The Chinese flag flies in the background of the Lujiazui financial district.
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The rally in Chinese stocks could signal a sign of tension, as a flare-up in U.S.-China trade tensions threatens to derail investor optimism.
After months of relative calm, Beijing’s restrictions on rare earth exports and new warnings from Washington about renewed trade tensions have reignited fears of another tit-for-tat trade cycle.
Chinese stocks had recently risen to multi-year highs on hopes for government stimulus and recent inflows of foreign capital into Chinese stocks. Mainland China’s benchmark CSI300, which tracks major stocks in Shanghai and Shenzhen, has risen nearly 20% since the beginning of the year through Oct. 9, while the Hang Seng Index has also risen about 33% over the same period.
However, the likelihood of that increase continuing was predicated on geopolitical risks, particularly trade stability. Analysts warned that sentiment could quickly erode as tariff rhetoric comes back to the forefront. Both indexes fell more than 2% on Monday.
Markets were pricing in a easing of tensions ahead of a possible meeting between US President Donald Trump and Chinese President Xi Jinping. But those hopes disappeared.
Asked if such a summit would happen now, Sean Darby, chief global strategist at Mizuho Securities, said: “I think it’s unlikely.”
“Perhaps the US was surprised by the strength of the pushback from China… markets were hoping for some kind of truce, so the next few weeks are going to be even more difficult.”
If neither side blinks, the economies of the United States and China will lead the world economy into a deep recession, if not a depression.
Ed Yardeni
President of Yardeni Research
Darby added that global stock markets were “perfectly priced” and were ill-prepared for a flare-up in trade tensions. “The positioning was very aggressive, both in equities and credit… everything was set up perfectly for the market to do well.”
The MSCI World Index, which tracks more than 1,000 large- and mid-cap stocks from 23 developed markets, has risen nearly 17% since the beginning of the year before President Trump announced Friday that the United States would impose new 100% tariffs on imports from China.
An unexpected flare-up in the tariff dispute risks leaving stock prices flat, if not more so. “The current stock market is likely to trade flat at best, if there is no further pullback,” he said.
Is the market already “overbought”?
Goldman Sachs warned that uncertainty now spans a wide range of scenarios from renegotiations to retaliation. The bank said the most likely outcome remained an extension of the May tariff truce, but warned that recent moves could signal that China is seeking concessions of its own and that a return to the triple-digit tariffs the two superpowers imposed earlier this year was still a possibility.
“Rising expectations and threatened policy responses clearly raise the risk of a more negative market outcome, with the US and China reimposing triple-digit tariffs,” strategists at the investment bank said in a note.
And if neither side goes to the cave, the risk is high. “If both sides don’t blink, the U.S. and Chinese economies will lead the world economy into a deep recession, if not a depression,” said Ed Yardeni, president of Yardeni Research.
Additionally, recent news of US-China tensions comes at a time when Chinese stocks have become “highly overbought” and gains have been concentrated in a small number of stocks, including: tencent, alibaba, NetEasesaid Arthur Budagyan, chief emerging markets and China strategist at BCA Research.
“Due to the overbought situation, Chinese offshore stocks are likely to fall,” he said.
