China’s stock market, which had recently enjoyed a significant rebound, is facing renewed pressure as escalating U.S.-China trade tensions threaten to disrupt investor sentiment. After a prolonged period of relative stability, the recent warnings from Washington regarding Beijing’s rare earth export controls have reignited concerns about a potential trade war, reminiscent of earlier tit-for-tat exchanges between the two nations.
In the wake of these developments, Chinese stocks surged to multi-year highs, buoyed by anticipations of government stimulus and increased foreign investment. As of October 9, Mainland China’s benchmark CSI 300 index, which encompasses key stocks from Shanghai and Shenzhen, had experienced nearly a 20% uptick since the beginning of the year, while the Hang Seng Index in Hong Kong climbed approximately 33% during the same timeframe. However, this positive momentum was heavily contingent on the geopolitical environment remaining stable, especially concerning trade relations. Both indices, however, took a hit, with losses exceeding 2% reported on Monday.
Market participants had initially priced in a potential easing of tensions ahead of a planned summit between U.S. President Donald Trump and Chinese President Xi Jinping. However, these optimistic forecasts have begun to wane. Sean Darby, the chief global strategist at Mizuho Securities, expressed skepticism about the potential for such a meeting to take place, suggesting that the U.S. may be underestimating China’s position. “We’re going to have a much more difficult couple of weeks now, because markets had expected some sort of truce,” he noted.
The possibility of both nations holding firm on their respective stances could plunge their economies into a substantial recession, with concerns mounting that the ongoing trade war could have far-reaching implications for the global economy. Ed Yardeni, President of Yardeni Research, emphasized the severity of the situation, warning that if no concessions are made, the potential for a deep economic downturn looms large.
Darby further elaborated that global equities are “perfectly priced” and ill-prepared for a resurgence of trade conflicts. He remarked that the market sentiment, previously set for continuation, might face challenges. “Equity markets now are going to trade sideways at best, if not have a further pullback,” he cautioned.
Goldman Sachs also highlighted the increasing uncertainty in the market, which now presents a wider array of potential scenarios, ranging from negotiations to outright retaliation. While the investment bank continues to consider the likely outcome to be an extension of the previous tariff truce, it cautioned that the latest trade maneuvers suggest China may be strategically positioning itself to seek concessions, raising the risk of a return to the steep tariffs imposed earlier in the year.
The stakes remain high, with Yardeni reiterating that if neither country makes concessions, a recessionary scenario could unfold. Compounding these concerns, analysts noted that Chinese equities had recently entered overbought territory, with gains heavily concentrated in a select few companies like Tencent, Alibaba, and NetEase. Arthur Budaghyan, chief emerging markets and China strategist at BCA Research, underscored that such market conditions render offshore Chinese stocks susceptible to a downward adjustment.
