Chinese Stocks Surge on U.S. Tariff Hopes

On February 4, 2025, Chinese stocks in Hong Kong saw a notable surge as investors responded to U.S. President Donald Trump's announcement regarding a potential delay in tariffs on Chinese goods. This development sparked renewed optimism in the market, raising hopes that China might avoid a potentially crippling increase in tariffs that could have further strained its already delicate economic situation. In response, the Hang Seng China Enterprises Index (HSCEI) rose almost 4% on Tuesday, marking its biggest daily gain since October 18, 2024. The rebound was significant, following a steep decline on Monday, when news of a 10% tariff increase hit the markets. The scheduled tariffs were due to take effect on Tuesday, but Trump's announcement of a forthcoming call with Chinese officials triggered a wave of optimism, suggesting a possibility of de-escalating the trade tensions.

The potential for negotiations between President Trump and President Xi Jinping has created a wave of optimism in financial markets, particularly in Hong Kong. Charu Chanana, the chief investment strategist at Saxo Markets Pte, pointed out that there is hope that the upcoming talks could mirror the successful negotiations with Mexico and Canada, which resulted in the temporary suspension of some tariffs. Given the history of high-level diplomacy between the U.S. and China, the potential for a similar breakthrough is seen as a possibility, albeit with caution. However, Chanana also noted that while markets may be hopeful, the overall uncertainty around the situation cannot be ignored. In her view, it is more likely that the U.S. and China will agree to extend the tariffs rather than cancel them altogether. The dynamics of trade negotiations between the two nations are complex, and the stakes are high. The tariff dispute is not just about trade; it encompasses strategic interests, national security concerns, and geopolitical power plays. As such, the talks may lead to incremental steps rather than a complete reversal of the tariff increases.

Despite the looming threat of tariffs, Chinese stocks continue to present an attractive valuation for investors, particularly when compared to other markets in Asia. The HSCEI, which tracks large Chinese companies listed in Hong Kong, is trading at a forward 12-month price-to-earnings ratio of approximately 8.4. This is relatively low compared to a broader gauge of stocks across Asia, which are trading at a higher average multiple of around 14. This discrepancy in valuation suggests that, even with the risks associated with tariff increases, there may be potential upside for investors willing to take on some degree of risk. Many analysts believe that the current market conditions may represent a buying opportunity, especially considering the historically low valuations of Chinese stocks. Investors are becoming increasingly attracted to the prospect of purchasing stocks at a discount, particularly in light of the positive momentum that has driven stock prices higher in recent months.

Investor sentiment towards Chinese stocks is currently shaped by the broader context of the U.S.-China trade war and its impact on global economic conditions. The volatility of the past few years has left many foreign investors cautious, with positioning in Chinese stocks now significantly lighter compared to 2018 when trade tensions were at their peak. Kelvin Tay, the regional Chief Investment Officer at UBS Global Wealth Management, noted that foreign investors have taken a more cautious approach to Chinese equities this time around, in contrast to the previous escalation of tensions. This shift in investor sentiment is partly due to the experience of the 2018 trade war, which resulted in sharp declines in Chinese stock prices and widespread market instability. As a result, many investors are adopting a more measured stance, aware of the risks associated with the ongoing trade dispute but also recognizing the potential for growth in Chinese markets if a resolution is reached.

In light of the escalating trade tensions, China is reportedly preparing to propose a return to the 2020 'Phase 1' trade deal with the United States. The Phase 1 deal, which was signed in January 2020, required China to make substantial purchases of American goods and services, including agricultural products, manufacturing goods, and energy resources. Under the terms of the agreement, China was expected to increase its purchases by $200 billion over a two-year period. However, the trade deal also included provisions related to intellectual property protections, currency devaluation, and restrictions on technology transfers, which were seen as critical components of the U.S.-China trade negotiations. The deal was hailed as a temporary truce in the broader trade war, but the agreement was far from comprehensive and did not address all of the issues that have driven tensions between the two nations.

The ongoing U.S.-China trade negotiations have significant global ramifications. As the world’s second-largest economy, China plays a crucial role in the interconnected global trade network. A failure to de-escalate the trade war could deepen the already challenging economic environment within China. The International Monetary Fund (IMF) projected that China’s growth rate would fall to 4.4% in 2023, the slowest pace in four decades, down from 8.1% in 2021, largely due to persistent global supply chain disruptions, regulatory crackdowns, and the cumulative impact of tariffs. The imposition of U.S. tariffs could exacerbate these challenges, as China’s manufacturing sector is particularly vulnerable. The tariffs imposed by the Trump administration on Chinese goods are estimated to have cost the Chinese economy about 0.8% of GDP in 2019 alone, according to a study by the Federal Reserve Bank of New York.

China’s technology sector, particularly artificial intelligence (AI), is seen as one of the primary drivers of future growth. In 2022, China invested approximately $14 billion in AI, making it the second-largest investor in AI globally, behind the United States. According to the China Academy of Information and Communications Technology, China’s AI market is expected to reach $16.5 billion by 2025, with a compound annual growth rate of 30%. This massive investment into AI research, coupled with significant government incentives, positions the Chinese tech sector as a key factor in the country's long-term economic recovery. AI technologies have the potential to drive productivity in various sectors, including healthcare, finance, manufacturing, and logistics, thereby compensating for declines in traditional industries.

Hong Kong’s role as a financial hub is vital to both China’s economy and the broader global financial ecosystem. With its advanced infrastructure, high liquidity, and status as an international financial center, Hong Kong serves as the primary gateway for foreign investments into China. In 2023, the Hong Kong Stock Exchange (HKEX) was the third-largest stock exchange in the world by market capitalization, with a total value of $6.1 trillion, trailing only the New York Stock Exchange and NASDAQ. The Hang Seng China Enterprises Index, which tracks major Chinese firms listed in Hong Kong, is a key indicator of investor sentiment towards Chinese stocks. In early 2025, this index surged nearly 4%, reflecting investor optimism over a potential trade deal between the U.S. and China, as well as the delayed imposition of tariffs. However, Hong Kong’s financial market is under threat due to political instability. Protests and the growing influence of Beijing’s policies have created uncertainty, leading to capital outflows and a decline in the city’s global standing. In 2023, Hong Kong’s banking sector saw a 25% decline in initial public offerings (IPOs) compared to 2022, as businesses reconsidered their listing options due to regulatory concerns. Despite this, Hong Kong remains a key player in the global trade war, and its ability to maintain its financial infrastructure will determine its future position in the global economy.

China’s economic outlook remains precarious, largely due to a confluence of external pressures and domestic challenges. As mentioned earlier, the IMF forecasted that China’s GDP growth would slow to 4.4% in 2023, reflecting a marked deceleration from previous years. This is due to a combination of the ongoing U.S.-China trade tensions, a slowing property market, and a contraction in consumer demand. The Chinese economy has been struggling with its transition from an export-driven model to one focused on domestic consumption and innovation. A central issue lies in China’s massive debt burden, with corporate debt exceeding 160% of GDP in 2022, a major drag on economic growth. The real estate sector, which accounts for nearly 30% of the country's total wealth, has been in decline, with property prices dropping by as much as 10% in some cities in 2023.