Trump-Xi summit brings one-year tactical trade truce in major de-escalation of bilateral tensions

Highlights: US President Donald Trump and Chinese President Xi Jinping yesterday achieved substantial progress in their summit in Busan, South Korea and concluded a one-year tactical trade truce that will lead to reduction of the US fentanyl-related tariff on China from 20 per cent to 10 per cent and extension of existing reprieve on reciprocal tariffs for a year. China agreed to suspend its new rare earths export controls for a year and resume soybean purchase from the US. Both sides agreed to pause shipping industry trade investigations and port fees for each other’s ships for one year. The fact that the trade truce has set a one-year limit and requires renegotiation on yearly basis underscores its tactical and agile nature, as the two nations put aside the more challenging andstructural fundamental disagreements over issues related to bilateral trade imbalance, China’s manufacturing overcapacity and US technology export controls on China. We expect this tactical agreement will lead to de-escalation of bilateral trade conflicts and mitigate global trade uncertainty, reinforcing our overweight stance on US, China and Hong Kong equities. 

• Despite its tactical nature, we expect the trade deal will bring positive impact on China’s growth outlook. Assuming US tariffs will be kept at the new effective rate of 47.6 per cent, this could potentially boost China GDP growth by 0.3ppt and help restore business confidence and investment demand. The trade truce provides much needed policy clarity for domestic and foreign businesses operating in China and across Asia, reducing uncertainty over supply chains stability that is essential for China’s growth outlook and Asia’s economic stability
• The reduction of the US fentanyl-related tariff on China from 20 per cent to 10 per cent will narrow the tariff advantages of Singapore, Japan, South Korea against China to 5 per cent-10 per cent from 15 per cent-20 per cent. The ASEAN economies will see their tariff advantages over China fading and potentially losing some of their US market gains. Indian exporters, who previously enjoyed a 5 per cent tariff advantage over China, are now at a substantial disadvantage given the 50 per centUS tariffs imposed on Indian products since late August
• We are mildly overweight on mainland China and Hong Kong equities and adopt a barbell strategy with preference for the domestically focused technology leaders which benefit from the rapid AI liftoff and high-quality companies that improve ROE by paying high dividends and increasing share buybacks. We stay neutral on the RMB with new forecasts of 7.05 for end-2025 and 6.95 for end-2026 against the USD