High-Stakes Reset: U.S.-China Trade Talks Resume in London Amid Rare Earth Tensions

Economic

China–U.S. Trade War

Summary:

President Trump confirmed that top U.S. officials will meet Chinese counterparts in London to restart trade negotiations, aiming to ease rising tensions around semiconductors...

Renewed Dialogue Amid Deepening Trade Frictions

In a pivotal move to de-escalate one of the most consequential trade confrontations of the decade, U.S. President Donald Trump has announced that Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick, and U.S. Trade Representative Jamieson Greer will travel to London on Monday to meet with Chinese Vice Premier He Lifeng. This meeting signals a renewed attempt to stabilize economic relations between the world’s two largest economies, whose bilateral trade exceeded $582 billion last year.

The upcoming negotiations follow a temporary truce in Geneva that saw a rollback of most punitive tariffs. However, that fragile progress has since been overshadowed by escalating disputes—particularly surrounding semiconductor policies and critical mineral exports.

Rare Earths at the Center of the Clash

A core flashpoint remains China’s grip on rare earth elements. Despite an agreement in Geneva, Beijing has delayed export permit approvals for shipments to the U.S., prompting Washington to accuse it of backtracking on promises. These materials—vital for defense systems, electric vehicles, and high-tech manufacturing—have become a key lever in the geopolitical tug-of-war.

Trump's cryptic remark following his recent call with President Xi—“There should no longer be any questions respecting the complexity of Rare Earth products”—suggests intensifying pressure on China to act, though the precise meaning remains unclear. In response, China’s Ministry of Commerce insisted its controls are in line with international norms and promised faster processing of license applications.

Wider Disputes Undermine Trust

The trust deficit has been compounded by other provocations. The U.S. Commerce Department’s advisory against the use of Chinese semiconductors and the revocation of certain student visas have reignited Beijing’s accusations of unfair treatment. Meanwhile, Washington remains wary of China's perceived foot-dragging on liberalizing access to key mineral exports and intellectual property commitments.

Beijing's official statement, released Saturday, confirmed that He Lifeng will lead China’s delegation in London, following his recent participation in Switzerland. His involvement underscores the talks’ significance, as he is the country's top economic policymaker and lead negotiator with Washington.

Strategic Implications for Global Markets

This high-level engagement comes at a critical juncture for both economies. China faces persistent deflationary pressure, weak consumer demand, and a struggling real estate sector. In contrast, the U.S. is leveraging relative economic resilience—buoyed by strong job data and financial market optimism—to demand broader market access and security assurances.

Markets, particularly those dependent on rare earths and global semiconductor supply chains, are watching closely. Auto manufacturers, tech giants, and clean energy firms across the U.S., Europe, and Japan have already begun contingency planning due to ongoing uncertainty around China's export policy.

The London meeting could prove to be a pivotal recalibration of the U.S.-China trade relationship. If successful, it may not only ease immediate tensions but also lay groundwork for long-term supply chain resilience and rules-based trade. However, the shadow of political mistrust and strategic competition looms large—highlighting that any breakthrough will require not just economic incentives but geopolitical finesse.

Source: Reuters

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Economic

Lending Rebounds Sharply Amid Temporary Policy Tailwinds

China’s banking sector saw a substantial rise in credit issuance in May 2025, with new yuan loans estimated to reach 850 billion yuan ($118.3 billion), up from just 280 billion yuan in April. The surge aligns with historical seasonal patterns—banks typically increase lending in the second month of each quarter—but this year’s jump is also linked to macro policy interventions and a de-escalation in trade tensions with the United States.

The figures, based on a Reuters poll of 18 economists, reflect a short-term boost in borrowing appetite following a rare 90-day tariff truce between the US and China. The agreement, announced in mid-May, saw both sides roll back steep tariff hikes imposed earlier in the year, which had previously chilled business sentiment and trade flows. The policy shift has revived hopes for a more stable trade environment, at least temporarily.

Monetary Easing Supports Liquidity, but Recovery Remains Uneven

Contributing to the lending recovery was a suite of monetary easing measures rolled out in May by the People’s Bank of China (PBOC), including a cut to key interest rates and a liquidity injection designed to improve credit conditions. Citi Research noted, however, that the impact of these steps may be delayed, pointing to persistently low bills discount rates—a proxy for short-term corporate borrowing costs—as evidence that underlying demand may not yet be fully responsive.

While the near-term credit surge looks promising, the broader macro backdrop remains challenging. Factory activity continued to contract in May for a second straight month, underscoring the headwinds facing China’s manufacturing sector. The uncertainty surrounding the durability of the trade truce and the ongoing slump in domestic consumption remain critical constraints on credit transmission.

Structural Weakness in Domestic Demand Persists

Despite the rise in lending, household demand for credit remains subdued. Consumers are still cautious amid job insecurity and slow income growth, leading to restrained spending and borrowing. Weak property prices and limited confidence in near-term economic prospects continue to weigh on household and small business balance sheets, suggesting that the recent surge in credit may be more supply-driven than demand-led.

Outstanding yuan loans for May are forecast to have grown 7.2% year-on-year, unchanged from April, indicating that while new issuance has picked up, it has yet to translate into accelerated loan stock expansion. This further supports the view that the increase in lending may reflect a tactical boost rather than a structural shift in borrower behavior.

Money Supply and Credit Indicators Also Strengthen

Broad money supply (M2) is expected to have risen 8.1% in May, slightly higher than April’s 8.0%, suggesting moderately improved liquidity conditions. Meanwhile, Total Social Financing (TSF)—a comprehensive measure of credit that includes off-balance-sheet financing such as trust loans, bond issuances, and equity funding—is projected to have doubled to 2.3 trillion yuan from April’s 1.16 trillion yuan.

This rebound in TSF may be partially attributed to government bond issuance, which has ramped up in recent months to support infrastructure investment and local government financing needs. As Beijing seeks to stabilize growth without overrelying on property markets, targeted fiscal stimulus through public investment has become increasingly central to its strategy.

Trade Policy Remains a Key Risk Factor

Despite the recent boost from the tariff truce, uncertainties remain over the long-term trajectory of US-China trade relations. A recent phone call between Presidents Trump and Xi Jinping has kept diplomacy alive, but unresolved issues—such as rare earth export controls and US curbs on Chinese access to chip technology—continue to loom over the relationship. Upcoming talks in London will be closely watched for signs of progress or renewed friction.

China’s surge in bank lending in May highlights how coordinated monetary and diplomatic efforts can temporarily stabilize financial conditions. However, persistent structural challenges—ranging from weak consumer sentiment to external trade volatility—mean that the rebound is unlikely to signal a durable turning point without deeper reforms or stronger domestic demand.

Policymakers may need to deploy further stimulus tools in the second half of the year if core indicators such as manufacturing output, employment, and retail activity fail to rebound. In this context, May’s credit data marks a tactical success but does not yet dispel concerns about the fragility of China’s recovery trajectory.

Source: Reuters

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Economic

Forex

Trump-Era Instability Reaches One of Asia’s Most Stable Currency Regimes

Hong Kong’s decades-old currency peg, long seen as a bastion of monetary stability in Asia, is facing renewed turbulence. Over the past month, the Hong Kong dollar (HKD) has oscillated rapidly within its official trading band of 7.75–7.85 per US dollar, reflecting how policy shocks from Washington are reverberating far beyond US shores. While the peg itself is not under direct threat, the secondary impacts—particularly on interest rates—have created significant challenges for financial institutions, investors, and businesses in the region.

Historically, Hong Kong’s interest rates closely follow US benchmarks, a mechanism that helps maintain the fixed exchange rate under the Linked Exchange Rate System. However, recent capital inflows into Hong Kong—from both global investors eyeing major IPOs and Chinese mainland investors increasingly active in local equities—have decoupled local borrowing costs from US rates.

The result has been a pronounced drop in Hong Kong’s interbank lending rates (HIBOR), widening the rate spread between the US and Hong Kong to record levels. As of last week, the three-month rate spread hit its highest point since 2020, creating arbitrage opportunities for traders and raising systemic risks.

HKMA Intervenes Amid Whipsawing Currency Flows

In response to this growing volatility, the Hong Kong Monetary Authority (HKMA) was forced to intervene four times in May to maintain the peg, selling HKD as it neared the strong end of its range. These interventions temporarily relieved pressure but also led to unintended consequences: ultra-low interest rates that encouraged speculative shorting of the HKD, which then swung sharply toward the weaker end of the band at 7.85.

The policy response has created a cycle of sharp rate swings, unsettling for both households and institutions. According to Raymond Yeung of ANZ, the speed of capital inflows into Hong Kong was unexpected and could produce a destabilizing interest rate shock if the US-HK spread closes abruptly.

Authorities Reaffirm Peg Amid Macro Uncertainty

Amid mounting speculation, Hong Kong’s leadership has reiterated its commitment to maintaining the peg. Chief Executive John Lee emphasized in an interview with the South China Morning Post that the peg remains “absolutely essential,” while HKMA head Eddie Yue highlighted the broader macroeconomic benefits of the current low-rate environment.

From a policy standpoint, lower rates have helped stabilize Hong Kong’s struggling property market, with home prices posting a modest increase in April after four consecutive months of decline. The government has also seized the opportunity to issue 30-year sovereign bonds for the first time, taking advantage of historically low borrowing costs to lengthen its debt maturity profile.

Macro Benefits Temper Immediate Risks, But Fragility Persists

While lower interest rates offer short-term advantages for borrowers and the government, the structural fragility introduced by this divergence cannot be ignored. Businesses and financial institutions with mismatched asset-liability profiles may suffer if rate spreads normalize abruptly. Additionally, with global trade already destabilized by ongoing tariff tensions between the US and China, any financial shock could ripple across Asia’s interconnected economies.

Hong Kong’s exchange rate regime is still intact, but the mounting side effects—from interest rate volatility to speculative flows—suggest that maintaining the peg in the Trump era requires increasingly active management and more complex trade-offs. With capital markets on edge and geopolitical pressures persisting, the HKMA’s ability to defend both monetary stability and financial resilience will remain under scrutiny. Whether the benefits of the peg continue to outweigh the costs may soon depend less on technical fundamentals and more on geopolitical restraint.

Source: Reuters

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Daily News

[Quick Facts]

1. Japan's Q1 economy shrinks less, supporting the Central Bank's Wait-and-See stance.

2. Iran gains sensitive intelligence, hitting U.S.-Israel weak point; Israel may escalate conflict.

3. Escriva: Benchmark interest rate path may need fine-tuning.

4. Schnabel: There's a "window of opportunity" for promoting the euro's global role.

5. U.S. trade negotiation team extends stay in India.

6. U.S. believes Russia will continue retaliation against Ukraine's "Operation Spider's Web" in the coming days.

[News Details]

Japan's Q1 economy shrinks less, supporting the Central Bank's Wait-and-See stance

Japan's economic contraction in the first quarter of this year was smaller than initially estimated, as inventory and consumption data improved. Japan's Cabinet Office said on Monday that the annualized quarter-on-quarter GDP growth rate stood at -0.2% in Q1, revised up from the initial estimate of -0.7%. Private consumption rose by 0.1%, while business spending increased by 1.1%. Inventories contributed 0.6 percentage points to economic growth, whereas net exports dragged it down by 0.8 percentage points. The revised data confirmed that Japan's economy had already started to shrink before U.S. President Donald Trump expanded tariff measures in April. For the Bank of Japan (BOJ), these figures may still support a wait-and-see approach, especially after the central bank lowered its growth forecast for this year at its last meeting. BOJ officials remain highly vigilant about the impact of tariffs, with Governor Kazuo Ueda describing the uncertainty as "extremely high" and warning last week that tariffs could affect Japan's economy through multiple channels.

Iran gains sensitive intelligence, hitting U.S.-Israel weak point; Israel may escalate conflict

Iran claimed to have obtained thousands of classified documents related to Israel's nuclear program, drawing global attention. Analysts believe Israeli Prime Minister Benjamin Netanyahu may seize this opportunity to escalate tensions with Iran. Iran's move is seen as a major victory for its intelligence agencies and a disclosure of Israel's nuclear activities. Though Israel has not publicly responded, analysts suggest Netanyahu, facing corruption allegations, might use the issue to divert domestic attention. This incident not only touches on the vulnerabilities of the U.S.-Israel alliance but also highlights their double standards on nuclear issues. Iran's strategic considerations include deterring Israel, strengthening its bargaining chips in nuclear negotiations, and consolidating anti-Israel, pro-Palestine solidarity in the region. The covert intelligence battle between the two sides is expected to remain intense, reflecting the deepening security dilemma of mutual hostility and deterrence within the Middle East.

Escriva: Benchmark interest rate path may need fine-tuning

Escriva, Governor of Spain's central bank and a member of the ECB Governing Council, stated that the baseline assumptions guiding ECB monetary policy may need adjustment. In an interview with El País on Sunday, she noted, " When the situation is full of uncertainties, it is convenient to maintain all open options. The central scenario with which we operate – GDP growth around 1%, inflation of 2% – may require, if confirmed, if any, some fine adjustments." She specifically mentioned that part of the uncertainty stems from the policy direction of U.S. President Donald Trump, which could lead to bidirectional fluctuations in inflation. Escriva expressed "a great consensus" with the ECB's gradualist approach, emphasizing that " It is an approach based on a continuous evaluation of the data, and in which we do not commit ourselves in advance with any path for future interest rates."

Schnabel: There's a "window of opportunity" for promoting the euro’s global role

Isabel Schnabel believes there’s a "window of opportunity" for promoting the euro’s global role. This comes as investors look to Europe amid uncertainties in the US market. Schnabel noted that investors are focusing on Europe to diversify their portfolios, which she described as a "positive confidence effect." European officials, including Schnabel and Christine Lagarde, are leveraging U.S. President Donald Trump's criticism of global trade and U.S. institutions to seek to strengthen the euro's global standing.

U.S. trade negotiation team extends stay in India

According to reliable sources, the U.S. trade team currently negotiating in India has extended its stay, indicating progress in talks ahead of the July deadline. The individuals requested anonymity because the information is not public. They said the team had initially planned to hold talks with Indian officials on June 5-6 but decided to stay until Tuesday to continue discussions. These sources estimated that most issues could be finalized within a week. India and the U.S. are working to reach a phased trade agreement and aim to finalize a preliminary deal by July on the so-called implementation period for reciprocal tariffs. Meanwhile, these tariffs are facing legal challenges in Washington.

U.S. believes Russia will continue retaliation against Ukraine's "Operation Spider's Web" in the coming days

The U.S. expects Russia's threat of retaliation over Ukraine's "Spider's Web" operation is not seriously acted upon, and it is highly likely to respond with a large-scale, multi-targeted strike, Reuters reported on June 7th. One source said the timing of the specific response remains unclear but is expected within the next few days. They believe Moscow's counterattack will be "asymmetric." Another informed source speculated that Russia might use missiles and drones to carry out strikes. A Reuters source in Western diplomatic circles said Russia's retaliation could target key sites such as government buildings. Military analyst Michael Kofman suggested Moscow might seek to strike the headquarters of Ukraine's Security Service (SBU), which played a key role in the "Spider's Web" operation, or offices of other regional intelligence agencies, possibly using medium-range ballistic missiles.

[News Details]

UTC+8 23:00 U.S. May New York Fed 1-Year Inflation Expectations

UTC+8 17:00 ECB Executive Board Member Elderson to Deliver a Speech

TBD Italy to Hold a National Referendum Election

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James Whitman

Economic

Other governments have so far taken three main approaches to dealing with Donald Trump’s trade threats. China hit back hard at the U.S. president’s tariffs and got him to back down partly. Canada also retaliated and avoided some of the pain Trump inflicted on other countries. Meanwhile, Britain cut a quick deal that favoured the United States. None of these is a model for the European Union.

The 27-member group is not China. Though its bilateral goods trade, opens new tab with the United States last year was worth 70% more than between the U.S. and the People’s Republic, opens new tab, the EU is not an autocracy that can outpunch Trump. If it antagonises the U.S. president, he might up the stakes by pulling the rug from under Ukraine and undermining the EU’s defences. American hard power gives it what geopolitical strategists call “escalation dominance”.

The EU is not Canada either. Ottawa was able to hang tough because its people were infuriated that Trump was trying to blackmail Canada into becoming part of the United States. While anti-Trump sentiment is high, opens new tab in the EU, politicians who are sympathetic to him, such as Poland’s new president, can still get elected.

On the other hand, the EU is not the United Kingdom. Both are at risk from Russia’s invasion of Ukraine. But the EU trades seven times more goods with the United States than Britain, opens new tab does - so Washington has more to lose if economic relations break down.

There is another way for the EU to handle Trump’s threats: play it cool. That is more or less what the bloc is doing. It involves neither escalating the conflict nor accepting a bad deal. It means being open to a good agreement if the U.S. lowers its demands, but willing to play the long game if it does not.

One reason to buy time is to help Kyiv. The longer the EU has to prepare its own support package for Ukraine, which should include getting it a lot of cash, the less the damage if Trump ultimately cuts off all U.S. aid to the country.

The president’s own vulnerabilities may also increase over time. Just look at the spectacular end of his alliance with Tesla (TSLA.O), opens new tab boss Elon Musk. The fragile U.S. trade truce with China may break down causing more financial turmoil, making Trump less keen to pick a fight with the EU. If the Supreme Court stops him using emergency powers to impose tariffs, his negotiating position will be weaker. And tariffs could hurt the U.S. more than its supposed victims, by pushing up inflation and crimping growth.

A QUICK DEAL?

Trump has zig-zagged in his trade threats and actions against the EU. The current state of play is that there are 50% tariffs on U.S. imports of steel and aluminium from the bloc, a 25% tariff on cars and 10% so-called reciprocal tariffs on most other goods.

The U.S. president has threatened to jack up these reciprocal tariffs to 50% if there is no deal by July 9. He is also looking at more “sectoral tariffs”, including on pharmaceuticals and semiconductors.

While the EU has complained to the World Trade Organization (WTO), it has delayed its own retaliation. Its negotiators accept that they are unlikely to overturn the reciprocal tariffs, the Financial Times, opens new tab has reported.

The bloc still aims to avoid the sectoral ones. Those on cars and any on pharmaceuticals would hurt it the most. It has dangled the possibility of buying more U.S. equipment and natural gas to get a deal.

An agreement on those lines could be good for the EU. It needs to beef up its defences and eliminate its purchases of Russian gas. While it would be best to have its own arms and energy supplies, buying more from the U.S. makes sense as an interim measure. An important nuance, though, is that the EU should reserve the right to take action against the reciprocal tariffs after the WTO issues its verdict, says Ignacio Garcia Bercero, opens new tab, a former senior EU trade official.

Such a pact would involve quite a climbdown by Trump. True, arms and gas purchases would narrow the U.S. goods deficit with the EU, which was $236 billion, opens new tab last year. But his administration has a host of other complaints including the bloc’s value-added tax and food safety standards as well the digital taxes that some of its members impose on tech giants. It is hard to see the bloc agreeing anything in those areas, says Simon Evenett, professor of geopolitics and strategy at IMD.

BACK TO WAR?

Although the U.S. side described last week’s trade talks with the EU as “very constructive, opens new tab”, discussions could easily break down. The question then is how the bloc would react if Trump imposed higher reciprocal tariffs.

The EU has so far imposed no countermeasures. Though it has agreed to tax 21 billion euros of U.S. imports in response to the steel and aluminium tariffs, it has delayed these until July 14 to try to get a deal. The European Commission, its executive arm, is also consulting on taxing a further 95 billion euros of U.S. imports in response to the car tariffs and the reciprocal ones. But added together, these tit-for-tat measures would be equivalent to only a third of the 379 billion euros of EU imports subject to Trump’s tariffs.

Some analysts, opens new tab think the bloc needs to be tougher. One idea is to crack down on American services, where the U.S. had a 109 billion euro, opens new tab surplus with the EU in 2023. Another is to activate its “anti-coercion instrument, opens new tab”, which would allow retaliation against U.S. companies operating in the bloc. Yet another is to threaten to ban exports of critical goods, such as the lithographic equipment necessary to make semiconductors.

Extreme events may require extreme responses. But for now, the EU should keep its cool. It should not kid itself that it is stronger or more united than it is. It should remember that Trump may get weaker with time. And it should never forget Ukraine.

Source: Reuters

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Economic

Commodity

Exports Rebound Sharply, But Structural Constraints Remain

China, the world’s dominant supplier of rare earths, exported 5,864.6 tons of these critical minerals in May 2025, marking a sharp 23% increase from April and the highest monthly volume in the past 12 months. The surge reflects a complex interplay between Beijing’s selective export curbs and robust external demand, particularly in high-tech and green energy industries.

While the headline increase appears to signal supply normalization, underlying constraints persist. The broad category of rare earths includes 17 distinct minerals, and China’s current restrictions do not apply uniformly across all of them. As a result, some subcategories—especially rare earth magnets—remain subject to strict controls, limiting availability for specific applications despite the overall increase in outbound shipments.

Partial Export Curbs Still Disrupt Global Supply Chains

The curbs announced in April targeted several high-value rare earth compounds, including those used in the production of permanent magnets essential for electric vehicles, wind turbines, robotics, and advanced defense systems. Although not all rare earth exports are restricted, the limitations on specific components have already triggered operational disruptions, particularly in Europe’s manufacturing base.

Data from April showed exports of rare earth magnets fell by 50%, and this dislocation has begun to cascade. Several European auto parts manufacturers were forced to halt operations last week due to component shortages. Meanwhile, semiconductor firms warned of impending shutdowns within weeks if supply constraints are not resolved. These developments underscore the strategic vulnerability many economies face due to China’s dominance in rare earth processing and refining.

Geopolitical Tensions Elevate Strategic Importance

The tightening of rare earth flows formed a critical agenda item in a rare direct phone call between US President Donald Trump and Chinese President Xi Jinping last week. The conversation highlighted how rare earths have become a flashpoint in broader trade and geopolitical tensions. While negotiations have resumed in London, the extent to which the two sides can reach a compromise remains uncertain.

For Beijing, rare earths serve not only as an economic lever but also as a diplomatic tool. By selectively managing exports, China can apply pressure while maintaining formal compliance with international trade norms. For importing countries, this unpredictability has heightened the urgency of diversifying supply chains and investing in alternative sources, including processing capacity in Australia, Canada, and Africa.

Cumulative Exports Show Modest Growth in 2025

Despite the monthly spike in May, year-to-date export volumes remain relatively stable. Total rare earth exports for the first five months of 2025 reached 24,827 tons, a slight increase from 24,266.5 tons during the same period in 2024. This modest annual growth suggests that while monthly data may reflect demand surges or logistical clearances, longer-term export capacity remains tightly controlled.

The full breakdown of May’s export composition will be available in China’s detailed trade release on June 20. Analysts expect it will show continued restrictions on high-tech inputs, even as raw material exports remain more fluid.

The jump in China’s rare earth exports in May offers short-term relief to global markets but does not alter the underlying vulnerability of industries dependent on these strategic minerals. Export controls remain selectively enforced, and the consequences are already visible in European manufacturing slowdowns. With geopolitical tensions unresolved and detailed data still pending, the global rare earth supply landscape remains precarious—fueling calls for diversification, onshoring, and greater strategic coordination among import-dependent nations.

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China–U.S. Trade War

Factory-Gate Prices Fall Sharply Despite Stimulus Measures

China’s producer price index (PPI) declined 3.3% year-on-year in May 2025, marking the steepest deflationary reading in 22 months and exceeding economists’ expectations of a 3.2% drop. The latest data reflects deepening structural strains in the industrial sector, where demand remains subdued and profit margins are compressed by prolonged price competition.

The sharper PPI drop from April’s 2.7% fall highlights continued contraction in input prices and manufacturing output, even as Beijing implements stimulus measures to stabilize growth. The deflationary momentum reinforces investor expectations that more aggressive policy easing may be required in the months ahead.

Weak Consumer Prices Underscore Fragile Demand

Consumer price trends offered little reassurance. The headline consumer price index (CPI) dipped 0.1% from a year earlier in May, matching April’s decline but coming in slightly better than market expectations for a 0.2% fall. On a month-on-month basis, however, CPI fell 0.2%, reversing April’s 0.1% increase.

These figures reflect persistent caution among households amid weak income growth and an uncertain labor market. Despite a series of fiscal and monetary support packages, household spending remains restrained, leading many businesses to rely on discounting strategies to stimulate demand. The government has responded by urging companies—especially in the automotive sector—to end destructive price wars that are contributing to deflation.

Housing Sector and Retail Sentiment Remain Sluggish

Stagnation in China’s housing market continues to weigh on broader consumer confidence. Home prices have failed to rebound meaningfully despite targeted easing measures, and real estate activity remains tepid. The sector’s underperformance not only dampens household wealth perceptions but also slows down related industries such as construction materials, home appliances, and furnishings.

Retail sales growth also slowed in May, underscoring lingering weakness in consumption. Concerns over job security and slow wage growth are encouraging precautionary saving, further weakening domestic demand—a critical component in China’s strategy to transition away from an export-dependent growth model.

Geopolitical Uncertainty Weighs on Industrial Confidence

Trade tensions with the United States have compounded the deflationary pressures. Following recent tariff hikes—peaking at a prohibitive 145% before partial rollback—uncertainty around supply chain stability and export competitiveness has increased. Though a phone call between Presidents Trump and Xi Jinping last week suggested potential de-escalation, concrete outcomes remain elusive.

Monday’s resumption of high-level US-China trade talks in London could offer directional clarity, especially around critical minerals, a focal point of current disputes. However, in the absence of a meaningful breakthrough, industrial sentiment may remain depressed, particularly among exporters and manufacturers reliant on US market access.

Core Inflation Shows Limited Resilience

Core inflation, which strips out volatile food and fuel prices, rose 0.6% in May, edging up slightly from April’s 0.5%. While the uptick suggests some underlying price stability, it remains far below the People’s Bank of China’s long-term inflation target. As such, it is unlikely to dissuade policymakers from further easing if deflation persists across key sectors.

China’s deepening producer deflation and stagnant consumer prices present a formidable challenge to policymakers aiming to engineer a sustainable recovery. With domestic demand faltering and external trade risks unresolved, the pressure is mounting on the central bank and fiscal authorities to implement more decisive, targeted stimulus.

The persistent decline in factory-gate prices—paired with weak retail and housing data—suggests that without renewed policy action, deflationary forces could become entrenched, further undermining economic momentum. The upcoming trade talks and the Lujiazui Forum later this month will serve as critical moments for Beijing to signal its next move in countering these mounting headwinds.