(Bloomberg) -- Donald Trump’s additional 10% tariffs on Chinese goods again brought geopolitical risks to the forefront of investors’ mind, prompting the biggest selloff in Chinese stocks in months.
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An index of mainland shares listed in Hong Kong slid 3.6%, the most since Oct. 15, while the onshore benchmark CSI 300 Index dropped 2%. The yuan was little changed after the central bank set a stronger-than-forecast daily reference rate for the currency in an apparent signal of support.
Friday’s slide in Chinese shares at least temporarily halts this year’s rally that’s been driven by optimism over the country’s artificial-intelligence capabilities and speculation Trump’s tariff threats were mostly negotiating tactics. The latest levies announced by the President on Thursday appear something of a wake-up call that investor sentiment may have become too positive.
“The extra 10% is frustrating because it keeps uncertainty alive and reinforces the risk that this becomes a pattern,” said Billy Leung, an investment strategist at Global X ETFs in Sydney. “Markets were already fatigued and tired by tariff talk, and now investors are being forced to reassess.”
China threatened to hit back at Trump’s trade threats with a spokesperson for the Ministry of Commerce saying the country “will counter with all necessary measures to defend its legitimate rights and interests.”
In addition to the tariff headlines, investors are also focusing their attention on China’s legislative session that’s scheduled to kick off next week. The annual gathering known as the National People’s Congress is where policymakers typically unveil key economic goals including the growth target.
“We expect the NPC to announce an increase in government spending to help counteract the impact of higher tariffs on the US’s imports from China,” said Kristina Clifton, senior economist at Commonwealth Bank of Australia in Sydney. “An unexpectedly large increase would strengthen the Aussie, kiwi and offshore yuan.”
Pullback Needed
Even with Friday’s swoon, the Hang Seng China Enterprises Index gained 14% in February, mainly powered by optimism over the new AI model from DeepSeek, making it the best-performing global gauges. The CSI 300 Index ended the month up 1.9%.
Some analysts remain optimistic, saying a pullback in this year’s rally is healthy and a pause is necessary before it can resume.
There’s likely to be “a near-term correction instead of a big retreat, as the tariff hike won’t directly hit the development of the domestic AI sector,” said Jason Chan, a senior investment strategist at Bank of East Asia Ltd. in Hong Kong. “The market, in general, expects trade talks will be held before a new round of tariff hikes occurs, but Trump’s latest announcement may give a surprise.”
The yuan was little changed at 7.2871 per dollar in onshore trading after earlier strengthening as much as 0.1%. That was after the People’s Bank of China set its so-called daily fixing for the tight-controlled currency at 7.1738, stronger than the average estimate in a Bloombeg survey of market participants.
“The China reaction so far has been so measured as they position for negotiations and we don’t expect the FX to be the tool to counter tariffs,” said Eddie Cheung, senior emerging market strategist at Credit Agricole CIB in Hong Kong. “That said, significant US tariffs on China exports is supportive of higher USD/CNY.”
The PBOC has set a string of fixings at levels stronger than 7.2 per dollar since late January, signaling its preference for a stable currency. Central bank Governor Pan Gongsheng said this month a steady yuan has contributed to the stability of global financial markets and economies around the world amid broad dollar strength.
Chinese government bonds gained as the latest tariff threat boosted demand for their haven properties. The benchmark 10-year yield dropped three basis points to 1.77%.
While additional US tariff hikes may do more economic damage that the original ones, their impact on the fundamentals of China’s listed firms may be relatively limited, according to Bloomberg Intelligence.
“With US exports accounting for about 20% of overall China exports, MSCI China’s US revenue exposure is likely a low single-digit percentage of overall MSCI China revenue,” analysts including Marvin Chen wrote in a research note.
--With assistance from Wenjin Lv.
