US President Trump threatened to impose an additional 100% tariffs on Chinese goods starting on 1 November, a further escalation in the trade war between the two countries. This situation is familiar by now. In the first half of April 2025, US tariff threats on Chinese exports peaked at 145% and were subsequently negotiated down to 30%.
Negotiations in Madrid last month were tough, with little progress made. Trump and Xi are scheduled to meet at the end of October at the Asia- Pacific Economic Cooperation summit in South Korea. This is raising hopes for a potential agreement. The recent escalation is best explained by this delicate timing, as it increases the pressure to reach some kind of agreement by the end of the month. Even by the standards of the Trump administration, however, this is an ambitious timeline. Meanwhile, financial markets appear to have recognised a familiar pattern: a significant escalation to speed up the process of finding a compromise.
China: Strong exports amid new tariff threats
China’s exports continue to remain surprisingly strong despite the US tariffs, showing resilience in a difficult trade environment. While Chinese exports to the US have declined by a total USD64 bn this year, compared with the same period last year, Chinese exports to markets outside the US have risen by USD225bn. Exports to ASEAN economies saw the strongest acceleration, followed by African and EU economies, more than offsetting the decline in shipments to the US. This export dominance has allowed China to take a strong position in the trade negotiations with the US. Over the past few days, tensions between the US and China have revived, as both countries exert additional pressure on each other. While these are mostly negotiation tactics, they have increased near-term uncertainty again.
The robustness of Chinese exports, despite the high US tariffs, suggests that some trade flows between China and the US are now flowing to, or via, other countries. Parts of China’s manufacturing production have likely been relocated to countries affected by a lower US tariff rate. At the same time, China’s export products are increasingly tapping into new markets. Low prices, which are a result of weak domestic demand and intense competition between Chinese companies, have increased the competitiveness of their products in global markets. Producer prices in China have fallen continuously for almost three years. This has weighed on companies’ profitability but has also allowed them to penetrate new markets.
China’s exports are likely to remain robust in the coming months and support growth amid weak domestic demand. However, following strong growth in the first half of the year, growth in overall economic activity is likely to remain slow in the coming months due to persistent domestic weaknesses and the waning impact of previous stimulus measures.
China and beyond: Renewed trade tension may trigger profit-taking
While Chinese exports seem to remain strong with the current tariffs, how has the economy responded to the new proposed tariffs? Chinese American Depository Receipts (ADR) fell sharply in US trading last Friday, while the Hang Seng Index futures tumbled 5% compared to the close on Friday. The Chinese market has been consolidating over the past week for various reasons, including weaker sentiment (Chinese equities also fell after Golden Week last year), lukewarm Golden Week consumption data, as well as reports of cuts in the loan-to-value ratios of some popular A-share names.
Nonetheless, President Trump’s new tariffs on China will likely become a perfect excuse for investors to take profits and await further developments on the trade front. In particular, we note that global hedge funds, regional mutual funds, and onshore Chinese mutual funds that did well in the recent rally are most likely to take profits. In the next couple of days, the size of the market declines will be heavily influenced by the scale of successive retaliatory measures, if any, by the US and China.
What does this mean for investors?
We expect Chinese stocks with high US exposure to underperform, and those stocks that have gained the most in the recent rally will likely face the biggest pressure from profit-taking. In our view, however, the near-term corrections are unlikely to derail the longer-term uptrend of the Chinese market. Our base case is that the two countries will avoid a full-blown trade war, and we regard the current escalation as similar to the twists and turns during the negotiation phase (in 2019) of Trade War 1.0. Furthermore, we believe that both sides still want to reengage, as their rhetoric is not overly hawkish, in our view. With the Hang Seng Index also trading neither significantly overvalued nor undervalued. This "reasonable" valuation reduces the risk of sharp declines (downward shocks) and buffers against further shocks because prices aren’t inflated beyond sustainable levels.