1 Beijing scrambles to save face as Sino-US trade talks begin
Who sought who out for talks?
On May 6, Washington announced that U.S. Treasury Secretary Scott Bessent and U.S. trade representative Jamieson Greer would meet PRC vice premier and economic czar He Lifeng in Switzerland on May 10 for trade talks.
The PRC insisted that it was the U.S. side that reached out for negotiations following the Trump administration’s imposition of steep tariffs on Chinese imports. Lin Jian, spokesman for the PRC Ministry of Foreign Affairs, said on May 7 that, “The meeting between Chinese and U.S. senior officials on economic matters was requested by the U.S. side. Recently, the U.S. has said repeatedly it wants to negotiate with China.” So-called “new media” outlets under PRC state media also claimed that the U.S. “actively contacted” Beijing through various channels seeking trade negotiations.
Meanwhile, the U.S. indicated that it was the PRC side that sought them out first. In an interview with Fox News on May 1, U.S. Secretary of State Marco Rubio said that “the Chinese are reaching out. They want to meet. They want to talk. We’ve got people involved in that.” When asked by reporters on May 7, President Donald Trump said, “They said we initiated? Well, I think they ought to go back and study their files, OK? I do think that.”
On May 7, The Wall Street Journal reported that Beijing created an opening for trade discussions by reaching out to Washington over fentanyl, citing people familiar with the matter. The people said that the Chinese sent the Trump administration questions seeking clarity on how the president wants to handle the trafficking of chemical ingredients used to make fentanyl in late April. The White House gave Beijing a list of suggestions in response, and PRC Public Security Bureau chief Wang Xiaohong privately expressed interest in further engaging with Trump officials to address the issue by potentially meeting with them in the U.S. or another country, the people said.
On May 9, Reuters published a piece on how China decided to come to the table on U.S. tariffs, citing three officials familiar with Beijing’s thinking. One official said PRC commerce minister Wang Wentao quietly reached out to U.S. commerce minister Howard Lutnick after Trump’s “Liberation Day” tariffs, but was rebuffed as not senior enough. But as messaging from both sides became more conciliatory, Beijing put forward Xi confidant He Lifeng. This met Washington’s demand for substantive talks with a senior official with direct access to Xi Jinping and avoided exposing the Chinese leader to potential embarrassment. A source told Reuters that a major factor for the PRC rejecting direct talks between Trump and Xi was Trump’s public berating of Ukrainian president Volodymyr Zelensky in February, adding that any unscripted hostile interaction between Trump and Xi would be an unacceptable loss of face for Xi.
The Reuters report added the central push factors for Beijing’s climb-down were internal signals that Chinese companies were struggling to avoid bankruptcies and to replace the U.S. market, citing three people familiar with Beijing’s thinking. For instance:
- Furniture and toy makers, as well as textiles, were immediately impacted by Trump’s tariffs. U.S. diplomats in China have been closely tracking factory closures, strikes, and job losses in the industrial heartland in southern China.
- An official said Chinese companies were having trouble replacing the U.S. market as developing nations cannot buy as much and this was an existential threat to many firms that needed to be resolved in days or weeks.
- Beijing was concerned that it was left without a place at the negotiating table while its major trading partners like Vietnam, India, and Japan started talks with the United States, according to two officials familiar with Beijing’s thinking.
Big picture
Over the course of several days in early April 2025, the U.S. imposed 145 percent tariffs on Chinese imports and the PRC hit back with 125 percent tariffs on U.S. imports. Both sides exempted certain items from tariffs, such as semiconductors, solar panel manufacturing equipment, and consumer electronics on the U.S. side, and reportedly 131 items including pharmaceuticals and industrial chemicals on the Chinese side.
Our take
1. In considering the economic challenges facing China and the United States, Beijing has greater motivation to push for trade negotiations first. Below is a brief overview of the situation facing each side.
United States
The U.S. faces short-term economic hardships stemming from carryover issues under the Biden presidency, the impact of President Trump’s sweeping “Liberation Day” tariffs, and other factors:
Wall Street has shown unease over Trump’s tariffs, with investors concerned about inflationary pressures and disruptions to global supply chains. Notably, the S&P 500 experienced heightened volatility in the first quarter of 2025, although the markets eventually stabilized.
- The Federal Reserve maintained its benchmark interest rate in the 4.25 percent to 4.50 percent range, citing heightened uncertainty due to Trump’s tariffs. The Fed’s monetary restraint could amplify the economic drag from the tariffs and narrow the Trump administration’s policy maneuvering room. For instance, high interest rates will limit borrowing for consumers and businesses, undermining the stimulative effect that could come if Trump passes tax cuts and deregulation measures.
- The tariffs create immediate challenges for American businesses. Notably, small and medium-sized enterprises face supply chain disruptions, threatening their survival. The cost of certain goods could also go up over time, testing the public’s patience.
- The U.S. Bureau of Economic Analysis estimated that the U.S. GDP decreased at an annual rate of 0.3 percent in the first quarter of 2025. However, a deeper analysis indicates that America’s economic fundamentals are sound and there is significant growth potential:
- The GDP decline was primarily driven by a surge in imports and reduced government spending, both technical drags rather than signs of waning economic vitality. The import growth stemmed from businesses stockpiling in anticipation of Trump’s tariff hikes to avoid higher costs. However, imports from China are likely to sharply contract due to reciprocal tariffs, and their negative impact on the GDP is expected to greatly diminish moving forward.
- The drop in government spending reflects Trump’s early policies, including efforts by various government agencies to streamline their staff and the Department of Government Efficiency’s efforts to tackle waste and corruption. Government spending could drop even further with a Trump administration budget proposal that calls for a $163 billion cut to the federal budget. These measures help reduce government debt and improve America’s long-term fiscal health.
- Consumer and business confidence is rebounding. Data shows that personal consumption expenditures and private fixed investment grew by a combined 3.0 percent in the first quarter of 2025, indicating strong demand and investment momentum. There are also early signs of manufacturing returning to the U.S., including Apple’s $500 billion investment in U.S.-based manufacturing and infrastructure and TSMC’s $100 billion investment in U.S.-based semiconductor chip manufacturing.
PRC
China’s economy faces severe challenges in both the short and long term:
- Official PRC economic data hints at the impact of tariff fears under Trump and the steep tariffs that were later imposed.
- China’s manufacturing PMI in April 2025 fell to 44.7 from 49.0 in March, highlighting the struggles of industries reliant on the U.S. market. Meanwhile, China’s exports to the U.S. in April 2025 plummeted, dropping 21 percent compared to a 9.1 percent increase in March. Chinese goods, however, continued to bypass tariffs by being rerouted through Southeast Asian countries during their exemption period, with China’s exports to ASEAN surging from an 11.6 percent increase in March to a 20.8 percent rise in April. Yet the sharp decline in U.S.-bound exports has slowed China’s overall export growth, which decelerated from 12.2 percent in March to 7.9 percent in April.
- In the short term, the tariff-induced export contraction will undermine manufacturing confidence, with increased volatility in the stock and bond markets.
- In the long term, sustained tariffs could lead to global supply chain restructuring and a decline in China’s industrial competitiveness, particularly in high-tech sectors where U.S. restrictions further exacerbate challenges. The overall scale of China’s economy is also likely to shrink.
- The People’s Bank of China announced a 50 basis point cut in the reserve requirement ratio (to 6.2 percent) and a 10 basis point cut reduction in the 7-day reverse repo rate (to 1.4 percent, releasing about 1 trillion yuan in liquidity). PBoC governor Pan Gongsheng said that the “moderately loose” monetary policy was adopted to address global uncertainties, and reserve requirements for auto finance companies were eliminated to stimulate consumption. The move, which was intended to counter the tariff shock and weak domestic demand, is likely to have limited stimulus effect:
- The rate cut aims to lower financing costs, providing short-term relief to export-driven companies by easing debt pressures and maintaining cash flow to prevent immediate insolvency risks. Per PBoC data, the weighted average corporate loan rate fell to a historic low of 3.8 percent in the first quarter of 2025, providing a buffer against immediate insolvency risks for manufacturers hit by U.S. tariffs. However, persistent deflationary pressures are undermining the policy’s effectiveness. In the first four months of 2025, China’s CPI fell by 0.1 percent year-on-year, and the PPI declined by 2.7 percent year-on-year. The downward trend of both economic indicators reflects weak demand. This deflationary environment elevates real interest rates — calculated as nominal rates minus inflation — keeping borrowing costs elevated despite the lower nominal rate. For example, while the nominal corporate loan rate fell to 3.8 percent, deflation (based on PPI) pushed the real interest rate to approximately 6.5 percent, dampening the incentive for businesses to take on new loans. Compounding these challenges, unresolved U.S. tariff barriers, including rates as high as 145 percent on select Chinese goods, continue to shrink export markets. Corporate sentiment remains bearish, with firms pessimistic about sales prospects, leading to muted demand for new credit. While the rate cut eases production-side pressures by lowering financing costs, it does little to stimulate sales, leaving export-driven companies mired in structural challenges. As a result, the PBoC’s monetary easing offers only limited respite, with broader economic headwinds likely to persist.
- The PBoC’s RRR cut is geared toward alleviating banking sector pressures rather than spurring economic expansion. PBoC data indicates that, as of March 31, 2025, commercial banks’ excess reserve ratio sank to 1.2 percent, the lowest since 2015 and a sharp drop from the 2.5 percent recorded pre-2020 pandemic. Concurrently, the banking sector’s net interest margin fell to a record low of 1.53 percent, reflecting severe liquidity constraints and eroding profitability. These metrics highlight the challenges posed by stringent reserve requirements and subdued loan demand, exacerbated by China’s economic slowdown and U.S. tariff pressures. With banks struggling to maintain adequate lendable funds, the liquidity injection offers critical relief to stabilize the financial system. However, its impact on broader economic growth is muted, as persistent weak demand and trade headwinds continue to limit credit uptake and investment activity.
- Reuters’ May 9 piece on why China climbed down on tariff talks indicates that Beijing is concerned about tariff-related business failures, raising unemployment, replacing the U.S. market, and being left out of trade negotiations with the United States.
2. Beijing is spinning the narrative that the U.S. first sought out China for talks primarily to save face. The CCP places an outsized importance on preserving its image (“great, glorious, correct”) because image affects political legitimacy and the tarnishing of image undermines regime stability over the long run. By claiming that the U.S. initiated the trade talks, the CCP is looking to mislead domestic audiences into believing that the U.S. cannot bear the consequences of the tariff war and blinked first in “great power” competition.
The CCP regime has on many occasions acted in a manner contradictory to its interests for the sake of saving face. For instance, PRC officials and propaganda outlets would come up with all sorts of reasons and explanations to justify the “scientific” basis of the “zero-COVID” policy during the three years of the COVID-19 pandemic. But when circumstances forced Beijing to do away with the policy, mainland media and officials ceased all mention of “zero-COVID” even as China faced outbreaks and likely COVID-related deaths over the following two years. Meanwhile, Beijing pressed ahead with reciprocal tariffs in response to Trump’s “Liberation Day” tariffs despite warnings from President Trump about the consequences of doing so. Later, Beijing would quietly exempt tariffs on over a hundred goods even as it publicly maintained a hardline stance.
