China Stocks Rally Amid Trade Optimism and Stimulus Hopes—But Risks Linger

China’s equity markets surged at the start of May 2025, with the Shanghai Composite and CSI 300 indices climbing on renewed hopes of easing U.S.-China trade tensions and aggressive monetary easing. However, underlying risks—from unresolved tariff disputes to weakening economic data—suggest the rally may be premature.

Market Performance: A Cautionary Rebound

Following a five-day Labor Day holiday, the Shanghai Composite Index rose 0.8% on May 4, though gains were pared as investors weighed lingering uncertainties. The index had closed April at 3,295, down 0.07% for the month but up 1.2% weekly amid optimism over stalled trade talks. Meanwhile, the CSI 300, a barometer of large-cap stocks, rebounded 0.95% to 3,808.54, its highest level since April 3.

Despite the short-term gains, forecasts remain bleak: analysts project the Shanghai Composite could slip to 3,214.33 by Q2’s end and 2,983.68 by year-end, driven by trade war risks and tepid corporate earnings. The CSI 300 faces similar headwinds, with its April low of 50.7 in the Caixin services PMI underscoring slowing new order growth.

Trade Talks: Hope Over Reality?

The market’s optimism stems largely from revived U.S.-China negotiations. Treasury Secretary Scott Bessent and trade negotiator Jamieson Greer held talks with China’s He Lifeng in Switzerland, marking the first high-level contact since President Trump’s April tariff hikes (now at 145%). While no deal emerged, markets cheered the dialogue’s resumption.

Meanwhile, China reportedly considered waiving its 125% tariff on select U.S. goods—a gesture toward de-escalation. Yet analysts remain skeptical. Rupert Mitchell of Blind Squirrel Macro warned equities were “pricing a complete evaporation of trade tensions within weeks,” a scenario he deemed “unrealistic.”

Monetary Easing: A Double-Edged Sword

The People’s Bank of China (PBOC) has leaned heavily on rate cuts and liquidity injections to offset trade-war pain. Governor Pan Gongsheng announced a “loose monetary policy,” including rate reductions and reserve requirement ratio (RRR) cuts. However, these moves failed to surprise markets, as traders had already priced in easing.

The PBOC’s actions came with unintended consequences. The offshore yuan fell to 7.2209, reversing a six-month high, as the central bank appeared to tolerate depreciation to ease export pressures. This strategy risks reigniting capital flight concerns.

Sectoral Winners and Losers

Not all sectors shared in the rebound. Consumer discretionary and tech stocks led gains, with Meituan (up 5.28%) and Alibaba (up 1.72%) outperforming in Hong Kong. Both companies benefited from rising e-commerce demand amid weak offline consumption.

Energy stocks, however, stumbled as oil prices slumped, despite Bank of America’s “overweight” call. The sector’s struggles highlight the uneven impact of global trade tensions.

The Elephant in the Room: Economic Data

While markets focus on trade talks, China’s economic fundamentals remain fragile. The April Caixin services PMI sank to 50.7, a seven-month low, reflecting slowing new orders. Meanwhile, Thailand’s inflation turned negative (-0.22% YoY), underscoring regional economic softness.

The PBOC’s monetary easing alone may not suffice. Analysts stress the need for fiscal stimulus—tax cuts or infrastructure spending—to counter the drag from trade disputes. Without these, the rally could unravel.

Conclusion: Hope vs. Reality

China’s stock markets have rallied on trade optimism and stimulus hopes, but the underlying risks are significant. While the Shanghai Composite’s post-holiday rebound and the CSI 300’s recovery to 3,808.54 reflect investor sentiment, the indices face a steep climb to sustain gains.

Key risks include:
1. Trade Uncertainty: A full de-escalation of tariffs remains distant, with both sides holding leverage.
2. Economic Data Slippage: Weak PMI readings and slowing services sectors suggest the economy is still contracting.
3. Currency Risks: The yuan’s depreciation could prompt further capital outflows.

Investors should treat this rebound as a tactical opportunity rather than a sustained rally. The data—projected declines to 2,983.68 by year-end, weak PMI readings, and analysts’ warnings—supports a cautious stance. As the old adage goes: “Don’t mistake a bull trap for a bull market.”

In short, China’s equity markets may have opened with optimism, but the path to recovery remains fraught with potholes.