China’s stock market and currency faced initial pressure as trading resumed following a week-long Lunar New Year break. Investors returned to fresh trade tensions with the United States, while volatility in the global artificial intelligence (AI) sector added to market uncertainty.
Despite concerns over trade friction, the newly imposed 10% tariffs from U.S. President Donald Trump have been relatively modest compared to initial expectations. This relief was evident in Hong Kong, where Chinese stocks posted a strong rally earlier in the week.
Investors seem to have largely priced in the tariffs, with China’s CSI 300 and Shanghai Composite slipping just 0.2%. According to Kaiyuan Securities analyst Wei Jixing, the market appears to be looking beyond the short-term trade dispute:
“China’s market will likely overlook the tariff disruptions, as DeepSeek is repairing risk appetite, while investors look forward to more proactive domestic policies.”
Optimism surrounding China’s AI sector has helped cushion market sentiment. DeepSeek, a low-cost Chinese AI model, stunned investors last week, leading to renewed enthusiasm for tech stocks. AI-related equities in China have outperformed, offering a counterbalance to broader trade-related concerns.
China’s central bank set the yuan midpoint at 7.1693 per dollar, its strongest level since November 8, 2024. This move signaled Beijing’s reluctance to devalue the yuan in retaliation to U.S. tariffs. Historically, China has allowed currency depreciation to offset tariff impacts, but the latest fix suggests a more measured approach in trade negotiations.
Mainland stocks took cues from Hong Kong, where Chinese equities rallied strongly despite the latest tariff imposition. Investors are now closely watching Beijing’s next policy moves, with expectations of further stimulus or regulatory easing to sustain market confidence.
While U.S.-China trade tensions remain a key factor, market participants are increasingly focused on China’s domestic policies. With AI innovation fueling optimism and the government’s potential intervention on the horizon, investors appear cautiously optimistic about the broader market outlook.
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