China-US trade ceasefire offers a welcome boost to the outlook

The Chinese and US governments released a joint statement following trade talks in Switzerland, announcing a 90-day ceasefire of sorts on the trade war, bringing US tariffs on Chinese products back to 30%, and Chinese tariffs on US goods to 10%. It remains uncertain if the de minimis exemption for products shipped from China and Hong Kong will be restored, or if the minimum fees will remain. These rates return tariffs to pre-'Liberation Day' levels and represent a better-than-expected de-escalation. Many market participants expected a de-escalation to near the post-'Liberation Day' tariffs of around 50-60%, which would have been a smaller boost to Chinese exports.

Although the de-escalation of the trade war benefits both economies, the agreement, which significantly lowers tariffs without any concessions, is likely to be viewed as a particular victory for China. China had previously demanded a reduction in tariffs before negotiations, and this now seems to have been achieved.

China's response following the April escalations showed that it was prepared for an extended test of endurance if necessary.

As we wrote in last Friday's note, China's Opens in a new tabApril trade data may have strengthened its hand heading into the Switzerland negotiations. The data showed that despite the 145% tariff hike, and talks of a de facto embargo and hard decoupling, exports to the US only fell to -21% YoY in April, implying that significant tariffs were being paid by US importers. This is consistent with anecdotal evidence that many Chinese exports do not necessarily have an obvious or easy substitute product.

Before Trump's Liberation Day surprise prompted a retaliation, we noted that China's Opens in a new tabprior responses to US tariff escalations had been quite measured to preserve the possibility for negotiations. Restoring tariff levels to this state has once again opened the door for those negotiations to continue. We previously believed that the fentanyl issue was one where there could be an area of cooperation, and indeed this was an area highlighted by US Treasury Secretary Scott Bessent after the Switzerland talks.

In our view, the reduction of tariffs on China back to 30% is a sufficient enough reduction to allow for a more or less return of normal trade – at this level, we suspect exporters, importers, and consumers will share in absorbing the impact of the tariffs, and overall business will likely resume. Looking back, the 20-30% tariff level through the first quarter saw exports to the US rise around 5.0% YoY, though this may be skewed to the upside due to trade frontloading.

In terms of impact on China's growth, the 90-day ceasefire will upgrade our second and third quarter growth outlook. We suspect that China's May and June exports to the US will bounce back sharply as importers with depleted inventories will take advantage of the ceasefire to resume imports. Depending on how talks proceed, we could see a frontloading of exports again in July and August, especially if there is not much clarity on a longer-lasting bargain being struck heading into the later stages of the 90-day period.

We are reverting our forecast for the year back to 4.7%, with further upside possible if a bilateral agreement is reached within the 90-day period.

The market's immediate reaction to the yuan has been a modest strengthening of the CNY against the dollar, with the USD/CNY and USD/CNH both at 7.21 at the time of writing. The USD/CNY is now trading at a lower level than pre-'Liberation Day' levels, despite the People's Bank of China easing and the back-and-forth tariff developments. Positive news flow could encourage capital inflows and support further strengthening of the CNY in the near term, though how this will balance out with what may also be conditions for a recovery of the USD remains difficult to gauge at this point. Our forecast band of 7.00-7.40 remains unchanged.

Find out more on Opens in a new tabING THINK.