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Tariffs

US-China Trade War Truce: Market Reaction and Implications

Strategic Insights

— 2 min read

A high-stakes meeting between US President Donald Trump and Chinese President Xi Jinping in South Korea concluded with a trade war truce, featuring a deal to trim tariffs on China in exchange for Beijing resuming US soybean purchases and tackling illicit fentanyl trade. However, the market reaction remained cautious, with China's yuan retreating from a near one-year high against the dollar post-meeting. Investors remained defensive, recalling previous negotiations where promising starts often led to setbacks.

Key Takeaways:

  • The trade war truce, announced after a nearly two-hour discussion, includes trimming tariffs on China in exchange for Beijing resuming US soybean purchases, keeping rare earths exports flowing, and tackling illicit fentanyl trade.
  • The Shanghai Composite Index hit its highest level since 2015 at the start of the session but closed down 0.73 per cent, inching away from the 10-year high it has been around this week.
  • China's CSI Rare Earth Industry rose more than 2 per cent, while defensive plays such as CSI Liquor Index and CSI Bank Index pared earlier gains.
  • The AI sector CSI Artificial Intelligence Index was down nearly 2 per cent.
  • The stakes are particularly high given the breadth of this year's rally across Chinese markets, with the Shanghai benchmark surging nearly 20 per cent this year and Hong Kong's Hang Seng climbing over 30 per cent.
  • Partial tariff rollbacks may do little to help loss-making Chinese exporters and manufacturers, or reverse weak consumer demand at home.
  • Analysts say the truce appears to be a tactical pause rather than a strategic breakthrough, with gaps left in the agreement, including no timeline on rare earths and no mention of Nvidia's Blackwell chips.

Statistics:

  • The Shanghai Composite Index closed down 0.73 per cent.
  • China's yuan retreated from a near one-year high against the dollar post-meeting.
  • The Shanghai benchmark surged nearly 20 per cent this year.
  • Hong Kong's Hang Seng climbed over 30 per cent this year.
  • China's exports to other parts of the world have remained resilient, while Beijing's push to advance artificial intelligence and develop better semiconductors and innovative drugs have given comfort to global investors this year.
  • Asian and global emerging markets funds made significant increases in their exposure to mainland China in September.

Sources:

  • U.S President Donald Trump and Chinese President Xi Jinping concluded a high-stakes meeting in South Korea with a trade war truce, as Chinese shares pulled back from a decade high. (AP)
  • China's commerce ministry confirmed the extension of their temporary trade truce for another year, an agreement reached by economic officials in Malaysia last week. (Reuters)
  • Besa Deda, chief economist at advisory firm William Buck in Sydney, said, "The response from markets has been cautious in contrast to Trump's enthusiastic characterisation of the meeting with Xi as 'a 12 out of 10'." (Bloomberg)
  • Lynn Song, chief economist for Greater China at ING, said, "Managing to meet and de-escalate after recent tensions will help remove a major uncertainty, lowering the immediate risks to end the year." (Bloomberg)
  • Charu Chanana, chief investment strategist at Saxo in Singapore, said, "It's hard to call this a clean risk-on, equity traders have seen this playbook before -- upbeat tone, little follow-through." (Bloomberg)
  • Tareck Horchani, head of prime brokerage dealing at Maybank Securities, said, "Overall, this looks like a tactical pause rather than a strategic breakthrough." (Bloomberg)

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