China Accelerates Domestic Economic Shift Amid Trade Tensions and Global Fragmentation

Economic

Summary:

China is intensifying efforts to strengthen its domestic market and reduce reliance on external trade, signaling a strategic pivot toward long-term economic resilience and technological self-sufficiency....

Beijing Reinforces Domestic Market as Strategic Shield

In response to mounting global uncertainties and trade frictions—particularly with the United States—China is accelerating a structural transition toward a more self-reliant economic model. At the center of this strategy is the development of a unified, robust domestic market capable of insulating the nation from future tariff shocks and export controls.

Prime Minister Li Qiang recently reaffirmed this direction, emphasizing the importance of strengthening internal circulation—the flow of goods, services, and capital within the national economy—as the foundation for China’s next phase of growth. This approach reflects Beijing’s recognition that traditional export-led growth is becoming less viable in an era marked by deglobalization and geopolitical instability.

From Export Dependence to Dual Circulation Strategy

The “internal circulation” concept, first introduced in 2020 as part of the broader "dual circulation" strategy, prioritizes domestic demand while maintaining selective openness to international trade and investment. Though not an abandonment of globalization, it positions domestic resilience as the economic backbone.

According to Zhang Zhiwei, chief economist at Pinpoint Asset Management, this policy shift stems from a realization that reliance on external markets can no longer guarantee growth. With global trade tensions intensifying, especially those involving the U.S., Beijing is now demonstrating firmer commitment to internal reforms previously discussed but insufficiently implemented.

Structural Reforms and Policy Modernization Drive the Transition

At a recent State Council meeting led by Vice Premier Ding Xuexiang, authorities outlined plans to enhance supply chain autonomy, upgrade industrial technologies, and address weaknesses in domestic consumption. Li Qiang emphasized the need to modernize production with technological integration and support export-oriented firms facing external pressures.

Simultaneously, senior economists like Xu Tienshen from the Economist Intelligence Unit have highlighted the need for deeper structural reforms, particularly improvements in China’s social safety net. In his view, sustainable domestic demand growth requires consumer confidence, which is rooted in welfare security and labor mobility—not just short-term fiscal stimulus.

The government is also pushing to remove regulatory fragmentation by building a national technology market and investing in AI-driven industrial transformation. Seven major ministries, including the People's Bank of China and the Ministry of Science and Technology, have issued a joint plan to finance technological innovation through a national venture capital fund and structural monetary tools like relending facilities.

Financial Tools Fuel Innovation, While Local Governments Guide Capital Allocation

The new funding framework emphasizes early-stage, small-scale, and long-term tech projects, with local governments playing a central role in directing capital toward foundational industries. This aligns with Beijing’s ambition to foster indigenous innovation and reduce exposure to foreign technological constraints.

These measures represent more than reactive adjustments to trade shocks; they constitute a fundamental evolution in China’s economic model. By strengthening its internal market and technological base, China aims to reposition itself within a fragmented global order.

Domestic Market as a Pillar of Economic Sovereignty

China’s ongoing transformation marks a deliberate decoupling from overreliance on external markets and a concerted move toward self-sustained development. As the global economic landscape shifts and China confronts long-term demographic and productivity challenges, building a unified and resilient domestic market emerges as both a defensive and forward-looking strategy.

If successful, this transition could allow China to retain its economic influence amid shifting geopolitical tides, positioning the country not just as a global manufacturer but as a consumption-driven powerhouse underpinned by innovation and internal stability.

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Cryptocurrency

China Unveils Digital Economy Action Plan for 2025

The National Bureau of Statistics of China announced the "Action Plan for Digital China Construction 2025" on May 16, 2025, aiming for the digital economy's core industries to comprise over 10% of GDP.

This initiative is significant as it integrates into China's broader strategy to enhance its digital economy, potentially driving considerable economic changes and market adaptations.

The "Action Plan for Digital China Construction 2025" outlines that the digital economy's core industries should surpass 10% of GDP. This initiative signifies a substantial push in China's digital transformation strategy. On May 16, 2025, the National Bureau of Statistics released this plan. While specifics about financial allocations or detailed objectives remain limited, the strategy inherently promotes digital integration within the economy.

China's government initiatives consistently show a focus on digital and data advancement. Recently, initiatives have included developing systems for public, corporate, and personal data, expected to be operational by 2029. The action plan complements such ongoing efforts.

The added value of core digital economy industries will account for more than 10% of GDP. — Kang Yi, Commissioner, National Bureau of Statistics of China

The announcement affects many, from industry leaders to policymakers, as digital strategies are essential for future economic growth. Core digital industries becoming a significant GDP part highlights the anticipated economic shift. Financial implications include increased digital infrastructure investment and innovation within core sectors.

Potential outcomes might include regulatory adjustments and technological advancements as China pursues digital transformation. Historical trends suggest that increased digital presence can enhance productivity and innovation across industries. Further analysis in the coming months will likely determine the broader impacts and shifts in digital policies.

Source: CryptoSlate

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China–U.S. Trade War

Economic

China Reduces U.S. Debt Holdings, Ceding Rank to the U.K.

According to data released by the U.S. Department of the Treasury, China offloaded $27.6 billion worth of long-term U.S. Treasury bonds in March 2025, reducing its total holdings to $765.4 billion. This move has allowed the United Kingdom—whose holdings rose to $779.3 billion—to surpass China for the first time in over two decades, becoming the second-largest foreign holder of U.S. debt after Japan.

This symbolic shift marks a broader change in the global financial hierarchy, as geopolitical tensions and monetary policy recalibrations reshape traditional investment flows. Japan maintained its lead with $1.13 trillion in holdings, increasing for the third consecutive month. Other countries such as Canada ($426.2 billion) and Belgium ($402.1 billion) also boosted their Treasury portfolios, though analysts note that some of Belgium’s holdings may actually reflect custodial accounts held on behalf of China.

Contrasting Trends: Global Inflows vs. Strategic Divestment

Despite China’s divestment, foreign appetite for U.S. Treasuries remains robust. In total, foreign holdings of U.S. government debt rose by $233.1 billion in March to a record $9.05 trillion—the second straight month of gains. This trend underscores the continuing appeal of U.S. bonds as a haven asset, even as political and economic uncertainties mount.

The divergence in behavior between China and other creditors suggests a strategic recalibration rather than a loss of confidence in U.S. fiscal instruments. While institutional investors and hedge funds—such as those operating through the Cayman Islands, which increased holdings to $455.3 billion—continue to treat Treasuries as a safe asset, China appears to be signaling dissatisfaction with U.S. policy, or hedging against future geopolitical and monetary instability.

Trade Tensions and Currency Volatility Behind the Sell-Off

China’s bond sell-off comes against a backdrop of rising U.S.–China trade tensions. In April, the U.S. Treasury market experienced notable volatility following President Trump’s threats to impose new tariffs. The U.S. dollar weakened sharply, while the yield on 10-year Treasuries fluctuated from 3.86% to 4.59%—a clear indication of investor anxiety over inflation and policy unpredictability.

Although a temporary thaw in trade relations has followed recent bilateral talks and new trade agreements—most notably with the U.K.—the broader trajectory suggests that China is actively reducing its exposure to U.S. sovereign debt as a geopolitical hedge.

Strategic Diversification or Political Signaling?

The reduction in China’s holdings may serve dual purposes: diversifying its foreign exchange reserves away from dollar-dominated assets and sending a political message to Washington amid heightened strategic rivalry. This move also coincides with Beijing’s broader efforts to internationalize the renminbi and shift its reserves into alternative stores of value, such as gold and infrastructure-related investments under the Belt and Road Initiative.

Analysts also point to China’s push for a stronger domestic financial architecture and increased holdings in hard assets, which may explain part of its diminished appetite for U.S. bonds.

Financial Realignment Reflects Rising Strategic Friction

China’s decision to sell tens of billions in U.S. Treasuries amid intensifying trade disputes with Washington reflects more than portfolio management—it underscores a deeper shift in global financial power dynamics. As the U.S. continues to attract foreign capital through the sheer weight of its debt markets, China is charting a more cautious, diversified path in response to an increasingly fragmented geopolitical order.

The implications are far-reaching. While immediate market disruption may be limited due to persistent global demand for U.S. debt, sustained divestment by China could gradually reshape the Treasury market’s underlying structure and raise questions about the long-term sustainability of America’s external financing model.

Source: Bloomberg

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Economic

Fed Moves Toward Workforce Restructuring in Long-Term Efficiency Push

On May 16, Federal Reserve Chairman Jerome Powell issued an internal memo announcing a significant restructuring initiative that will see the central bank reduce its workforce by approximately 10% in the coming years. The decision, affecting up to 2,400 positions out of a current workforce of nearly 24,000, is being framed as part of a strategic plan to modernize operations and optimize institutional effectiveness.

Although the Fed operates independently from congressional appropriations—funded instead by income from securities holdings and service fees to supervised banks—Powell emphasized the importance of organizational review as a “healthy and necessary” process for any institution with long-term responsibilities.

Voluntary Exit Program and Operational Streamlining

The centerpiece of the plan is a “voluntary deferred separation program” targeted at eligible employees at the Fed’s Board of Governors in Washington, D.C. While this soft approach avoids immediate layoffs, it reflects a shift toward leaner operations and long-term cost rationalization.

Powell has tasked Fed leadership with aligning departmental functions, improving workflow efficiency, and assessing the optimal scale of the organization to meet statutory mandates effectively. The focus will be on maintaining agility in a complex economic environment and ensuring that resource allocation reflects evolving priorities.

The initiative mirrors broader efforts by the Trump administration to downsize federal operations. Though the Fed is technically outside the executive branch’s budgetary control, its alignment with themes from the Government Efficiency Office—led by Elon Musk—is notable in tone and timing.

Implications for Fed Structure and Future Readiness

According to its 2023 annual report, the Federal Reserve employs approximately 23,950 individuals nationwide, including around 3,000 in Washington and over 20,000 across its 12 regional Reserve Banks. The 10% reduction translates to a significant contraction in human resources, though phased implementation and voluntary participation are expected to mitigate disruption.

Powell also framed the program as an opportunity for employees to pursue career transitions, while enabling the Fed to reconfigure its internal capacity for future challenges—especially as it navigates a volatile macroeconomic landscape marked by rising debt, policy uncertainty, and global financial realignments.

Strategic Downsizing with an Eye on Institutional Agility

The Federal Reserve’s plan to cut 10% of its workforce signals a new chapter in institutional self-examination and modernization. While largely symbolic of broader federal downsizing themes, the move reflects Powell’s commitment to ensuring the Fed remains responsive, efficient, and capable in its evolving role within the U.S. and global financial system.

In an era where central bank policies are under intense scrutiny—ranging from balance sheet expansion to financial supervision—this internal recalibration aims to bolster credibility, operational focus, and long-term resilience. Whether other independent financial institutions follow suit remains to be seen, but the Fed’s initiative sets a precedent for proactive governance reform.

Source: Reuters

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Economic

EU Signals Strategic Shift Away from Investment Pact with China

During a recent forum discussion with Chinese officials, Marjut Hannonen, the EU Delegation’s Head of Trade in China, firmly dismissed the possibility of resuming negotiations on the long-stalled Comprehensive Agreement on Investment (CAI). According to Hannonen, the EU’s priority lies not in reopening the deal but in addressing the widening structural issues plaguing EU–China economic relations.

Her remarks follow a cooling in bilateral tensions after China lifted sanctions on several EU parliamentarians and institutions—a move widely interpreted as an attempt to reopen CAI talks. However, Hannonen was unequivocal in her response: "There is no intention on the EU’s part to do anything with the CAI. It’s not even under consideration."

A Legacy of Stalled Engagement and Rising Distrust

The CAI, initially hailed as a landmark agreement in 2020, lost momentum after the European Parliament froze its ratification in 2021 in response to China’s sanctions related to accusations of human rights violations in Xinjiang—claims which Beijing denies. The diplomatic standoff has since left the agreement dormant, and current EU rhetoric signals that its revival is politically untenable.

Hannonen highlighted a broader deterioration in trade relations over the past two decades, attributing this trend to rising barriers against European firms and asymmetric market access in China. While some sectors like services show promise, the overall trade relationship is strained by deeper systemic imbalances.

Subsidies and Overcapacity Emerge as Core Issues

A central grievance from the EU is China’s aggressive subsidization of its domestic industries. This policy has triggered concerns across multiple sectors, especially in areas where Chinese industrial output is flooding European markets with underpriced goods, such as electric vehicles and solar panels.

The problem, according to Hannonen, is not merely national but global: “Overcapacity is a severe and worsening issue. Instead of addressing it, China is doubling down on production, further destabilizing the international trade environment.” The EU has responded with defensive measures, such as imposing tariffs on Chinese EV imports in 2024, prompting retaliatory actions from Beijing.

These developments underscore the EU’s strategic pivot from negotiation to protectionism, aimed at shielding its own industries from systemic disadvantages.

China Calls for Dialogue but Criticizes Western Trade Policies

Responding to the EU's tough stance, Li Jian, Director-General for European Affairs at China’s Foreign Ministry, acknowledged existing bilateral frictions but called for constructive dialogue. He warned against policies of economic coercion and unilateralism—implicitly criticizing the U.S., and by extension, likeminded allies for contributing to global instability.

His call for China and Europe to exercise “responsible leadership” reflects Beijing’s diplomatic attempt to maintain engagement while resisting perceived Western encirclement. However, without structural reforms from China or a clear shift in EU strategy, dialogue alone appears insufficient to bridge the divide.

Strategic Decoupling Gains Ground

The EU’s unequivocal dismissal of CAI revival reflects a maturing recognition that trade liberalization with China may no longer be strategically viable under current conditions. Deepening subsidy tensions, persistent overcapacity, and political mistrust have created a landscape where multilateral investment frameworks struggle to gain traction.

In this evolving context, the EU appears to be recalibrating its approach—prioritizing defensive economic measures, targeted engagement, and issue-based cooperation rather than sweeping trade deals. Unless China addresses the structural concerns raised, particularly in industrial policy and human rights, the CAI will likely remain shelved, a relic of a geopolitical climate that no longer exists.

Source: Reuters

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Political

President Donald Trump said the US had presented Iran with a proposal over Tehran’s nuclear ambitions and that the country’s negotiators needed to move soon on the offer as talks intensify.

“They have a proposal, more importantly they know they have to move quickly or something bad — something bad’s going to happen,” Trump told reporters aboard Air Force One as he returned to Washington from a visit to the Middle East.

The president did not provide details on the proposal that follows talks being led by his special envoy, Steve Witkoff, and mediated by Oman. The most recent session was Sunday.

A major sticking point has been whether the US would accept Iran keeping some kind of civil nuclear program as part of the deal, and US officials have given conflicting messages on the levels of uranium enrichment they would accept.

Trump has repeatedly threatened military action against Iran if Tehran does not reach a deal to limit its atomic work in exchange for relief from crippling US sanctions. Iran says its program is peaceful but it’s long faced suspicion that it could be weaponized.

Iran’s lead negotiator, Foreign Minister Abbas Araghchi, repeated his insistence that Iran retain some enrichment capacity in comments late Thursday, while citing “contradictory” negotiating positions from the US.

“What the parties to the negotiations say in the media is not the same as what they say behind closed doors,” he said.

Tehran also sent negotiators to Istanbul on Friday to discuss nuclear issues and sanctions with the European signatories of the 2015 nuclear deal that Trump withdrew from in his first term.

“We will meet again if necessary to continue talks,” Deputy Foreign Minister Kazem Gharibabadi said on X, adding that Iran, the UK, France and Germany were “determined to sustain and make the best use of diplomacy.”

During his Mideast visit, Trump suggested that the US is moving closer to an agreement to curb Iran’s nuclear activities even as he has sought to ramp up pressure on the country, warning that his offer will not remain on the table indefinitely.

Source: Yahoo Finance

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Economic

China–U.S. Trade War

Trump Administration Prepares Tariff Wave Amid Stalled Global Negotiations

In a bold and decisive statement from Abu Dhabi, U.S. President Donald Trump announced on May 16 that his administration will begin imposing new tariffs on multiple trading partners within the next 2–3 weeks. The announcement reflects the administration’s frustration with the logistical impossibility of negotiating trade agreements simultaneously with up to 150 countries.

According to Trump, the Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick will soon notify foreign governments of revised tariff rates. He emphasized the U.S. would remain “fair” but firm in enforcing new trade terms, a stance that sharply contrasts with multilateral trade frameworks.

Diplomatic Timeframe Narrowing: From Pause to Penalty

The decision follows a 90-day tariff suspension announced on April 9, which was intended to allow time for trade negotiations. However, with the grace period nearing its end on July 8, few agreements have been finalized. Only two frameworks—one with the United Kingdom and a second with China—have been formally announced so far, negotiated in Geneva by senior U.S. officials.

Meanwhile, over 100 countries have expressed interest in commencing talks, creating a bottleneck that U.S. trade officials admit they cannot realistically resolve within the timeframe. As a result, countries that fail to reach a deal may face retaliatory tariffs as high as 50%, a threshold previously mentioned by Trump as a potential ultimate goal by mid-2026.

Tariff Uncertainty Roils Global Trade Landscape

The Trump administration’s ambiguous position on tariff levels is generating widespread market anxiety. While the U.S. currently maintains a basic 10% import tariff for most goods, some sectors already face significantly higher rates. Notably, the President has hinted that many countries will soon be subject to rates far exceeding the 10% “floor” cited by Commerce Secretary Lutnick.

The recent trade deal with the U.K. allows British goods to enter at the 10% rate, but Trump declared that such "generous terms" would not extend to others. For countries like Vietnam, Japan, India, and the EU, which are still in negotiations, the looming threat of elevated tariffs presents significant economic and diplomatic risks.

Fitch Ratings and Investor Concerns Amplify Policy Volatility

According to Fitch Ratings, the U.S. average tariff remains elevated at 13%—far above the pre-Trump baseline of 2.3%—even after temporary rollbacks tied to talks with China. While this is down from 23% in early April, the current level still represents a significant departure from historical norms and global trade expectations.

This persistent unpredictability is sparking strong reactions from financial markets. In recent weeks, stock prices have swung violently in response to mixed messages from the Trump administration—oscillating between aggressive rhetoric and negotiation overtures. Economists now estimate a 50% chance of a U.S. recession, citing the disruptive effects of trade policy as a key risk factor.

Domestic Impact: Businesses and Consumers Brace for Fallout

Beyond geopolitics, the uncertainty surrounding Trump’s trade policies is weighing heavily on U.S. businesses and consumers. Unpredictable tariffs complicate supply chains, delay procurement decisions, and create pricing volatility in both imported goods and domestic alternatives.

While some firms are attempting to frontload imports or reconfigure supply chains, many face rising costs that will eventually pass through to consumers. The short-term benefit of tariff suspensions has failed to provide the stable planning horizon that industries need to manage risk.

Unilateral Trade Escalation Risks Global Retaliation

As the July 8 deadline approaches, the Trump administration’s shift toward broad-based tariffs appears imminent. The lack of clarity about specific tariff levels, combined with the collapse of a multilateral strategy, introduces significant volatility into global trade dynamics. Though some deals may still materialize, the broader pattern suggests a return to the “America First” doctrine that prioritizes leverage over cooperation.

With key U.S. trading partners still awaiting formal terms, and global investors increasingly wary, the coming weeks may mark a turning point in the post-pandemic trade order—one shaped more by bilateral pressure than by rules-based negotiation. Whether this yields stronger U.S. economic outcomes or triggers a wave of global retaliation remains a question markets and policymakers are watching closely.