Chinese equities tanked on Monday as the market reacted to the escalating trade war between the United States and China. The Shanghai Composite Index fell by 6.25%, while the China A50 and the Hang Seng indices dropped by 5.20% and 10.2%, respectively.
This sell-off was a continuation of what happened last week. As a result, the Hang Seng has plunged by 17% from its highest point this year, while the Shanghai Composite and A50 have dropped by less than 10% from their highest levels this year.
Shanghai Composite, China A50, and Hang Seng indices
Chinese equity indices tanked as futures linked to the United States continued plunging. The Dow Jones Industrial Average futures fell by another 1,000 points, while those linked to the S&P 500 and Nasdaq 100 fell by 162 and 700 points, respectively.
These indices tanked after China reacted to Trump’s tariffs on Friday by implementing its reciprocal ones. The country will add a 34% tariff on all goods coming from the US and take other measures, including adding more companies to its entity list and restricting some rare earth minerals to the United States.
Chinese and American indices collapsed after Donald Trump and his officials remained adamant that this strategy will work out. In a statement on Truth Social, Trump said:
“We have massive Financial Deficits with China, the European Union, and many others. The only way this problem can be cured is with TARIFFS, which are now bringing Tens of Billions of Dollars into the U.S.A. They are already in effect, and a beautiful thing to behold.”
Chinese indices like the Shanghai Composite, Hang Seng, and China A50 accelerated as the market predicted that there would be a seismic recession in the coming months as trade flows wane.
Why Chinese stocks will bounce back
There is a key reason why the Chinese stocks, especially the Hang Seng Index may bounce back in the coming months. As we wrote here, many companies in the Hang Seng have little exposure to the United States.
For example, BYD stock price plunged by 18% on Monday even though the company does not sell its vehicles to the US. It sells most of its vehicles in China and other countries in the Southeast region.
The same case is true with Geely Automobile, which also plunged by over 18% on Monday. While some Geely brands sell vehicles in the US, many others does not. Other Hang Seng Index constituents that plunged on Monday like Sunny Optical, JD.com, Kuaishou Technology, Xinyi Solar, and Li Auto are mostly domestic groups.
The same is true with other large companies in the Shanghai Composite and China A50 indices like Kweichow Moutai, ICBC, Agriculture Bank of China, China Mobile, and China Constuction Bank. Most of these are domestic companies.
Potential catalyst for China stocks rally
There are two potential catalysts for the Hang Seng, China A50, Shanghai Composite, and other equities. First, Donald Trump may decide to cave in and end his tariffs, a move that would partially lead to a strong recovery of global stocks.
Second, the Federal Reserve may decide to intervene as it has done in the past black swan events. It may do that by cutting interest rates and even initiating quantitative easing policies.
While the Fed has resisted these measures, there is a likelihood that it will intervene since the market is demanding so.
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