China's investors signal trade truce is no panacea for markets

Business Times

15-05-2025

[SINGAPORE] The trade truce is not enough to ignite a rush into Chinese financial assets amid expectations of reduced policy stimulus and lingering uncertainty on a final deal.
While Chinese stocks have rallied following the agreement, recouping their losses since the Apr 2 volley of tariff announcements, global investors appear to be staying on the sidelines. Market expectations on further government support have been tempered given the better-than-expected outcome of tariff negotiations last weekend.
'The upside appears limited unless we see further policy support or a clear improvement in earnings, as much of the recent good news is already reflected in prices,' said Eva Lee, head of Greater China equities at UBS Global Wealth Management. 'Major headwinds would be the negotiation takes longer than expected while China did not offer effective stimulus measures to stabilise the economy.'
Strategists expect the yuan to rise at a measured pace against the greenback while bond yields could edge lower as deflationary pressure persists.
Here's a look at what investors are saying about Chinese assets after the tariff reprieve:
Stocks
Stock traders have cheered the Sino-US trade de-escalation, with the MSCI China Index rising more than 4 per cent this week, extending a rally earlier in the year driven by the nation's technological advancement. Still, it may take a while to reach a final deal: in the first Trump trade-war episode in 2018, Chinese stocks went on a bumpy ride before a trade pact was finalised.
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The impact of higher tariffs will trickle down to consumer demand and corporate profits, and that's likely to cast a shadow over China's nascent earnings recovery, analysts say. As it's still uncertain what tariff rates the two countries will settle for eventually, money managers are sticking to defensive and domestically oriented sectors to protect the downside.
The sentiment-driven market mood means 'further volatility ahead with fundamentals taking a backseat', said Elizabeth Kwik, investment director of Asian equities at Aberdeen Investments. 'We continue to favour companies with predominantly domestic exposure and where we have higher earnings visibility.'
Currency
The yuan jumped to a six-month high this week in both onshore and offshore markets after the trade truce, with strategists turning more optimistic on the currency's outlook amid exporters' rising interest in repatriating their US dollar earnings. Some are expecting the currency to appreciate towards 7 per US dollar, from the current level of around 7.2.
Still, Chinese authorities are expected to carefully manage the yuan's upward trend to avoid massive inflows. The People's Bank of China set the daily reference rate at a level weaker than the average forecast in a Bloomberg survey of analysts and traders on Wednesday, for the first time since November.
'While the US has softened the tariff war due to a lack of immediate near-term alternatives, the medium-term decoupling with China on the supply chain and tech fronts is ongoing,' said Ju Wang, head of Greater China FX and rates strategy at BNP Paribas. 'It is difficult to envision China allowing significant yuan appreciation, especially given that the local property market remains weak.'
Bonds
Government bond yields rose as the truce dampened demand for haven assets. The benchmark 10-year yield has climbed around five basis points in May, though last month it posted the biggest monthly decline since December on Beijing's monetary easing and escalated trade tensions.
Bond traders have become more cautious now compared to when the reciprocal tariffs spooked investors in April and spurred a flight to safety. Still, yields may dip again, according to market watchers, as investors bet on more monetary easing to stimulate the already sluggish domestic demand even without tariffs.
'There is still room for Chinese bond yields to head lower, given that deflationary pressure will persist with tariffs imposed on China,' said Cary Yeung, head of greater China fixed income at Pictet Asset Management. 'The 30 per cent tariff in place will continue to slow China's growth. Therefore, we expect accommodative monetary policy to persist, which is beneficial to bond yields.'
Commodities
Oil rebounded this week on the truce. This may be a short-term relief as the trade war already appears to be reducing the volume of goods arriving in the US. Industrial metals also rose but the trade thaw may give only marginal support to aluminium, which is expected to decline this quarter amid headwinds from exports to non-US countries, according to Citigroup.
'Commodities are rebounding to price in the trade war truce between China and the US,' said Xuezhi Li, head of Chaos Ternary Futures's Research Institute. Still, 'tariffs between the two countries surely will not stay at the current low levels. There will be back-and-forth and cause blows to demand', bringing industrial metals prices lower.
Gold, a haven which has risen to records amid the uncertainty, fell. BLOOMBERG