Deloitte China Monthly Report Issue 97

Economy

The US-China Trade Pact: A Pause or a Sustainable Agreement?

The US-China trade deal, signed in Geneva on May 12th, has been lauded by both sides as a win, and rightly so. A prolonged standoff would have led to a lose-lose outcome, with escalating costs for both economies. However, for this truce to endure, several conditions must be met.

At the heart of the agreement is a mutual tariff reduction: the U.S. and China have lowered their previously prohibitive rates of 145% and 125% to 10% and 30%, respectively. The 20% tariff imposed by China on fentanyl also suggests there is room for further reduction during the "90-day pause." On May 13, China resumed orders of Boeing aircraft, and the Ministry of Commerce announced a temporary suspension of the Unreliable Entity List measures against 17 US firms, effective May 14. This follows a joint statement issued after the Geneva trade talks. The Trump Administration has eased export controls on semiconductor chips and lowered the ‘de minimis’ tariff on small Chinese parcels. The outcome of this deal is far better than most observers, including us, expected. We previously estimated an average tariff rate of around 35%, primarily because that any rate exceeding the 35% threshold would imply the termination of China’s PNTR (Permanent Normal Trade Relations) status, which would send a highly destabilizing political signal. Besides, China would have won the battle on resolve and pain index, as any tariffs above 50% would have been merely part of the bargaining process.

The speed of this agreement is extraordinary – it was wrapped up in just a single weekend in Geneva. To paraphrase Li Chenggang, China’s chief trade negotiator, “if the dishes are good, timing is less important”. For a stress-tested Chinese economy that has gone through relentless tariffs and export controls, 30% should have come as a huge relief for Chinese exporters. The reality is that both the US and China were trying to lower the temperature. For the U.S., any delay in shipments from China will increase the risk of a recession and put upward pressure on prices.

China, while prepared to weather a “protracted trade war”, has explicitly stated that the removal most tariffs will be a precondition for trade negotiations. At the same time, China was prepared to ink the deal should conditions be ripe. The key question now is what would make this trade deal stick.

In a subsequent interview, Scott Bessent, US Treasury Secretary, described the negotiations as “constructive” and marked by “mutual respect”, ruling out further escalation. However, he also stressed the importance of establishing a mechanism to prevent further increases in tariffs.  If lessons from the Phase One Trade deal (signed in late 2018) have been learned, China is expected to make efforts to narrow trade imbalances between the two countries by buying agricultural produce and natural gas. Unfortunately, Covid-19 and subsequent export controls taken by the Biden Administration have vastly altered the incentives on the part of China.

Secretary Bessent has also outlined a vision of a “beautiful rebalancing”, which would entail more manufacturing in the US and more consumption in China. In theory, this mutual rebalancing could have been a win-win for both, but in practice, so long as pervasive distrust remains between the two largest economies, tariffs will inevitably serve as a tool of industrial policy in the US, prompting China to accelerate supply chain localization and reduce its reliance on the US. market.

Figure 1: China’s export diversification efforts since 2018

^{Source: Wind, Deloitte research}

That said, one of the key lessons from the failed Phase One Trade Deal is that overly ambitious commitments can derail implementation. If the current deal survives the 90-day pause, both sides should keep it simple by focusing on increased purchases of US products, which can be done relatively easily by China. There is also an implicit condition underpinning this simplicity– a stronger RMB exchange rate. The tariff playbook, revealed on April 2, is based on a key assumption: that foreigners would shoulder most of the tariff burden. This implies that either most US trading partners will have to make outright concessions, or that the dollar will remain strong. Unfortunately for Washington, this assumption has been unravelled. The forced U-turn by the Trump Administration on tariffs in mid-April in the wake of drastic sell-offs of global financial markets has restored investor confidence in the US equity market, but confidence in the once-mighty dollar has been impaired significantly.

Several forces are driving this correction.  Decisive action taken by German policymakers on bold fiscal policy has boosted investor hopes of a cyclical recovery in the Eurozone, sending the Euro on a steady upward trajectory. The Yen was at an extremely oversold level to begin with, a result of the Bank of Japan’s ultra-loose monetary policy, which is prone to rebounding as market sentiment suddenly shift. More importantly, fiscal woes in the US and President Trump’s showdown with Federal Reserve Chair Jerome Powell over interest rates have weakened confidence in the dollar as a global safe haven and reserve currency. The dollar’s weakness has put the Fed in an awkward position. To cut the Fed Fund Rate at this juncture is not feasible due to a persistently strong labour market. If the US fiscal situation becomes more sustainable, credit economies may have to accept a weaker dollar as an implicit haircut.

From the perspective of most savers in North Asia, led by China and Japan, a managed revaluation of the dollar against currencies in North Asia will take off some refinancing burdens for the US if interest rates cannot be lowered. However, any comparison with Plaza Accord would be misplaced. China today is not Japan yesterday, and the Geneva trade deal is no grand bargain but rather a practical detente struck in a game of chicken.

Chinese investment in the US. remains heavily restricted under the "America First Investment Policy," which has increasingly taken on the tone of strategic decoupling. Besides, given deflationary pressures in the Chinese economy, a strong RMB will compromise China’s monetary easing. Having said this, the tariff war has proven that decoupling between the US and China is not feasible. If certain adjustments to the currencies of surplus economies could ease trade tensions, it will be a small price to pay for China. Of course, China is aware of the concerns held by many countries over China’s export competitiveness. A stronger RMB is a positive signal to mitigate such concerns, which may be translated into tariffs and backlash against China’s investment. Two weeks ago, the New Taiwan Dollar appreciated by 7% against the dollar for no apparent reason amid the central bank’s intervention. At the end of the day, exchange rates are relative prices; if most surplus economies’ currencies gain ground against the dollar, investors’ reduced fears over the fiscal profile of the US Government may reduce market volatilities.

Figure 2: revaluation in the surplus economies’ currencies against US dollar

^{Source: Wind, Deloitte research}

In short, for this deal to stick, China needs to step up purchases of US products while the US must draw a line between trade policy and national security. In practical terms, China’s investment in areas not deemed to touch on national security (including EV batteries) should be welcomed. For the Trump Administration, given its flip-flopping on tariffs, the political risk of negating this deal will be politically costly. Finally, it is worth remembering that even if more trade deals are struck with other major economies such as the EU and Japan over the next few months, tariffs will remain structurally higher than the pre “Independence Day” era.

Retail

Value-for-Money and Emotional Value Drive May Day Service Spending

This year’s May Day holiday saw another surge in travel following the relaxation of pandemic restrictions, with passenger transport demand rising sharply compared to last year. The number of interregional travelers increased by 7.9%, with the highest growth seen in waterway, air, and rail transport, while self-driving remained a popular option. Domestic tourism figures also climbed, with tourist numbers and total spending up by 6.4% and 8.0% respectively—reaching 161.0% and 153.1% of 2019 levels. Cross-border travel between China and other countries rose by 28.7%.

However, despite the high travel volume and strong demand, per capita spending declined, indicating a dip in overall consumer expenditure. According to data from the Ministry of Culture and Tourism, per capita tourism spending reached only 95.1% of 2019 levels, highlighting continued room for improvement. As of March 2025, consumer confidence in employment remains historically low, which continues to weigh on income expectations and willingness to spend.

Figure: Consumer Confidence Index Remains Below the Benchmark Line

^{Data Source: National Bureau of Statistics}

In summary, the key characteristics of this year May Day service consumption market and its impact on businesses are as follows:

Value-for-money and emotional value remain major drivers of consumer behavior.
Consumers, whether purchasing goods or services, increasingly seek emotional satisfaction and a sense of fulfillment within limited budgets. Data from Meituan shows that during the May Day holiday, bookings for budget hotels rose by 80%, while bookings for high-end hotels increased by only 15%. In third-tier cities and below—where hotel prices are generally lower—bookings for high-star hotels surged by over 80%, outpacing those in higher-tier cities. Meanwhile, consumers showed a strong preference for group-buying deals that offer both quality and affordability in dining and sightseeing. According to Douyin’s group-buying data, orders for family-style meals and local cuisine rose by 77% and 45% respectively, while package deals for hotels and scenic spots grew by 116%. Businesses must address the dual demand for upgraded experiences and rational spending by consistently offering more cost-effective products and services that meet consumers’ desire for quality while respecting their budget constraints.

County-level tourism is evolving, unlocking spending potential in lower-tier markets.
The rise of county-level tourism is driven not only by cost-consciousness but also by a shift in consumer expectations—from basic sightseeing to more distinctive and immersive travel experiences. Data from Tongcheng reveals that tourism interest in counties of fourth-tier and below grew by 25% during the May Day holiday, 11 percentage points higher than in third-tier and above cities. This deepening interest in niche destinations is also boosting surrounding retail consumption. Businesses should recognize the growing potential of these emerging tourism hotspots and expand their marketing strategies to better capture holiday and travel-related consumption opportunities.

Inbound tourism is accelerating, creating new growth in domestic consumption.
Visa-free policy enhancements, such as the 240-hour transit visa exemption and an expanded list of visa-free countries, are fueling a sharp rise in inbound tourism—a new growth driver in the domestic service consumption market. According to Ctrip, inbound tourism orders jumped by 130% during this year’s May Day holiday. Popular destinations include major first- and second-tier cities like Shanghai, Shenzhen, Guangzhou, Beijing, Chengdu, Chongqing, Hangzhou, Zhuhai, Xi’an, and Qingdao. For example, Beijing welcomed 104,000 inbound tourists over the holiday, generating 1.13 billion yuan in tourism revenue, with an average per capita spend of 10,865 yuan—compared to just 1,171 yuan for domestic tourists. This surge highlights the recovery potential of the international tourism market. Businesses should target inbound visitors with offerings and marketing strategies that showcase local culture and have strong appeal on social media.

The growing emphasis on value-for-money and emotional satisfaction is becoming the new normal in China. To stay competitive, businesses must gain a deeper understanding of different consumer segments and align their offerings more closely with evolving preferences. By doing so, they can unlock new avenues for growth and help guide the consumer market into a more dynamic and resilient phase.

Energy

Why China’s Push for a Unified Power Spot Market Signals a Turning Point for the Energy Sector

On April 16, 2025, China’s National Development and Reform Commission (NDRC), together with the National Energy Administration, issued the Notice on Accelerating the Development of the Power Spot Market (hereinafter referred to as the “Notice”), setting a clear goal: to achieve near-complete national coverage of the power spot market by the end of 2025. This move marks a decisive step toward building a unified national electricity market and sends a strong signal of deepening reform.

Why is a unified power spot market urgent for China?

China’s push for a nationwide power spot market has become increasingly urgent. Without a market that accurately reflects real-time supply and demand, renewable energy cannot be effectively integrated into the trading system. At present, China’s electricity market remains fragmented, primarily organized by province, with considerable variation in pricing mechanisms and trading rules across regions. This patchwork structure has made inter-provincial power transactions difficult and limits the efficient allocation of electricity across the country.

Key pillars: timelines, regional coordination, user participation

• Tighter timelines, broader market coverage. So far, six regions—Shanxi, Guangdong, Shandong, Gansu, Western Inner Mongolia, and the State Grid’s interprovincial market—have launched formal spot market operations. Additional provinces are expected to begin continuous settlement trials or formal operations by the end of 2025 or 2026.
• Regional coordination as a strategic breakthrough. The Southern Grid-managed regions and the Beijing–Tianjin–Hebei cluster are taking the lead. These areas aim to initiate continuous settlement trials and simulated operations by the end of 2025. By the same timeline, generation companies will begin participating in interprovincial spot transactions, alongside the gradual inclusion of power retailers and end-users.
• Users step in the spotlight.  The Notice calls for full user-side participation in spot market operations—bidding, clearing, and settlement—including bidding, clearing, and settlement—in all regions running spot markets or continuous trials. Shanxi, Shandong, Sichuan, and Gansu have already piloted user-side engagement. The integration of emerging participants such as energy storage systems and virtual power plants will give users a real voice in price formation.

Table: Provincial Spot Market Timelines

Market Impact: Efficiency Over Volume

Under a unified spot market, electricity prices will more transparently reflect real-time supply and demand, leading to more frequent price fluctuations. While 2025 will see continued expansion in coal and renewable capacity, electricity demand is expected to grow more steadily. This will intensify competition among generators, as prices become increasingly dynamic. Spot prices could spike during peak hours or drop near zero during periods of low demand, forcing both users and generators to adapt their strategies based on real-time pricing signals.

• For generators, operational efficiency will outweigh sheer capacity. The dominance of "installed capacity" as a competitive edge is fading. Power sources with predictable output, dispatch flexibility, and low marginal costs will be best positioned to thrive. In a market shaped by real-time clearing and price volatility, responsiveness, strategy, and digital O&M algorithms will increasingly define profitability.
• Retailers are evolving into service platforms. The traditional “buy low, sell high” model is giving way to integrated service offerings. Retailers are turning into orchestrators of flexible, distributed energy resources such as rooftop solar, building loads, and EV chargers. By aggregating these assets into virtual power plants with bidding capabilities, they are unlocking new revenue streams and playing a more central role in market transactions.
• Technology service providers are entering a boom phase. Sub-segments such as load forecasting, trading algorithms, and data security are growing rapidly. Driven by market-oriented electricity trading and system scheduling, the market for renewable energy forecasting technology is projected to grow from 1.29 billion yuan in 2023 to 2.27 billion yuan by 2027. Providers of intelligent dispatch systems, AI-driven trading strategies, and market validation tools are poised for soaring demand.

This marks a comprehensive overhaul of China’s electricity market. Moving forward, success will no longer be measured by how much power a company generates or sells, but by how quickly it can balance supply, how accurately it can forecast demand, and how flexibly it can manage resources. The companies that adapt early and refine their capabilities will be best positioned to lead the next era of China’s evolving energy landscape.

Technology, Media & Telecommunications

Surging Momentum in Homegrown Innovation Drive

On May 12, 2025, the US agreed to suspend the additional 24% tariffs on key semiconductor manufacturing components, temporarily reducing the overall tariff rate to 10%. This move has eased some of the cost pressures associated with importing chips and advanced equipment, and partially alleviated supply chain tensions for affected companies. However, with the potential reinstatement of tariffs after the grace period and ongoing technology restrictions such as chip bans, long-term uncertainty remains.

In response, China will continue to accelerate homegrown innovation, focusing on domestic substitution in semiconductors and breakthroughs in AI computing power. This effort is driving the tech industry to move up the value chain toward higher-value-added segments.

Semiconductors: Accelerating Domestic Substitution

While China exempts certain semiconductor equipment not directly originating from the US—such as chips designed in the US but fabricated abroad—tariffs on other products (including memory, AI, and automotive chips) have reverted to base levels. Nonetheless, high costs for chip equipment and components persist, with many core items still subject to tariffs ranging from 25% to 50%. As a result, China's semiconductor industry continues to face significant challenges.

• Dependence on High-End Chip Imports: In 2024, China imported 123 billion yuan worth of semiconductor products from the US, accounting for 3.76% of total imports. Critically, 90% of advanced chips under 7nm (e.g., CPUs and GPUs) remain reliant on foreign supply, underscoring the risk of being "choked" by external control over critical technologies.

Figure: Percentage of Imports of Advanced Process Chips Below 7nm in 2024

• Export Controls and Technology Blockades: The US has signed a trilateral agreement with the Netherlands and Japan to restrict the export of Dutch DUV lithography machines and control 23 types of semiconductor equipment from Japan. Additionally, the sale of Nvidia’s H20 chips to China is restricted, and Huawei’s Ascend chips have been effectively cut off from global supply chains.

Under these stringent control measures, China’s semiconductor industry is pushing ahead with self-reliance and technological breakthroughs.

• Accelerating Domestic Substitution: At the upstream level, localization is advancing steadily in chip design, with domestic firms making progress in high-end EDA tools and architecture development. In the midstream, companies such as SMIC are scaling up production of mature processes (14nm and above), and domestically developed lithography and etching machines are entering production line validation. In downstream packaging and testing, players like JCET are reaching global technical frontiers. Currently, the localization rate across the semiconductor value chain stands at 28.7%. By 2030, China aims to raise this to 70% across design, manufacturing, and packaging/testing, establishing a self-sufficient system from chip concept to delivery.
• Growing Exports of Mature Process Chips: China maintains a strong competitive edge in the global low- to mid-end chip market. In 2024, the country accounted for approximately 35% of global production capacity for mature-node chips (28-nanometer and above), which is projected to rise to 39% by 2027. In the first two months of 2025, China’s integrated circuit exports totalled 180 billion yuan, a year-on-year increase of 13.2%. Exports of mature process chips will continue to grow.

Artificial Intelligence: Reinforcing the Drive for Indigenous Innovation

China’s AI sector faces growing challenges from surging training costs and external tech barriers:

• Rising Computing Costs: Increased costs of imported hardware have led to higher expenses for training large language models. For instance, the procurement cost of high-end GPU chips like Nvidia A100 and H100 has risen by an estimated 10–15% due to tariffs.
• Isolation of Technology Resources: The US Department of Commerce's Bureau of Industry and Security (BIS) published two documents in the Federal Register, listing over 50 Chinese tech firms and institutions on the Entity List, including 12 AI-related companies. This significantly restricts their access to US technologies, equipment, and services, thereby hindering technological iteration.

Despite pressures, Chinese AI firms are doubling down on domestic innovation and international expansion：

• Accelerating Technological Independence: By building a self-reliant tech ecosystem and promoting domestic development across the algorithm–compute–data chain, China is significantly enhancing its resilience to external risks:

a) Upstream (Chips): By 2030, the localization rate for chip design, manufacturing, and packaging/testing is expected to reach 70%.

b) Midstream (Large Models): As of 2024, there are 1,328 AI large models globally, with China accounting for 36%, second only to the US (44%). Notably, the DeepSeek app reached 33.7 million daily active users, hitting 20 million within 20 days of launch—making it the fastest-growing AI application globally. The performance gap between domestic and top international large models is gradually narrowing.

c) Downstream (Applications): AI is booming in various sectors in China such as government, finance, and retail, supporting tasks such as human-computer interaction, remote operations, marketing, and decision-making.

Expanding Global Reach: Chinese AI firms are making significant inroads in overseas markets. For example, DeepSeek became the first Chinese-developed AI tool to gain traction in mainstream Western markets. ByteDance’s Hypic has also found a global youth audience with its AI-powered photo editing and social features, while Zuoyebang’s Question AI app entered Western education markets with a photo-based homework solution. In addition, China’s AI tech and service exports to Belt and Road countries rose by 42% year-on-year in 2024.