US-China Chip Spat Threatens Fragile Truce as Markets Weigh PBoC Stimulus

US and China Trade War: Tensions Rise on Chips

On Monday, May 12, the US and China announced a 90-day trade war truce, slashing tariffs on Chinese goods from 145% to 30% and US goods from 120% to 10%. In response to the truce, the Hang Seng Index rallied 2.98%, while the Nasdaq Composite Index surged 4.35%. The tariff cuts helped ease US stagflation fears and concerns about China’s economic outlook.

However, tensions have resurfaced. Last week, reports emerged that the US administration may expand its export blacklist to include more Chinese semiconductor firms. Risk sentiment soured on threats of tighter chip controls. The Kobeissi Letter reported:

“China has issued a statement on the US adjusting chip export controls, claiming the US ‘seriously undermined consensus reached at Geneva talks’. China is asking the US to ‘correct wrongdoings’ just days after the US-China trade deal was reached.”

The latest trade developments underscore how fragile the truce remains, particularly with US efforts to curb China’s access to advanced technology.

China Economic Data Signals Risk to Consumption Shift

While the trade deal may reduce stagflation jitters, recent Chinese data suggests deeper structural issues. Industrial production rose 6.1% year-on-year (YoY) in April, down from 7.7% in March but still elevated. Meanwhile, retail sales increased 5.1% YoY after rising 5.9% in March.

The slowdown in consumer spending came despite Beijing’s stimulus efforts aimed at boosting domestic demand and consumption. Uncertainty stemming from the US-China trade war likely weighed on consumer sentiment, impacting the effectiveness of Beijing’s stimulus measures.

Mohamed A. El-Erian, President, Queen’s College, Cambridge University, commented:

“The latest Chinese macro numbers illustrate a familiar pattern in the country’s economy: government measures often succeed in boosting industrial production, but tend to be less effective at stimulating household consumption.”

Recent CPI and producer price figures also reflected a weak demand backdrop, raising concerns about China achieving its around 5% 2025 growth target. China’s Consumer Price Index fell 0.1% YoY in April, while producer prices, a leading inflation indicator, fell 2.7% YoY after declining 2.5% in March.

Natixis Asia-Pacific Chief Economist Alicia Garcia Herrero remarked:

“While China has clearly outsmarted the Trump administration, reaching a very beneficial deal, the Chinese economy is not doing well. Deflation is in full swing (-0.1% for April CPI and much lower for producer/export prices), and we just got very weak loan/total social financing data. The huge uncertainty is having a toll on the demand for credit and, very likely, on investment.”

Credit data reinforced that concern. April’s new Yuan loans rose just CNY280 billion, a sharp drop from CNY3,640 billion in March.

PBoC Cuts Loan Prime Rates to Boost Demand

On Tuesday, May 20, the People’s Bank of China cut the 1-year and 5-year Loan Prime Rates (LPR) to 3% and 3.5%, respectively, in a bid to revive credit demand. Meanwhile, major state-owned banks lowered Renminbi deposit rates by up to 25 bps, according to CN Wire.

While lower deposit rates may discourage saving, ongoing economic uncertainty could have more influence on household saving trends. Trade developments will remain key to influencing consumer confidence and spending.

Markets React to PBoC Move but Remain Cautious

Investors responded favorably to the PBoC’s rate cuts. The Hang Seng Index advanced 1% on May 20, while the CSI 300 and Shanghai Composite Index rose 0.21% and 0.1%, respectively. Still, caution prevailed, reflecting persistent uncertainty surrounding trade negotiations and tech restrictions.

Year-to-date (YTD), the CSI 300 is down 1.19%, while the Nasdaq has fallen 0.49%. In contrast, the Hang Seng Index has climbed 17.38% YTD, as tech advancements sent the Hang Seng Tech Index up 18.65%, while the Roundhill Magnificent Seven ETF has fallen 3.95%.

Outlook

Trade developments will remain the dominant driver of market sentiment. Any escalation in US-China tensions could fuel concerns about the global economy and trigger a flight to safety. However, Beijing may introduce additional stimulus to fuel consumption, potentially boosting risk sentiment. Fed signals would also be crucial. A firm stance on interest rates to counter tariff-induced inflation could weigh on US equities.

Stay with us for updates on China’s economic outlook, trade developments, and global market reactions.