1 Beijing suggests that China can withstand tariff pain even as early data looks troubling
PRC rejects talk of Sino-US trade dialogue progress
April 24
1. PRC foreign ministry spokesman Guo Jiakun said at a regular press conference that China and the U.S. are “not having any consultation or negotiation on tariffs, still less reaching a deal,” and reports of Sino-U.S. negotiations are “fake news.”
2. At a regular press conference, PRC commerce ministry spokesman He Yadong denied speculation of any progress in bilateral communications between the U.S. and China. He said that “unilateral tariff measures were initiated by the U.S.” and if the U.S. “truly wants to solve the problem, it should … completely cancel all unilateral tariff measures against China and find a way to resolve differences through equal dialogue.”
3. President Donald Trump refuted the PRC’s statement that the two sides have not held talks to ease trade tensions. Trump told reporters, “They had a meeting this morning. It doesn’t matter who ‘they’ is. We may reveal it later, but they had meetings this morning, and we’ve been meeting with China.”
State media attempts to spin trade slump into ‘good news’
April 18
The Suzhou Port announced that all its container terminals will offer free storage services for three months for loaded containers belonging to foreign trade enterprises in Suzhou from April 18 to July 17, 2025.
April 19
PRC state broadcaster CCTV reported that U.S.-bound shipment orders from children’s products manufacturer Goodbaby Group have been temporarily suspended and original export plans have been canceled, citing interviews conducted in Kunshan, Suzhou, and Jiangsu.
CCTV noted that while Goodbaby Group has paused most production and shipment of products bound for the U.S., its R&D department has not stopped working and has in fact become even busier. CCTV added that the company is planning to launch new products originally scheduled for release in 2026 or 2027 ahead of schedule this year.
April 21
The PRC transport ministry released data showing that ports across China handled 244 million tons of cargo in the week of April 7, a 9.7 percent decline from the previous week. The drop was larger than the 0.88 percent decline from the week of March 31 after the U.S. announced reciprocal tariffs.
April 22
Following the release of key first quarter foreign exchange revenue and expenditure data by the PRC State Administration of Foreign Exchange (SAFE), state mouthpiece Xinhua published an article titled, “Net Inflows, New Increases! Highlights in China’s Cross-border Capital Flows in Q1” (淨流入、淨增持！一季度我國跨境資金流動亮點多).
The article said that the official data showed net inflows of cross-border capital by enterprises and individuals in the non-banking sector reaching $51.7 billion in the first quarter of 2025, a “relatively high level” for the same period in history. The net inflow of cross-border funds under the goods trade account reached $206.3 billion, a year-on-year increase of 1.2 times.
The article quoted SAFE deputy director and spokesman Li Bin as saying that the rapid increase in net capital inflows from goods trade in the first quarter of the year reflects the “strong resilience of China’s foreign trade in overcoming external pressures.
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Per SAFE’s data, China recorded a foreign exchange settlement and sales deficit of $57.593 billion in the first quarter of 2025. This was more than double the $24.818 billion deficit during the same period in 2024, and indicates significantly increased capital outflow pressure.
Of the total deficit, the current account (including trade in goods and services) recorded a deficit of $12.864 billion, compared to a $938 million deficit in the same period last year. Meanwhile, the direct investment deficit reached $19.177 billion, compared to a $8.532 billion deficit in the same period in 2024.
April 24
At the annual meetings of the International Monetary Fund and World Bank in Washington D.C., People’s Bank of China governor Pan Gongsheng said that China’s economy had a “good start” in the first quarter and maintained a “positive recovery trend,” according to state media reports.
Pan said that China’s “innovation-driven momentum continues to be unleashed, domestic demand keeps expanding, and market vitality and confidence are further strengthened.” He added that the economy achieved “steady and relatively fast growth” with the first quarter GDP growing at 5.4 percent from a year ago. Pan further noted that China’s financial system remained stable “despite global uncertainties and external shocks,” with the financial markets “demonstrating strong resilience and smooth operation.”
Consumption shrinks in Beijing and Shanghai
April 18
The Beijing Municipal bureau of statistics released local consumption data for the January-March 2025 period:
- In March, total retail sales of consumer goods decreased by 9.9 percent year-on-year to 104.95 billion yuan.
- In the January-March period, total retail sales of consumer goods decreased by 3.3 percent year-on-year to 345.85 billion yuan.
April 23
The Shanghai Municipal bureau of statistics released local consumption data for the January-March 2025 period:
- In March, total retail sales of consumer goods decreased by 14.1 percent year-on-year to 128 billion yuan.
- In the January-March period, total retail sales of consumer goods decreased by 1.1 percent year-on-year to 405.745 billion yuan.
China to exempt some US goods from tariffs?
April 24
Bloomberg News reported that the PRC government is considering suspending its 125 percent tariff on some U.S. imports, citing people familiar with the matter. Those imports include medical equipment, some industrial chemicals like ethane, and plane leases.
Bloomberg said that the list of exemptions is still shifting and discussions may not progress. People familiar with the matter said that companies in vulnerable sectors have asked the authorities to submit the customs codes of U.S. goods that they need to be exempt from the U.S. tariffs. A person said at least one Chinese airline has been notified that payments to aircraft leasing firms located in free trade zones will not be subject to the new U.S. tariffs.
Bloomberg also noted that traders have been circulating purportedly tariff-exempt lists of customs codes that correlate to key chemicals and chip-making components.
April 25
1. Mainland media Caijing reported that eight tariff codes corresponding to semiconductors or integrated chips have been exempted from additional tariffs, citing multiple sources from Chinese technology companies with chip import needs. The exemption currently does not include memory chips. Caijing added that this means Chinese companies with fabrication locations in the U.S. do not have to pay import tariffs on some chips.
2. Reuters reported that China has exempted some goods from U.S. tariffs, including some pharmaceutical drugs, some aerospace equipment parts, and some chips.
Reuters also reported that a list of 131 categories of products that were supposedly under consideration for tariff exemptions was circulating among some businesses and trade groups and Chinese social media. The list included items like vaccines, chemicals, jet engines, and eight types of chips.
Backdrop
The Trump administration noted earlier in the week of April 21 that the current level of U.S. and China tariffs is not sustainable and the final U.S. levy may not be at the current 145 percent rate.
Our take
1. In response to the Trump administration’s more “conciliatory” stance on tariffs, the CCP authorities have opted to reject talks of trade negotiations, talk up the Chinese economy’s “resilience,” and signal that China can endure further tariff pain and engage in a prolonged trade war with the United States.
Beijing’s response is par for the course given that neither the PRC nor the U.S. is currently in a position to meet each other’s opening conditions to enter into negotiations. Therefore, the PRC has to maintain a hardline stance and not appear to be the first to make concessions. Meanwhile, the CCP’s talking up of the Chinese economy — which is in line with its tendency to hide flaws and only report “positive” things — appears to be partly an attempt to posture that China is able to withstand the pain of a tariff war and indirectly remind the White House of the potential impact of a near-“trade embargo” on U.S. supply chains.
As for the Trump administration’s “conciliatory” stance, we believe that they are looking to manage market expectations and prevent disappointment, ease concerns about Sino-U.S. decoupling, and coax Beijing to the negotiating table.
2. China’s economy is showing early signs of strain from the U.S.-China tariff war, and Beijing will find it difficult to endure prolonged trade tensions. Official economic data suggests that Beijing may need to quietly exempt certain industries from tariffs to mitigate further damage to its economy and industrial sectors. For instance, China has indicated it might waive tariffs on critical imports like ethane, a key petrochemical raw material, if trade talks with the U.S. progress positively. As the world’s leading plastics producer, China relies on ethane, with the U.S. supplying 65 percent of global production and China absorbing 45 percent of U.S. ethane exports. This softening stance aims to protect domestic industries while creating an opportunity for negotiations.
China’s willingness to consider tariff exemptions reflects both economic necessity and a strategic move to facilitate trade talks. By signaling flexibility, Beijing is protecting key industries and positioning tariff relief as a bargaining chip to encourage dialogue with the United States. This approach underscores China’s attempt to balance domestic economic stability with the need to project resilience in trade negotiations.
3. The tariff war is causing significant logistical challenges, with Chinese shipping containers bound for the U.S. accumulating at ports and freight transport nearly halted. If this situation persists, it could deepen investors’ pessimism about China’s economic outlook, accelerating capital outflows. This disruption highlights the broader economic risks China faces if trade tensions remain unresolved.
4. On paper, China’s trade surplus appears robust, with 2024 and Q1 2025 figures at $992.16 billion (up 20.5 percent) and $272.97 billion (up 48.6 percent), respectively. The reality, however, is less promising. The State Administration of Foreign Exchange reports that only $299.22 billion and $56.18 billion of the goods trade settlement surplus returned to China, representing just 30 percent and 20 percent of the total. This suggests that Chinese companies may be using exports to transfer capital overseas, undermining the perceived strength of China’s foreign exchange earnings.
Meanwhile, China’s consumption data reveals a troubling economic divide. First-tier cities like Beijing and Shanghai saw declines in March and the prior quarter, despite national retail sales growth of 5.9 percent in March and 4.6 percent for January-March. This discrepancy points to potential data manipulation by the National Bureau of Statistics and reflects a significant income drop in major cities, forcing residents to cut back on spending, particularly on durable goods. Economic conditions in smaller cities are likely even worse, amplifying concerns about China’s economic health.
5. The combined impact of logistical bottlenecks, capital outflows, and declining consumption underscores the severe economic toll of a prolonged tariff war on China. These challenges suggest that the CCP regime is under significant pressure and is likely eager to pursue negotiations with the U.S. to alleviate the mounting economic strain. But Beijing will find it difficult to enter into trade talks if it cannot overcome the issue of saving “face” (or “respect” in the CCP’s parlance) and reach some sort of mutual understanding with the United States.
2 April Politburo meeting rehashes economic policies in response to intensified US-China trade war
The CCP Politburo held a meeting on April 25 to analyze and discuss the current economic situation and economic policy. This was the first high-level Party meeting since President Donald Trump announced “reciprocal tariffs” on April 2 and subsequently raised tariffs on China to 145 percent.
The meeting noted that under the “comprehensive leadership over economic work” of Party Central with Comrade Xi Jinping at the core, the Chinese economy showed an “improving trend” and overall social stability has been maintained. Also, officials must strengthen “bottom-line thinking” and solidly carry out economic work as the impact of external shocks intensifies.
Noteworthy points from the Politburo meeting include:
- Overall economic tone: Continue with the principle of “seeking progress while maintaining stability” (穩中求進), coordinate domestic economic efforts with “international economic and trade struggles,” firmly “handle our own affairs well,” emphasize “stabilizing employment, enterprises, markets, and expectations,” and use the “certainty” of high-quality development to cope with the “uncertainty” of a rapidly changing external environment.
- Macroeconomic policy: Adopt a more proactive fiscal policy (including accelerating the issuance of special-purpose and ultra-long-term government bonds) and monetary policy (including timely reserve requirement ratio and interest rate cuts, and the creation of new structural tools).
- Boosting consumption: Raise incomes of low- and middle-income groups, vigorously develop service consumption, remove restrictive measures, and introduce service consumption and elderly care re-lending programs. Increase funding support for the “two new” policies (large-scale equipment renewal and consumer goods trade-in initiatives), and intensify implementation of the “two heavy” constructions (major national strategies and key security capability constructions).
- Industrial support: Assist struggling enterprises, promote integration of domestic and foreign trade, cultivate new quality productive forces, establish a “tech board” (科技板) in the bond market, and promote “AI+” industrial upgrades.
- Deepening reforms: Accelerate development of a unified national market, expand openness in the service sector, strengthen international cooperation, and oppose unilateral bullying.
- Risk prevention: Continue resolving local government debt and overdue payments to enterprises, advance urban village and dilapidated housing renovation, and push for a new model in the real estate sector.
- Social welfare: Ensure unemployment protection and relief, stabilize food prices, consolidate poverty alleviation achievements, and enhance workplace safety and disaster preparedness.
- Party leadership: Emphasize strengthening the Party’s comprehensive leadership over economic work and improving work style.
Our take
1. The April Politburo meeting sticks to the CCP’s standard operations of playing up the good and downplaying the bad (報喜不報憂) in discussing China’s current economic situation and economic policy. For instance, the meeting talked up the economy (“improving trend”) and praised the Xi leadership for the economic results. The only hint that Beijing is feeling pressured is the exhortation for officials to prepare for the worst (strengthen “bottom-line thinking” and solidly carry out economic work as “economic shocks intensify”) and be absolutely obedient to the Party (strengthening the Party’s comprehensive leadership over economic work and improving work style).
The policies introduced at the Politburo meeting are largely consistent with those introduced over the past two years, with no breakthrough reforms. The meeting also resorts to superficial sloganing like “handling our own affairs well” and boasting about the “certainty” of “high-quality development.” Beijing’s lack of fresh ideas and rehashing of measures that have not produced results suggest that it is still figuring out how to cope with the “rapidly changing external environment” caused by Trump’s tariffs. Assuming minimal changes in the trade war situation and Beijing’s economic policy framework, it is increasingly uncertain that the CCP authorities can effectively hedge against tariff risks this year and maintain economic growth.
2. China’s first quarter data indicates that its fiscal position is under significant strain and raises concerns about the sustainability of the PRC’s economic policies in the face of U.S. tariffs. According to the PRC Ministry of Finance, total fiscal revenue for Q1 2025 reached 6.94 trillion yuan, a 2.6 percent year-on-year decline, while expenditure rose 5.6 percent to 9.25 trillion yuan. This widened the fiscal deficit to 2.31 trillion yuan, a 41.3 percent surge from the previous year. With export-oriented firms facing potential losses or closures in April, fiscal revenue is likely to deteriorate further, underscoring the urgency for robust policy responses.
To counter tariff-induced economic pressures, the Politburo has proposed accelerating the issuance of local government special bonds and ultra-long-term national bonds. The funds from the bond sale would go towards transfer payments to local governments, ensuring the “three guarantees” (people’s livelihood, wages, and grassroots operations) and alleviating pressure from maturing local debts. However, excessive bond issuance comes with problems. China’s national bond issuance in 2025 is estimated to exceed 12 trillion yuan and potentially surpass 15 trillion yuan, far beyond the banking system’s capacity to absorb.
Meanwhile, data from the China Bond Information Network reveals that Q1 2025 saw national bond issuance of 3.27 trillion yuan (net issuance of 1.45 trillion yuan, a record high) and local government bond issuance of 2.84 trillion yuan, with half used to refinance implicit debt. Total bond issuance of 6.11 trillion yuan equates to a monthly liquidity drain of over 2 trillion yuan from financial markets. Banks, as primary bond buyers, face tightening liquidity, with net interest margins (declined to 1.52 percent in Q4 2024) expected to shrink further, eroding profitability and threatening financial stability.
The central bank’s proposed measures, including RRR cuts and interest rate reductions, aim to inject liquidity into the market but face significant constraints. These actions risk exacerbating renminbi depreciation pressures and accelerating capital outflows, which could further strain bank liquidity and heighten foreign exchange risks. The limited scope for monetary easing underscores the challenges of mitigating tariff impacts without triggering broader financial instability.
The Politburo’s macroeconomic strategy, while described as proactive, will likely offer only short-term relief and fail to address structural economic weaknesses. Policies such as increased bond issuance and monetary easing may stabilize local government operations and spur marginal growth, but their impact is curtailed by declining infrastructure investment efficiency, persistent consumer spending weakness, and the unresolved real estate crisis. Moreover, the aggressive bond issuance and liquidity constraints could amplify systemic risks, including tighter financial conditions and heightened vulnerability to capital flight.
In sum, Beijing’s current fiscal and monetary policies are unlikely to adequately offset the adverse effects of U.S. tariffs, with fiscal deficits and bond issuance set to reach unsustainable levels. Notably, the projected national bond issuance for 2025, potentially exceeding 15 trillion yuan, risks overwhelming the banking system’s capacity. Without bold structural reforms, Beijing’s ability to sustain economic growth amid external pressures remains in doubt, potentially deepening investor concerns about China’s long-term economic resilience.
3. The Politburo’s recent economic work arrangements have failed to deliver robust measures to counter the risks posed by escalating U.S. tariffs. This would likely undermine market confidence and prompt a bearish response in capital markets this week.
Beijing’s failure to effectively address tariff risks could have broader implications, potentially spilling over into the political sphere. If economic and financial instability intensifies, it may erode public and elite confidence in the Xi leadership’s ability to navigate external challenges. Such developments could trigger political risks, complicating Beijing’s efforts to maintain stability while managing domestic and international pressures.
