Chinese Stocks Rally on PBOC’s Aggressive Easing and Fragile Trade Hopes

The Shanghai Composite Index surged 4.5% in early May ontvang, marking its strongest week since late 2022, as investors priced in a cocktail of monetary easing and flickering optimism over U.S.-China trade talks. The rally has been fueled by the People’s Bank of China (PBOC) unleashing a record RMB 2.1 trillion (US$290 billion) in liquidity measures and structural reforms, while high-level trade negotiations in Switzerland hinted at a potential thaw in the world’s most consequential trade war. But beneath the surface, the gains face headwinds from geopolitical risks and the stubborn reality of tariffs that are still at historic highs.

The PBOC’s Aggressive Monetary Push

The central bank’s May 7th 10-point package was a blunt-force attempt to counter deflationary pressures and stabilize growth. Key measures included:
- A 0.5% cut to the reserve requirement ratio (RRR), injecting RMB 1 trillion into banks.
- A 10 basis point reduction in the 7-day reverse repo rate (now 1.4%), lowering borrowing costs for households and businesses.
- Sector-specific support:
- RMB 300 billion for tech innovation (e.g., semiconductors, AI).
- RMB 500 billion for rural SMEs and elderly care infrastructure.
- A 0.25% rate cut on five-year housing provident fund loans, targeting first-time buyers.

The PBOC’s actions were a stark departure from its cautious stance of 2023. Analysts at Capital Economics noted that the RRR cuts alone are equivalent to a $138 billion injection, which could boost annualized GDP growth by 0.2-0.3 percentage points.

Trade Talks: Symbolic Progress, Substantial Risks

While the PBOC’s easing provided a near-term catalyst, the bigger question revolves around the U.S.-China trade talks. The May 10th meeting in Switzerland between U.S. Treasury Secretary Scott Bessent and China’s Vice Premier He Lifeng marked the first in-person talks since tariffs hit their peak:
- U.S. tariffs on Chinese goods: 145%, up from 25% in 2019.
- Chinese retaliatory tariffs: 125% on U.S. imports, including agricultural goods and tech components.

The immediate outcome was minimal, with Bessent stating the goal was “de-escalation, not a big deal.” But markets latched onto the symbolism:

• Cargo volumes: A 60% decline in April, with JPMorgan projecting an 80% drop by mid-2025.
• U.S. economic impact: The first quarter GDP contraction of 0.3%, driven by businesses stockpiling goods pre-tariff.
• Chinese factory activity: The Caixin PMI hit a 16-month low in April, prompting the PBOC’s rate cuts.

Why the Rally Faces Resistance

While the PBOC’s moves and trade talks sparked buying, three factors could limit gains:

1. Geopolitical Risks:
2. President Xi Jinping’s May 12th visit to Moscow underscored China’s alignment with Russia, raising sanctions risks.

3. India-Pakistan tensions, including a drone strike on New Delhi, have heightened regional instability.

4. Profit-Taking in Growth Stocks:

5. Real estate shares, which rose 12% in early May, slumped as analysts noted the housing rate cuts were insufficient to reverse oversupply.

6. Tariff Reality Check:

7. The U.S. is unlikely to reduce its 145% tariffs without reciprocal concessions on tech export controls.
8. China’s Commerce Ministry reiterated demands for “mutual respect” before easing retaliation.

The Bottom Line: Fragile Rebound, Not a New Bull Market

The Shanghai Composite’s rally has been driven by monetary stimulus and hope, but the data suggests caution:

• Economic fundamentals: China’s Q1 GDP grew just 4.5%, below expectations, while U.S. inflation remains stubbornly above 3%.
• Trade war costs: The IMF estimates the tariffs have shaved 0.5% off global GDP and could push the U.S. into recession by late 2025.

The PBOC’s easing is a stopgap, not a cure. Without a meaningful tariff reduction—say, the U.S. lowering rates to 60% from 145%—the rally is likely to fizzle. Investors should treat this as a tactical opportunity rather than a signal of a sustained turnaround.

In the end, China’s stock market remains a geopolitical and monetary experiment. The PBOC can print liquidity, but it can’t print a solution to a trade war that’s now a structural feature of the global economy.

Conclusion: The Shanghai Composite’s May rally reflects a classic “buy the rumor, sell the news” cycle. While the PBOC’s easing and trade talks provided a spark, sustainable gains require two things: a tangible tariff reduction and a stabilization of China’s real estate sector. Until then, the rally is a blip in a broader landscape of strategic competition and economic fragmentation.