The US-China trade tensions appear to be easing, with both countries agreeing to tariff reductions. The US will lower its tariffs from 145% to 30%, while China will cut its duties from 125% to 10%, starting on 14 May.

This initial agreement suspends additional 24% tariffs for 90 days, offering time for further negotiations. However, should these additional tariffs resume, China’s GDP growth could reduce by about 1.0ppt over the next year.

Fiscal Measures To Counter Tariff Impact

To counter the tariff impact, China may roll out a fiscal package approved in March, offsetting some economic effects. Without further fiscal measures, GDP growth could face moderate risks, with expectations set at 4.8% by 2025.

China’s recent monetary policy easing aligns with economic expectations, potentially leading to another policy rate cut in Q4. With global tariff wars causing deflationary pressures, China’s CPI inflation forecast for 2025 is adjusted to -0.1%, down from 0.7%.

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The recent easing of trade tensions between the United States and China, marked by a mutual agreement to drastically reduce tariffs starting 14 May, introduces some temporary relief. The US plans to reduce import taxes from a punitive 145% to a lower 30%, while China is set to bring its own duties down from 125% to a more manageable 10%. A separate batch of 24% US tariffs has been shelved for 90 days, giving negotiators a window of time. This breathing space is not permanent, of course, and a return of tariffs remains on the table if talks falter.

If additional duties re-enter the frame, the latest projections indicate a measurable drag on China’s annual GDP growth—about one percentage point, to be precise. That reduction would not be spread evenly and would mostly damage trade-heavy sectors and capital formation. The country has, however, a contingency plan in the form of a fiscal stimulus programme cleared earlier this year. This package is not expected to single-handedly buffer all downside risks, but it should alleviate some of the direct strain on domestic demand and employment.

In the meantime, Beijing has already moved on the monetary front. Policymakers carried out interest rate cuts earlier this quarter, and with inflation now forecast to cling below zero for much of 2025—down from a previous estimate of 0.7% to -0.1%—the door is wide open for another adjustment, likely in the final months of this year. Lower rates and a relatively weak consumer price outlook point to a demand-side story that is not turning around quickly. In fact, deflation risks have started to feel less like a passing concern and more like a medium-term constraint.

Policy And Derivative Strategies

From our perspective, this puts a sharper focus on implied volatility, particularly across index options and rates. The soft inflation print alone won’t dictate the next move, but when seen alongside manageable FX pressures and weakening producer prices, there’s room to expect the PBOC to lean further on policy easing tools. We’ll continue monitoring the reassessment of terminal rates across Asian fixed income futures, as well as spreads on CNH forwards, which are beginning to show renewed hedging activity.

Li in particular appears to be reacting with a measured tone—consistent with a central authority keen to keep the RMB exchange rate stable without triggering unwanted outflows. For structured product positioning, we’ve been watching changes in skew on long-dated contracts, which may surprise on the low side if sentiment firms post-negotiations. Cross-asset correlation remains high, and as such, we’ll avoid chasing directional trades until further clarity emerges by early July.

We are reducing exposure to cyclical derivatives and favouring calendar spreads that price in another rate cut later this year. Upfront vega remains relatively expensive, so we are instead opting for second-half maturities that better reflect the policy lag. While some longer-dated implied vols continue to look elevated, there’s an argument for limited upside unless broader risk-on trends emerge across global equities.

What this means practically is that traders should watch closely early signals from state-linked policy banks in China and intermediate import figures out of East Asia. These typically give us a heads-up on the trade drag and are often overlooked. Margin requirements across OTC swap positions may tighten slightly if deflation persists, so it’s worth running new funding scenarios now, rather than waiting.

Corporate hedgers, particularly those in export-heavy manufacturing, may want to revisit their delta exposure for the remainder of Q2. With lower tariffs coming into play ahead of summer shipping volumes, we should see a recalibration of trade flows—but only if negotiations continue progressing in June.

Overall derivatives pricing on Asian risk remains anchored to monetary policy expectations and not just trade outcomes. So we’ll be keeping a close watch on weekly liquidity operations from the central bank, any shift in credit impulse data, and PMI figures that have lagged in recent months.

As always, model assumptions and macro inputs will tilt the outcome in either direction. But given the clarity around near-term trade duties, it makes sense to lean into strategies that transition cleanly into the third quarter once this 90-day window closes.

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