China’s New Stimulus Fails to Impress as Trade Talks Loom

China’s latest economic stimulus package has fallen flat with investors as markets showed minimal reaction to measures designed to revive faltering growth. Despite interest rate cuts and a significant liquidity injection announced Wednesday, benchmark indexes barely moved, with the CSI 300 adding just 0.61% and Hong Kong’s Hang Seng Index gaining less than 0.4% over two days of trading.

The muted response reflects growing pessimism about China’s economic outlook amid escalating trade tensions with the United States, with investors increasingly focused on upcoming high-level trade negotiations rather than domestic policy actions.

Stimulus Package Lacks Market-Moving Impact

People’s Bank of China Governor Pan Gongsheng unveiled a package of measures Wednesday including a 10 basis point cut to key policy rates and a 50 basis point reduction in bank reserve requirements. According to CNBC, the central bank also announced plans to establish low-cost relending facilities for technology-related bond repurchases and investments in elderly care and services consumption.

The scope of the stimulus drew comparisons to a sweeping policy rollout last September that had fueled a dramatic market rally, lifting the CSI 300 index over 32% in just six trading days. However, history failed to repeat itself this time, with analysts suggesting markets had largely priced in the policies ahead of the announcement.

“It was nothing but a stopgap instead of a solution,” said Neo Wang, lead China economist and strategist at Evercore ISI, highlighting the limitations of the central bank’s approach when confronted with structural economic challenges and external pressures.

Economic Data Points to Mounting Pressure

Recent economic indicators have signaled deterioration in China’s economic environment, particularly in manufacturing. The manufacturing purchasing managers’ index fell to a 16-month low in April, sliding into contractionary territory with a gauge on new export orders dropping to its lowest level since December 2022, according to data cited by CNBC.

Services activity in China also slowed in April compared to March, suggesting broader economic weakness beyond the manufacturing sector. Employment indicators have been particularly concerning, with the latest PMI showing job losses across multiple sectors as manufacturers halt production and place workers on paid leave.

Goldman Sachs estimates that approximately 16 million jobs—representing 2% of China’s labor force—are involved in the production of U.S.-bound goods, highlighting the significant employment implications of trade tensions.

All Eyes on Switzerland Trade Talks

Investor attention has largely shifted to upcoming trade negotiations between U.S. and Chinese officials scheduled to take place in Switzerland. China confirmed Wednesday that Vice Premier He Lifeng will meet with U.S. Treasury Secretary Scott Bessent during a visit to Switzerland later this week, though there was disagreement about which side requested the meeting.

“Any measures that could help China’s economy sustain growth in the face of the U.S. import tariffs would increase China’s bargaining power in subsequent negotiations with the U.S.,” said Thierry Wizman, global FX & rates strategist at Macquarie, suggesting the timing of the stimulus may be strategically linked to the trade talks.

The meeting would mark the first high-level U.S.-China trade discussions since tariff escalations in April, which saw duties on Chinese imports rise to prohibitive levels exceeding 100% in some categories.

Prospects for Trade Resolution Remain Uncertain

Analysts offer divergent views on the potential outcomes of the upcoming negotiations. Robin Xing, chief economist at Morgan Stanley, projects U.S. effective tariffs on Chinese goods could be lowered from current levels to a terminal rate of approximately 45% by year-end, representing a significant reduction though still historically elevated.

However, others remain skeptical about prospects for a comprehensive agreement. According to CNBC’s reporting, China failed to fulfill its commitment under the previous Phase One deal to purchase $200 billion more in U.S. goods and services over two years as the Covid-19 pandemic disrupted global trade.

“China doesn’t believe this talk will lead anywhere,” said Wang Dan, China director at risk consultancy firm Eurasia Group. “Things could get worse and that’s why they are saving the big gun for later,” she added, suggesting Beijing may be reserving more powerful economic measures for potential future escalations.