China: Stimulus or Status Quo? Beijing Faces Crossroads Amid Trade Uncertainty

PBoC Holds Rates as China Growth Beats Target, Trade Risks Loom

On July 21, the People’s Bank of China kept the one-year and five-year loan prime rates unchanged at 3% and 3.5%, aligning with market consensus. The one-year LRP affects household and corporate loan rates and demand for credit, while the five-year LRP is a benchmark for mortgage rates.

Economists attributed the rate hold to better-than-expected economic momentum in the first half of 2025. The Chinese economy expanded by 5.2% year-on-year in the second quarter, marginally softer than 5.4% growth in Q1. Nevertheless, growth in the second quarter surpassed Beijing’s 5% GDP target.

Notably, robust demand for Chinese goods bolstered the economy despite US tariffs. Exports rose 5.8% YoY, accelerating from May’s 4.8% increase, while imports rebounded, suggesting improved domestic demand.

Easing US restrictions on chip exports to China and Beijing’s approval of licenses for rare earth mineral exports to the US have raised hopes for a US-China trade deal.

The Kobeissi Letter reported:

“China’s total export volumes of rare-earth magnets jumped 158% MoM in June, to 3,188 tons, the most since March. Exports to the US surged 667% to 353 tons, from just 46 tons a month earlier. Despite the rebound, overall shipments remained well below trends seen before China imposed export controls in early April. June volumes were still only about 66% of the 2024 monthly average, according to customs data.”

The resilient Chinese economy has also enabled firms to increase staffing levels, crucial for the ongoing transition toward a consumption-driven economy. CN Wire reported:

“6.95 mln urban jobs created in H1, completing 58% of annual job creation target.”

Will tariffs derail China’s rebound?

However, US tariffs on key Southeast Asian countries have raised concerns about China’s economic outlook. Vietnam agreed to a 20% tariff and a 40% levy on transshipments bound for the US, potentially targeting Chinese exporters bypassing US tariffs. China’s exports to Southeast Asian countries, including Vietnam, jumped 16.8% YoY in June, while exports to the US tumbled 16.1%.

A slump in exports to the US via Southeast Asian countries could impact total Chinese exports, the labor market, and domestic consumption.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero remarked:

“Export growth might slow to 2-3% year-on-year in the third quarter of this year, and perhaps just 1% in the last quarter. Shipments of low value goods, which can easily be manufactured elsewhere—such as furniture, clothes, shoes, and toys—to be most affected. Bicycles originally intended for export to America are already on sale at low prices on Chinese e-commerce sites.”

While China’s economic outlook has dimmed, Beijing appears optimistic, reinforced by the PBoC’s decision to keep the LPRs steady. Garcia Herrero commented:

“Recent comments by top Chinese economic officials suggest they realize something needs to be done. How much is action versus words, I don’t know. But I do think it’s a big problem for China.”

A US-China trade deal with lower tariffs and removal of any remaining export restrictions may further delay policy action from Beijing. Nevertheless, Beijing’s recent pledges have highlighted a willingness to roll out fresh policy measures should economic momentum fade.

On July 18, Beijing pledged further support, reportedly stating:

“Will introduce policies to further stimulate consumption, boost services consumption.”

Hang Seng Index Hits 25,000 on Economic Momentum and Stimulus Hopes

Positive sentiment toward China’s economy, Beijing’s stimulus pledges, and easing US-China tensions have lifted demand for Hong Kong and Mainland China-listed stocks. The Hang Seng Index has risen 4% in July to date, eyeing a 3-month winning streak. Significantly, the Index broke above 25,000 for the first time since February 2022.

Meanwhile, Mainland China’s CSI 300 and Shanghai Composite Index have gained 4.18% and 3.61% in July to date. NVIDIA and Advanced Micro Devices’ plans to resume chip exports to China boosted demand for tech stocks. The Hang Seng TECH Index and Roundhill China Dragons ETF are up 5.4% and 2.95%, respectively, July to date. The Nasdaq Composite Index is up 2.97% in the month, with NVDIA and AMD soaring 8.48% and 10.64%, respectively, over the same period.

Outlook

US-China trade talks, Beijing’s stimulus cues, and broader US trade developments remain the principal drivers.

Lower US tariffs on Southeast Asia and China could boost demand for Chinese goods, signaling a robust economic outlook. On the other hand, rising tensions and higher tariffs on China and the broader Asian region could pressure the economy. Under this scenario, Beijing’s policy responses will likely be crucial for risk sentiment and demand for HK and Mainland China-listed stocks.

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