Xi Jinping's £1.6 Trillion Stimulus to Safeguard China's Economic Standing – How Will Trump Respond?

With US-China trade talks set to kick off in Switzerland this weekend, President Xi Jinping is pulling out all the stops to bolster China's economy. Facing a tariff war sparked by Donald Trump's levies, Xi's government has unleashed a raft of measures to shield businesses and consumers from the fallout.

From interest rate cuts to massive liquidity injections, these moves signal Beijing's determination to hold its ground. But will they be enough to weather the storm?

China Bolsters Financial Defences

Ahead of the 10 May 2025 trade talks, China's central bank slashed its key policy rate and reduced the reserve requirement ratio, freeing up £750 billion ($1 trillion) in liquidity. These steps, announced on 7 May, aim to ease the strain of Trump's 145% tariffs on Chinese imports, which threaten millions of factory jobs.

A S&P Global report highlights that these measures boosted Chinese stocks, with the CSI 300 index jumping 2.8% on 7 May.

Xi's strategy is clear: fortify domestic growth to counter external pressures. By prioritising sectors like semiconductors and green energy, Beijing hopes to reduce reliance on US markets. Yet, analysts warn that with 1.4 billion consumers facing higher import costs, consumer confidence could waver, as reported by Bloomberg.

Trade Talks Face High Stakes

The Switzerland talks, led by Chinese Vice Premier He Lifeng and US Treasury Secretary Scott Bessent, mark the first formal negotiations since Trump's tariffs took effect. Both sides are under pressure to de-escalate, with bilateral trade nearly halted by reciprocal levies, China's own 125% tariffs match the US blow for blow.

Trump hinted at flexibility, saying on 5 May that he's open to lowering tariffs 'at some point' to restore business ties, per Bloomberg. But with Xi doubling down on economic self-reliance, compromise may be tough.

The stakes are massive. The US imported £320 billion ($420 billion) in Chinese goods in 2024, and a prolonged standoff could disrupt global supply chains. A Discovery Alert analysis on 6 May 2025 notes that smaller economies, like Australia and South Korea, are already feeling the ripple effects, with export declines of 8–12%.

For China, protecting its £13.6 trillion ($18 trillion) economy is non-negotiable, especially with unemployment risks looming.

Global Markets Hang in the Balance

Xi's pre-talks stimulus has calmed markets, but the mood remains jittery. Bitcoin surged 3% on 7 May, reflecting bets on a potential de-escalation, while US stocks rose on hopes of a deal, according to Bloomberg.

Yet, the Federal Reserve's decision to hold interest rates steady, citing trade war risks, underscores the uncertainty. Fed Chair Jerome Powell warned on 7 May that tariffs could fuel inflation, potentially adding £600 ($797) to annual US household costs.

China's stimulus may buy time, but it's not a cure-all.

With factory output already slowing, down 4.2% in April 2025, Beijing's focus on domestic consumption faces hurdles. Retail sales growth, at 3.1% year-on-year, lags behind pre-tariff levels, per Reuters.

Xi's Gamble Shapes Global Trade Future

As Xi Jinping braces for trade talks, his bold economic moves show China's resolve to stand firm. The £1.6 trillion ($2.1 trillion) stimulus and rate cuts are a lifeline for businesses, but they can't fully offset the tariff war's toll.

With global markets on edge and consumers bracing for higher prices, the Switzerland talks could dictate the fate of £4 trillion ($5.3 trillion) in annual trade.

Xi's playing a high-stakes game, and while China's economy is stronger for it, the world's watching to see if peace, or chaos, prevails.