The Chinese national flag flies with the Lujiazui Financial District in the background.
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The recovery of Chinese stock markets could be showing signs of strain as renewed trade tensions between the US and China threaten to derail investor optimism.
After months of relative calm, Washington's new warnings about Beijing's export controls on rare earths and renewed trade tensions have revived fears of a new trade cycle.
Chinese stocks recently rose to multi-year highs on expectations of government stimulus and a recent influx of foreign capital into Chinese stocks. China's benchmark CSI 300, which tracks major stocks in Shanghai and Shenzhen, rose nearly 20% since the start of the year through Oct. 9, while the Hang Seng Index rose about 33% over the same period.
However, the possibility of that rally continuing was predicated on stability in geopolitical risk, especially in trade. With tariff rhetoric back at the forefront, analysts warned that sentiment could quickly unravel. Both indices lost more than 2% on Monday.
Markets had priced in relaxation ahead of a possible meeting between US President Donald Trump and President Xi Jinping. But those expectations have faded.
“I don't think it's very likely,” said Sean Darby, chief strategist at Mizuho Securities, when asked whether such a summit would happen now.
“The United States may have been surprised by the strong response from China. We are now in for a much tougher few weeks as markets expected some sort of truce.”
If neither side blinked, the American and Chinese economies would plunge the global economy into a deep recession, if not a depression.
Ed Yardeni
Chairman of Yardeni Research
Darby added that global stocks were “perfectly priced” and ill-prepared for a renewed trade showdown. “Positioning has been very aggressive, both in equities and in credit… everything that could perfectly ensure the markets would do well.”
The surprising reemergence of tariff disputes threatens to push stocks aside, if not worse. “Equity markets will now trade sideways at best if there is no further pullback,” he said.
An already 'overbought' market?
Goldman Sachs warned that the uncertainty now includes a broader range of scenarios, from renegotiations to retaliation. While the bank said the most likely outcome remains an extension of the May tariff truce, it warned that the latest moves could signal that China is seeking its own concessions, and that there is still a chance the two superpowers will return to the triple-digit tariffs imposed earlier this year.
“Higher expectations coupled with greater threatened policy responses clearly raise the risk of a more market-negative outcome in which the US and China reimpose triple-digit tariffs,” the investment bank's strategists said in a note.
And the stakes are high if neither side collapses. “If neither side blinks, the U.S. and Chinese economies would push the global economy into a deep recession, if not a depression,” said Ed Yardeni, president of Yardeni Research.
Furthermore, news of the latest US-China row came as Chinese stocks had become 'highly overbought', with gains concentrated in a handful of stocks such as Tencent, Alibaba.com, NetEasesaid Arthur Budaghyan, chief emerging markets and China strategist at BCA Research.
“Overbought conditions leave Chinese offshore stocks vulnerable to a pullback,” he said.
