Institutional Interpretation: The Impact of the U.S. "Reciprocal Tariffs" on Chinese Assets

Under the impact of "reciprocal tariffs," the global trade system is facing a century-long change, and global asset prices have also experienced significant fluctuations. Although the new tariffs will inevitably pose challenges to the Chinese economy, we believe that compared to 2018 or the past three years, the Chinese stock market has many favorable conditions, including changes in geopolitical narratives and technological narratives, as well as the valuation advantages of Chinese assets themselves and the space for macro policy efforts.

Overall, we believe that Chinese assets have resilience in the short term compared to global stock markets, with mid-term opportunities outweighing risks. If policy responses are appropriate, market risk premiums are expected to continue to improve, and the "revaluation of Chinese assets" is still ongoing. In terms of allocation, the short-term focus should be on stability, with low-volatility dividend stocks relatively favored. The consumer and investment sectors benefiting from domestic demand policies also have trading opportunities in the short term. In the mid-term dimension, the AI industry remains an important mainline, and pullbacks will present layout opportunities. Additionally, with further strengthening of stable growth policies and a rebound in effective demand, the consumer sector is expected to gradually welcome a trend-driven market.

Under the impact of "reciprocal tariffs," the global trade system is facing a century-long change. On April 2nd, U.S. time, Trump’s "reciprocal tariffs" were implemented, with the policy adopting a comprehensive "carpet-style" tariff and a country-specific tariff with "one country, one tax rate," covering over 60 economies. The scope and magnitude of this tariff increase far exceeded previous market expectations. If the tariffs are fully implemented, the effective tariff rate in the U.S. will exceed the tariff levels in the U.S. after the implementation of the Smoot-Hawley Tariff Act in 1930 (Chart 1). This means that the global trade system formed over the past few decades will be significantly affected, with profound long-term impacts on the global economy, and global asset prices have also experienced significant fluctuations.

Chart 1: U.S. effective tariff rate will rise significantly

Note: 1900-1918 and 2024 are U.S. government fiscal years, 1919-2023 are calendar years, and 2025 is estimated by the CICC macro team.

Global assets show significant volatility after tariff shocks, while Chinese assets demonstrate resilience

Global assets show significant volatility, with uncertainty lingering. After Trump announced the unexpected "reciprocal tariffs" on April 2nd, recession trades heated up, U.S. Treasury bonds surged, and global risk assets faced severe setbacks. U.S. stocks experienced the largest declines among major global economies, with the Nasdaq/S&P 500 falling for two consecutive days, with cumulative declines of 11.4%/10.5%, and the VIX reaching its highest level since the pandemic in 2020. European and Asia-Pacific stock markets also experienced significant corrections; commodity prices also plummeted, with copper and Brent crude oil both falling over 10% cumulatively in two days, reaching new lows for nearly one year and nearly three years, respectively. After a previous surge, gold also saw profit-taking following expectations being realized.

Characteristics of this round of asset volatility: U.S. assets weaken, while Chinese assets show resilience. We have noticed two distinct aspects of this round of global asset volatility: **First, in the past, when the U.S. imposed tariffs on other economies, funds typically withdrew from those economies, and U.S. stocks performed better than global stocks. However, this time, as the U.S. imposed tariffs globally, U.S. stocks led the global decline, and the dollar also experienced a significant drop, which may reflect multiple layers of meaning **

First, as a deficit country, the significant increase in tariffs represents a substantial supply shock for the United States, raising the risk of "stagflation";

Second, the extent of the tariff increase exceeds most market expectations, and the future trajectory is highly uncertain, representing an uncertainty shock;

Finally, the previously extremely low risk premium in the U.S. stock market implied overly optimistic expectations. Tariffs will have a significant impact on the U.S. fundamental outlook, the global trading system, and even the rules of goods and capital flows, making this a risk premium shock. Moreover, the decline of the U.S. dollar and the leading drop in U.S. stocks may also reflect a global capital shift away from the U.S. market.

The second difference is the resilience of Chinese assets. After the U.S. announced "reciprocal tariffs," the Shanghai Composite Index / CSI 300 fluctuated slightly, with declines of only -0.2%/-0.6%, significantly lower than other major markets; and from the performance since the beginning of the year, the Chinese stock market, especially the Hang Seng China Enterprises Index, has outperformed globally, while U.S. stocks have seen the largest declines (Chart 2). This may indicate that under the unprecedented shock of tariff policies, the global valuation system may be undergoing a new change, with global capital repositioning based on geopolitical reassessment progress.

Chart 2: Performance of Major Asset Classes Globally Since 2025: Chinese Stocks Show Resilience, U.S. Stocks Lead Global Declines

Source: Wind, CICC Research Department; Note: As of April 3

The Impact of This Tariff Shock Exceeds That of 2018-2019, and the Global Economy Still Faces Significant Uncertainty

This round of U.S. tariff increases is not only aimed at China but affects the globe. The characteristic of this U.S. tariff policy is that it is not solely directed at China but involves major countries and regions worldwide.

In addition to the U.S. imposing a basic 10% blanket tariff on all imported goods, some countries and regions will face higher rates. Currently, the specific appendix details of the tariff rates have not been published on the White House's official website, but based on Trump's statements, economies with higher reciprocal rates include the European Union (20%), Japan (24%), South Korea (25%), mainland China and Hong Kong/Macau (34%), Taiwan (32%), India (26%), Thailand (36%), and Vietnam (46%). The CICC macro team estimates that if these tariffs are fully implemented, the effective tariff rate in the U.S. will rise significantly from 2.4% in 2024 by 22.7 percentage points to 25.1%, exceeding the tariff levels in the U.S. after the implementation of the Smoot-Hawley Tariff Act in 1930.

The uncertainty surrounding tariffs remains high, and short-term fluctuations in asset prices are unlikely to settle quickly. First, the scope and magnitude of the reciprocal tariffs are broad, and we believe they will have a significant impact on the U.S. and even the global economy. How countries will respond after the implementation of tariffs is also crucial. For example, on April 4, Beijing time, the State Council Tariff Commission announced a 34% tariff on all imported goods originating from the U.S. starting April 10, and the Ministry of Commerce announced that 16 U.S. entities would be placed on an export control list, with 11 U.S. companies added to an unreliable entity list This means that trade frictions have further escalated, putting downward pressure on the global economy. Secondly, after the reciprocal tariffs, attention should also be paid to whether additional tariffs will be imposed on commodities such as semiconductors, medical products, timber, and copper, as well as the future policy uncertainties for Mexico and Canada, which have received tariff exemptions this time. Finally, the duration of the reciprocal tariffs and the possibility of changes through negotiations in the future all indicate that short-term fluctuations in global asset prices are unlikely to settle quickly.

The implications of tariff policies differ for China, the U.S., and the global economy. The impact of increased tariffs varies between trade surplus and deficit countries. As a deficit country, the U.S. faces rising costs for businesses and residents due to increased tariffs, leading to greater inflationary pressure. Moreover, tariffs essentially represent an increase in government revenue, with businesses and consumers bearing the costs, which is equivalent to fiscal tightening, putting downward pressure on the economy. Therefore, we believe the U.S. faces "stagflation" pressure, placing the Federal Reserve in a dilemma.

The China International Capital Corporation (CICC) macro team estimates that based on previous tariffs, the addition of reciprocal tariffs could raise U.S. PCE inflation by 1.9 percentage points, increase U.S. fiscal revenue by $737.4 billion, and reduce U.S. real GDP growth by 1.3 percentage points. As a surplus country, China faces external demand pressure due to increased tariffs, primarily dealing with insufficient demand, which may pose certain challenges for the economy. However, China's policy response direction is clearer, with policy efforts to support expanding domestic demand becoming a relatively intuitive policy option.

For other global economies, such a wide-ranging tariff shock will damage global demand, especially for small export-oriented economies in Southeast Asia, which will face even greater impacts. Furthermore, if the U.S. economy experiences a downturn or even recession, other global economies will inevitably face significant challenges.

The environment for the Chinese market is relatively favorable, and assets are expected to exhibit relative resilience; the "revaluation of Chinese assets" is still ongoing.

Drawing from the experience of the trade frictions in 2018-2019, market performance in the medium term is determined by domestic economic fundamentals and policy responses. In 2018, the U.S. began implementing increased tariffs on China, coupled with domestic financial deleveraging and external shocks combined with internal contractionary policies, leading to weak overall performance in the A-shares and Hong Kong stocks. However, in 2019, as the scope of U.S. tariffs expanded and rates significantly increased, the market rebounded from 2019 to 2020 (Charts 3 and 4).

The core reason lies in the end of tight credit policies for domestic deleveraging in 2019, with macro policies shifting to accommodative measures supporting a new round of credit expansion. The depreciation of the RMB also partially offset the impact of tariffs, leading the domestic economy into a new recovery cycle. Moreover, structurally, although industries with high export ratios such as home appliances, light industry, electronics, and machinery faced pressure after the trade policies were implemented, new industrial trends such as rapid penetration of 5G communication, accelerated domestic substitution in semiconductors, and the rise of new energy vehicles injected new vitality into the domestic economy.

Chart 3: A-share market performance and exports to the U.S. before and after the announcement of Trump's trade policies from 2017 to 2019

Source: Wind, CICC Research Department

Chart 4: A-share sector performance from 2017 to 2019 after Trump's trade policy (unit: %)

Source: Wind, CICC Research Department

Objectively speaking, although the recent tariff increases are bound to pose challenges to the Chinese economy, we believe that compared to 2018 or the past three years, the Chinese stock market has several favorable conditions, including changes in geopolitical narratives and technological narratives, as well as the valuation advantages of Chinese assets themselves and the space for macro policy efforts. Overall, we believe that the Chinese stock market still possesses relative resilience in the short to medium term, and the "revaluation of Chinese assets" is still ongoing, with the specific logic as follows:

1) Changes in geopolitical narratives, global capital facing reallocation. In the past two years, the AI revolution, large fiscal policies, and global capital inflows have formed a positive cycle, driving the rise of the U.S. stock market. At the same time, after the Russia-Ukraine conflict, the narrative of "de-globalization" has become popular, and major global economies are showing signs of polarization, which has become a major reason for global capital outflow from the Chinese market.

According to the latest data, the proportion of China's market in global active fund holdings has decreased from 14.6% at the beginning of 2021 to a minimum of 5% in 2024, continuously underweighting passive funds by about 1 percentage point for two consecutive years. From the perspective of shareholding proportion, the share of foreign capital in the free-floating market value of A-shares has dropped from a peak of 10% in 2021 to about 7.5% currently (Charts 5, 6). However, after Trump's election, the recent imposition of large tariffs, strengthening the expulsion of illegal immigrants, and DOGE cutting fiscal spending have all brought a tightening effect on the U.S. economy (Chart 7), leading to stagflation risks for the U.S. economy, and the uncertainty index for U.S. and global economic policies has risen sharply, reaching a new high since 2021 (Chart 9).

Trump's policy mix has triggered a reassessment of the overly optimistic outlook for the U.S. economy, and in the face of the current "certainty of uncertainty" in the U.S., global investors are forced to begin a new round of "geopolitical re-evaluation." This round of tariff increases has led to a depreciation of the dollar, which may also reflect that global capital no longer views the dollar as a safe-haven currency, increasing the pressure for capital outflow from the U.S. market, while other non-U.S. markets have recently received capital inflows. Whether foreign "long money" will flow back to China after reallocation depends on the repair of domestic fundamentals, but it also means that the potential for foreign "long money" inflow into the Chinese market is gradually emerging. From the low correlation between Chinese and U.S. stock markets in recent years, Chinese assets have risk diversification value for global capital (Chart 8).

Chart 5: Since 2022, overseas active funds have continuously underweighted Chinese assets, currently underweighting by 1.2 percentage points

Source: EPFR, CICC Research Department Chart 6: The proportion of foreign capital holdings in A-shares has decreased from 10% in 2021 to the current 7.5%

Source: Wind, CICC Research Department

Chart 7: Overview of tariff policies since Trump's inauguration

Source: White House, CICC Research Department

Chart 8: The correlation between Chinese and foreign assets has decreased, and Chinese assets provide risk diversification value

Source: Bloomberg, Haver, CICC Research Department

Chart 9: The uncertainty index of U.S. and global economic policies has risen sharply

Source: Wind, CICC Research Department

2) Changes in the technology narrative have led the market to re-recognize China's innovation potential. DeepSeek has become the fastest app in history to surpass 100 million users (Chart 10), symbolizing the "break of Western technology monopoly" with its three unexpected advantages of low cost, high performance, and open-source, promoting technological equality and providing free product trials to help individuals and businesses reduce costs and increase efficiency.

More importantly, breakthroughs in AI have led the market to re-recognize the potential of China's technological innovation. An increasing number of top global AI talents are choosing to work in China, and the number of patents in generative AI in China is also leading globally. According to the AI Development Index constructed by CICC's "AI Economics," China's comprehensive level of AI development is second only to the United States, and it has richer application scenarios than the U.S., demonstrating outstanding potential in application aspects (Chart 11).

In addition, China's achievements in green transformation are evident, advanced process chips are gradually making breakthroughs, and the manufacturing industry has significantly improved its global competitiveness. From the smartphone supply chain to the new energy vehicle supply chain, Chinese manufacturing, leveraging its large market and economies of scale, is continuously evolving into the center of the global supply chain (Charts 12, 13). This series of technological breakthroughs, combined with the breaking of the "American exceptionalism" narrative, means that the market needs to reassess the innovation potential and global competitiveness of Chinese technology companies.

Chart 10: DeepSeek has become the fastest-growing app in history due to its advantages of open-source, low cost, and high efficiency

Source: Wind, CICC Research Department

Chart 11: China's AI development comprehensive level is second only to the United States, and it has richer application scenarios than the United States, with outstanding potential in application aspects.

Source: IMF, WB, CICC Research Institute, CICC Research Department

Chart 12: China's manufacturing value added and global share

Source: UN Comtrade, CICC Research Department

Chart 13: Export scale of industrial intermediate goods as a proportion of the global total

Source: UN Comtrade, CICC Research Department

3) A-shares and Hong Kong stocks are at historical lows and are attractive, while U.S. stock valuations imply overly optimistic expectations. As of April 4, the dynamic price-to-earnings ratio of the CSI 300 Index is only 11.3 times, still significantly lower than the historical average (the dynamic valuation average since 2005 is 12.6 times). The current valuation of A-shares has recovered from the extreme position at the end of September last year but still has room for further upward adjustment.

The dynamic valuation of the Hang Seng China Enterprises Index is less than 10 times, lower than the CSI 300 and also below its historical average. From the perspective of equity risk premium, the equity risk premium of the CSI 300 has been corrected downwards from nearly a 10-year high of 7% after "924", rebounding to 6.5% at the beginning of the year (higher than the historical average of one standard deviation). The equity risk premium of the Hang Seng Index from the perspective of domestic capital (using the 10-year government bond yield as the risk-free rate) is as high as 10%, significantly higher than the past average. In contrast, the equity risk premium of the S&P 500 was once below 0 at the beginning of the year, meaning the market believes that stock returns do not require an additional risk premium compared to government bond yields, reflecting extremely optimistic expectations, which contrasts sharply with the higher risk premium of Chinese stocks (Chart 14).

From a structural perspective, the market is reassessing China's innovative potential in AI, and the valuations of leading Chinese technology companies still need to align with AI development trends. Overall, we believe that global economic development expectations are changing, and the valuation system will inevitably face reshaping. Currently, the valuation of Chinese stocks is at historical lows, while U.S. stock valuations still imply many optimistic expectations. In the process of global capital reallocation, valuations are relatively favorable for the Chinese stock market.

Chart 14: The equity risk premiums of A-shares and U.S. stocks have both converged from extreme levels

Source: Bloomberg, China International Capital Corporation Research Department

Chart 15: Chinese tech giants are significantly undervalued compared to US stocks, with recent narrowing

Source: AI Product List aicpb.com, China International Capital Corporation Research Department

Chart 16: Chinese tech stocks previously underpriced the AI outlook

Source: FactSet, Bloomberg, China International Capital Corporation Research Department

Note: Due to industry classification reasons, US tech stocks refer to the Magnificent 7, while China refers to the top 10 tech giants (Tencent, Alibaba, Meituan, Baidu, SMIC, Xiaomi Group, JD.com, BYD, Geely, NetEase). Other economies use MSCI Information Technology; data as of December 31, 2024.

4) China has significant counter-cyclical policy space, and if it can effectively address the issue of insufficient demand, it will provide positive support for asset prices. The impact of tariffs on trade surplus and deficit countries varies; the US faces "stagflation" pressure, while China's environment of insufficient demand is under further pressure. The effectiveness of macro policies in addressing "stagflation" and insufficient demand differs; the "stagflation" environment in the US implies slowing growth or even recession, which may lead to policy dilemmas. However, China's policy direction in addressing effective demand insufficiency is clearer.

Moreover, some investors compare the impact of trade friction on the global economy to the 1930s, when countries retaliated against each other with tariffs, which is considered one of the important reasons for the prolonged economic depression following the 1929 US stock market crash. However, we believe there are significant differences between now and the 1930s. The current domestic macro policy framework has stood the test of time; as long as our macro policies can effectively address the issue of insufficient demand, there is no need to be pessimistic about the performance of risk assets.

On one hand, having experienced previous trade friction, we expect the current round of government responses to be more targeted, with a lower reliance on exports to the US than in the past. Additionally, the significant efforts over the past three years to address real estate and local government debt issues have created favorable conditions for current policy space.

On the other hand, there has been a positive shift in our macro policies. Since the policy changes after September 24 last year, the market has seen the decision-making body's execution capability. The government work report from the Two Sessions also clearly states that "policies should be implemented as early as possible, preferring early over late, to seize time against various uncertainties." We believe that unexpected external risks will prompt domestic counter-cyclical policies to increase their efforts more firmly. Furthermore, the "vigorous promotion of consumption, improving investment efficiency, and comprehensively expanding domestic demand" has been placed at the top of the 2025 work tasks in the Central Economic Work Conference at the end of last year and this year's government work report This means that our country's policy framework places greater emphasis on shifting from a past focus on supply to demand. In the context of external demand facing uncertainties, stable domestic demand policies are expected to further take effect, which will be key to stabilizing our market's own risk premium.

The market shows short-term resilience, with medium-term opportunities outweighing risks; short-term allocation should prioritize stability, while technology remains the main line in the medium term. Overall, the uncertainty of short-term tariff policies and the contagious nature of global market fluctuations may bring volatility to Chinese assets, but the expected impact is lower than that on other major markets. In the short term, Chinese assets exhibit resilience compared to global stock markets.

In the medium term, changes in geopolitical narratives and technology narratives improve market expectations and promote global capital reallocation. Coupled with the valuation advantages of the Chinese market, there is significant room for policy response, which is expected to take positive action. If policies are appropriately addressed, the market risk premium is likely to continue improving, and the "revaluation of Chinese assets" is still ongoing. In terms of allocation, under the short-term volatile environment, the focus may need to be on stability, with low-volatility dividend stocks likely to outperform. The consumption and investment sectors benefiting from the push of domestic demand policies also present trading opportunities.

From a medium-term perspective, the performance of growth industries depends on industry prosperity and profit cycles. The breakthroughs of DeepSeek provide conditions for the development of AI application scenarios. The current high prosperity of the AI industry may still be in its early stages. We believe that in the future, from infrastructure such as computing power and cloud computing to application stages, profits are expected to gradually materialize, remaining an important main line in the medium term, with pullbacks presenting layout opportunities. In the future, with further strengthening of stable growth policies and a rebound in effective demand, the consumption sector is expected to gradually welcome a trend-driven market.

Source: CICC Insights

Authors: Li Qiusuo, Miao Yanliang, et al