China’s latest stimulus measures fail to impress as investors focus on U.S. trade talks

China’s latest push to revive growth with broader stimulus measures has failed to cheer its stock market as worries over economic deterioration outweigh policy optimism, with investors focused on trade talks with the U.S.

The scope of the stimulus package, including interest rate cuts and a major liquidity injection, drew some comparisons to a sweeping policy rollout last September that had fueled a market rally, lifting the CSI 300 index over 32% in a six-day winning streak.

However, the story did not repeat this time. The benchmark index barely budged on the day of the announcement, adding just 0.61%, and rose by nearly the same Thursday. Hong Kong’s Hang Seng Index gained less than 0.4% over the two days.

Markets had largely priced in the policies ahead of the briefing, coupled with concerns over the ongoing trade war hurting the world’s second-largest economy, according to analysts.

People’s Bank of China Governor Pan Gongsheng on Wednesday announced to cut key policy rates by 10 basis points and lower the amount of cash that banks need to hold by 50 basis points. Among a raft of measures, Pan said the central bank will set up low-cost relending facilities for repurchases of tech-related bonds and for investments in elderly care and services consumption.

The stimulus was largely in line with the economic priorities laid out at last month’s Politburo meeting. It was “nothing but a stopgap instead of a solution,” said Neo Wang, lead China economist and strategist at Evercore ISI.

The Politburo, China’s second most powerful political body, last month urged local authorities to prepare for “worst-case scenarios” with sufficient planning, calling for an accelerated implementation of proactive fiscal and monetary policies. It also laid out plans to support financing for the technology sector, boost domestic consumption while stabilizing exports.

Without specific mention of tariffs, the central government acknowledged that “impacts from external shocks” have intensified.

Unlike last September, when the PBOC “explicitly” backed the stock markets and provided direct financing for investments and share buybacks, this round of stimulus is more targeted at industrial and social needs, said Eugene Hsiao, head of China equity strategy at Macquarie Capital.

For a meaningful rally, investors are awaiting more targeted fiscal measures that directly boosts consumer sentiment and more effective plans to prop up the real estate sector, said Hsiao.

Chinese policymakers, privy to the country’s early economic data, appeared to be ramping up stimulus measures at a time when the economy has started to feel the early strains from tariffs.

“China is responding to the evident slowdown in economic activity,” said Thierry Wizman, global FX & rates strategist at Macquarie.

While China’s economy expanded by a better-than-expected 5.4% in the first quarter, it now faces growing headwinds after the tariff conflict with the U.S. intensified last month. In view of the exorbitant tariffs, a slew of major Wall Street banks slashed China’s full-year growth forecasts to around 4%, significantly lower than the official growth target of around 5%.

Latest economic data out of China has signalled economic deterioration. The manufacturing purchasing managers’ index fell to a 16-month low, sliding into contractionary territory in April, with a gauge on new export orders dropping to its lowest since December 2022. Services activity in the country also slowed in April from the prior month.

China is set to release its trade data for April on Friday which is likely to reflect the full impact of tariffs on its outbound shipments.

ANZ’s Yeung estimates export growth to fall by 2.2% in April, a sharp decline compared to a 12.4% growth in March. The number of container vessels from China to the U.S. dropped dramatically to 42 by April-end from 71 on April 21, according to his estimates.

Concerns have been mounting that the fallout would spill over to the labor market. The latest PMI indicated employment fell across the board in April, as manufacturers started to halt production and put workers on paid leave.

Goldman Sachs estimates that that 16 million jobs — 2% of the country’s labor force — are involved in the production of U.S.-bound goods.

The recent revocation of the U.S. “de minimis” rule which exempted low-value goods from tariffs has also raised employment worries in China’s labor intensive sectors, particularly apparel and consumer electronics.

Beijing’s stimulus push came ahead of trade talks between the U.S. and China that have raised hopes of a de-escalation in trade tensions between the two countries.

“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 Macquarie’s Wizman.

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 while claiming it was requested by Washington. Trump disagreed with that characterization.

The planned meeting would mark the first high-level U.S.-China trade talks since the tariff escalations this year.

While reaching a comprehensive deal is likely to be complex and time-consuming, a phased rollback of tariffs from both sides is possible, although analysts are split on the pace of such de-escalation.

Robin Xing, chief economist at Morgan Stanley projects U.S. effective tariffs on Chinese goods could be lowered from the current prohibitive levels to a terminal rate of 45% by year-end.

However, attempts to achieve a more comprehensive deal, similar to the Phase One deal signed during Trump’s first term, will likely be “lengthy and possibly unproductive,” said Tianchen Xu, senior economist at Economist Intelligence Unit, as both sides have shown little appetite for compromise over respective strategic priorities and economic red lines.

China failed to fulfill its commitment under the Phase One deal to purchase $200 billion more in U.S. goods and services over two years as the Covid 19 pandemic hit.

For the upcoming tariff meeting with Bessent, 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 said, alluding to possibly stronger measures to support the Chinese economy.