China Markets Sink as Trade War Intensifies

[para. 1] China's stock markets experienced a significant downturn on Monday amid rising concerns that President Donald Trump's escalation of tariffs could potentially lead the global economy into a recession and disrupt international trade. [para. 2] Trump's recent announcement of "reciprocal tariffs" on several countries, including China, provoked a strong response from Beijing. Following Trumps’s announcement, the Chinese government implemented several countermeasures, including a 34% tariff increase on all imports from the U.S., effective next Thursday. [para. 3] In light of these events, an article from the official Xinhua News Agency emphasized China’s commitment to taking firm actions to protect its sovereignty, security, and other national interests.

[para. 4] The Hong Kong and Chinese mainland stock markets, which were previously closed for the Qingming Festival, confronted steep declines on Monday, with significant indexes suffering their most severe losses in over a decade. [para. 5] Analysts at Nomura Holdings Inc. noted that Beijing's decisive retaliation was underestimated by the markets, diminishing the likelihood of a U.S.-China summit or a “grand bargain” in the immediate future, while the risk of heightened U.S.-China tensions has increased.

[para. 6] The Shanghai Composite Index plunged by up to 9% before closing down by 7.34%, marking the biggest daily drop in five years. Other key indexes, including the CSI 300 Index and the Shenzhen stock market benchmark, experienced massive declines, with Shenzhen's daily drop being the largest in over a decade. [para. 7] The Hang Seng Index in Hong Kong reflected these negative trends, registering a 13.22% decline, the worst performance since the Global Financial Crisis.

[para. 8] Despite the downturn, mainland stocks showed some recovery towards the end of trading, supported by Central Huijin Investment Ltd.'s intervention. The company increased its exchange-traded fund holdings and pledged further purchases to stabilize the market. [para. 9] Other Asian markets were also impacted, as Japan’s Nikkei 225 Index fell by nearly 9% before closing 7.8% lower, its lowest in 17 months. Trading in Nikkei stock futures was temporarily halted due to extreme volatility.

[para. 10] Industry-specific analyses revealed that the automobile, electronics, and machinery and equipment sectors were particularly hard-hit, experiencing declines exceeding 10% in mainland markets. [para. 11] In Hong Kong, the tech sector was badly affected, with major companies like Alibaba and Tencent facing steep double-digit percentage declines.

[para. 12] The turmoil extended beyond stocks, affecting other financial markets. Chinese government bond yields dropped significantly as investors shifted to safer assets, with 10-year CGB yields reaching near-record lows. Commodities experienced a sharp downturn, with notable drops in the prices of precious metals and energy futures.

[para. 13] Speculation is growing about the yuan's potential devaluation as a response to the tariffs, with the Chinese currency weakening slightly after the Qingming holiday. On Monday, both onshore and offshore yuan experienced slight depreciations against the U.S. dollar. [para. 14] Analysts at ANZ Bank noted China’s increasing flexibility over its exchange rate policies, hinting at possible interest rate cuts to offset the tariff impacts.

[para. 15] Trump’s widespread reciprocal tariffs spanning 10% to 50% on multiple countries, including China, led to widespread market shock, most notably affecting China with a cumulative tariff rate of 54% on U.S. imports. [para. 16] In addition to retaliatory tariffs, China imposed export controls and added selected U.S. entities to export restriction lists. [para. 17] U.S. tariffs on Chinese imports could significantly increase when considering possible rerouting through neighboring Southeast Asian countries which are also facing high reciprocal tariffs.

[para. 18] Industries reliant on U.S. markets, such as electronics and telecommunications, are projected to face significant challenges due to their high export dependence on the U.S. market.