Trade Tensions Ease as Markets Rebound on US-China Diplomacy and Monetary Stimulus

The global markets breathed a collective sigh of relief in early May 2025 as US-China diplomatic talks kicked off in Geneva and the People’s Bank of China (PBOC) announced a series of monetary easing measures. While the immediate reaction sent Asian equities soaring, the long-term implications remain clouded by unresolved trade tensions and structural economic challenges. Here’s what investors need to know.

The Diplomatic Pivot: A Fragile Truce?
The May 6 announcement of US-China trade talks marked a rare moment of cooperation between two nations locked in a bitter trade war. With tariffs hitting historic highs—145% on Chinese goods entering the US and 125% the other way—the talks aimed to soften the blow to both economies. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng led their teams, but progress was limited. The US demanded reciprocal concessions for tariff cuts, while China insisted on “equality and mutual respect.”

Despite the lack of breakthroughs, markets rallied on the mere prospect of dialogue. Asian equities surged, with the Shanghai Composite and Hong Kong’s Hang Seng indices climbing 2.5% and 3%, respectively, on May 7—the day the PBOC unveiled its stimulus package.

China’s Monetary Lifeline: A Short-Term Fix?
The PBOC’s moves were designed to cushion China’s export-reliant economy from the trade war’s fallout. Key actions included:
- Cutting the reverse repo rate to 1.4%, a 0.1% reduction.
- Lowering commercial bank lending rates by 0.25%, to 1.5%.
- Reducing the reserve requirement ratio by 0.5%, freeing ¥1 trillion ($137.6 billion) for loans.

These measures targeted exporters, factory upgrades, and key sectors like innovation and elder care. The central bank’s messaging framed the cuts as a “policy buffer” to stabilize liquidity and investment.

Yet, the gains were fleeting. Hong Kong’s Hang Seng index retreated by midweek, reflecting skepticism about whether these moves could counter weakening consumer demand and business sentiment. Analysts noted that without fiscal stimulus—such as tax cuts or infrastructure spending—the PBOC’s measures might merely delay, not resolve, the slowdown.

The Fed’s Stance: A Tightrope Walk
Meanwhile, the Federal Reserve held its benchmark rate at 4.25%–4.5% during its May meeting, despite the US economy contracting by 0.3% in Q1 2025. Fed officials cited lingering inflation risks exacerbated by the trade war’s supply chain disruptions. The decision underscored a dilemma: easing rates could weaken the dollar and worsen trade imbalances, while maintaining high rates risks deepening the slowdown.

The dual pressures of tariffs and high borrowing costs have created a precarious environment for US businesses. Industries like manufacturing and tech—already reeling from supply chain bottlenecks—now face higher input costs due to the trade war.

The Bottom Line: Caution Amid Optimism
The market rally of May 7–8 reflects hope that diplomatic dialogue and monetary easing can avert a full-blown crisis. However, the underlying issues—trade imbalances, weak demand, and geopolitical distrust—remain unresolved.

Investors should weigh two key factors:
1. Policy Effectiveness: The PBOC’s ¥1 trillion liquidity injection may provide short-term relief for exporters and banks, but without fiscal support, it’s unlikely to revive consumer spending. China’s Caixin manufacturing PMI, which fell to 49.6 in April (below 50 signals contraction), suggests the pain is far from over.
2. Trade Talks Outlook: A meaningful tariff rollback would boost US-China trade volumes and ease inflationary pressures. However, the US-China history of “talks without action” means investors should demand concrete concessions—such as a phased tariff reduction—before pricing in sustained gains.

Conclusion
The May 2025 events highlight a fragile equilibrium: markets rally on diplomatic gestures and stimulus, but the structural issues driving the trade war persist. While Chinese equities and US Treasuries may see near-term gains, the path to sustained recovery hinges on two critical variables:
- Geopolitical Compromise: A reduction in tariffs to below 100% would remove a major drag on global growth.
- Fiscal Action: China needs targeted spending to boost domestic demand, while the US must address its Q1 contraction without destabilizing its own inflation fight.

For now, the rally appears more about hope than reality. Investors are advised to monitor key indicators: China’s industrial output (due June 2025), US-China tariff announcements, and the Fed’s next rate decision in July. Until these deliver tangible progress, the rebound should be treated as a tactical opportunity rather than a buy-and-hold signal.

In short, the PBOC’s rate cuts and US-China talks have bought time—but time, in this case, is running out.