US-China Trade Tensions Rise—What’s Next for Markets and the Yuan?

US-China Trade War: Beijing Strikes Back

The US-China trade war just escalated. With fresh tariffs in place and Beijing striking back with countermeasures, global markets brace for the fallout. As tensions rise, the economic and political stakes have never been higher.

On February 4, 10% US tariffs on Chinese goods took effect. While Canada and Mexico reached initial agreements with Washington, Beijing filed a lawsuit with the World Trade Organization (WTO) to contest the tariffs. Immediately after the US tariffs became effective, Beijing announced selective tariffs on US products, including:

• 15% tariffs on US coal and LNG.
• 10% tariffs on US crude oil, agricultural equipment, large-displacement vehicles, and pickup trucks.

These tariffs will take effect on February 10. Further escalating tensions, China’s commerce ministry and its customs administration announced export controls on key minerals, including tungsten, citing national security concerns.

Notably, the US relies heavily on tungsten imports as domestic production is limited. The US government considers tungsten a critical mineral because of its significance in industries such as defense, electronics, and industrial manufacturing.

These measures may affect trade talks. A prolonged trade war could further strain China’s economy, which already faces weak global demand and domestic challenges. Despite China’s economy expanding by 5.4% year-on-year in Q4 2024, S&P Global expects 10% tariffs to slow China’s economy to 4.1% in 2025.

President Trump’s highly anticipated call with China’s President Xi Jinping did not occur on February 4. If the two leaders engage in talks, markets will gain more clarity on the possibility of a trade deal.

China’s Trade War Playbook: Lessons from Trump’s First Term

China’s approach to the trade war draws from its strategy during Trump’s first presidency:

• Reciprocal Tariffs: Targeting US agricultural products to pressure Trump’s rural voter base.
• Currency Adjustments: Weakening the Yuan to offset tariff effects.
• Strategic Negotiations: In 2020, China and the US negotiated the Phase One trade deal in which China agreed to increase purchases of US goods and services.

China’s Retaliation: A Shift in Tactics

China has retaliated with reciprocal tariffs but has yet to further weaken an already fragile Yuan. While USD/CNY trends will be watched closely in the near term, a Trump-Xi Jinping call will be crucial.

In addition to trade tensions, China is intensifying scrutiny on US tech firms. The Chinese government announced an antitrust investigation into Google. On February 6, Beijing extended its probe to include Apple Inc. (AAPL). According to CN Wire:

“China’s antitrust watchdog is laying the groundwork for a potential probe into Apple Inc.’s policies and the fees it charges app developers, part of a broader push by Beijing that risks becoming another flashpoint in the country’s trade war with the US.”

China’s Economy Faces New Headwinds

Private sector PMI data signals trouble for China’s economy.

• Caixin Manufacturing PMI dropped from 50.5 in December to 50.1 in January.
• Services PMI fell from 52.2 to 51.0.

Notably, the manufacturing and services sectors reported job losses amid the economic uncertainty. The private sector could face more headwinds in Q1 if the US and China fail to negotiate terms to remove tariffs successfully. Weaker labor market conditions may limit the effectiveness of Beijing’s stimulus measures aimed at boosting consumption.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero was surprised by China’s response, stating,

“I would’ve waited to try to negotiate with Trump, because Trump might have avoided the tariffs for good if China had shown some compromise.”

Despite this, markets viewed Beijing’s retaliation as measured, particularly as Trump’s 10% tariffs are significantly lower than his campaign-trail pledge of 60%. These tit-for-tat maneuvers set the stage for intense negotiations. China has shown little willingness to yield to US demands.

Market Reaction: No Signs of Panic

While tensions rise, markets have remained relatively stable. Mainland China’s CSI 300 reopened after the Lunar New Year, closing 0.58% lower on February 5. Meanwhile, the USD/CNY trended higher on February 5 but remains below January’s peak. If Beijing allows the yuan to weaken significantly, it could reduce the effect of US tariffs on demand for Chinese goods.

Mainland China Equity Markets Are on the Move

On Thursday, February 6, the Mainland China equity markets opened the session higher. The CSI 300 and Shanghai Composite Index advanced by 0.81% and 0.84%, respectively. Meanwhile, the Hang Seng Index gained 0.30% in the morning session. The market trends reflected investor optimism that the US and China could avoid a full-blown trade war.

Stay Ahead: Expert Forecasts on US-China Trade and Global Markets

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