Chinese equities slumped and bond futures climbed as investors grew jittery over the prospect of a revived trade war between Beijing and Washington.
The Hang Seng China Enterprises Index fell 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, dropped as much as 2.7% before halving its drop. The People’s Bank of China boosted its daily reference rate to its strongest since November, signalling its intent to keep the yuan steady.
The 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.
The extent of the decline was less severe than the 6.1% slump in the Nasdaq Golden Dragon China Index on Friday. Some investors appear to be using the selloff to buy the dip amid expectations that the worst may be avoided following weekend signals from the White House that it’s open to a deal.
“Markets should brace for near-term volatility from the tariff headlines, but China’s diversified export base and swift policy response mean the broader impact on the economy and markets is contained,” said Dilin Wu, a strategist at Pepperstone Group. “Traders may see this as a short-term shock rather than a structural threat.”
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 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. Tech stocks in particular were on a tear, with Alibaba’s share prices more than doubling this year.
In the currency market, the offshore yuan advanced as much as 0.2%, erasing its losses from Friday. The central bank set the yuan fixing at 7.1007 per dollar on Monday, above estimates in a Bloomberg survey. China’s bond futures advanced amid risk-off sentiment, with the 30-year contracts jumping as much as 0.7%, the most since August.
The fixing “is a strong signal that despite President Trump’s threat of 100% tariffs against China, the PBOC will not allow the yuan to depreciate and intends to maintain exchange rate stability,” said Khoon Goh, head of Asia research at ANZ in Singapore. “This should help to calm the broader Asian FX markets today.”
Some market watchers say any downward pressure would be cushioned by investors eager to jump in after missing out on this year’s rally.
The latest tit-for-tat between the 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, Tan said.
The main focus of negotiations between Beijing and Washington centres 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-lacklustre sentiment despite a bull run in equities.
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