11-05-2025
Tariff war: China's stock market pays the price
Agencies
Beijing
China is feeling the heat from the tariff war. The nation's stock market is reeling, and the country's rigid stance risks deepening the economic downturn. Early stimulus efforts offered little relief, and Beijing hesitates to roll out new measures, betting that Washington will yield.
On April 28th, China's stock market endured a significant downturn, amplifying concerns about economic instability. The Shanghai Composite Index slid by 0.2 percent, the Shenzhen Component Index dropped 0.62 percent, and the ChiNext index declined 0.65 percent. Over 4,100 stocks recorded losses, with real estate taking a sharp 3 percent hit. Investors remain cautious as Beijing refrains from deploying bold stimulus measures, reinforcing fears of an uncertain economic strategy. This hesitation fuels speculation about China's long-term approach to financial resilience and market recovery.
China's fiscal challenges deepened in the first quarter, as government spending grew by 4.2 percent year-on-year while revenue declined by 1.1 percent. This imbalance resulted in a record-high fiscal deficit of 1.26 trillion yuan ($173 billion). To mitigate financial pressures, local governments accelerated borrowing, issuing nearly 1 trillion yuan in special bonds—a staggering 60 percent increase from the previous year.
Meanwhile, the People's Bank of China (PBOC) stepped in, boosting loan allocations to state-owned investors to stabilize the stock market. Despite these interventions, economic uncertainty persists. Policy advisers warn that additional measures might be necessary, yet Beijing remains cautious, resisting sweeping stimulus initiatives. As financial constraints tighten, China faces difficult choices about balancing stability and economic resilience in an evolving global landscape.
Unlike the US, which has moved toward negotiation by easing its tariff stance, China remains steadfast, refusing to make the first move. Under President Xi Jinping's leadership, Beijing is maintaining a posture of resilience, signalling confidence rather than reacting impulsively. However, this calculated patience carries significant risks.
Analysts caution that economic stability could falter without substantial stimulus—potentially up to 2 trillion yuan—to sustain growth above 4 percent.
Wall Street forecasts suggest that China might introduce new financial measures worth between 1 and 1.5 trillion yuan in the second half of the year, but even this may not be enough to neutralize the ongoing tariff impact. As global markets watch closely, Beijing must balance its commitment to economic sovereignty with the urgency of sustaining stability.
Liu Ting, Chief China Economist at Nomura, warns that announcing stimulus measures prematurely could be perceived as Beijing conceding under pressure—a strategic misstep in the ongoing trade standoff. Such an action might suggest internal instability, eroding confidence in China's economic leadership. Yet, delaying intervention carries its own risks. Economic strains could worsen, prolonging recovery and increasing dependence on later policy interventions. Beijing must carefully balance assertiveness with pragmatism, ensuring that any stimulus aligns with broader financial stability and long-term resilience.
As the trade war intensifies, US Treasury Secretary Scott Bessent has confirmed ongoing negotiations with 17 key trade partners, deliberately excluding China. This calculated diplomatic move aims to isolate Beijing, exerting pressure to reconsider its economic stance. Analysts warn that China cannot endure Trump's steep 145% tariff levels indefinitely, pushing Beijing toward inevitable policy shifts to mitigate financial strain.
Compounding these challenges, China's foreign policy has taken a confrontational turn. Senior fellow Gordon Chang highlights Beijing's escalating disputes with the Philippines, Taiwan, South Korea, and Australia—an approach that appears counterproductive at a time when it desperately needs allies. This growing diplomatic isolation raises concerns about deeper systemic instability, fuelling speculation that Xi Jinping's leadership may be entering a decisive and potentially precarious phase.
China has maintained a firm public stance against tariff concessions, yet emerging reports indicate a subtle rollback on duties for critical US imports. Reductions on semiconductors, aviation equipment, industrial chemicals, and medical devices suggest Beijing is making quiet adjustments to safeguard economic stability. Despite these shifts, the Chinese Communist Party remains publicly silent, unwilling to acknowledge reliance on American trade. Analysts contend that open admission would undermine political credibility, forcing Beijing to balance pragmatic economic decisions with maintaining a facade of resilience in the ongoing trade dispute.
China's state media continues to project resilience, reassuring the public that the economy can endure ongoing turbulence. However, behind the scenes, signs of adjustment are emerging. The Wall Street Journal reports that Beijing is weighing the removal of its hefty 125 percent tariffs on select US imports, signalling a quiet yet significant shift in policy to curb industrial disruptions. If China continues this pattern of quiet concessions while maintaining an unyielding public stance, it risks deepening economic instability rather than securing long-term resilience. Xi Jinping's reluctance to openly adjust policy in response to mounting trade pressures may prolong financial uncertainty, erode investor confidence, and limit Beijing's flexibility in global negotiations. The CCP's emphasis on political strength over economic pragmatism could lead to stagnation, forcing heavier reliance on state-controlled interventions.
Without a strategic recalibration, China may find itself in an increasingly precarious position—isolated diplomatically, strained financially, and vulnerable to long-term economic decline. As global markets evolve and trade alliances shift, Beijing's approach may determine whether China stabilizes or continues on a downward trajectory.
