US-China Trade: Tariffs Stay Despite Deal – Eyes on Rare Earths and Deal Commitment

China PMI Numbers Signal Potential Floor

US-China tensions have eased in recent sessions after reaching agreements on trade restrictions, crucial for both economies. However, China’s private sector PMI data sent mixed signals. The NBS Manufacturing PMI increased from 49.5 in May to 49.7 in June. Meanwhile, the Caixin Manufacturing PMI rose to 50.4 in June, up from 49.3 in May, and crucially above the 50 neutral level.

NBS private sector PMIs and the more influential Caixin Manufacturing PMI revealed a pickup in domestic demand. Domestic demand trends suggested that Beijing’s stimulus measures were gaining traction at the end of the second quarter. However, a continued fall in external demand underscored two critical focal points: US-China trade developments and fresh stimulus from Beijing.

With the NBS and Caixin Manufacturing PMI surveys showing weak external demand, fresh stimulus may be needed to reinforce domestic demand amid ongoing external weakness.

Economists Highlight the Need for Fresh Stimulus

East Asia Econ remarked on the NBS Manufacturing PMI data, stating,

“China – still looking like a soft floor. At a headline level, the industrial PMIs were better in June, but the details were weak, and there was no improvement in the services PMI. The rise in the credit impulse is taking away some of the downside risk for the cycle, but there aren’t indications that the cycle is about to really improve.”

While a recovery in the Caixin Manufacturing PMI was positive, the prospect of prolonged US tariffs on Chinese goods suggests external demand may remain a drag on the sector. Fresh stimulus measures providing corporate subsidies to boost profits could be the next step. A rebound in industrial profits may drive hiring. An improving labor market could lift consumer sentiment, potentially fueling household spending.

Natixis Asia Pacific Chief Economist remarked on China’s industrial profit slump in May, stating,

“Cost of over-competition- but also US tariffs, clearly hurting Chinese companies. Corporate profits fell 9.1% in May. Unsustainable without additional subsidies.”

US-China Trade Deal Leaves Tariffs in Effect: What’s Next?

Last week, US President Trump and Commerce Secretary Howard Lutnick declared the US and China had signed a trade agreement. However, the details of the agreement were limited, raising concerns about the effectiveness of the deal and whether both sides would stick to the terms.

While the details of the agreement are sketchy, Beijing pointed to easing trade restrictions, stating,

“China will, in accordance with the law, approve export applications for controlled items that meet relevant requirements. The US side will accordingly lift a series of restrictive measures imposed on China.”

Beijing likely referred to the approval of licenses for rare earth mineral exports to the US and the removal of US controls on semiconductor exports to China. The removal of these restrictions could pave the way to lifting tariffs, which remain in effect.

US Treasury Secretary Scott Bessent cleared up any confusion about the trade deal and tariffs, stating,

“Now our tariffs are 30% on China, theirs are 10%. 20% fentanyl tariffs on China remain in place.”

Markets Eye Export Trends and Tariff Developments

Although market reaction to the US-China trade deal was mixed, easing trade tensions boosted demand for Hong Kong and Mainland China stocks. Hopes of further stimulus measures also bolstered investor appetite for Mainland China stocks. However, concerns about the effect of ongoing tariffs on external demand capped monthly gains.

In June, the CSI 300 and Shanghai Composite Index advanced 2.5% and 2.9%, respectively, while the Hang Seng Index gained 3.36%. In contrast, the Nasdaq Composite Index jumped 6.57% in June on easing geopolitical risks and rising bets on multiple Fed rate cuts.

US-China Trade Developments: Will China Drop Tariffs?

This week, US-China trade headlines could be crucial for global markets. However, progress toward removing sweeping tariffs may hinge on the US and China delivering on the key components of the new trade deal.

The US or China could hike levies if the other side restricts or delays exports. The potential of a renewed escalation in the US-China trade war may leave investors on a cautious footing. Tariff hikes may also affect China’s private sector, the labor market, and consumer sentiment, which could limit the effectiveness of Beijing’s measures to boost domestic consumption.

East Asia Econ remarked on China’s ongoing transition to a consumption-led economy, stating:

“China – structure of GDP shifting, but slowly. Recent data show investment fell in 2024 to under 40% for the first time since 2008. On the flip side, consumption edged up, helped by a stabilization of the savings ratio and a rise in welfare spending. But none of these changes are happening fast enough to boost the cycle.”

What Are the Numbers to Watch?

In May, China’s rare earth magnet exports tumbled 74% year-on-year, the largest fall on record. Rare earth magnet exports to the US plunged 93%. With China mining 69% of global rare earth minerals and processing about 90% of the global supply, the next trade report will be crucial.

Although export trends will be vital, China’s economic data will indicate whether the economy remains on track for 5% growth. Consumer sentiment, household spending, youth unemployment, trade data, and the housing market need monitoring. For context, youth unemployment was a whopping 14.9% in May compared with a national unemployment rate of 5%.

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