China: Trade Tensions Rise as Truce Nears Expiry, Markets Face Fresh Risks

US-China Trade Tensions Simmer

The US and China extended the 90-day trade war truce in August, averting 145% tariffs on Chinese shipments to the US. The extension raised hopes of a potential trade deal, fueling demand for Mainland and Hong Kong-listed stocks.

Last week, China’s chief trade negotiator, Li Chenggang, met with US officials to discuss trade terms under the truce. However, there were no reported discussions about a trade deal, weighing on optimism toward an agreement.

Since last week’s meetings, trade tensions have resurfaced, tempering hopes of an agreement before the 90-day truce expires in October.

This week, updates from the China Summit came under scrutiny as Beijing sought to reform ties with India and bolster relations with BRICS nations. The China-Russia-backed Shanghai Cooperation Organization (SCO) drew global leaders, including Russian President Vladimir Putin and Indian Prime Minister Narendra Modi. Even North Korean leader Kim Jong Un attended the Summit.

US President Trump reacted to updates from the China Summit in Beijing, stating:

“Please give my warmest regards to Vladimir Putin and Kim Jong Un, as you conspire against the United States of America.”

Trump’s comments suggested another shift in US-China relations after months of de-escalation. However, Beijing appears eager to ease US dependency, potentially diluting Trump’s grip on global trade. Chinese President Xi Jinping reportedly stated:

“We should leverage the strength of our mega-sized markets and economic complementarity between member states and improve trade and investment facilitation.”

China Targets Southeast Asia for Exports

Xi’s emphasis on multilateral ties and regional partnerships contrasts sharply with Trump’s protectionist trade policies. China Beige Book CEO Leland Millar discussed China’s rising dominance in an interview with Bloomberg, stating:

“I wouldn’t call it a position of strength, but it’s getting stronger considering that a lot of countries are backing away from their close relationship with the United States. So, we’re seeing a situation where China is becoming an attractive option because it’s not the United States right now.”

On China’s trade alliances, the recent slump in exports to the US and jump in shipments to the rest of the world, Millar commented:

“It’s not alliances, but it’s not all transshipments either. It’s essentially China shoving its exports down other countries’ throats. The United States, you can see it in our China Beige Book data, you can see it in other trade data, direct shipments from China to the US have been going down, but China has been unloading its exports, in particular, into Southeast Asia, because they can’t push back.”

Millar commented on China’s dominance in the region, stating:

“They can’t push back geopolitically; they can’t compete with Chinese lower prices that are dumping their overcapacity into Southeast Asia. So it’s not about tightening an economic bloc. If anything, it’s the opposite. But it means, in a world in which China is trying to find places to dump its exports, it’s picking on its weaker neighbors, and it’s being very successful right now.”

Beijing Targets Domestic Consumption amid Trade Uncertainties

Despite China’s efforts to redirect shipments to Southeast Asia and other parts of the world, economic indicators are sending mixed signals.

Chinese exports surged 7.2% year-on-year in July, up from 5.8% in June, while imports rose 4.1% (June: 1.1%). However, recent private sector PMI data revealed potential red flags. Notably, August’s RatingDog Manufacturing and Services PMIs showed two concerning trends. Rising input costs and intensifying competition pressured profit margins. Firms reduced staffing levels across the private sector to reduce costs.

Falling margins and rising unemployment could undermine Beijing’s efforts to boost domestic consumption. Unemployment rose from 5% in June to 5.2% in July, with youth unemployment surging to 17.8% (June: 14.5%).

Rising unemployment could weigh on sentiment and household spending. Despite these headwinds, Beijing introduced fresh policy measures this week, aiming to boost consumption. Beijing reportedly launched a program to subsidize consumer loans to boost household credit and spending.

The latest subsidy program follows several policy measures targeting consumers. Retail sales figures for July signaled a sharp drop in consumer spending, triggering the latest round of stimulus. Retail sales rose 3.7% year-on-year in July, slowing from 4.8% in June, signaling weakening consumer demand .

A pickup in demand for consumer credit and household spending could ease the effect of competition on margins. Improving margins may allow firms to increase staffing levels, potentially improving sentiment.

Mainland Stock Markets Stumble

Hong Kong and Mainland China-listed stocks came under selling pressure on Thursday, September 4. The CSI 300 and the Shanghai Composite Index dropped 2.24% and 1.71%, respectively, while the Hang Seng Index fell 1.2% in morning trading.

Concerns about margins, weakening external demand, and rising unemployment weighed on sentiment. Reports of China’s financial regulators considering cooling measures for the stock market added to the negative mood. Policymakers are reportedly considering the removal of short-selling restrictions and the introduction of measures to curb speculative trading.

Despite today’s losses, Mainland equity markets hold on to solid YTD gains. The CSI 300 and the Shanghai Composite Index are up 10.42% and 11.45%, respectively. While the CSI 300 and Shanghai Composite trail the Nasdaq Composite’s 11.32% gain, the Hang Seng Index continues to outperform with a 24.8% rise.

Trade news and Beijing’s policy measures could be crucial for market momentum, given the latest pullback.

Rising US-China trade tensions, weakening external demand, and the absence of fresh stimulus could unravel the market rally.

The Road Ahead: Services Sector Activity, Trade Talks, and Stimulus

US-China trade talks and Beijing’s stimulus plans will continue influencing sentiment in the weeks ahead.

However, traders should closely monitor upcoming Chinese economic data for insights into the macroeconomic backdrop. Trade data (September 8), inflation (September 9), and new loan trends (September 12) will face increased scrutiny.

A sharp drop in exports, intensifying deflationary pressures, and a slump in demand for credit could challenge Beijing’s 5% GDP growth target. A loss of economic momentum would likely pressure Mainland and Hong Kong-listed stocks.

Track our real-time updates on China trade policy and equity market trends, and consult our economic calendar.