Morning from Denmark’s capital,

Some very interesting news has come out of China overnight. The Ministry of Finance has decided to waive tariff extensions on certain U.S. goods. Similar to Iran, China appears to be playing ball here while the world awaits the new U.S. administration to step in.

The Hang Seng Index and some China-sensitive assets have gained ground on this news. On the surface, China’s attempt to appear conciliatory towards the U.S., possibly in hopes of discouraging Trump from imposing harsher tariffs, is reassuring for now.

Domestic demand in China has collapsed, and the country’s housing crisis continues to worsen. The government’s ongoing stimulus interventions lack the intensity needed to meaningfully revive the economy. China’s primary strategy in recent months has been ramping up production to sustain growth. While this approach has helped them hit their official 5% GDP growth target year-over-year, it’s worth noting that this achievement is somewhat artificial. Producers are bearing the brunt, with shrinking profit margins, because:

1. Overproduction isn’t being absorbed by Chinese households, who prefer saving over spending.
2. Much of the surplus is being sold globally at significantly reduced prices, cutting into margins further.

This leaves China’s growth strategy highly vulnerable. If the U.S. increases tariffs, their only viable path to generating economic growth would be jeopardized.

By playing this “soft” card, China has revealed its fragility to the U.S., giving Trump the upper hand in negotiations. Whether he chooses to impose the steep tariffs he mentioned during his campaign trail or backs down in exchange for significant concessions, one thing is clear: China is stuck between a rock and a hard place.

Chart 1.a: China’s only Domestic Growth Engine at Risk (If Tariffs Are Implemented)