Source: China International Capital Corporation Insight
Authors: Li Qiusuo, Miao Yanliang, and others.
Under the impact of "reciprocal tariffs," the Global trade system is facing a century of change, and there have also been significant fluctuations in Global asset prices. Although the recent tariff increases are bound to pose challenges to the economy of China, it is believed that compared to 2018 or the past three years, the China stock market possesses many favorable conditions, including changes in geopolitical narratives and Technology narratives, as well as the valuation advantages of Chinese assets and the room for macro policy efforts.
Overall, it is believed that China assets exhibit resilience in the short term compared to the global stock market, with medium-term opportunities greater than risks. If policy responses are appropriate, market risk premiums are expected to continue improving, and the "Re-evaluation of China Assets" is still underway. In terms of allocation, the focus is on stability in the short term, with low-volatility dividend stocks or relatively advantageous options, benefiting from domestic demand policies. The consumer and investment sectors also have trading opportunities in the short term due to policy implementation. In the medium term, the AI industry remains a significant mainline, and dips will bring layout opportunities. Furthermore, as policies for steady growth are further intensified and effective demand rebounds, the consumer sector is expected to gradually welcome a trending market.
Under the impact of "reciprocal tariffs," the global trade system is facing a century of changes. On April 2, U.S. time, Trump’s "reciprocal tariffs" were implemented, introducing a comprehensive "carpet" tariff and a "one country, one tax rate" style of tariffs covering over 60 economies. The scope and extent of these tariffs greatly exceed previous market expectations. If tariffs are fully implemented, the effective tariff rate in the U.S. will surpass the tariff levels in the U.S. after the 1930 Smoot-Hawley Tariff Act (Chart 1). This indicates that the global trade system formed over the past few decades will be significantly impacted, with profound long-term effects on the global economy, leading to substantial fluctuations in global asset prices.
Chart 1: The effective tariff rate in the USA will rise sharply.
Following the tariff impact, global assets exhibit significant volatility, with China assets showing resilience.
Global assets are experiencing significant fluctuations, and under uncertainty, the aftermath remains unsettled. On April 2, USA time, after Trump announced expectations-exceeding "reciprocal tariffs," recession trades heated up, US Treasury bonds surged, and global risk assets suffered heavy setbacks. US stocks were the hardest hit among major global economies, with the Nasdaq and S&P 500 experiencing two consecutive days of declines, with cumulative drops of 11.4% and 10.5% respectively. The VIX reached its highest point since the COVID-19 pandemic in 2020, and European and Asia-Pacific stock markets also experienced notable corrections; Commodity prices also fell sharply, with copper and Brent crude oil both plummeting more than 10% over two days, hitting new lows for nearly one and three years respectively, and after a prior surge, Gold also saw profit-taking following expectation adjustments.
Characteristics of this round of asset fluctuations: US assets weakened, while Chinese assets displayed resilience. We notice two departures from previous rounds of global asset fluctuations: firstly, in past instances where the USA levied tariffs on other economies, funds typically flowed out of those economies, with US stocks outperforming globally. However, this time, with the USA imposing tariffs globally, US stocks led the decline, and the US dollar also saw a marked drop, which may reflect multiple layers of meaning.
Firstly, as a deficit country, significant tariff increases pose a large supply shock for the USA, raising the risk of "stagflation."
Secondly, the extent of the tariff increases surpassed most prior market expectations, and the future trajectory carries high uncertainty, representing an uncertainty shock.
Lastly, the previously extremely low risk premium in US stocks implied overly optimistic expectations. Tariffs have significant impacts on the fundamentals of the USA, the global trade system, and even the rules governing goods and capital flows, thus representing a risk premium shock as well. Moreover, the decline of the US dollar and the leading drop in US stocks may reflect the choice of global funds to flow out of the US market.
The second difference is the resilience of Chinese assets. After the USA announced "reciprocal tariffs," the SSE Composite Index and Csi 300 Index experienced slight fluctuations, with declines of only -0.2% and -0.6%, respectively, significantly lower than other major markets. Furthermore, from the beginning of the year to date, the Chinese stock market, especially the Hang Seng China Enterprises Index, has led in performance globally, while US stocks have seen the largest declines (Chart 2). This may suggest that under unprecedented tariff policy shocks, the global valuation system may be undergoing changes, with global funds repositioning based on progress in geopolitical reassessments.
Chart 2: Performance of major asset classes globally since 2025: Chinese stocks exhibit resilience, while US stocks lead global declines.
The impact of this tariff shock has surpassed that of 2018-2019, and the global economy still faces considerable uncertainty.
This round of additional tariffs from the USA not only targets China but has a global impact.
In addition to the USA implementing a blanket 10% tariff on all imported goods, certain countries and regions will face higher tax rates. Currently, the specific detailed tariff rates have not yet been released on the White House's official website, but from Trump's statements, economies with higher reciprocal tax rates include the EU (20%), Japan (24%), South Korea (25%), mainland China and Hong Kong and Macau (34%), Taiwan (32%), India (26%), Thailand (36%), and Vietnam (46%). The China International Capital Corporation macro team estimates that if these tariffs are fully implemented, the effective tariff rate in the USA will surge from 2.4% in 2024 by 22.7 percentage points to 25.1%, which will exceed the USA's tariff level after the implementation of the Smoot-Hawley Tariff Act in 1930.
The uncertainty regarding tariffs remains significant, making it difficult for asset prices to stabilize quickly in the short term. First, the scope and magnitude of reciprocal tariffs are extensive, and it is believed they will have a significant impact on the economy of the USA and even globally. The reactions of various countries after the implementation of tariffs are also critically important. For example, on April 4th, Beijing time, the State Council Tariff Commission announced that starting April 10th, a 34% tariff will be imposed on all imported goods originating from the USA. The Ministry of Commerce announced that 16 American entities will be included in the export control list and 11 American companies will be added to the unreliable entity list.
This indicates an escalation in trade friction, putting downward pressure on the global economy. Secondly, after imposing reciprocal tariffs, attention should be paid to whether additional tariffs will be imposed on Semiconductors, medical products, timber, Copper, and other commodities, as well as the future policy uncertainties regarding Mexico and Canada, which obtained tariff exemptions this time. Finally, the duration of the reciprocal tariffs and the potential for changes through negotiations imply that short-term fluctuations in global asset prices are unlikely to stabilize quickly.
The implications of the tariff policy differ for China, the USA, and the global economy. Imposing additional tariffs has varying effects on trade surplus and deficit countries. As a deficit country, the USA will face rising costs and increased inflation pressure due to additional tariffs. Moreover, tariffs fundamentally increase government revenue, leading to cost burdens on businesses and consumers, equating to fiscal tightening and downward pressure on the economy. Hence, it is believed that the USA faces "stagflation" pressure, putting the Federal Reserve in a dilemma.
The China International Capital Corporation macro team estimates that the combination of reciprocal tariffs on top of the existing tariffs may push up US PCE inflation by 1.9 percentage points, increase US fiscal revenue by $737.4 billion, and reduce US real GDP growth rate by 1.3 percentage points. China, as a surplus country, will face external demand pressure due to the additional tariffs, primarily facing insufficient demand, posing certain challenges for the economy. However, China's policy response direction is clearer, with an emphasis on supporting domestic demand as a relatively straightforward policy option.
For other global economies, such extensive tariff shocks will inherently damage global demand, particularly for smaller, export-oriented economies in Southeast Asia, which will be significantly more impacted. Moreover, if the economy of the USA declines or even enters recession, it will also present substantial challenges for other global economies.
The environment in the Chinese market is relatively favorable, and assets are expected to have relative resilience, with the "reassessment of Chinese assets" still ongoing.
Based on the experience of trade friction from 2018 to 2019, market performance in the medium term is determined by domestic economic fundamentals and policy responses. In 2018, the USA began to implement tariffs on China, coupled with domestic financial deleveraging and external shocks along with internal contractionary policies, which led to a weak overall performance of A-shares and Hong Kong stocks; however, in 2019, as the scope of tariffs increased and rates were significantly raised, the market regained upward momentum from 2019 to 2020 (Charts 3 and 4).
The core reason lies in the fact that the tight credit policy for domestic deleveraging ended in 2019, and macro policies shifted to being accommodative, supporting a new round of credit expansion. The depreciation of the renminbi also somewhat offset the impacts of tariffs, while domestic economic fundamentals entered a new recovery cycle. Moreover, structurally, although sectors with high export shares such as home appliances, light industry, electronics, and machinery faced pressure after the introduction of trade policies, new industry trends such as rapid penetration of 5G communications, accelerated domestic substitution in semiconductors, and the rise of new energy vehicles injected new vitality into the domestic economy.
Chart 3: The performance of the A-share market and exports to the USA before and after the implementation of Trump's trade policy from 2017 to 2019.
Chart 4: The rise and fall of various sectors in the A-share market following Trump's trade policy from 2017 to 2019 (unit: %).
Objectively speaking, while the recent tariff increases may inevitably pose challenges to China's economy, it is believed that compared to 2018 or the past three years, the Chinese stock market has more favorable conditions, including changes in geopolitical narratives and technology narratives, as well as the valuation advantages of Chinese assets and the space for macro policy to act. Overall, it is believed that the Chinese stock market will still have relative resilience in the short to medium term, and the "reassessment of Chinese assets" is still ongoing, with the specific logic as follows:
1) Changes in geopolitical narratives have led to a reallocation of global funds. In the past two years, the AI revolution, large-scale fiscal measures, and global capital inflows have created a positive cycle, driving up the U.S. stock market. Meanwhile, after the Russia-Ukraine conflict, the narrative of "de-globalization" has become popular, with major global economies presenting a camp-like division, becoming the primary reason for capital outflows from the Chinese market.
According to the latest data, the proportion of China’s market in global actively managed funds has decreased from 14.6% at the beginning of 2021 to a minimum of 5% in 2024, continuously underweight compared to passive funds by about 1 percentage point for two consecutive years. In terms of shareholding ratio, overseas funds' share of the free-floating market value of A-shares has dropped from a peak of 10% in 2021 to about 7.5% currently (charts 5, 6). However, after Trump was elected, recent large tariff increases, strengthened deportation of illegal immigrants, and DOGE budget cuts have brought about a tightening effect on the U.S. economy (chart 7), and the U.S. economy faces stagflation risks. The uncertainty index for U.S. and global economic policies has surged, reaching a new high since 2021 (chart 9).
Trump's policy mix has triggered a reassessment of the overly optimistic outlook for the U.S. economy globally. In the face of the current "certain uncertainty" in the U.S., global investors have been forced to begin a new round of "geopolitical re-evaluation." The recent tariff increases did not lead to a rise in the dollar, but rather a drop. This anomaly may reflect the fact that global capital no longer views the dollar as a safe-haven currency, increasing pressure for capital outflows from the U.S. market, while recent non-U.S. markets have attracted capital inflow. Whether "long money" from foreign capital will flow back to China after reallocation depends on the repair of domestic fundamentals, but it also means that the potential for foreign capital inflows into the Chinese market is gradually emerging. From the perspective of the low correlation between the Chinese and U.S. stock markets in recent years, Chinese assets have risk diversification value for global funds (chart 8).
Chart 5: Since 2022, overseas actively managed funds have continuously underweighted Chinese assets, currently underweight by 1.2 percentage points.
Chart 6: Foreign ownership of A-shares has decreased from 10% in 2021 to the current 7.5%.
Chart 7: Overview of tariff policies since Trump took office.
Chart 8: The correlation of assets between China and foreign countries has decreased, and Chinese assets provide risk diversification value.
Chart 9: The uncertainty index of economic policies in the USA and globally has risen significantly.
2) Changes in the technology narrative allow the market to reassess China's innovation potential. DeepSeek has become the fastest app to reach 0.1 billion users in history (Chart 10), symbolizing "breaking the Western technological monopoly" with three unexpected advantages: low cost, high performance, and open source, promoting technological equality and providing free trials of products to help individuals and enterprises reduce costs and increase efficiency.
More importantly, breakthroughs in AI have allowed the market to reassess China's technological innovation potential. An increasing number of top global AI talents are choosing to work in China, and China leads the world in the number of patents in generative AI. The AI development index constructed by China International Capital Corporation in "AI Economics" shows that China's overall level of AI development is second only to the USA, and it has richer application scenarios than the USA, possessing outstanding potential in application aspects (Chart 11).
In addition, China's achievements in green transformation are evident. Breakthroughs in advanced process chips are gradually being achieved, and the manufacturing industry has significantly improved its global competitiveness. From the smart phone industry chain to the new energy vehicle industry chain, Chinese manufacturing continues to evolve into the center of the global industry chain due to its large market and economies of scale (Charts 12, 13). This series of technological breakthroughs, combined with the disintegration of the "American exceptionalism" narrative, means that the market needs to reassess the innovation potential and global competitiveness of Chinese technology companies.
Figure 10: DeepSeek, with its advantages of being open-source, low-cost, and high efficiency, has become the fastest-growing app in history.
Figure 11: China's overall AI development level is second only to the USA, and it has more diverse application scenarios than the USA, possessing outstanding potential in application aspects.
Figure 12: The added value of China's manufacturing industry and its global share.
Figure 13: The export scale of industrial intermediate products as a proportion of the global total.
A-shares and Hong Kong stocks are at historically low levels and possess attractiveness, while US stock valuations imply overly optimistic expectations. As of April 4, the dynamic PE of the CSI 300 Index is only 11.3 times, significantly lower than the historical average (12.6 times since 2005). The current valuation of A-shares has partially recovered from the extreme position at the end of September last year but still has room for further upward adjustment.
The dynamic valuation of the Hang Seng China Enterprises Index is below 10 times, even lower than the CSI 300 Index, and also below its historical average. From the perspective of equity risk premium, the equity risk premium of the CSI 300 has decreased from the near 10-year high of 7% after '924,' rebounding to 6.5% at the beginning of the year (above the historical average by one standard deviation).$Hang Seng Index (800000.HK)$From the perspective of domestic capital (using the 10-year government bond yield as the risk-free rate), the equity risk premium is as high as 10%, significantly higher than past averages. In contrast, the equity risk premium of the S&P 500 was at one point lower than zero at the beginning of the year, indicating that the market believes stock yields do not require additional risk premium compared to government bond yields, reflecting extremely optimistic expectations, which sharply contrasts with the higher risk premium of Chinese stocks.
On a structural level, the market is re-evaluating China’s innovative potential in AI, and the valuations of leading Chinese technology companies still need to align with the trends in AI development. Overall, it is believed that the expectations for global economic development are changing, and the valuation system will inevitably face reconstruction. Currently, Chinese stock valuations are at historical lows, while US stock valuations still imply a lot of optimistic expectations. During the global capital reallocation process, valuations are relatively favorable for the Chinese stock market.
Chart 14: The equity risk premiums of A-shares and US stocks have converged from extreme levels.
Chart 15: There is serious undervaluation of Chinese technology giants compared to US stocks, which has recently narrowed.
Chart 16: Chinese Technology Stocks Previously Undervalued AI Outlook.
Note: Due to industry classification reasons, US technology stocks refer to the Magnificent 7, while China's refers to the 10 Technology Giants ( $TENCENT (00700.HK)$ 、 $Alibaba-W (09988.HK)$ 、 $MEITUAN-W(03690.HK)$ 、 $Baidu Group-SW (09888.HK)$ 、$Semiconductor Manufacturing International Corporation (00981.HK)$、 $XIAOMI-W(01810.HK)$ 、 $JD-SW(09618.HK)$ 、$BYD Company Limited (01211.HK)$、$Geely(00175.HK)$、 $NTES-S(09999.HK)$ The remaining economies use MSCI information technology; time until December 31, 2024.
China has significant room for counter-cyclical policy. If it can effectively address the issue of insufficient demand, it will provide positive support for asset prices. The impact of increased tariffs varies between countries with trade surpluses and those with deficits. The USA faces pressure from "stagflation," and the environment of insufficient demand in China is further under pressure. The effects of macro policies in responding to "stagflation" and insufficient demand differ. A "stagflation" environment in the USA implies a slowdown or even recession, creating policy dilemmas. However, China's policy direction in addressing effective demand deficiency is more clear.
Some investors compare the impact of trade friction on the global economy with that of the 1930s, when countries retaliated against each other by imposing tariffs, which is considered one of the significant reasons for the prolonged depression following the stock market crash in the USA in 1929. However, there are important differences between now and the 1930s. The current domestic macro policy framework has stood the test of time, and as long as China's macro policies can effectively address the issue of insufficient demand, there is no need to be pessimistic about the performance of risky assets.
On one hand, having gone through previous trade friction experiences, we expect the current government response to be more targeted. The dependency on exports to the USA is also lower than in the past, and the substantial measures taken over the past three years to manage the Real Estate and local government debt issues have created good conditions for current policy space.
On the other hand, there has been a positive shift in China's macro policies. After September 24th of last year, the policies have become more proactive, demonstrating decision-making capability to the market. The government work report during the two sessions also clearly stated, "Policies should be implemented as early as possible, prioritizing speed over delays to compete with various uncertainties." Therefore, we believe that unexpected external risks will compel domestic counter-cyclical policies to be more robust. Moreover, the central economic work conference at the end of last year and this year's government work report placed "actively boosting consumption and improving investment efficiency, comprehensively expanding domestic demand" at the top of the work tasks for 2025.
This indicates that our policy framework emphasizes a shift from a past focus on supply to demand. In the face of external demand uncertainties, policies stabilizing domestic demand are expected to gain further traction, which will be key to maintaining the risk premium in China's market.
The market shows short-term resilience, with medium-term opportunities outweighing risks. The short-term allocation should prioritize stability, while technology remains the medium-term focus. Overall, although uncertainties surrounding short-term tariff policies and the contagiousness of global market fluctuations may cause volatility in Chinese assets, the expected impact is lower than that on other major markets, allowing Chinese assets to demonstrate resilience compared to the global stock market in the short term.
In the medium term, shifts in geopolitical narratives and technology narratives are improving market expectations and facilitating the reallocation of global capital. Coupled with the valuation advantages of the Chinese market, there is significant room for policy responses, which are expected to strengthen. If policies are implemented effectively, market risk premiums should continue to improve, and the "re-evaluation of Chinese assets" is still in progress. In terms of allocation, given the volatility in the short-term environment, stability should be prioritized, with low-volatility dividend stocks likely to have a relative advantage, and sectors benefiting from domestic demand policies could also present trading opportunities.
From a medium-term perspective, the performance of growth industries will depend on the industry's prosperity and profit cycles. The breakthrough by DeepSeek provides conditions for the development of AI application scenarios. The current high prosperity of the AI industry may still be in its early stages, with expectations that infrastructure from computing power and Cloud Computing to applications gradually manifest profits. This remains an important medium-term focus with opportunities for positioning during any corrections. With further strengthening of policies aimed at maintaining growth and a rebound in effective demand, the consumption sector is expected to gradually usher in a trend market.
Editor/rice
