In response to the "Trump 2.0" tariff wars, China has refused to bow to pressure and has presented itself as an underdog standing up to the big bully. The 25 April Politburo meeting and a video released by the Ministry of Foreign Affairs on 29 April have characterised the China-US tariff war as part of a broader “struggle in international economic and trade relations”. The video put forth several key messages from the Chinese perspective, serving as a domestic rallying cry, demonstrating the Chinese government's determination to stand firm against the US, while acknowledging that China is now in a protracted and arduous struggle, with no easy victory in sight.

US and China issued a joint statement on 12 May to temporarily pause the tariff war. However, similar episodes that took place during “Trump 1.0” in 2018 would serve as a cautionary reminder. One would recall how the initial China-US trade agreement was unravelled just two months later by Trump’s unilateral and repeated escalations of tariff sanction against China. It is now apparent that US Treasury Secretary Bessent has taken charge of the current round of tariff negotiations, and a temporary truce has been struck with China to maintain the stability of the US financial markets. However, in a CNBC interview, Bessent remarked, “We do not want a generalised decoupling from China, but what we do want is a decoupling for strategic necessities, which we were unable to obtain during Covid.” Thus, the trade war is far from over. Both Chinese and American business leaders are likely to make full use of this precious 90-day window, not only to rush exports, but also to accelerate outbound investment. Under the lingering shadow of the China-US trade war, China’s outbound investment has witnessed a sharp rise. According to China’s State Administration of Foreign Exchange, the country’s outbound investments increased by around USD 48 billion in Q1 of 2025, a 28% year-on-year increase. This is the second highest in recent years, only trailing Q1 of 2017, when Wanda, HNA, Anbang, and Fosun engaged in aggressive overseas expansion. Chinese government has recently stepped up its support for enterprises to “venture abroad”. Going forward, the internationalisation of Chinese businesses will no longer be limited to entering a single foreign market or simply exporting goods. Instead, it will be a “born to be global” integrated strategy. Meanwhile, the tempo and pressure of China-US negotiations are expected to be closely tied to the inventory restocking during this 90-day window, as well as the planning of subsequent phases of factory production.

The tariff war at its root is a contest for monetary and financial supremacy. Trump’s ability to target 185 countries in the ongoing tariff war is precisely predicated on US dollar supremacy. In the foreseeable future, however, depreciation of the US dollar and appreciation of other major currencies have been widely anticipated. China for its part has been actively promoting the internationalisation of renminbi by broadening its cross-border usage and settlement mechanisms. Recently, the Shanghai Gold Exchange has established a delivery vault in Saudi Arabia to support RMB-denominated 'Shanghai Gold' transactions. This move enhances the credibility of the renminbi and lays the groundwork for RMB-based settlement in China–Saudi Arabia trade, particularly in oil.

On the domestic front, China will press ahead with a full-spectrum policy package aimed at defusing local government debt risks, expediting clearing of overdue payments owed by local governments to enterprises, as well as reinforcing China’s domestic demand-driven growth model to promote “internal circulation”. Urban renewal efforts will be intensified to systematically redevelop urban areas of substandard housing. The new development model for the real estate sector will emphasise building new supply of high-quality housing, incentivise buying-back of unsold inventory housing, and work towards stabilising the property market. It is noteworthy that although housing prices have fallen by about 40% from their 2016 peak, the pace of decline has already noticeably moderated.

The 25 April Politburo meeting has reiterated the importance of building a sustained, stable, and vibrant capital market to better serve the real economy. In line with this goal, the China Securities Regulatory Commission issued a document on “Action Plan for Enhancing the Quality of Mutual Funds” on 7 May, which focuses on strengthening the alignment of interests between fund managers and investors. The action plan calls for an overhaul of the fee structure of actively managed equity funds. Fund managers will now be subject to a floating fee mechanism, thus ending the long-standing flat-fee model of earning steady revenues regardless of fund performance. The action plan also seeks to foster more stable and disciplined investor behaviours through improved governance and incentive structures.

At the same Politburo meeting, a new risk-sharing mechanism has been introduced to support the issuance of technology innovation bonds. The People’s Bank of China (PBoC) will provide low-cost re-lending facilities to facilitate procurement of these bonds. In collaboration with local governments and market-oriented credit enhancement institutions, the PBoC will deploy a range of credit enhancement mechanisms, including joint guarantees, to absorb part of the default risks. These measures are designed to provide technology enterprises and equity investment institutions access to long-term low-cost financing through bond markets.

According to the State Council’s 7 May press conference, a new round of liquidity injection has already begun, albeit in a highly targeted manner. As highlighted in the PBoC’s Q1 Monetary Policy Report, indiscriminate monetary easing could exacerbate overcapacity, deepen supply-demand imbalances, and hinder efforts to avoid deflation. However, the report has also noted that the current state of the government’s balance sheet allows significant room for additional fiscal measures to stimulate aggregate demand. Drawing on Japan’s experience, the report warns that prolonged low interest rates could inflate asset prices and exacerbate income inequality; thus, suggesting that the PBoC has no intention to carry out broad-based monetary easing. The PBoC will likely be relying on structural policy tools and targeted liquidity injections, rather than sweeping interest rate cuts or across-the-board reductions in the reserve ratio requirement.

On the livelihood front, the 25 April Politburo meeting has called for stronger efforts to safeguard basic living standards, placing employment at the front and centre of the government’s “four stabilities”, which include jobs, trade, investment, and expectation stability. The Politburo meeting has decided to increase unemployment insurance payout for workers from enterprises badly affected by the ongoing tariff war and called for the establishment of a more tiered and targeted social welfare system. At present, China’s international trade sector supports an estimated 170 million jobs directly and indirectly, accounting for around 24% of the national workforce. The potential employment impact of trade disruptions is therefore substantial and cannot be overlooked. Earlier, at the 18 April State Council executive meeting, Chinese officials have also urged enterprises to take a proactive role in maintaining employment, expanding vocational training programmes, strengthening support for work-relief initiatives, and improving public employment services.

The above analysis outlines the key challenges, strategic direction, and possible policy responses China is adopting in the face of the tariff war initiated by Trump. Following Trump’s re-election, Chinese President Xi Jinping, in his meeting with Singapore’s Senior Minister Lee Hsien Loong, reaffirmed China’s commitment to staying focused on its own development agenda, expressing confidence in sustaining long-term economic momentum and achieving high-quality growth. Amid a global environment marked by uncertainty, protectionism, fragmentation and disruptions, China strives to maintain a stable development trajectory. Through a coordinated mix of financial and fiscal tools, China is committed to ensuring high-quality growth and systemic reform, and aims to share the fruits and lessons of its economic progress with the world.

By Jin Weiping, Institute of Economics, Tsinghua University

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