CNBC's The China Connection newsletter: A fragile truce as tempers flare

CNBC

21-05-2025

Just a week after a breakthrough in U.S.-China trade tensions, neither side can yet be confident that the other is holding up their end of the bargain.
"These 90 days won't be smooth," Liu Weidong, research fellow at a state-affiliated think tank, the Chinese Academy of Social Sciences' Institute of American Studies, told me this week. That's according to a CNBC translation of his Mandarin-language remarks.
He predicts elevated uncertainty and smaller steps next, given the already-large breakthrough, as the U.S. and China each try to feel the other out towards a middle ground.
The posturing has already begun.
China's Ministry of Commerce on Wednesday warned that it would take legal action against those involved in assisting or implementing measures to curb the usage of advanced semiconductors from China.
It follows an earlier accusation by the same ministry on Monday that blamed the U.S. for undermining trade talks with a Huawei chip warning last week — although the U.S. Bureau of Industry and Security had actually toned down its language and dismissed a more restrictive Biden-era plan on chips.
Many in the U.S. are also concerned that China isn't relaxing rare earth export controls, another area in which China dominates the supply chain. That's despite the joint statement's vague description of how China would "suspend or remove the non-tariff countermeasures taken against the United States since April 2, 2025."
"I do think Washington was expecting the export controls on that group of rare earths to be lowered, permitting exports in a relatively unrestricted way," said Scott Kennedy, senior adviser and trustee chair in Chinese Business and Economics at the Center for Strategic and International Studies in Washington, D.C.
"If it turns out that, in fact, that is not the result, the U.S. will probably conclude that China is in violation of the agreement," he said. "We could see a re-escalation sooner rather than later."
While the White House has yet to respond to a CNBC request for comment, a step back reveals ambiguity on China's side.
But are the rare earth export controls part of China's countermeasures to U.S. tariffs? That's up for debate. An April 4 document from China's commerce ministry and customs agency announcing the export controls did not explicitly label them as such.
While China did pause restrictions on 28 U.S. entities that were slapped with export controls on critical minerals, the ministry has made several public statements about strengthening export controls on critical minerals.
"Given the comprehensive and competitive nature of bilateral relations, the current truce — while focused on trade—can easily be undermined by export controls," said Yue Su principal economist, China, at The Economist Intelligence Unit.
"While rhetorical posturing is unlikely to undermine the 90-day truce, China may well recalibrate its export control regime in a measured response to U.S. actions," she said.
The Chinese commerce ministry on Sunday also announced duties of up to 74.9% on imports of an engineering plastic from the U.S., Europe, Japan and Taiwan.
U.S. President Donald Trump last week told Fox News he is open to a call with Chinese President Xi Jinping, or even a trip to China. But Beijing hasn't dropped any hints.
"I'd be surprised if the two step into the middle of these issues right now with so much unclear," Kennedy said.
The new U.S. Ambassador to China, David Perdue, arrived in Beijing on Thursday, slightly more than two weeks after being confirmed by the Senate. He was previously the head of Asia for U.S. packaged consumer goods company Sara Lee.
One of Perdue's first social media posts called for "strong actions" on fentanyl. He said on X that, together with U.S. Trade Representative Jamieson Greer, they were "meaningfully engaged with the Chinese on next steps to stop this dangerous situation."
The U.S. has left in place 20% in tariffs imposed earlier this year over China's alleged role in the fentanyl crisis.
The joint statement last week said the U.S. and China would establish a mechanism for talks about economic and trade relations, but neither side has specified when the next one would occur.
Liu, who helped author a report in February with The Carter Center about bilateral cooperation, emphasized the overall focus of the current talks is trade rather than tech. He expects that China could eventually agree to buy more U.S. agriculture and energy products — given the perception that pressuring farmers can influence Trump.
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Retail sales and industrial production growth slowed in April. The sluggish real estate sector showed little sign of improvement. However, major Chinese online shopping companies reported better sales in the first quarter, helped by artificial intelligence-powered ads. Electric car company Leapmotor said its gross margin for the first quarter was a record 14.9%, while Chinese battery giant CATL raised $4.6 billion in its Hong Kong listing on Tuesday.
China is gearing up for its next five-year plan. The next set of development goals will kick in next year. The science ministry, central bank and several other ministries have also announced measures to support "high-level scientific and technological self-reliance." A new policy for preventing government spending waste calls for favoring domestic vehicles, especially new energy makes.
Chinese and Hong Kong stocks climbed Wednesday.
Mainland China's CSI 300 was up 0.68% while Hong Kong's Hang Seng Index — which includes major Chinese companies — rose 0.53% as of 12 p.m. local time.
The benchmark 10-year Chinese government bond yield is at 1.669%.
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