China Faces Trade-Offs in Talks With US Amid Weak Demand and Export Risks

China’s households, % of deposits held on demand

The weak domestic environment could challenge Beijing’s 5% GDP growth target for 2025, given recent trade developments. US tariffs on Indonesia (19%) and transshipments from Vietnam (40%) may weigh on demand from Southeast Asia.

Exports to Southeast Asia rose 16.8% year-on-year in June, while exports to the US tumbled 16.1%. Higher tariffs on China’s key trade routes through Southeast Asia may impact trade terms and the broader economy. Despite US tariffs, China’s exports rose 5.8% year-on-year (YoY) in June, a sharp pickup from May’s 4.8% increase. Strong exports contributed to China’s 5.2% year-on-year GDP growth in the second quarter, marginally softer than the first quarter’s 5.4%, but above the 5% GDP target.

A sharp drop in exports to Southeast Asia and US tariffs on Chinese goods may pressure China’s private sector. Uncertainty about a US-China trade deal could also force Beijing to delay meaningful stimulus to bolster the economy. Addressing domestic demand could be crucial. But weakening external demand may impact the labor market, consumer sentiment, and household spending.

Given the dynamics, China may want more certainty with a balanced trade deal, but getting one may require Xi Jinping to make significant compromises.

US-China Trade Talks Fuel Uncertainty, Impacting Market Sentiment

Mainland China markets retreated in early trading on Tuesday, July 29, with the CSI 300 pulling further back from eight-month highs. However, despite the pullback, the CSI 300 and Shanghai Composite Index have posted July-to-date gains of 5.02% and 4.38%, respectively, outperforming the Nasdaq Composite Index (+3.97%). Easing trade tensions and hopes for a deal have lifted sentiment. However, uncertainty and renewed tensions could trigger a reversal, potentially exposing April’s seven-month lows.

The Hang Seng Index also retreated in early trading on Tuesday, but remained up 5.15% month-to-date.