Chinese stocks fell after US President Donald Trump said his threat to impose 10% tariffs on the nation’s goods was still being considered and may take place next month.
The benchmark CSI 300 Index snapped a four-day winning streak after Trump said tariffs on the Asian country were being weighed due to “the fact that they’re sending fentanyl to Mexico and Canada.” Those comments eroded the earlier optimism among investors that came after the new president refrained from referring to Chinese tariffs on his inauguration day Monday.
“It only gets tougher from here,” said Xin-Yao Ng, an investment director at abrdn in Singapore. “It’s a reminder that Trump will do something, because the first day might have given some the false impression that he might not. More gradual tariffs might also delay or reduce the force of stimulus that the market wants.”
The CSI 300 Index closed down 0.9%, while the Hang Seng China Enterprises Index, which tracks mainland stocks listed in Hong Kong, dropped 2%. The yuan (CNY) led declines in emerging Asian currencies, with the onshore and offshore currencies both weakening at least 0.2% against the dollar (US$).
While there remains plenty of uncertainty about Trump’s plans for China tariffs, including whether the 10% he flagged Tuesday would be on top of the 60% he threatened earlier, his comments suggest that any reprieve for the country may be short-lived.
Concern that US-China ties are worsening had eased somewhat following news of a pre-inauguration call between Trump and Chinese leader Xi Jinping that the US president described as “very good.” Investor sentiment was also boosted after Trump avoided any reference to higher China levies on his first day in office.
See also: Xi dodges early Trump tariffs, buying China time to influence US
CAt the same time, expectations for greater volatility during Trump’s presidency are clouding the outlook for Chinese shares, and are adding to earlier concern that they were unable to maintain gains made during September’s stimulus-driven rally. Those fears had led the MSCI China Index to enter a bear market this month.
Deteriorating confidence
Investors’ view of China is worsening after the stock market failed to hold on to its September rally, according to a Bank of America survey of fund managers published Tuesday. Growth optimism deteriorated further, with a net 10% of respondents expecting the economy to strengthen, down from a net 61% in October, the survey found.
See also: China home prices fall at slower pace as stimulus takes hold
In one sign of improving sentiment toward Chinese assets, a measure of the yuan’s expected volatility continued to drift lower on Wednesday. Hedge funds have been unwinding option trades on the dollar-offshore yuan currency pair this week as the exchange rate dropped from its recent high, according to traders.
Trump’s reference to the fact he is “still weighing” China tariffs raised concern about potential future action, keeping volatility and uncertainty high, said Billy Leung, an investment strategist at Global X ETFs. Investors are likely to adopt a cautious, “wait-and-see approach,” making it difficult to position into Chinese equities until clarity emerges, he said.
