China - The Art of the No-Deal

China enters escalated trade war with US after a solid first quarter

GDP growth in Q1 was solid at 5.4% y/y (see China enters trade war on solid first quarter), underpinned by policy support and frontloading of exports. March data also showed an improvement, with PMIs up and industrial production and retail sales accelerating. That said, property data remained lackluster, and ongoing deflation shows that the supply side stays stronger than the demand side. Moreover, these numbers do not yet reflect the escalation of the trade war with the US in April (see below). This may impact business and consumer confidence – as it did at the start of the 2018 trade war – complicating Beijing’s efforts to lift consumer spending and private investment. Still, weekly Chinese container data suggest that the recent turns in US tariff policy (see below) have supported export flows. Frontloading of small-value exports may also still play a role – as the US de minimis clause will expire on May 2nd.

After sharp escalation of trade war in April, Beijing now plays ‘hard to get’ vs Trump

Since ‘US Liberation Day’ on 2 April, the US-China tariff war escalated, with the US now levying 145% on imports from China (and 125% vice versa). Further threats loom, such as the US port fee plan aimed at breaking China’s dominance in global shipbuilding/shipping. That said, driven mainly by bond market pressures, the US made several twists in tariff policy (see Reversal Day and US-China trade war: Twist and Shout), and the recent exemption on consumer electronics (covering ±25% of exports to the US) is a key mitigant. Various US officials have hinted at a future US-China trade deal, but so far Beijing does not seem to have much appetite to go along with Trump’s Art of the Deal tactics. China has positioned itself as ‘the adult in the room’, stating it would neglect further US tariff hikes (which have become meaning-less anyway), while also using instruments such as export restrictions on critical metals, blacklisting US firms, and halting purchases of Boeings, LNG etcetera. China also has leverage on the US via its large holdings of US Treasuries. Beijing likely feels it now has the upper hand, as the US is facing the macro and market fall-out of its tariff policy. China will also feel pain from the trade war, but does not face mid-term elections next year and hence may have a higher 'pain tolerance'.

We lowered our annual growth forecasts due to the larger, more abrupt export shock

We already assumed China would be ‘singled out’ in terms of tariffs and had forecast below-trend q/q growth in Q2/Q3. The April escalation implies the direct export shock (Chinese exports to the US were 2.8% of GDP in 2024) will be even more severe and abrupt, although we still expect mitigation from exemptions (see above), trade circumvention (e.g. through ASEAN) and trade reorientation. We also still assume a stepping up of monetary and fiscal support and looser FX policies to offset this shock. All in all, we adjusted our quarterly growth profile and cut our growth forecasts for 2025/26 to 4.1% (from 4.3%) and 3.9% (from 4.2%). Of course, uncertainty surrounding these forecasts is still larger than usual. A key downside risk would stem from countries teaming up with the US against China. Still, we think most countries will keep carefully managing trade relations with both giants. China is already the largest trade partner for most countries, and has also issued warnings not to make anti-China agreements with the US.