(Bloomberg) — The prospect of a revived trade war between Beijing and Washington threatens to undermine this year\u2019s blistering rally in Chinese stocks and weigh on the yuan.<\/p>\n
Most Read from Bloomberg<\/p>\n
Global equities took a hit in US hours on Friday after President Donald Trump warned he would impose a \u201cmassive\u201d 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. He spoke out after Beijing unveiled curbs on the export of rare earths earlier in the week.<\/p>\n
While Chinese markets will get their first chance to respond on Monday, any following of the US selloff may be tempered by weekend signals from the White House that it\u2019s open to a deal and Trump declaring the US wanted to help, not hurt China.<\/p>\n
Currencies including the Australian dollar edged higher in early trading Monday and the offshore yuan inched 0.1% higher against the dollar to pare Friday\u2019s loss.<\/p>\n
China\u2019s equities and yuan may slide though \u201cI\u2019d expect that pressure to be more modest than I would\u2019ve done a few hours ago before the Trump\u201d post on social media, said Michael Brown, a strategist at Pepperstone Group. \u201cBut some weakness is the expectation.\u201d<\/p>\n
<\/p>\n
A gauge of Chinese stocks listed in the US plunged more than 6% on Friday 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\u2019 export controls negotiations, sliding nearly 5%. Emerging market currencies weakened.<\/p>\n
\u201cChina\u2019s markets will likely open under pressure Monday,\u201d said Haris Khurshid, chief investment officer at Chicago-based Karobaar Capital LP. \u201cThe tariff headline and new tech restrictions will spook sentiment right out of the gate.\u201d<\/p>\n
A lasting deterioration of ties between the two largest economies could imperil one of the world\u2019s best performing stock markets this year, as well as renew doubt over China\u2019s investability.<\/p>\n
Hong Kong\u2019s 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\u2019s 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.<\/p>\n
Story Continues <\/p>\n
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. Emerging-Asian currencies have underperformed most of their EM peers this year, with the Bloomberg Asia Dollar index up just 2.6% against the dollar. A broader index of EM currencies has climbed 6.4%, on track for its best year since 2017.<\/p>\n
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.<\/p>\n
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 \u2014 a meeting Trump threatened to cancel but later said was still possible.<\/p>\n
The uncertainty may limit the impact on Chinese equities, according to Hao Zhou, chief economist at Guotai Junan Hong Kong Ltd.<\/p>\n
\u201cI expect China\u2019s markets to fall initially and then rebound with caution,\u201d he said. \u201cThere are lot of questions left unanswered.\u201d<\/p>\n
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.<\/p>\n
On Sunday, China said the US should stop threatening it with higher tariffs and urged more negotiations to agree on a trade deal. China\u2019s 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.<\/p>\n
Untenable Situation<\/p>\n
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\u2019ll meet Xi at a summit in South Korea this month.<\/p>\n
\u201cAs this is clearly an untenable situation only weeks from the leaders\u2019 summit, both sides could be seen as \u2018all in\u2019 on the upcoming negotiation and working their way down from this point,\u201d Hong said. For the stock market, the trade escalation \u201cwill dent the rally but is unlikely to change its upward trajectory,\u201d he said.<\/p>\n
Also on investors\u2019 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.<\/p>\n
In the currency market, traders will be watching to see if China\u2019s central bank sends any signals when it sets the yuan\u2019s daily reference rate on Monday. The so-called fixing limits the onshore currency\u2019s 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.<\/p>\n
<\/p>\n
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.<\/p>\n
\u201cThe China rally this year has run too far,\u201d Wang said. \u201cIt might take a pause for fundamentals to catch up.\u201d<\/p>\n
–With assistance from Matthew Burgess, Abhishek Vishnoi and Sangmi Cha.<\/p>\n
(Updates with currency moves and Trump comment from second paragraph, EM currencies in ninth paragraph)<\/p>\n
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