The Chinese national flag flies with the Lujiazui financial district in the background.
VCG | Visual Group China | Getty Images
China’s stock market rebound may show signs of strain as renewed trade tensions between the United States and China threaten to derail investor optimism.
After months of relative calm, new warnings from Washington about Beijing’s rare earth export controls and renewed trade tensions have reignited fears of a new trade round of retaliation.
Chinese stocks recently hit a multi-year high on expectations of government stimulus and a recent influx of foreign capital into Chinese stocks. Mainland China’s benchmark CSI 300, which tracks major stocks in Shanghai and Shenzhen, was up nearly 20% year to date through Oct. 9, while the Hang Seng Index jumped about 33% in the same period.
However, the possibility that this recovery will continue depends on the stability of geopolitical risks, particularly commercial risks. With tariff rhetoric returning to the forefront, analysts warn that sentiment could quickly collapse. Both indices lost more than 2% on Monday.
The markets had factored in relaxation in anticipation of a possible meeting between US President Donald Trump and President Xi Jinping. But those expectations have faded.
“I think it’s not very likely,” said Sean Darby, chief global strategist at Mizuho Securities, when asked if such a peak would materialize now.
“Maybe the US was surprised by the strength of China’s reaction… we’re in for a much tougher few weeks now, because the markets were expecting some sort of truce.”
If neither side blinked, the U.S. and Chinese economies would push the global economy into a deep recession or even depression.
Ed Yardeni
President of Yardeni Research
Darby added that global stocks were “perfectly priced” and ill-prepared for another trade showdown. “The positioning has been very aggressive, both in equities and credit… anything that could be fine-tuned to make the markets do well.”
The MSCI World Index, which tracks more than a thousand large and mid-cap stocks from 23 developed markets, was up nearly 17% year to date before Trump announced Friday that the United States would impose new 100% tariffs on imports from China.
The surprise re-emergence of the tariff conflict risks deteriorating stocks, or even worse. “The stock markets will at best evolve in a stable manner, or even experience a further decline,” he declared.
A market already “overbought”?
Goldman Sachs warned that uncertainty now extends to a wider range of scenarios, from renegotiation to retaliation. Although the bank said the most likely outcome remained an extension of the May tariff truce, it cautioned that the latest moves could indicate that China itself is seeking to make concessions, and that it is still possible that the two superpowers could return to the three-digit tariffs imposed earlier this year.
“Higher expectations as well as threats of greater policy responses clearly increase the risk of a more negative outcome for the market in which the United States and China reimpose triple-digit tariffs,” strategists at the investment bank said in a note.
And the stakes are high if neither side gives in. “If neither side blinked, the U.S. and Chinese economies would push the global economy into a deep recession or even depression,” said Ed Yardeni, president of Yardeni Research.
Additionally, news of the latest spat between the United States and China came as Chinese stocks had become “very overbought,” with gains concentrated in a handful of stocks like Tencent, Alibaba, NetEasesaid Arthur Budaghyan, chief emerging markets and China strategist at BCA Research.
“Overbought conditions make offshore Chinese stocks vulnerable to a pullback,” he said.
