Bracing for Impact and Direct Response

It became clear that the trade war was starting to take a toll when Chinese exports to the U.S. in April dropped by 21%. With the world’s two largest economies locked in a standoff, China knew it had to act fast. In response, policymakers launched a series of economic measures to shield the country from the fallout and to keep the growth on track.

The People’s Bank of China stepped in with a package of monetary easing on the 7th of May. Key changes included a small but meaningful cut to the seven-day repo rate and a half of percentage point reduction in the amount of money banks must hold in reserve. These moves were designed to inject roughly 1 trillion yuan ($138.5 billion) into the financial system, helping businesses survive the storm and keeping credit flowing.

Other layers of protection

The goal was simple: protect the economy from external shocks and buy time while global trade tensions played out. On top of monetary policy, fiscal policy stimuli were introduced too. They included cuts in mortgage rates for first-time homebuyers, making it easier for families to get on the property ladder. In the auto sector, where consumer confidence had taken a hit, the government announced plans to scrap reserve requirements for car financing firms gradually.

On top of that, Beijing introduced a 500 billion yuan re-lending program to support spending and the elderly care sector, which is becoming more important as the population ages. These efforts aimed to stimulate demand and reduce financial pressure on both consumers and small businesses.

Even though credit demand was still soft, the message from policymakers was clear. They were ready to back the private sector and do what it took to stabilize the property market and the broader economy.

Source: Yahoo Finance*

Turning to Diplomacy

While economic tools helped cushion the blow, China knew that long-term stability would require something more. All eyes turned to Switzerland, where Chinese Vice Premier He Lifeng met with U.S. Treasury Secretary Scott Bessent for the first high-level talks since tariffs had ramped up.

Surprisingly, the talks delivered results. On May 12th, the U.S. officially announced the agreement to scale back some of its steepest tariffs, cutting rates from as high as 145% down to 30%. China responded by reducing its own tariffs from 125% to 10%. It wasn’t a full resolution, but it was a major de-escalation step forward and marked a cooling of tensions after months of heated exchanges.

Financial markets welcomed the news with open arms. U.S. stock markets jumped, with the S&P 500 hitting its highest point since early March. Nasdaq also saw its strongest close in over two months. Meanwhile, gold prices fell, and the U.S. dollar strengthened as investors breathed a collective sigh of relief. *

What Comes Next?

For now, the deal offers a breather. But it's just a pause, not a permanent fix. The deeper issues like the U.S. trade deficit and concerns about Chinese industrial policy are still on the table. Still, there’s growing hope that both sides resolve conflicts diplomatically.

China’s quick reaction to the economic pressure, both with policy changes and diplomacy, shows that the authoritarian country took the threat of prolonged conflict seriously. Analysts agree that the next few months will be key. Importers are gearing up for the holiday season, and neither side wants to risk another round of disruption. If the current calm holds, there’s a real chance that this fragile peace could evolve into something more lasting.

* Past performance is no guarantee of future results.