CNBC’s The China Connection: U.S.-China relations have changed

This report is from this week’s CNBC’s The China Connection newsletter, which brings you insights and analysis on what’s driving the world’s second-largest economy. Each week, we’ll explore the biggest business stories in China, give a lowdown on market moves and help you set up for the week ahead. Like what you see? You can subscribe here.

The world got a taste of an effective U.S.-China trade embargo, and after a breakthrough on Monday with lowered tariffs, there’s no going back. China now has the “mutual respect” it has long craved from the U.S.

U.S. Treasury Secretary Scott Bessent told CNBC’s Joe Kernen that “there is a sense of mutual respect” during the talks, a point that U.S. Trade Representative Jamieson Greer also emphasized in his remarks to the press on Monday.

That’s in stark contrast to how the first high-level bilateral meeting under the Biden administration kicked off with an exchange of insults in Alaska, followed by a “balloon incident” that delayed then-U.S. Secretary of State Antony Blinken’s first visit to China for months.

What’s also rare is that on Monday, the U.S. and China released a joint statement — something both sides haven’t done since November 2023 with the “Sunnylands” statement on climate cooperation.

Looking ahead, it will be critical to see whether joint statements will be issued after major meetings, or revert to separate readouts, a senior advisor to world governments and business leaders, who has regular dialogue with top officials from both countries, told CNBC. The source requested anonymity due to the sensitive nature of the conversations.

The source expects volatility is likely around tariffs — an important point of flexibility for Trump as a tool for managing relations with major powers. The source added that a possible resolution could involve large Chinese purchases from the U.S., investments in the U.S. that create jobs, while Beijing gets concessions core to its interests.

“The post-WWII trade framework that once underpinned stable expectations is gone; even further tariff rollbacks won’t restore it,” Jianwei Xu, senior economist at Natixis, said in a LinkedIn post Monday.

Xu added that large businesses will continue supply chain diversification, but small businesses may stop production — as overall confidence fades in the U.S. dollar as the world’s ultimate reserve currency.

In a better-than-expected outcome, the U.S. and China agreed Monday to cut back on most new tariffs on each other’s goods for 90 days while the two sides negotiate economic and trade policy.

That’s after China, the second-largest supplier of U.S. goods last year, was the only country across the 180 nations and territories hit by “reciprocal” U.S. tariffs to retaliate.

Hong Kong’s Hang Seng Index has recovered to levels seen just before the early April escalation in trade tensions, while the S&P 500 clawed back into positive territory for the year.

“It might be just the beginning of the inevitable collision of the two largest economies,” Ting Lu, chief China economist at Nomura, said in a note Monday, adding that “the U.S. is still on the offensive, but China might learn much better on how to dig itself in for the future attack.”

Within half an hour of releasing the Chinese-language version of the joint U.S. trade agreement on Monday, China’s Commerce Ministry announced that several ministries and provinces held a meeting that day for strengthening export controls on critical minerals, another area in which China dominates the supply chain.

The State Council, China’s top executive body, on Monday also published a whitepaper on national security that began by citing the Opium War, which marked the start of a traumatic period known as the “century of humiliation” in China, seared into its national consciousness. The whitepaper had similar narratives, calling for self-reliance and playing up the country’s role as a stabilizing force amid global uncertainty.

However, China’s growing emphasis on national security tends to come at a cost for some foreign entities, according to business associations.

“A 90-day suspension, while welcome, still creates significant uncertainty for U.S. companies’ business planning and costs, undermining their long-term global competitiveness,” the U.S.-China Business Council said in a statement Monday, urging China to “end unfair trade practices and market-entry barriers.”

But Beijing continued to make thinly veiled swipes at the U.S. on Tuesday at a conference with Latin American and Caribbean leaders on Tuesday.

Chinese President Xi Jinping said that “bullying and coercion only lead to isolation,” without naming any country in particular, to an audience that included the presidents of Colombia, Brazil and Chile.

Even as China’s exports to the U.S. plunged by more than 20% in April, trade data show that China ramped up its exports to Southeast Asia, the European Union and Latin America.

“Despite the temporary tariff‑war reprieve, China continues to signal that it is looking to diversify away from U.S. agricultural goods,” Dennis Voznesenski, agricultural economist at CBA, said in a note Tuesday.

He cautioned that seasonality and weather in South America would impact China’s ability to reduce its U.S. purchases.

But he pointed to reports that China, on May 9, signed a letter of intent with exporters in Argentina to buy about $900 million in soybeans, corn and vegetable oil, while China has resumed soybean imports from five Brazilian firms.

China’s imports from Argentina grew by 6.4% last year to $7.03 billion, according to official data accessed through financial data provider Wind Information.

But for many companies that once solely relied on China-based suppliers, the sudden surge in U.S. tariffs last month is just the latest reason to broaden out.

“Smarter importers have realized that long-term, they are most secure when they are diversified, and hence will continue looking for alternative sources,” said Ash Monga, founder and CEO of Guangzhou-based Imex Sourcing Services, a supply chain management company. He launched a website last month called “Tariff Help” for small businesses to find ways to diversify from China-based suppliers.

— CNBC’s Bernice Ooi contributed to this report

The U.S. and China are talking. Bessent and Chinese Finance Minister Lan Fo’an met in Washington, D.C., on the sidelines of an international meeting there late last month, the Financial Times reported, citing sources. After the two countries met in Switzerland over the weekend and reached a deal, investment banks have started revising up their China growth forecasts.

China’s property sector nears stabilization. That’s according to an S&P report Sunday that predicts primary home sales volume is set to moderate its decline to a 2% drop this year, versus a 17% plunge last year.

Nvidia still wants the Chinese market. The U.S. chipmaker plans to release a downgraded version of its most powerful H20 artificial intelligence chip for China in the next two months, after U.S. officials imposed export restrictions on the original model, Reuters reported Friday, citing sources.

Mainland China’s CSI 300 was up 1.15% while Hong Kong’s Hang Seng Index — which includes major Chinese companies — rose 1.73% as of 2 p.m. local time.

The benchmark 10-year Chinese government bond yield is at 1.672%.

The offshore Chinese yuan weakened 0.22% against the greenback to 7.2114.