Volatility over US-China tariff flare-up likely to be short term; China holds advantage, say analysts

[SINGAPORE] Selling hit markets across the Asia-Pacific region on Monday (Oct 13) following the latest salvo in the trade war between the US and China.

US President Donald Trump on Oct 11 said that he would impose a fresh 100 per cent tariff on China, on top of existing levies, and export controls on “any and all critical software” starting from Nov 1. This came after Beijing last week announced export controls on rare-earth minerals.

Beijing on Oct 12 said it will retaliate if Trump does not back down, reported state news agency Xinhua.

However, analysts broadly saw the latest flare-up as political posturing rather than a lasting escalation, and expect markets will likely stabilise amid selective risks and longer-term opportunities. Most expect tensions to ease once rhetoric subsides, though they cautioned that de-coupling could accelerate and more export front-loading could follow as businesses brace for potential supply disruptions.

Markets on Monday had reacted negatively at the news initially, but pared losses by the close. At the close, Singapore’s Straits Times Index (STI) was down 0.8 per cent, while Hong Kong’s Hang Seng Index slumped as much as 3.1 per cent in the morning before paring some of the losses to close at 1.5 per cent down.

In mainland China, the Shanghai Stock Exchange Composite Index fell 3.3 per cent initially before paring some losses to close at 0.2 per cent lower. The CSI 300 tumbled 4.5 per cent initially but recouped most of the losses to close 0.5 per cent down.

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South Korea’s Kospi was down as much as 1.5 per cent as at 9.35 am before paring some losses to close 0.7 per cent down. Australia’s ASX 200 fell 0.8 per cent by the close. Markets in Japan were closed on Monday for a holiday.

Trump’s planned tariffs will see import taxes on Chinese goods rise to 130 per cent from 30 per cent, slightly under the 145 per cent level imposed earlier this year that was later reduced.

Trump later posted a statement on his social media platform Truth Social that hinted Chinese President Xi Jinping might have a way to back down and suggested that a full trade war would hurt China.

Volatility and losses likely short-term with China holding ‘escalation dominance’

DNB Carnegie senior economist Kelly Chen pointed out that China’s dominance in rare earth elements means it holds “escalation dominance” for the next three to five years. This will likely force the US towards further “tactical concessions” despite the Trump administration’s hawkish rhetoric, she said.

Chen added that dominance has been a US “concern” since the early 2010s and rare earth elements became a “key negotiating lever” in the US-China relationship in April this year.

Even with efforts to reduce dependence on Beijing for these critical minerals, the US is almost entirely reliant on China for them. The Asian giant produces more than 90 per cent of the world’s processed rare earths and rare earth magnets and has used export restrictions to throttle shipments.

China’s near-total monopoly of these rare earth minerals limits Trump’s ability to sanction it, as estimates suggest that the US’ stockpile of rare earths could be emptied in around 90 days should Beijing cut off their supply, indicated Reuters.

“Despite longstanding efforts, US dependence on China persists. Even with ample capital and Ebitda guarantees, lead times stretch over years and are likely insufficient to ensure domestic US supply until 2028,” said Chen.

Citi analysts on Monday suggested that stock volatility should be lower than during the US reciprocal tariffs in the second quarter of 2025 “because the new tariff only applies to exporters directly exporting to the US from China”.

Morningstar’s Asia equity market strategist Kai Wang said the looming threat “could be short-lived” and offered investors a chance to buy China stocks at a relative discount.

He added that the US government shutdown is also increasingly dampening consumer sentiment in the US, which implies Trump will want to avoid re-escalating foreign policy issues without solving the domestic shutdown first.

“Riskier assets such as Bitcoin and Nasdaq futures are also up 4 and 2 per cent, respectively, since the US market close on Friday, while S&P futures were up 1.3 per cent as at 10 am Hong Kong time, suggesting that investor sentiment remains positive,” said Wang.

The belief that the latest hits in the trade spat were just posturing was echoed by Eli Lee, the chief investment strategist at the Bank of Singapore.

“Our assessment of forward scenarios at this juncture leans towards sabre-rattling or a moderate intensification of US-China tensions, instead of a sharp re-escalation of the US-China conflict,” said Lee.

Morgan Stanley called it a temporary escalation with an “off-ramp”.

“While we’ve been consistently sceptical that the US and China could reach a durable trade agreement, we’re equally sceptical that the current escalation will lead to a durable disequilibrium, given it is in neither side’s interest,” it said in a note.

The US bank added that the most likely outcome is both giants will return to another form of a deal with continued tariff pauses, punctuated by periods of temporary escalation.

Lee added that the overall risk environment remained “constructive” in the long term, given that rates cuts are to come. But he cautioned that portfolios should be “sufficiently diversified and robust” to withstand heightened volatility and a possible short-term correction “if US-China uncertainties further intensify”.

UOB’s Ho Woei Chen concurred that the re-ignited tit-for-tat was likely for leverage in the upcoming negotations. However, she cautioned that “wide differences and significant issues” need to be addressed before a trade deal can be achieved and the ongoing de-coupling is likely to “accelerate” until then.

Ho added that the uncertainties implied that there is still room for more front-loading of exports to avoid disruption to the supply chains ahead of the holidays, in line with OECD forecasts, with existing front-loaded inventory potentially hiding the impact on global trade until later.