China's machinery grinds to a halt: the gap with the US is already being felt in exports despite the trade truce.

All the brilliance of China's April trade data has turned to darkness in May's. Although China's exports to the US had already plummeted in April amid trade tensions, China successfully diversified its shipments to other customers that month, particularly in Southeast Asia and Latin America. In May, however, this diversification did not mask the damage caused by the decline in exports to the US , even though the two countries agreed to a well-worded trade truce last month.

In US dollar terms, Chinese export growth to its trading partners slowed from 8.1% year-on-year in April to a three-month low of 4.8% last month . For the first time this year, exports contracted on a seasonally adjusted month-on-month basis as US tariffs began to take their toll. Exports to the US fell 34.5% year-on-year , the largest decline recorded outside the initial pandemic lockdown in 2020 , to $28.8 billion. The previous month saw a 21% drop. As in April, the reorientation of trade to third countries continued to provide substantial compensation. But this time it was partial.

Shipments to Vietnam , for example, increased by 22%, surpassing $17 billion for the third consecutive month, as Chinese companies continue to ship through third countries to try to avoid US trade tariffs. However, this influx is increasing the US trade deficit with Vietnam and other countries, threatening their negotiations with Washington over their own tariffs.

Imports also declined, a worrying sign for domestic demand. After contracting 0.2% year-on-year in April, they declined 3.4% last month, below expectations. Imports of industrial products fell, in line with broader evidence that the construction sector is losing momentum despite increased fiscal support. Imports from the US were hit hard by China's tariff retaliation ahead of the trade truce, contracting more than 18% year-on-year last month, their worst result in 14 months.

"The slowdown in export growth in May should be partially reversed this month, as it reflects the fall in US orders before the trade truce, which was slow to translate into actual shipments. However, with tariffs likely to remain elevated and Chinese manufacturers facing further constraints on their ability to sustain rapid gains in global market share, we believe export growth will slow further later in the year," Capital Economics analysts estimate, following trade data released Monday by Chinese authorities.

"A slowdown in China's export growth and a deeper drop in shipments to the United States in May suggest that the trade war truce that brought temporary tariff relief has yet to make a material difference ," said David Qu, an analyst at Bloomberg Economics.

"The China-US trade war has led to a sharp drop in exports to the US, but the damage has been partially offset by increased exports to other countries," said Zhiwei Zhang, resident economist and chief economist at Pinpoint Asset Management, in a client note. "The trade outlook remains highly uncertain at this point," he added, noting the impact of "anticipatory consolidating" as foreign buyers increase their shipments in anticipation of higher tariffs.

"May's data is likely to continue to be negatively impacted by the period of heightened US tariffs. We anticipate that export growth to the US could recover in the coming months. We could even see an early concentration of imports given the still elevated risk of further tariff increases , given the uncertainty surrounding last month's trade negotiations," ING believes.

Although China seemed to have remarkably resisted the initial attacks, the truth is that the first cracks are already appearing in the "Asian giant's" foreign sector. Companies with a large portion of their business exposed abroad are experiencing a significant drop in sales to the US, which they are attempting to offset with increased sales to other countries around the world.

Although this strategy is the right one and has worked initially, the truth is that to place these goods in "secondary" markets , Chinese manufacturers are having to offer lower prices , which reduces the profitability of their businesses, affecting their margins, profits, and ultimately, investment and hiring (and wages in China as well). The Chinese machinery is grinding to a halt.

After very positive headlines when both powers agreed to a three-month trade truce on May 12 with much lower tariffs than had been announced (Washington lowered tariffs from 145% to 30% and Beijing from 125% to 10%), the talks have experienced a certain stalemate, with the US side telegraphing some frustration. US Treasury Secretary Scott Bessent himself, the US strongman in these negotiations, verbalized it this way . Donald Trump himself referred on social media to the "toughness" of his Chinese counterpart Xi Jinping.

Trade talks between the two countries continue with a key meeting this Monday . Last Friday, US President Donald Trump announced that Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick, and US Trade Representative Jamieson Greer would meet with Chinese officials in London on Monday and that the talks "should go very well."

" While we believe both countries are interested in reaching a trade agreement, we also believe it will take time to formalize, as both nations' current positions are quite maximalist ," Link Securities is skeptical.