1 Tariff war puts China’s economy under further strain
China’s factory activity contracts
May 31
The PRC National Bureau of Statistics announced that China’s manufacturing purchasing managers’ index increased by 0.5 from the previous month to 49.5, or below the 50-point mark separating contraction from growth.
June 3
The Caixin/S&P Global manufacturing PMI fell from 50.4 in April to 48.3 in May, a 32-month low and the first time since October 2024 that the index entered the contraction zone.
The Caixin/S&P Global manufacturing index is focused more on export-oriented and small firms in coastal regions. When exports were stronger previously, the Caixin survey results typically outperformed the official figures.
State Council implements ‘debt collection’ order for SMEs
June 1
The State Council’s revised Regulations on “ensuring timely payments to small- and medium-sized enterprises” (保障中小企業款項支付條例) came into effect.
Key provisions in the Regulations include:
- Government agencies, public institutions, and large enterprises — including central and state-owned enterprises — must pay SMEs for goods, construction projects, and services within 60 days.
- Government agencies, public institutions, and large enterprises are prohibited from forcing SMEs to accept non-cash payment methods such as commercial bills or electronic receivables certificates, and cannot use these non-cash methods as a disguised way to delay payments.
The State Council first issued the Regulations in July 2020, and they were revised in October 2024.
Backdrop
President Donald Trump announced his “Liberation Day” tariffs on April 2 and incrementally hiked U.S. tariffs on Chinese imports to a peak of 145 percent on April 9 in response to Beijing’s attitude to the initial tariffs and countermeasures. In response, the PRC increased its tariffs on U.S. imports to a peak of 125 percent on April 11.
Both sides agreed to a 90-day trade truce on May 12. Under this agreement, the U.S. lowered its tariffs on Chinese imports to 30 percent while the PRC reduced its tariffs on U.S. goods to 10 percent.
Our take
1. The contraction of China’s official PMI and the Caixin PMI in May 2025 highlights the impact of the Trump administration’s steep China tariffs imposed in April. In particular, the Caixin PMI figure, which tracks export-oriented SMEs along China’s coastal regions, reflects the disruption in China’s export sector.
Fueled by robust stockpiling by U.S. importers in anticipation and after confirmation of a Trump victory and incoming tariffs, China’s official PMI remained in the expansion territory from October 2024 through March 2025 (barring a dip in January due to the Chinese New Year holiday). However, the April PMI fell to 49.0 from 50.5 in March with the onset of the tariff war; China’s U.S. exports declined 21 percent to just $33.02 billion in April as tariff-related logistical problems emerged.
The U.S.-China tariff pause saw a surge in U.S. importer orders and a rise in demand for U.S.-bound shipping routes. Despite this, China’s PMI in May rose only marginally by 0.5 points, signaling cautious expansion among Chinese firms. The business skepticism is likely due to uncertainty about future U.S.-China trade dynamics, and bodes ill for China’s export and manufacturing sectors.
President Trump’s recent statements about China “violating” the Geneva deal and the PRC’s slow-walking of licenses for critical metals suggest that U.S.-China trade relations are likely to remain rocky in the near future. Consequently, any modest PMI gains are likely to be short-lived, with growth potentially unsustainable beyond August 2025 with the persistence of tariff pressures and geopolitical tensions.
2. Beijing’s implementation of Regulations to ensure timely payments to SMEs is aimed at mitigating cascading corporate debt, stimulating demand, and counteracting persistent deflationary pressures. However, entrenched issues such as substantial debt burdens, systemic inefficiencies, and governance challenges limit the policy’s effectiveness.
First, overdue payments from government entities and state-owned enterprises to private businesses significantly exacerbate China’s deflationary environment. Liquidity constraints deter corporate investment, while delayed wage payments suppress consumer spending, further weakening demand. Official data indicates that by the end of 2024, accounts receivable for industrial enterprises above a designated size exceeded 26 trillion yuan. A significant portion comprises debts owed by government agencies, public institutions, and large enterprises to private firms, as targeted by the Regulations. Practices such as local governments’ “debt criminalization” or SOEs extending payment terms through commercial bills inflate financial costs for businesses. At a 4 percent interest rate, the annual interest on 26 trillion yuan in receivables reaches 1 trillion yuan — equivalent to nearly half the 2.3 trillion yuan net profit of China’s state-owned commercial banks in 2024.
Second, strained local finances make it challenging for local governments to make a full repayment of overdue debts despite the Regulations. In 2024, local governments recorded total fiscal revenue of 18.1 trillion yuan (encompassing general public budgets, government fund budgets, and state-owned capital operating budgets) against expenditures of 34.2 trillion yuan, resulting in a 16.1 trillion yuan deficit. This fiscal shortfall suggests that local governments lack the resources to settle outstanding debts to enterprises, raising questions about their intent to prioritize repayment even if mandated to do so by the central government.
During the 2025 Two Sessions in March, the central government allocated 4.4 trillion yuan in special-purpose local government bonds for infrastructure, land acquisition, commercial housing purchases, and debt repayment. Approximately 1 trillion yuan — roughly a quarter — was designated for settling overdue payments to enterprises, covering only the equivalent of the interest on the 26 trillion yuan debt. April 2025 data from the People’s Bank of China shows local government deposits at approximately 12 trillion yuan, less than half the total receivables. While the exact share of debts owed by local governments and SOEs is unclear, their significant contribution necessitated the Regulations. Regardless, these figures underscore Beijing’s limited capacity to resolve this issue comprehensively.
3. Without a fundamental shift in economic policy, including moving away from Party-led control toward market-oriented reforms and redirecting funds from inefficient infrastructure to boost consumer spending, China’s economy will remain vulnerable. Escalating U.S.-China trade tensions, as seen in recent tariff disputes, are likely to intensify economic pressures, deepen deflation and threaten the CCP regime’s stability.
2 Xi meets Belarusian leader at Zhongnanhai after 14-day public ‘absence’
Xi meets Lukashenko
Xi Jinping met with Belarusian president Alexander Lukashenko in Beijing on June 4.
According to state mouthpiece Xinhua, Xi said that the two countries are “true friends and good partners,” while Lukashenko said he felt a “genuine sense of friendship” from China” during each of his 15 trips to the country.
Belarusian news agency BelTA said that the Xi-Lukashenko meeting at Zhongnanhai lasted two and a half hours. The two sides held a working discussion over a tea, followed by a one-on-one conversation between the two heads of state. Afterwards, a friendly luncheon was held. BelTA said that the arrangement reflects the special bond and friendship between the two leaders.
Xi was reported as telling Lukashenko that his office was “right next door” and this was the first time the latter was being received at Zhongnanhai. Meanwhile, Lukashenko said their meeting was “family-like. Not an official one, not a working one, but a family-like one.” He added that being invited into Xi’s home “speaks volumes” and that he was waiting to host Xi at his home.
Belarusian first deputy prime minister Nikolai Snopkov, who was also in China, told the media, “The official talks are just supplementary. The key lies in the visit itself — this format has never been used with any other world leaders. It’s a family-like friendly lunch, and that is the core.”
Xi invited Lukashenko to attend the Shanghai Cooperation Organization summit and a military parade to be held in Beijing between late August and early September.
While in Beijing, Lukashenko also held multiple meetings with representatives of the Chinese business community.
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Previously, BelTA reported on June 2 that Belarusian president Lukashenko would visit the PRC from June 2 to June 4. Also, Beijing would host a traditional, friendly family-like meeting between Lukashenko and Xi. The two leaders were expected to hold a one-on-on talk, followed by informal discussions on the current state and prospects of China-Belerus relations, with a focus on deepening bilateral ties through joint projects and multilateral initiatives.
Xi goes ‘missing’ for 14 days?
Xi Jinping did not make a public appearance between May 20 and June 3, sparking speculation about his whereabouts and grip on power.
Xi’s last public appearance as reported by state media was his inspection tour in Henan Province. CCTV’s Xinwen Lianbo aired a report on May 20. Since then, state media coverage of Xi consisted of letters and phone calls that Xi exchanged with foreign leaders, Xi’s past speeches, congratulatory messages by Xi, and military regulations signed by Xi. For instance, state media reported that Xi held phone calls with the leaders of France (May 21), Germany (May 23), and South Korea (June 4). Also, the CCP Central Committee’s ideological journal Qiushi published an article atttribued to Xi on the “accelerating the construction of an education powerhouse” on June 1 and Xinwen Lianbo continually featured “Xi Jinping Thought” in its lead stories.
During the 14-day period, other members of the Politburo Standing Committee like Li Qiang, Zhao Leji, and Ding Xuexiang made public appearances, per state media reports. Additionally, the CCP Politburo did not hold a meeting in May.
Some overseas Chinese commentators claimed that Xi’s “lack” of public appearances and “reduced visibility” in official media was “unusual.” They interpreted this as another sign of Xi “losing power” and suggested that the Party was facing serious internal problems. SinoInsider has occasionally debunked and expressed skepticism about the “Xi losing power” narrative, as well as explained its potential dangers.
Our take
1. Xi Jinping’s 14-day stretch without a public appearance is curious, but not without precedent. Since taking office, Xi has “disappeared” from public view for a lengthy period on at least three occasions, but re-emerged each time with his authority intact:
- August 2018: Xi Jinping made no public appearances for 19 days, but was still mentioned in official media. He later “re-emerged” on Aug. 19 at the conclusion of a Central Military Commission Party-building meeting that emphasized the Party’s absolute leadership over the military. The Sino-U.S. trade war was well underway in August 2018, with President Trump tariffs on $200 billion worth of Chinese goods to 25 percent.
- July and September 2022: Xi “disappeared” for over 10 days in both months, leading to various speculations.
- July 2024: Xi went “missing” for three weeks, resulting in speculation that he was suffering from an illness or had been subjected to a coup. We previously analyzed that it was more likely that Xi and other top officials were at the annual Beidaihe work retreat.
The speculation that Xi’s recent lengthy “absence” from public view is due to his “losing power” is not persuasive given that official PRC media maintained prominent propaganda and coverage of Xi and his political theories. If Xi was really in trouble or if there were “serious internal problems” in the CCP, the first place that it would be reflected in Party propaganda and media coverage of Xi and other top officials, including reduced coverage of said officials, notable changes in propaganda narratives, and a de-emphasis of Xi’s political theories. Further, speculation that Xi has “already been replaced” by “reform-minded” Party elders or other officials who want a return to Deng Xiaoping’s policies does not hold water as PRC official media continues to promote Xi’s policies instead of those associated with Deng’s “reform and opening up” (i.e. pro-West, pro-foreign investment, pro-“collective leadership”, etc.).
Propaganda aside, key institutions and campaigns showed no easing up of efforts to uphold Xi and follow his orders during his “missing” period. On May 26, the 20th Central Commission for Discipline Inspection Standing Committee held an expanded study session on the theme of “deeply studying and understanding General Secretary Xi Jinping’s important discourses on strengthening Party conduct” and “accurately grasping the core essence and practical requirements of the central eight-point regulations and their implementation rules.” CCDI secretary Li Xi, a close Xi ally, chaired the meeting and emphasized the need for disciplinary and supervisory organs to study Xi’s political thought and uphold his various political theories (“self-revolution,” “Two Establishes,” “Two Safeguards,” etc.).
We believe that there are other more plausible explanations for Xi’s “absence”:
- Xi could have been huddling with his trade negotiators to figure out how exactly to deal with the U.S. during the 90-day tariff truce and proceed with trade talks. Incidentally, Xi’s 19-day “non-appearance” in August 2018 came around the period of heightened Sino-U.S. trade tensions.
- Xi and his officials could have been cloistered away to deal with rapidly worsening crises in the regime, including a range of economic and social problems.
- Xi could have fallen ill and needed time to recuperate.
2. It is not irregular that no Politburo meeting was held in May. The Xi leadership did not hold a May Politburo meeting in 2023, and there were multiple months without Politburo meetings between 2013 – 2015 and 2021 – 2023.
It is possible that the Xi leadership did not feel the need to convene a Politburo meeting this May because the prior meeting was held late in April. If so, the next meeting could be held in June.
3. Xi Jinping hosting Belarusian president Lukashenko in Zhongnanhai is somewhat unusual given that such diplomatic treatment was previously accorded to more significant international figures and the building of important bilateral relations. For instance, Jiang Zemin received Henry Kissinger at Zhongnanhai in 1998 and former Russian president Boris Yeltsin there in 2001, while Li Keqiang met a U.S. congressional delegation at Zhongnanhai in April 2014 and Xi greeted President Barack Obama there in November 2014. In contrast, China-Belarus ties are not particularly crucial and there are currently no major cooperative initiatives between the two countries.
Given the above circumstances and Lukashenko’s flattered reaction to the “family-like” treatment he received in China, there is a possibility that the latter’s trip was a last-minute arrangement. There is also a chance that one of the reasons for Lukashenko’s visit was to help dispel speculation about Xi’s lengthy “absence” from public view. Some scenarios include:
- If there has been a backroom power struggle but Xi is in control, he could have taken the time to clean up things behind the scenes during those 14 days he went “missing.” Lukashenko was then roped in on short notice to give Xi an excuse to make a public appearance. Xi had previously “vanished” from public view for about two weeks in the lead up to the 18th Party Congress, ostensibly to seek help from Party elders (in particular, the Ye family) in factional struggle against the Jiang Zemin faction.
- If there was a power struggle and Xi lost, he could be placed under house arrest while Xi’s opponents decide what to do with him. In this scenario, Lukashenko was arranged to meet Xi at Zhongnanhai because that was the only place they could meet and Xi’s opponents were looking to simultaneously project a sense of “normality” while hinting that changes are underway by having Xi participate in an unusual diplomatic meeting. However, we assess the probability of this scenario to be very low.
- Xi could be recovering from an illness. Therefore, Lukashenko was arranged to have a “family-like” meeting with Xi at his home where the latter’s symptoms, if any, could be better concealed.
