Beijing Scan | Issue 2

Chinese Economy

The Chinese economy registered an unexpected slowdown in April, with industrial output cooling and retail sales declining to their lowest in over three years. It faced a double whammy: rising energy costs due to the Iran war and persistently weak domestic demand. Retail sales rose only by 0.2 percent, the weakest since December 2022, while industrial output grew at 4.1 percent, much below the expected 5.9 percent. Urban fixed-asset investment contracted by 1.6 percent, defying expectations of a comparable 1.6 percent expansion. Growth is now expected to cool in Q2 after a better-than-expected Q1.

Image 1: Growth in China’s retail sales and industrial production

Source: LSEG

Although strong exports and domestic fuel-pricing controls moderated the impact of the energy shock and cushioned domestic weakness, they seem to have failed to fully offset the challenges facing the Chinese economy. Increased input costs continue to compress already thin industrial margins, further weighing on consumption.

Striving to counter mounting pessimism, Chinese state media has expressed confidence in China's economic resilience. It maintains that the core fundamentals remain intact, with the foundations of long-term growth and logic of high-quality development unchanged. In addition, the media argues that an economy anchored in a comprehensive industrial base, strong supporting capabilities and sustained innovation is unlikely to lose competitiveness in response to external shocks.

The breadth of the early Q2 slowdown has revived the prospects of stimulus and intensified the debate over whether the People's Bank of China (PBOC) will lower the interest rate or the reserve requirement ratio (RRR). PBOC, meanwhile, released the "China Monetary Policy Implementation Report for the First Quarter of 2026" on 11 May, reiterating plans to maintain a moderately loose monetary policy. Therefore, authorities in China are expected to adopt a measured approach to the April data and avoid reacting to a single month’s weakness. The Politburo’s convening in July, to review economic growth and policies, can emerge as “the next potential window” for any recalibration in economic policy.

Meanwhile, more than a dozen US executives from leading aviation, commodities, technology, and finance conglomerates accompanied President Donald Trump on his May 13-15, 2026, visit to China. The CEOs, including Elon Musk, Tim Cook, and David Solomon, among others, met with the heads of Chinese regulators and ministry officials to ‌advance their business interests in the country. They also expressed strong confidence in the Chinese economy and market, particularly highlighting “innovation and vitality” as key drivers of its growth.

Chinese Politics and Foreign Policy

Trump finally visited China, undertaking his first trip to Beijing in his second term, after earlier deferring the visit amid geopolitical uncertainty stemming from the conflict in Iran. The Trump–Xi summit in Beijing carried multiple implications for US–China relations, centred on competing narratives, the reaffirmation of China’s red lines, and a tentative economic thaw within an enduring strategic rivalry. Beijing publicly reiterated its “red lines” ahead of the visit: Taiwan, human rights, political systems, and China’s right to development, framed within principles of mutual respect, peaceful coexistence, and win-win cooperation, as articulated through official statements: one on red lines and another on three principles.

Chinese President Xi Jinping rejected the “Thucydides Trap” framing and instead advanced the idea of “constructive strategic stability.” He promised to “open China’s door wider” to US businesses, improve military-to-military communications, and expand areas of cooperation, while underlining Taiwan as the “most important issue in bilateral relations.”

Both sides, however, diverged sharply in their official readouts of the summit. The White House readout emphasised progress on fentanyl, expanded Chinese purchases of US agricultural and energy goods, agreement on keeping the Strait of Hormuz open and demilitarised and preventing an Iranian nuclear weapon. China’s readout merely said leaders “exchanged views” on international and regional issues, such as the Middle East situation, the Ukraine crisis, and the Korean Peninsula.

Image 2: US-China Summit Readouts: Divergences

Source: Authors - created by Notebook AI

On economic recalibration, Trump’s 2025 NSS framed the effort as rebalancing “fundamentally unbalanced” ties. U.S. Treasury Secretary Scott Bessent proposed a bilateral trade board and an investment board to channel “non-sensitive” commerce and Chinese capital into U.S. manufacturing. Trump touted “millions” of jobs, potential relaxation on Nvidia’s H200 exports, and a Boeing aircraft purchase. Beijing, in contrast, vaguely referred to “relevant arrangements” and tariff reduction, avoiding specifics.

On rare earths, Washington said that China would “address US concerns” both on supply chain shortages, particularly yttrium, scandium, neodymium, and indium, and over curbs on the sale of rare earth production and processing equipment following the Beijing summit. China’s Ministry of Commerce merely promised to work with the US to ensure the security and stability of global supply chains.

The 2026 summit and a potential Sino-American rapprochement portend consequences for the region. Chinese commentators already frame the outcome as a diplomatic gain for Beijing. As Ding Yifan and Jin Canrong of Renmin University argue, the US overreach and mounting conflicts have pushed Washington toward engagement with China. They discern an emerging shift toward a “constructive relationship of strategic stability” which China will likely leverage across its immediate periphery.

China’s Military: Taiwan Arms Sales in US–China Negotiations

The Taiwan issue emerged as a central variable shaping the 2026 US–China summit and its outcome. Ahead of the visit, signals from Washington suggested policy incoherence: the White House hinted at flexibility, the State Department stressed continuity, while Congress advanced arms sales to Taipei. Beijing read these mixed signals as a US shift toward “smart ambiguity.” It concluded that Washington was unwilling to be drawn into direct conflict with China and that neither unification, nor independence, nor the use of force would serve US national interests.

Nevertheless, Beijing believes the US has explicitly articulated its two crucial interests in Taiwan in its official strategic documents, particularly the island’s centrality to the global semiconductor supply chain and its geostrategic position as a gateway to the Second Island Chain and a key node linking Northeast and Southeast Asia. Chinese policy circles perceive this as a sharpening of US strategic focus on Taiwan, and they further argue that Washington is increasingly linking the South China Sea, the Taiwan Strait and the East China Sea into an integrated strategic theatre, indicative of a recalibrated US regional approach.

However, by 2026, US arms sales to Taipei had emerged as a more immediate concern for President Xi. In his second administration, Trump first approved a US$330 million package in November 2025, covering spare parts for F-16 and C-130 aircraft as well as Taiwan’s indigenous fighters. This was followed in December 2025 by a larger US$11.1 billion sale centred on asymmetric capabilities, including HIMARS and ALTIUS systems, M109 Paladin self-propelled artillery, and Javelin and TOW missiles. The addition of 82 HIMARS units, on top of 29 already in service, would give Taiwan the second-largest inventory outside the US. Moreover, a speedy delivery of ALTIUS drones and anti-armour missiles from stable manufacturing lines would further strengthen Taiwan’s anti-invasion capacity. Taken together, these two arms sales would have significantly heightened Beijing’s concerns.

Image 3: Trump’s Three Arms Sale Decisions to Taiwan (2025-26)

Source: Authors - created by Notebook AI

A third package, proposed in early 2026 by the Trump administration, offered even more: a US$14 billion sale centred on PAC-3 missiles and NASAMS interceptors. These two successive arms sales worth over US$ 25 billion appear to have marked an inflection point in Beijing’s response. China, therefore, reframed the summit around the arms sales issue, signalling that meaningful progress would require visible US restraint on Taipei. During the talks, Xi is reported to have linked future bilateral engagements, including the remaining three high-level visits scheduled for this year, and movement on other agenda items, to a delay or cancellation of the package. In response, Trump signalled a pause, citing geographic distance and a reduced likelihood of conflict, while privately weighing US munitions constraints following the Iran war, which depleted key stockpiles and slowed arms transfers elsewhere.

Disclaimer: Beijing Scan is the fortnightly China newsletter of the Observer Research Foundation, offering incisive analysis of key political, economic, foreign policy, and military developments.

Written by Atul Kumar, Kalpit A. Mankikar, and Antara Ghosal Singh, (Fellows) and Swayamsiddha Samal ( research intern) with the Strategic Studies Programme at the Observer Research Foundation (ORF). The views expressed are those of the authors.

• International Affairs
• China
• India
• USA and Canada
• Chinese economy slowdown
• Domestic demand weakness China
• Energy costs Iran war
• Export performance China
• Fiscal stimulus China
• Industrial output China
• Interest rate cut China
• People’s Bank of China
• Reserve Requirement Ratio
• Urban fixed-asset investment

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