party Congress and in the wake of the purge of former foreign minister Qin Gang and former defense minister Li Shangfu. Also, the CCP elite have long monopolized the financial system and sector, and Party princelings are likely involved in financial corruption of some sort to varying degrees.
A probe of Liu Tianran, however, does not necessarily mean that Xi Jinping and Liu He have fallen out, or that either has “lost power.” With the anti-corruption campaign probing the financial sector, it is inevitable that members of the CCP elite who are involved in finance would be caught up in sweeping investigations. Liu Tianran could also be treated with leniency (i.e. having him return any illicit gains, etc.) as long as the corruption he is involved in is not particularly severe, does not concern collusion with Xi’s factional rivals, and does not oppose or undermine Xi Jinping. Liu He could too escape unscathed if he is found to be not involved with his son’s schemes (assuming they exist).
It cannot be ruled out that an investigation into Liu Tianran, if indeed one is taking place, was orchestrated by “anti-Xi” forces looking to turn Xi Jinping’s anti-corruption campaign and prioritization of national security matters against the Xi camp itself. We previously analyzed that Qin Gang could have been an early victim of “anti-Xi” efforts. Regardless, the more allies and associates of allies that Xi purges, the more his “quan wei” would be undermined, and the more effective the political rumors and speculation about Xi “losing power” would become.
2. Yuan Hongbing’s Party insider information about Miao Hua and He Weidong is broadly consistent with CCP operations and power plays. To save his skin, Miao could have considered implicating as many officials as possible, particularly those of higher ranks. The logic behind this is that the Xi leadership would be left with a messy and destabilizing situation of having to investigate and possibly purge many high-level officials and a great swathe of lower officials, and Miao’s crimes would not be as “serious” as initially suspected if his higher-ups are involved.
Miao Hua could be bringing greater trouble upon himself if he has indeed outed thousands of officials. In Miao’s worst case scenario, senior officials who fear being implicated could find ways to silence him in custody.
Separately, Yuan’s claim that He Weidong had overseen the PLA’s military drills to intimidate Taiwan on April 1 is inconsistent with the growing likelihood that He is already in some sort of trouble. It is very implausible that the Xi leadership would trust He to lead sensitive military exercises when he is under suspicion of corruption, and rumors that He was being probed had emerged weeks before the April 1 drills.
3. Xi Jinping’s “self-rectification” campaign will likely broaden in scope and target even those considered to be “loyalist” as the anti-corruption authorities scramble to find work for themselves and build political capital, and as “anti-Xi” elements in the regime look to exploit loopholes to subvert his leadership. Sweeping and increasingly indiscriminate investigations will inevitably foster greater discontent towards Xi in the officialdom, fermenting the conditions for potentially serious political destabilization.
