China's markets return from holiday to US trade war, DeepSeek rally

Hua Hong Grace Semiconductor

05/02/2025 03:26

(Updates with China market open)

        * 
      Mainland markets return to tariffs after week-long break
    

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      HK-listed Chinese shares have surged this week
    

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      Firm yuan fixing shows Beijing's resolve to minimise
volatility
    

  
    By Jiaxing Li
       SHANGHAI/HONG KONG, Feb 5 (Reuters) - China's stocks and
currency came under pressure as markets returning from a
week-long break were greeted by a fresh trade dispute with the
United States and ructions in the global artificial intelligence
sector.
    Tariffs so far have been less than what the Trump
administration had initially indicated and relief was evident in
Hong Kong, where Chinese stocks rallied this week.
    Meanwhile, enthusiasm around China's artificial intelligence
company DeepSeek bolstered AI stocks.
While investors were taking money off the table, declines have
so far been limited with both the bluechip CSI300  .CSI  and the
Shanghai Composite Indexes  .SSEC  slipping roughly 0.2%.
Investors are now mostly focused on what Beijing might do to
bolster confidence.
    Kaiyuan Securities analyst Wei Jixing said President Donald
Trump's 10% tariffs on Chinese goods had largely been priced in.
    "China's market will likely overlook the tariff disruptions,
as DeepSeek is repairing risk appetite, while investors look
forward to more proactive domestic policies," Wei said,
referring to the new low-cost Chinese AI model that stunned
markets last week.
    China's central bank on Wednesday set the yuan midpoint
 CNY=CFXS  at 7.1693 per dollar, the strongest level since Nov.
8, 2024, which investors read as a sign of Beijing's reluctance
to immediately resort to currency depreciation in response to
U.S. tariffs.
    Yuan weakness helped blunt the impact of tariffs in U.S.
Trump's first term as president, and the fix is widely followed
for clues to China's negotiating stance on tariffs.
     
     
Mainland stock markets  .SSEC   .CSI300  took their cue from
Hong Kong, which opened two days earlier. Chinese stocks there
rose strongly on Tuesday, despite a move by the Trump
administration to impose 10% tariffs on Chinese imports.
Much has happened during China's week-long Lunar New Year
holiday. Over the weekend, Trump imposed levies on goods from
China, a move that prompted Beijing to announce targeted tariffs
on U.S. imports and put several companies, including Google, on
notice for possible sanctions. 
Trump's actions, which also included duties on Mexico and
Canada, jolted global markets. The tariffs came as the world of
artificial intelligence -- another major driver for global
stocks over the past year -- was roiled when China’s DeepSeek
unveiled a cheaper AI model just a day before China went on
break. That triggered a selloff across technology stocks as
investors reassessed the sector's value.
    Even so, there was some relief for markets, as the initial
tranche of tariffs on China was lower than what Trump has
threatened in the past. And the president also gave reprieve to
two other trading partners – Canada and Mexico – leading
investors to believe that China could strike a deal as well. 
Trump and Chinese leader Xi Jinping are expected to speak soon,
although the timing of the conversation is not clear.   
    "Any sign that Xi and Trump have a 'good talk' or both
countries expressed commitment to work on a deal should qualify
as a temporary truce and be supportive of sentiments," said
Christopher Wong, a currency strategist at OCBC Bank. 
     
    Expectations Beijing will do more to support its economy in
the face of U.S. tariffs, relief that the tariffs were lower
than what Trump had initially threatened and bullishness on the
AI and electric vehicle sectors drove gains in Hong Kong.
    Chinese companies listed in Hong Kong  .HSCE  rallied more
than 4% this week to a three-month high, and tech heavyweights
 .HSTECH  rallied nearly 7%. On Wednesday, the Hang Seng Index
 .HSI  lost 1.2% in early trade, likely on profit-taking.
    Both the offshore and onshore yuan weakened too. The
offshore yuan  CNH=D3  has shed 0.6% against the dollar since
Jan 27, when mainland markets closed for the holiday, and hit a
lifetime low this week. 
    Investors will see any attempts by China to weaken the
currency as a hint Beijing expects a protracted war and is using
the yuan to counter the effect of tariffs, as it did during
Trump's first term in 2018.
    "On the whole, having a trade war is not what the market
wants... but investors are less likely to panic this time," said
Elizabeth Kwik, investment director of Asian equities at abrdn,
referring to how markets had been positioning for trade tensions
for months.
     
Artificial intelligence-related stocks jumped on the mainland as
they played catch-up to stocks in Hong Kong, riding on
bullishness on local technology firms spurred by DeepSeek.
    An index tracking Chinese AI stocks surged 3%, while shares
of robot makers  .CSIH30590  rose nearly 4%. China's tech-heavy
STAR 50 Index  .STAR50  gained 3%.     
    China's benchmark blue chip index fell 3% in January as
investors fretted over the increasingly volatile macro outlook
and Beijing's tepid policy response.
     

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
China markets in 2025    https://tmsnrt.rs/4gpTzQT
China's markets as trade frictions rise in 2025    https://reut.rs/4jKm1QA
China's markets during 2018 trade war    https://reut.rs/4hIKe7T
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Reporting by Jiaxing Li; Editing by Vidya Ranganathan, Paritosh
Bansal, Anna Driver and Sam Holmes)
((mailto:jiaxing.li@thomsonreuters.com +852 63358304))