A new negotiation channel led by US Treasury Secretary Scott Bessent and China’s vice premier He Lifeng has been established, signalling a more structured attempt to resolve longstanding trade issues.
While this agreement is only temporary, it is considered a key development in global trade dynamics and sent risk assets higher. Following the news on the 90-day tariff cuts, the US market saw an immediate boost – US equities rallied, Treasury yields climbed and the US dollar strengthened – indicating the market’s optimism on the potential growth and earnings prospects.
Meanwhile, this is good news for the Chinese economy, as this comes on the back of a raft of stimulus measures announced by China which included interest rate cuts and a major liquidity injection, as Beijing at the time worked towards stepping up efforts to soften the economic damage caused by the trade war with the US.
On May 7, China announced a series of stimulus measures aimed at bolstering domestic consumption, including a 10 basis point interest rate cut by the central bank and a substantial liquidity injection of RMB1 trillion ($180 billion) from its reserves.
See also: Japan's second wind: Why the world’s most overlooked market is back in play
“The package reinforces the policy emphasis on domestic consumption and extends macro support from goods to services consumption. This pivot is necessary to prop up employment, as services are greater generators of employment than manufacturing per unit of output,” says Maybank analysts Erica Tay and Chua Hak Bin in their May 7 report.
China’s economy remains a rather domestic one but many jobs in the economy rely on the manufacturing sector which has a large involvement in the manufacturing of goods exported to the US, particularly in the electronic goods sector and the machinery and transport equipment sector.
According to data from Natixis Corporate and Investment Banking (Natixis CIB), just over 35% of China’s electronic goods exports and about 27% of their machinery and transport equipment exports are exported to the US and this means China’s job market will suffer if tariffs were imposed.
See also: US-China tariff rollback offers markets a surprise boost, but risks linger
The investment bank estimated that if tariffs had reduced Chinese exports to the US by 80%, 6.4 to 7.8 million jobs would have been lost.
Rosy but short-term outlook
These developments have painted a more positive image on the outlook for China’s economic growth this year with analysts from JP Morgan saying that the magnitude of the temporary tariff reduction is larger than expected. They estimated that if the new lower tariff rates are maintained for the rest of the year, China’s 2025 economic growth forecast could reach 4.8% compared to the bank’s previous forecast of 4.1%. The investment bank also does not expect the Chinese government to introduce additional fiscal stimulus later this year if all remains well.
Meanwhile, on the asset management side, Tai Hui, APAC chief market strategist, JP Morgan Asset Management (JPMAM), says: “The magnitude of this tariff reduction is larger than expected. This reflects both sides recognising the economic reality that tariffs will hit global growth and negotiation is a better option going forward. The 90-day period may not be sufficient for the two sides to reach a detailed agreement, but it keeps the pressure on the negotiation process.”
Tai adds that JPMAM is still waiting for further details on other terms of this agreement, for example, whether China would relax on rare earth export restrictions. In the near term, Tai expects the market to get back on to a risk-on sentiment. He also notes that pressure on the Fed to cut rates may also ease for the time being.
On the other hand, the Bank of Singapore (BoS) expects three key implications from the negotiations that happened over the last weekend. Firstly, the research team is of the view that this lowers tail risks for the US economy and improves the outlook for corporate earnings. BoS maintains its base case that the US will avoid recession and unwind most of the unsustainable tariffs imposed in recent months.
"After the announcement, the US 10-year Treasury yield moved higher, US equities rallied, and the US dollar strengthened, in-line with what one will expect to see with firmer US growth expectations," says the BoS research team, adding that the Fed will take a "wait-and-see" approach and cut rates only once this year.
For more stories about where money flows, click here for Capital Section
Secondly, the shift back to a 10% baseline mirrors a similar deal reached with the UK earlier this month, which BoS suggests could lead to a broader policy approach of using extreme tariffs as leverage in negotiations, then reverting to a default rate while talks progress.
Lastly, the speed and scale of the rollback is expected to lift valuations in consumer and technology sectors, which had been hit hardest by trade frictions. The positive momentum may continue if further easing measures are announced.
On the other hand, Aberdeen Investments’ investment director of Asian equities, Elizabeth Kwik, says: “Our global macro research team’s initial estimate is that all this takes the average US tariff on China down to 27% (with only 11% up from the start of Trump’s second term).”
The reduction in tariffs is seen as a significant step towards resolving trade imbalances, with China likely to make concessions in reversible areas to maintain leverage in ongoing talks. The initial talks will create a mechanism to continue trade discussions over the next 90 days. According to Kwik, key issues will include reducing China’s rare earth export restrictions, as well as “five or six” strategic industries (such as pharmaceuticals or steel) where the US will seek supply chain independence from China. Reducing the US trade deficit with China also remains a key goal for the Trump administration.
Overall, Kwik sees high-quality companies as the “most attractive part of the Chinese market”, offering excellent value, resilient earnings, but also delta to any improvement in sentiment. While she keeps a close eye on further negotiations, she continues to favour companies with defensive characteristics, including strong balance sheets.
Too soon to celebrate
However, like the wider reciprocal tariff pause back in April, it is probably too soon to say whether the pause is a permanent reduction of tariffs between the US and China especially if the US still aims to reduce their trade imbalances with China according to Natixis CIB senior economist Jianwei Xu.
“From the US perspective, if the ultimate target is to rectify the trade imbalance between China and the US, the tariffs cannot go back to how it was at the start of this year. In my opinion, the two countries will still step back because the tariffs on each other (previously) were too harsh for both sides,” says Xu during a webinar held by Natixis CIB on May 7, before the deal to scale back on tariffs for 90 days was established.
Meanwhile, market watchers rejoice as some short-term clarity on the US-China trade relations has returned, but there is no doubt that uncertainty still lingers, especially beyond the 90 days and Trump’s infamous track record of making sudden surprise announcements.
Hence, experts advise investors to stay alert, invest in high-quality names and look for sectoral-specific opportunities across different markets that can ride the recovery wave and any potential uncertainty to come.
Aberdeen’s Kwik says: “Like the wider reciprocal tariff pause, it is probably too soon to say whether the pause is a permanent reduction. We expect that negotiations will be a protracted process and our global macro research team expects that US-China tariffs will settle at around 60%, as Trump promised on the campaign trail. That said, the sudden pause — and the potential for deal-making — suggest risks could be skewed to a lower end-point.”
On the other hand, Mathieu Racheter, head of equity strategy research at Julius Baer, notes that equity markets rallied sharply on news of the temporarily slashed tariffs. A relatively solid first-quarter earnings season provided further support too. While Racheter notes that retail investors have been active in buying the dip, he says: “At current levels, however, we remain cautious and do not share the prevailing optimism regarding a quick resolution of the trade conflict. Even if new deals are announced, they are likely to involve complex conditions and protracted implementation timelines, making a full rollback of tariffs to pre-conflict levels unlikely.
“With fundamentals expected to weaken further in the coming quarters and our economists assigning a 50% probability to a US recession, we caution against chasing the rally.” Racheter recommends further reallocating towards international equities, such as Europe, Japan, China and India, where valuations are more attractive and macro conditions appear relatively supportive.
The temporary scaling back tariffs will likely lift consumer confidence and sentiment and should act as a tailwind for consumption-driven companies. The consumer cyclical sector and the technology sector in Asia have historically been resilient in their recovery following de-escalations of trade wars.
Morningstar’s Asia equity market strategist, Kai Wong, and senior associate equity analyst, Kathy Chan, note in a recent report that looking back at Trump’s first trade war with China in 2018, Morningstar observed a 42.64% rebound in its Asian technology index in 2019 after a 24.14% pullback during the trade war in 2018, while its consumer cyclical index rebounded 19.91% during 2019 after a 19.78% contraction in 2018.
“For investors with a greater risk appetite, we suggest the consumer cyclical and technology sectors as they should see the greatest appreciation based on the history of the first trade war. We prefer moat-y stocks that are likely to have lower drawdowns due to their high quality should US-China relations deteriorate again,” says Wong and Chan.
Among the pair’s picks, e-commerce giant JD.com and Fortune 500 American-Chinese fast food company Yum China were preferred in the consumer cyclical side, with JD.com particularly standing to benefit even more from further government stimulus from China.
Taiwan Semiconductor Manufacturing Company (TSMC) emerged as the pair’s pick in the technology side as the pair view the stock as undervalued and expect the firm to continue doing well given its competitive advantage in its technological advancements and its status as a near-monopolistic player in the chipmaking industry.
