Maybank says prediction markets are suggesting that a Trump-Xi meeting is ‘78% likely’ before the end of October
[SINGAPORE] Just as Asian markets shuttered at the end of last week, trade tensions between China and the US revved up again.
US President Donald Trump said that he would impose a fresh 100 per cent tariff on China. Set to go into effect from Nov 1, it will apply on top of existing levies and export controls on “any and all critical software”.
US tariffs on imports from China this year had reached a high of 145 per cent, leading to China retaliating with a 125 per cent tariffs on its imports of US goods. Both countries brought their tariffs down in May to 30 per cent and 10 per cent, respectively, before agreeing to a 90-day truce in August that has been extended twice.
Investors sold off in markets across the Asia-Pacific when trading resumed on Monday (Oct 13), though analysts broadly saw the latest flare-up as political posturing rather than a lasting escalation. Markets across Singapore, Hong Kong and China largely fell initially before paring some if not most of their losses later.
Markets, however, suffered a fresh bout of volatility on Tuesday as China sanctioned American entities of South Korean shipping giant Hanwha Ocean in a new riposte, as well as other tit-for-tat measures.
Here’s why the fragile trade peace between the US and China was breached, and what has been happening over the past week.
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How were rare earths the catalyst?
Beijing last week announced export controls on rare earths, an act that was dubbed “hostile” by Washington.
The term refers to 17 elements (such as neodymium and yttrium) that are essential for producing all manners of goods, from cars to aircraft engines, smartphones and data centres. China produces over 90 per cent of the global supply of processed rare earths and rare earth magnets, and now has export restrictions on 12 of them.
An earlier round of export controls in April caused shortages of rare earth magnets, forcing car manufacturers around the world to pause operations. This time, China said it would facilitate licence approvals, but will reject defence-related applications and closely scrutinise advanced semiconductor and some artificial intelligence applications.
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The controls sparked the US threat of additional 100 per cent tariffs, which would bring the total tariffs on Chinese goods to as high as 130 per cent.
“The relationship between the world’s two largest economies remains prone to sudden escalations, supporting our view that continued economic/trade clashes between the two superpowers are inevitable,” said Nomura analysts in a Monday note.
Morgan Stanley analysts on Monday also warned about supply chain disruptions and slower progress of localisation of rare earths and magnets production for economies outside of China as a result of the export restrictions.
What happened: tit-for-tat actions, export ban on Chinese chipmaker Nexperia
In response, Trump on Friday also hinted at retaliatory export controls on Boeing aircraft parts. There are nearly 1,900 Boeing aircraft in operation in China and talks to sell another 500 have been ongoing.
China’s market regulator on Friday also announced an anti-trust probe into Qualcomm’s recent acquisition of Israeli firm Autotalks, causing its shares to slide 5 per cent.
Tensions between China and Europe also grew after the Netherlands’ government took control of chipmaker Nexperia on Sunday and suspended its Chinese CEO, Zhang Xuezheng. The company manufactures computer chips for the car and consumer electronics industries. The Dutch cited “major shortcomings that could jeopardise security of supply” of the company’s chips to European factories.
The US had raised concerns about Zhang before Nexperia was taken over by the Dutch government, according to court papers.
In response, China banned Nexperia from exporting products it makes in the country, which may hinder Dutch efforts to retain access to the company’s chips.
With fears growing that the late October US-China trade talks in South Korea would be cancelled (stoked by Trump himself), US Treasury Secretary Scott Bessent said on Monday that the 100 per cent tariffs “do not have to happen” and the meeting is still on.
China’s Ministry of Commerce still piled on. On Tuesday, it said it was placing limits on five US entities of Hanwha Ocean, one of South Korea’s biggest shipbuilders, causing its shares to slide 8 per cent.
This followed tit-for-tat port fees on Chinese vessels docking in the US and on American-owned ships arriving in China going into effect on Tuesday. Shares of SGX-listed Chinese shipbuilder Yangzijiang Shipbuilding slid 4.3 per cent over the day’s trading.
China’s Ministry of Transport on Tuesday added that it was investigating the impacts from the US Trade Representative’s Section 301 probe into China’s maritime sector and may implement further retaliatory measures.
On Wednesday, Trump also railed against China’s suspension of US soybean purchases, saying that his government is considering “terminating business with China having to do with cooking oil”.
What does the volatility mean for investors?
Despite the continued escalation in trade tensions, DBS analysts on Wednesday said “investors are treating these headlines as noise for now”.
Investors are trading as if the economy is in a sweet spot (neither overheating nor weakening), but are keeping some safety positions in short-term US Treasuries, gold and small bets that volatility might pick up, said DBS’ Eugene Leow and Philip Wee.
“It appears that both the US and China believe that they can emerge victorious from a trade war at this point, which means that further escalations could be on the cards,” said a Maybank note on Wednesday.
The note added that prediction markets are suggesting that a Trump-Xi meeting is “78 per cent likely” before the end of October. Coupled with a US government shutdown that has hitherto been largely ignored by markets, Maybank concluded that “some volatility” is expected going forward.
Analysts on Monday broadly saw the latest flare-up as political posturing rather than a lasting escalation, and expect markets will likely stabilise in the medium to long-term. Most expect tensions to ease once the war of words cools, though they cautioned that decoupling could accelerate and more export front-loading could follow ahead of supply disruptions.
OCBC’s economists had said the key signals to watch include the final list of restricted rare earth exports and their licensing timelines, whether the US actually enforces the 100 per cent tariff on Nov 1 and the extent of China’s antitrust actions against US firms such as Qualcomm.
“Recent US-China developments have become more fluid, and (the) situation can worsen before improving,” said OCBC on Monday. “For Asia and Asean economies, this renewed tension is both a challenge and an opening.”
