China’s stock market experienced a slight uptick following a recent agreement with the United States that aims to temporarily suspend most tariffs on each other’s products for a period of 90 days. This unexpected development has led to a more optimistic outlook from investment banks regarding China’s economic growth, although concerns about the nation’s domestic fundamentals persist.
The signing of the trade deal could already be seen as an optimistic move against an inclement economic backdrop. China’s CSI 300 index edged higher, building on a previous session’s gain of 1.6%. In Hong Kong, the Hang Seng Index initially rallied close to 3% before reversing course, eventually closing down 1.5%. This fluctuation underscores the volatility in the market as investors grapple with mixed signals from both international negotiations and domestic economic indicators.
Analysts had long called attention to China’s stock market dependency on domestic fundamentals. Unfortunately, those fundamentals are weak right now. Dan Wang, Eurasia’s China director, emphasized this point, stating, “This doesn’t change the bigger picture. China’s stock market still depends on domestic fundamentals, which remain weak.”
According to the latest economic forecasts, China’s second-quarter GDP is likely to be much higher than the released figure of 4.5%. In addition, projections for the third quarter suggest continued strength in growth, with some forecasting that growth may exceed 4%. This optimism is supported by a series of policy ease measures and programs aimed at boosting domestic consumption.
Challenges persist in various sectors. China’s real estate crisis has shown no signs of abating, and local government debt is soaring. These concerns cast a long shadow over the economic horizon. They point to important reasons to question whether any new growth figures’ upward momentum will last.
Opportunities do exist within specific sectors. Analysts point to the promise of China’s internet and technology industries. They are finding powerful opportunities within select sub-sectors of the communications services and consumer discretionary sectors. Eddy Loh, chief investment officer at Maybank, emphasized the opportunity in Chinese equities. He said the market valuation was still attractive and not especially demanding. Substantial risks exist in the current environment. Investors able to work through these complexities could see opportunities for attractive returns.
For now, the temporary suspension of tariffs provides a glimmer of hope. Yet experts caution against naive or overly sunny readings of this temporary pause in hostilities. As Morgan Stanley’s analysts were the first to note, tariffs are at record highs. They acknowledge that the suspension window could lead to more upfront shipments and production, meaning any benefits may be short lived.
Dan Wang further underscored this notion when he wrote, “This is a short-lived truce, not a thawing of the bilateral relationship.” He stressed that “A 90-day truce is awfully short in trade diplomacy. This refreshing perspective shines a light on the day-to-day realities of U.S.-China relations and the importance of continuous engagement to reach mutually beneficial, long-term outcomes.
China is beating a path through its economic interstices. How well international trade agreements are used to improve domestic conditions will be central to this path. While the new trade deal is likely to boost market sentiment in the short term, for sustained growth over the long haul, China needs to address the underlying imbalances in its economy.
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