China Advances 'People-Centered' New Urbanization; China-EU Trade Tensions Escalate

Overview

This HSBC macro tracker report analyzes three key recent developments in China’s livelihood policies, trade relations, and institutional reform. First, the State Council issued guidelines promoting delivery of basic public services based on permanent residence—a milestone signaling the launch of 'people-centered' New Urbanization 2.0, aimed at unlocking consumption potential by improving migrant worker welfare. Second, China-EU trade tensions have escalated, with the EU planning new restrictive measures and China vowing firm countermeasures. Third, the domestic anti-overcompetition campaign continues, emphasizing institutional reform to build a unified national market. Additionally, the report interprets April’s fiscal data, arguing that the spending slowdown reflects normal quarterly rhythm adjustments—not a policy pivot.

Core views

On livelihood and urbanization: On May 25, the State Council issued guidelines requiring strengthened education rights for migrant workers’ children, inclusion of non-hukou households in public rental housing programs, and improved social insurance coverage. These measures target approximately 170 million urban-based migrant workers and their families. The report argues this represents a departure from previous urbanization strategies—which prioritized shifting rural labor to cities to support manufacturing and construction—in favor of treating urbanization as a key lever for building a robust domestic market and raising consumption’s share of GDP. By 'investing in people' and reducing precautionary savings among migrant workers, their latent consumption potential can be unlocked. Fiscal allocation also reflects this structural shift: the share of general public budget expenditures devoted to livelihood-related areas has increased since the start of the year. On trade: Rising Chinese exports to Europe and expanding trade surpluses have heightened tensions. The European Commission is scheduled to discuss new China-focused trade policies on May 29, potentially introducing further restrictions. Earlier, on May 19, the EU decided to cut steel tariff-free import quotas by 47% and double over-quota tariffs. China’s Ministry of Commerce stated that if the EU persists with discriminatory restrictions, China will take resolute countermeasures. Notably, the EU’s actions are broadening beyond traditional anti-subsidy and anti-dumping tools into wider security agendas—including revisions to the Cybersecurity Act and the Industrial Accelerator Act—which could affect a broader range of Chinese enterprises, including those in energy-related sectors. In 2025, electric vehicles (EVs), lithium-ion batteries, and solar cells collectively accounted for 8.3% of China’s exports to the EU, while the EU represented about 40% of China’s exports of these products. On institutional reform and 'anti-overcompetition': Premier Li Qiang’s State Council Executive Meeting reaffirmed building a unified national market as a core requirement for high-quality development. The meeting called for deepening institutional reform, with priorities including property rights protection, market access rules, fair competition enforcement, an effective social credit system, and market exit mechanisms. A commentary article in Qiushi Journal noted that 'resource access' does not guarantee 'efficient allocation', identifying locally driven reductions in entry costs and distorted price signals as key roots of 'overcompetition', and pointing to local protectionism and market fragmentation as systemic bottlenecks. The report contends that while sector-specific initiatives may yield quicker progress in the near term, addressing local interference remains one of the biggest medium-term challenges. The tone of related policy statements suggests accelerated legal revisions—indeed, the National People’s Congress 2026 legislative agenda already includes first readings of revised versions of the Government Procurement Law and the Bidding and Tendering Law. On fiscal data: April’s fiscal figures show a temporary slowdown in spending, consistent with weak investment momentum. The main drag came from government funds, where expenditures fell 21% year-on-year amid a 35% plunge in land transfer revenue and a temporary slowdown in local government special bond issuance. Although revenues improved, general public budget expenditures also weakened noticeably, narrowing the year-to-date fiscal deficit to RMB 1.1 trillion. The report interprets this as a pause following strong front-loaded fiscal spending and healthy GDP growth in Q1—not a withdrawal of support. Should recent headwinds persist, policy responses may reaccelerate bond issuance and fund deployment. Infrastructure investment is expected to remain strongly supported this year, propelled by the new 'Six Networks' policy initiative.

Analysis framework

The report employs an analytical framework combining macro policy tracking with validation using high-frequency data. First, it extracts long-term strategic intent—such as 'people-centered' urbanization and 'anti-overcompetition' institutional reform—from policy texts issued by the State Council and top-level meetings. Second, it analyzes marginal shifts in the external environment—including EU tariff policies and signals from the U.S.-China summit—by integrating international trade dynamics. Third, it dissects April’s detailed fiscal revenue and expenditure data (general public budget and government funds) to distinguish seasonal/rhythmic factors from structural trends, thereby clarifying the true stance of fiscal policy. This layered, qualitative-to-quantitative methodology helps clarify the relationship between short-term volatility and long-term structural transformation.

Methodology notes

• Macroeconomic framework

  Structural Fiscal Policy Analysis

  The report looks beyond aggregate fiscal spending levels, instead focusing on shifts in spending composition (e.g., rising share allocated to livelihood areas) to identify the government’s strategic pivot from 'iron, roads, and real estate' infrastructure to 'investing in people'—a critical lens for understanding the long-term logic of consumption-driven growth.

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  In analyzing urbanization, the report implicitly applies a supply-demand logic: improving supply-side provision of public services unlocks demand-side consumption potential among migrant workers—reflecting a macro perspective grounded in supply-demand interaction.

• Competition and Strategy Framework

  Unified National Market and Anti-Overcompetition

  The report defines 'overcompetition' as resource misallocation arising from local protectionism and market fragmentation, proposing construction of a unified national market as the institutional remedy—a competition-environment analysis rooted in institutional economics.

Key data

• Target Population SizeApproximately 170 millionUrban-based migrant workers and their families—the core beneficiaries of new urbanization public service coverage
• EU Steel Tariff-Free Quota Cut47%Announced by the EU on May 19; over-quota tariffs were also doubled
• Share of China’s Exports to EU (EVs/Batteries/Solar Cells)8.3%Combined share of these three products in China’s total exports to the EU in 2025
• YoY Change in Government Fund Expenditure (April)-21%Driven by a 35% drop in land transfer revenue and slower special bond issuance
• Year-to-Date Fiscal DeficitRMB 1.1 trillionNarrowed due to slower spending

Impact & implications

The report concludes that successful implementation of New Urbanization 2.0 would significantly unleash domestic demand by reducing precautionary savings, aiding China’s transition toward consumption-driven growth. A stronger domestic market could also improve relations with trading partners by increasing import demand. However, near-term escalation in China-EU trade friction may disrupt relevant sectors—especially the new-energy industrial chain—and the EU’s expanding security agenda implies risks may spill over into broader domains. The temporary fiscal spending slowdown should not be misread as policy retreat; infrastructure investment remains a key growth engine this year. If institutional 'anti-overcompetition' reforms materialize, they would enhance resource allocation efficiency—but face significant medium-term challenges from regional interest conflicts.

Risks

• The EU introduces broader restrictive trade measures affecting more Chinese industries
• Local protectionism and market fragmentation prove difficult to resolve fundamentally in the medium term
• Persistent weakness in the property market further depresses land transfer revenue, constraining local government fiscal capacity
• Deteriorating external trade conditions offset gains from domestic structural reforms

What to watch

• Outcome of the European Commission’s May 29 discussion on new China trade policies
• Progress of negotiations during Commerce Minister Wang Wentao’s anticipated late-June visit to Brussels
• Legislative progress on revised Government Procurement Law and Bidding and Tendering Law
• Pace of local government special bond issuance and infrastructure investment data in coming months