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Trade tensions between the US and China threaten this year's strong rally in Chinese stocks and the yuan
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Trump announced a 100% tariff increase on Chinese goods from Nov 1 and export controls on software
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Chinese stocks listed in the US fell over 6%, with Nvidia shares dropping nearly 5% amid export control issues
The prospect of a revived trade war between Beijing and Washington is threatening to undermine this year’s blistering rally in Chinese stocks and weigh on the yuan.
Global equities took a hit on Friday after US President Donald Trump warned he would impose a “massive” increase of tariffs on Chinese goods. He later said he would put an additional 100% tariff on China from Nov. 1, as well as place export controls on critical software. His reaction came after Beijing unveiled curbs on the export of rare earths earlier in the week.
A gauge of Chinese stocks listed in the US plunged more than 6% in its biggest loss since trade tensions escalated in April. American equities also tumbled, with Nvidia Corp., which is caught in the middle of the two nations’ export controls negotiations, sliding nearly 5%. Emerging market currencies weakened.
“China’s markets will likely open under pressure Monday,” said Haris Khurshid, chief investment officer at Chicago-based Karobaar Capital LP. “The tariff headline and new tech restrictions will spook sentiment right out of the gate.”
A lasting deterioration of ties between the two largest economies could imperil one of the world’s best performing stock markets this year, as well as renew doubt over China’s investability.
Hong Kong’s Hang Seng Index has climbed 31% in 2025 as Chinese equities benefited from the trade truce with the US in addition to optimism over the country’s growing heft in artificial intelligence. Alibaba Group Holding Ltd. has surged more than 100%, with Tencent Holdings Ltd. up almost 60%. The rally comes after the Hang Seng fell for four straight years through 2023.
Any sustained weakness in the yuan is typically negative for Asian currencies because the yuan has long been seen as an anchor for the region. On Friday, the Australian dollar, a so-called China proxy, sank 1.3%.
Chinese government bonds, however, stand to benefit. On Saturday, the 30-year yield dropped five basis points in thin volumes, the most since April, according to official data. The 30-year yield reached the highest in almost a year earlier this month amid stronger risk appetite.
Whether the truce holds or collapses remains unknown. Trump acknowledged Friday that he could retreat from the tariff escalation if Beijing backed down from its plan to limit rare earth exports. Trump and Chinese President Xi Jinping are due to meet later this month — a meeting Trump threatened to cancel but later said was still possible.
Read more: Trump’s Dealmaking Diplomacy Grows Fragile as China Fires Back
The uncertainty may limit the impact on Chinese equities, according to Hao Zhou, chief economist at Guotai Junan Hong Kong Ltd.
“I expect China’s markets to fall initially and then rebound with caution,” he said. “There are lot of questions left unanswered.”
The main focus of negotiations between Beijing and Washington centers around export controls. The US is limiting shipments of semiconductors and AI chips needed by China, while China is curbing exports of critical materials and magnets wanted by the US.
On Sunday, China said the US should stop threatening it with higher tariffs and urged more negotiations to agree on a trade deal. China’s recent trade countermeasures on US-related issues were necessary defensive actions, the Ministry of Commerce said in a statement. Beijing on Thursday said overseas exporters of items that use even traces of certain rare earths sourced from China will now need an export license, citing national security grounds.
Untenable Situation
The increased tensions can be seen as part of negotiating strategies before the meeting between Trump and Xi, according to Hao Hong, chief investment officer at Lotus Asset Management in Hong Kong. Trump has previously said he’ll meet Xi at a summit in South Korea this month.
“As this is clearly an untenable situation only weeks from the leaders’ summit, both sides could be seen as ‘all in’ on the upcoming negotiation and working their way down from this point,” Hong said. For the stock market, the trade escalation “will dent the rally but is unlikely to change its upward trajectory,” he said.
Also on investors’ minds will be a closed-door meeting convened by the Chinese Communist Party from Oct. 20-23 to review development plans for the next five years.
In the currency market, traders will be watching to see if China’s central bank sends any signals when it sets the yuan’s daily reference rate on Monday. The so-called fixing limits the onshore currency’s moves by 2% on either side. The yuan, which has gained some 2% against the greenback this year, closed at 7.136 per dollar on Friday.
Regardless of the risks posed by tougher talk between Beijing and Washington, Chinese equities were already looking overheated, said Barry Wang, co-portfolio manager of the China Opportunities Fund at Oberweis Asset Management. The MSCI China Index of stocks capped its fifth month of gains in September, its longest winning streak since 2018.
“The China rally this year has run too far,” Wang said. “It might take a pause for fundamentals to catch up.”