Chinese equities tumbled and bond futures climbed as investors grew jittery over the prospect of a revived trade war between Beijing and Washington. The offshore yuan rebounded as the central bank set a strong fixing.
The Hang Seng China Enterprises Index slumped as much as 2.4% on Monday, with tech heavyweights Alibaba Group Holding Ltd. and Tencent Holdings Ltd. among the biggest drags. The CSI 300 Index, a benchmark for mainland shares, fell as much as 2.7% before halving its drop. The People’s Bank of China boosted its daily reference rate to 7.1007 per dollar, the strongest level since November, signaling its intent to keep the yuan steady.
Monday’s setback follows a sharp rally in Chinese equities this year, as investors shrugged off trade frictions and bought into the country’s tech prowess and Beijing’s ability to support the economy. President Donald Trump’s threat to slap an additional 100% tariffs on Chinese goods, in response to Beijing’s export controls on critical minerals, served as a stark reminder of the fragility of any trade truce.
Markets recoiled despite weekend signals from the White House that it’s open to a deal. Goldman Sachs Group Inc. economists warned of a “wider range of outcomes” stemming from the stand-off — from greater concessions and possibly lower tariffs to the risk of substantial new export restrictions and steeper tariffs.
The renewed tensions may cause volatility in major China-related indexes in October, Citigroup Inc. analysts including Pierre Lau wrote in a note. Those with a greater proportion of profits from US exports — including tech hardware, solar equipment, and semiconductors — might be among the most vulnerable sectors, they said.
A lasting deterioration of ties between the two largest economies could imperil one of the world’s best performing stock markets this year, as well as renew doubt over China’s investability.
The Hang Seng China gauge has climbed nearly 30% in 2025 through Friday as Chinese equities benefited from the trade truce with the US in addition to optimism over the country’s growing heft in artificial intelligence. Alibaba Group Holding Ltd. has surged more than 100%, with Tencent Holdings Ltd. up almost 60%.
In the currency market, the offshore yuan advanced as much as 0.2%, erasing its losses from Friday. China’s bond futures surged amid risk-off sentiment, with the 30-year contracts jumping as much as 0.7%, the most since August.
Some investors may see the retreat as an opportunity to add Chinese holdings after missing out on this year’s massive rally.
The latest tit-for-tat between US and China will cause quick downward pressure on Chinese stocks, but the short term decline is a “good opportunity to increase allocation if one doesn’t have enough of China in portfolio,” said Francis Tan, Asia chief strategist at Indosuez Wealth in Singapore. A correction would be healthy for Chinese equities given the strong gains so far this year, he said.
The main focus of negotiations between Beijing and Washington centers around export controls. The US is limiting shipments of semiconductors and AI chips needed by China, while China is curbing exports of critical materials and magnets wanted by the US.
Also on investors’ minds will be a closed-door meeting convened by the Chinese Communist Party from Oct. 20-23 to review development plans for the next five years. After the summer ended with two of the weakest months for retail sales this year, preliminary figures showed consumer demand cooling further during the eight-day Golden Week that started Oct. 1, suggesting still-lackluster sentiment despite a bull run in equities.
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