China counters tariff war with market shifts, weaker yuan: Analysts

Analysts surveyed by Argaam said that the escalation of reciprocal tariffs between the US and China warns of further economic slowdowns and disruptions in global supply chains.

They added that financial markets have become more vulnerable to sharp volatility with every new development in the conflict, amid declining risk appetite and a shift of liquidity toward defensive assets.

On the other hand, they predicted that any de-escalation in the trade war could pave the way for an economic recovery, boosting investor confidence and driving increased domestic and international spending.

The analysts pointed out that the trade balance tilts in favor of China, given the US' heavy reliance on its products. China has adopted a strategy to reduce its dependence on the US market through diversifying its markets and using financial tools such as currency devaluation to offset the impact of tariffs.

State of Chinese Markets

Khalid Al-Amri, an analyst and investor in Chinese markets

Khalid Al-Amri, an analyst and investor in Chinese markets, said that the Hong Kong Stock Exchange (HKEX) witnessed its largest single-day drop since the 1997 crisis, plunging 13% in one session.

He added that the exchange has fallen by nearly 9% since the announcement of tariffs in April 2025, reflecting investors’ concerns over the effects of protectionist policies.

Li Xing Financial Markets Strategist Consultant to Exness

Li Xing, a strategic advisor at Exness, said Chinese financial markets have been volatile over the past two weeks. While there was a recent rebound of the Shanghai Composite index, due to the US tariff exemptions on some tech products, the broader outlook remains cautious.

"The announcement of steep new US tariffs and China’s retaliatory measures has intensified trade tensions, leading to concerns about long-term economic impact. March exports saw a temporary increase as firms rushed shipments, but falling imports reflect underlying challenges," Xing said. "Overall, despite some short-term gains, the market remains under pressure, and further government support is likely."

Most Affected Sectors

Al-Amri said the actual impacts remain unclear due to daily changes in customs policies, but some affects have begun to emerge, especially in the US market. Companies relying on manufacturing in China or Vietnam, such as Nike and Lululemon, have recorded their lowest valuations in the past decade.

He explained that US tech companies were notably affected due to their heavy reliance on global supply chains, along with high valuations based on expectations of strong future growth. As fears of an economic recession grew, the market began reevaluating these projections, leading to declines in growth stock prices.

Al-Amri pointed out that some defensive sectors, like healthcare and essential consumer goods, saw temporary gains. This positive performance is linked to two main factors; first, these companies were trading below their fair value before market disruptions; second, they are favored by investors seeking safe havens amid volatility and fears of recession.

Meanwhile, Xing said the US tariffs affected several sectors, with technology being one of the hardest hit. However, the Trump administration announced exemptions for smartphones, computers, and other electronic devices from the steep tariffs on Chinese imports. This was seen as a relief for major tech companies like Apple, which rely heavily on Chinese manufacturing.

"Despite this, the tech industry still faces price hikes and supply chain disruptions, particularly in hardware and data center construction. Some components, such as semiconductors, could be exposed to new tariffs, which could affect companies in the US and China. Other sectors, including automotive and apparel, are also dealing with higher costs," Xing said.

Liquidity Levels in the Chinese Market

Xing said China could face challenges in attracting and retaining foreign investment if trade tensions continue to increase. While Foreign Direct Investment (FDI) dropped in 2024, this trend continued into early 2025 with a 20.4% year-on-year decline.

"In March, concerns over tariffs and global uncertainty led to a net outflow of $17.1 billion from emerging market stocks and bonds, with the majority coming from Chinese equities. Chinese bonds also saw outflows of $6.7 billion," she added.

Sectors Poised for Growth

Xing said several Chinese sectors could be well-positioned despite current tensions, including electric vehicles, semiconductors, e-commerce, and AI-driven robotics. Leading companies such as BYD, NIO, SMIC, Alibaba, and Tencent could benefit from strong domestic demand, innovation, and consistent policy support.

"Key criteria for investors include identifying sectors with government backing, companies focused on Research and Development and technological self-sufficiency, strong exposure to the domestic market, and limited reliance on US technology or concentrated supply chains, particularly those expanding into emerging markets," Xing said.

Meanwhile, Al-Amri sees opportunities in some Chinese companies, despite their reliance on the domestic market and limited exposure to foreign markets. He noted that crises often create opportunities amid the current volatility, indicating that the word "crisis" in the Chinese language consists of "danger" and "opportunity."

He advised investors to focus on measurable elements of companies, such as business quality, valuation attractiveness, and long-term growth potential. The analyst emphasized that these factors rarely align except during crises and significant volatility, and leveraging market downturns to build long-term positions distinguishes successful investors.

Future Scenarios

Xing said if the trade conflict de-escalates, the best-case scenario for the Chinese market includes a rebound in exports, stronger GDP growth, and improved investor confidence. This could contribute to an increase in foreign investment and domestic spending, especially as the government introduces measures to support consumption and stabilize the real estate sector. It would also ease pressure on China’s tech industry, helping it better integrate foreign technologies alongside local innovation.

In contrast, if tensions escalate, the worst-case scenario could bring economic slowdown, higher tariffs, and trade retaliation. This would strain global supply chains, worsen challenges in the property market, and disrupt key tech sectors. This scenario could have a large impact on the global economy, affecting companies exporting to China.

Meanwhile, Al-Amri noted that prolonged negotiations are not in either party’s interest, as many companies have already started cutting capital expenditures and reducing hiring in anticipation of a potential recession that could raise supply chain costs and lower sales, particularly in tariff-affected markets like China.

He noted that the Trump administration issued temporary 90-day tariff exemptions to avoid immediate economic damage, recognizing the complexity of trade negotiations requiring more time for clear resolutions.

Al-Amri warned that the emergence of trade alliances among exporting countries, such as China and Vietnam, to counter protectionist policies of importing nations led by the US could complicate the global economic landscape. Washington might use tariffs as a negotiating tool to pressure the EU into forming a united front against China, prolonging negotiations and increasing market uncertainty.

The analyst believes that the trade escalation could push the economy into a short-term recession, which would force the Federal Reserve to cut interest rates quickly, as happened during the COVID-19 crisis. This is particularly relevant given Washington’s need to refinance around $7 trillion in bonds over the next six months. With current interest rates at about 5%, the annual cost of debts would reach $350 billion. However, if interest rates are reduced to 0.5%, the cost would drop to just $35 billion, significantly easing the burden on government spending.

Al-Amiri points out that rising inflation benefits debt and bondholders, such as the US, because it gradually reduces the real value of debts over time. If annual inflation reaches 5%, the real value of bonds will decrease by the same percentage each year.

In light of these factors, Al-Amiri raises this question: Does Washington use tariffs and higher prices to steer the economy toward a studied inflationary recession that serves its financial and strategic objectives?

China Holds the Upper Hand

Al-Amri said the trade balance clearly favors China, as the US imports over $450 billion worth of Chinese goods compared to just $150 billion it exports to China, reflecting deep US reliance on Chinese products.

Since 2018, China has pursued a policy of reducing dependence on the US market, lowering its exports to the US from 19.2% to 14.7% by 2024 while expanding its presence in alternative markets outside the G7 group, whose share of China’s exports dropped from 48% in 2008 to around 30% last year.

Despite pressures, China’s share of global exports rose to 14% from 13% during Trump’s first presidency, achieving a record trade surplus exceeding $1 trillion for the first time.

China’s response has been selective and balanced, including imposing equivalent tariffs, targeting politically sensitive sectors like agriculture, a key Trump voter base, and restricting rare earth metal exports critical for chip production, where China dominates 90% of global output.

Additionally, Chinese companies relocated some of their factories to countries like Mexico and Europe, mitigating tariff impacts and ensuring continued access to international markets. China also employed financial tools, such as currency devaluation, to offset tariff effects. A 10% devaluation of the yuan makes Chinese exports 10% cheaper, effectively neutralizing tariff hikes and limiting export volume impacts.

Al-Amri said despite Trump’s tough rhetoric, he is a strategic negotiator, as his book "The Art of the Deal" reflects his deep understanding of negotiation tactics.

With a background in real estate development, Trump understands the economic costs of uncalculated escalations, making him likely to seek a settlement that achieves political and economic gains without disrupting global trade balances, Al-Amri concluded.