Chinese Equities Surge Amid Stimulus Boost and Trade Talks: Is the Rally Sustainable?

The Shanghai Composite Index rose 0.5% and Hong Kong’s Hang Seng Index climbed over 2% in May 2025, as investors bet on China’s new economic stimulus measures and the potential for U.S.-China trade talks to ease tensions. While optimism has fueled the rally, the path forward remains fraught with structural challenges and unresolved geopolitical friction. This article dissects the drivers of the market rebound and evaluates the risks threatening its longevity.

The Stimulus Package: A Lifeline or a Band-Aid?

China’s central bank and government have deployed a multi-pronged stimulus to counter slowing growth and the impact of U.S. tariffs. Key measures include:
- Monetary Easing: The People’s Bank of China (PBOC) cut its reverse repo rate to 1.4%, reduced the reserve requirement ratio (RRR) by 0.5%, and lowered housing loan rates to ease liquidity constraints.
- Fiscal Expansion: A 4% fiscal deficit (the highest in 30 years) unlocked RMB1.6 trillion ($221 billion) for infrastructure, technology, and land acquisition projects. Local governments also received a 13% boost in borrowing quotas to fund regional initiatives.
- Sector-Specific Support: RMB500 billion ($70 billion) was allocated to recapitalize state-owned banks, while a new AI-focused fund targeted tech innovation to reduce reliance on U.S. supply chains.

However, analysts argue the stimulus lacks the scale to offset systemic headwinds. The real estate sector—still mired in defaults and oversupply—remains excluded from direct bailouts, while weak credit demand limits the impact of rate cuts. Morgan Stanley’s economists note that without addressing structural issues like high youth unemployment and local government debt, growth could remain below the 5% target.

Trade Talks: A Glimmer of Hope, or a Prolonged Standoff?

In Geneva in May 2025, U.S. officials and Chinese Vice Premier He Lifeng held their first in-person talks in years. While no deal emerged, the dialogue signaled a cautious thaw in tensions. U.S. Treasury Secretary Scott Bessent acknowledged the “unsustainability” of 145% tariffs on Chinese goods, while China’s delegation reiterated its refusal to negotiate under “unequal” terms.

The stakes are high: U.S. imports from China have dropped 60% since early 2025, with JPMorgan predicting an 80% decline by year-end. This has sparked fears of shortages and inflation, with Hasbro warning of $300 million in losses due to tariff-driven cost hikes.

Yet progress remains elusive. U.S. President Trump has ruled out immediate tariff cuts, while China demands full U.S. tariff removal as a precondition. Analysts like Alicia Garcia-Herrero (Natixis) suggest a “partial deal” could involve temporary tariff pauses, but Zhang Li (China scholar) warns that deeper issues—technology restrictions, fentanyl smuggling—will prolong the conflict for years.

Market Reactions: Optimism vs. Reality

Equity markets have priced in the “best-case scenario” of a de-escalation. The Hang Seng Tech Index rose 8% in May, buoyed by hopes for a tech-sector rebound, while banks and real estate stocks rallied on liquidity injections.

However, skepticism lingers. Analysts highlight:
1. Structural Weaknesses: China’s reported 5.4% annual GDP growth in Q1 2025 is disputed, with factory activity contracting at a 16-month low.
2. Debt Risks: Local governments, already burdened by RMB50 trillion ($7 trillion) in debt, face strained fiscal capacity to execute projects.
3. External Pressures: U.S. tariffs now average 32%, and retaliatory measures (e.g., 125% tariffs on U.S. goods) have slashed agricultural imports to near zero.

Conclusion: A Fragile Rally, a Long Road Ahead

The recent equity rebound reflects hope that China’s stimulus and trade talks will stabilize growth. Yet the data paints a more nuanced picture:
- Positive Signals: The fiscal expansion and monetary easing have boosted liquidity, while tech and infrastructure sectors show promise.
- Red Flags: The real estate crisis, weak consumer demand, and trade tensions remain unresolved. Even if tariffs are reduced, structural reforms are needed to address overcapacity and debt.

Investors should proceed with caution. While the Shanghai Composite and Hang Seng indices may see short-term gains, long-term sustainability hinges on meaningful trade progress and systemic reforms. As the PBOC’s Governor Yi Gang noted, the current measures are a “policy buffer,” not a solution—underscoring the fragile nature of this rally.

In a race against time, China’s policymakers must navigate a narrow path between stimulus-driven growth and the risks of over-leverage. For now, the markets are betting on hope—but history suggests reality will eventually catch up.