China - Geneva truce softens export shock, but uncertainty remains

April data show initial hit from trade war escalation last month, before Geneva-truce  

Following an acceleration in growth momentum in March helped by frontloading and stimulus, April data showed the impact of the escalating US-China trade war last month, before the Geneva truce agreed mid-May. Weaker PMIs, with a sharp drop of the export sub-indices, provided the first clear macro signals (see here). ‘Hard’ activity data brought more evidence of the initial tariff shock (see here). Industrial production, retail sales and investment slowed in April compared to March. Still, industrial production came in stronger than expected, while retail sales were disappointing, indicating that the supply side remains stronger than the demand side. April data also showed ongoing weakness in the property sector. Despite the slowdown in activity data, the jobless rate edged slightly lower, to 5.1%. However, the biggest positive surprise came from exports, with annual growth holding up well, as a ±20% decline in exports to the US was offset by rising exports to ASEAN, the EU and other destinations. This is in line with our view that China’s export shock to the US is mitigated by trade circumvention and reorientation of exports (next to ‘tariff dodging’ practices).

US-China truce takes away key headwind, although uncertainty remains high 

After the sharp escalation in the first half of April, with US import tariffs on China skyrocketing to 145% (and 125% vice versa), there has been a sharp turnaround since, as financial markets and US firms pressured the US administration to dial back. Following the introduction of tariff exemptions for categories like consumer electronics (see US-China trade war: Twist and Shout), and car parts, the US and China on 12 May communicated a major de-escalation in the trade war, with a 90-day pause and a temporary reduction of tariffs to 30% on Chinese exports (10% ‘universal’ and 20% fentanyl-related), and 10% (on US exports) – see our update Well, that de-escalated quickly. Moreover, the two countries established an economic and trade consultation mechanism, through which talks can continue. We expect all of this to result in a softening of the direct export shock to the US, although uncertainties/risks obviously remain with regard to the future of future trade and other relations between China and the US (and other major trade partners).

We raise our growth forecasts again on the softer export shock  

The Geneva truce is softening a key drag for the Chinese economy in the coming months. We assume the size of additional stimulus will remain contingent on the impact from the tariff shock. We expect more stimulus, as breaking down the negative feedback loop from property to domestic demand remains a policy priority. Still, a softer export shock implies that Beijing will likely tone down a bit regarding the stepping up of additional support. We also see less need for a sharp CNY depreciation now, and have revised our forecasts for USD-CNY significantly. After we cut our growth forecasts following the April escalation (see China – The Art of the No-Deal), we have changed our quarterly growth profile again following the Geneva truce. As a result, we have raised our annual growth forecasts for 2025 and 2026, to 4.7% and 4.2% (from 4.1% and 3.9%), respectively. Of course, uncertainty surrounding these forecasts is larger than usual, given the global circumstances (combined with ongoing domestic challenges).