Can tariff disturbances turn around?

On May 12, China and the United States issued a joint statement from the Geneva economic and trade talks, announcing a reduction of the tariffs imposed on both sides since April 2 from 125% to 34%. Additionally, following the practices of the United States with other countries, 24% of the tariffs will be suspended for 90 days, with only the remaining 10% of tariffs being imposed. At the same time, the two countries will establish a mechanism to continue negotiations on economic and trade relations. The results of this meeting exceeded market expectations, and Huatai Research's multi-team collaboration interpreted the impact and future outlook of this U.S.-China tariff downgrade.

Macro: The Origin, Impact, and Future of U.S.-China Tariff Downgrade

At 3 PM on May 12, China and the United States issued a joint statement from the Geneva economic and trade talks, announcing a reduction of the tariffs imposed on both sides since April 2 from 125% to 34%. Additionally, following the practices of the United States with other countries, 24% of the tariffs will be suspended for 90 days, with only the remaining 10% of tariffs being imposed. At the same time, the two countries will establish a mechanism to continue negotiations on economic and trade relations. Based on our consistent analytical framework, we analyze the macro impact and future outlook of the recent "downgrade" of U.S.-China tariff conflicts. We summarize 10 points of judgment.

1. The extent of the U.S.-China tariff downgrade exceeds expectations

After the U.S.-China tariff downgrade, the tariff levels imposed between the two countries have significantly decreased by 91 percentage points, and there is still room for negotiation regarding the 20% tariff imposed by the U.S. on China due to the fentanyl issue. During the 90-day exemption period for reciprocal tariffs, the tariff rate imposed by the U.S. on China decreased from 145% to 30%, which includes the 20% fentanyl-related tariff + 10% "reciprocal tariff," while the tariff rate imposed by China on the U.S. decreased from 125% to 10%. Furthermore, the U.S. and China are also negotiating the 20% tariff related to fentanyl, which may also be further reduced.

The extent of the U.S.-China tariff downgrade has comprehensively exceeded expectations, mainly reflected in the following three aspects: 1) Previous U.S. tariff negotiations with other countries have been bumpy, leading to low market expectations for this U.S.-China Geneva negotiation; 2) During the 90-day exemption period for reciprocal tariffs, China's reciprocal tariff rate has returned to the same level as other countries, indicating that in terms of reciprocal tariffs, China's "treatment," especially after the "liberation day" on April 2, has not been relatively harsher than the global standard; and 3) Compared to the end of last year, when the market expected the Trump administration to impose a 10% tariff globally and a 60% tariff on China, the current level of tariffs imposed on China is better than that expectation.

2. The U.S. has a strong short-term motivation for "downgrade," which is the cornerstone of better-than-expected negotiation results, with relatively few "concessions" from the Chinese side

The U.S. is experiencing initial inflation and supply chain pressures, coupled with tariff policies that have slowed down Trump's domestic policy advancement, creating a strong short-term motivation for "downgrade." On one hand, recent U.S. tariff policies have significantly raised inflation expectations among residents and businesses, and U.S. consumer goods inventories are about to run out; additionally, considering the manufacturing and transportation time for orders, U.S. Christmas orders must be placed by May at the latest, and the deadline for placing orders is approaching (see "Simulating the Possibility and Path of U.S.-China Tariff 'Downgrade'," 2025/4/28) On the other hand, the tariff policy has led to the "suspension" of domestic policies such as tax cuts and deregulation, which were claimed by the Trump administration during the campaign, and Bessent stated that unconventional measures to avoid hitting the debt ceiling may run out in August, making it urgent for the U.S. to reach a fiscal budget.

For this reason, the "concessions" required by the Chinese side in this negotiation are limited. Compared to the "concessions" measures proposed by the U.S. in negotiations with other countries, such as purchasing American goods and increasing investment in the U.S., this joint statement does not include China's increase in purchases from the U.S. or expansion of foreign direct investment (FDI) in the U.S., indicating that the Chinese side has not made substantial "concessions."

3. After the U.S.-China tariff downgrade, the total tariff level of the U.S. on China and the actual tax rate of the U.S. on the global scale will significantly decline within the next 90 days, and the impact on global trade volume will noticeably weaken.

During the 90-day exemption period for reciprocal tariffs, U.S. tariffs on China will drop to around 40%, and global tariffs will decrease to 15-17%. After the U.S.-China tariff downgrade and the postponement of the 24% reciprocal tariff, the U.S. tariff level on China has increased by 29% since Trump took office (compared to 125% on April 10, Chart 1). If the U.S. and China reach an agreement on the fentanyl issue, the U.S. tariff level on China could be further reduced by up to 20 percentage points. Consequently, the U.S. weighted average tax rate on a global scale will drop to 14.9-16.8%, and if the fentanyl-related tariffs are reduced, it could fall to 12.2-14.7% (Charts 2 and 3).

If we assume that the elasticity of global trade volume to price/tax is about -1 to -1.5, it may drag down global trade volume by 2-4 percentage points, lower than the previous decline of over 5% under tariff scenarios. Considering that the U.S. accounts for about 13% of global total imports in 2024, it is expected that U.S. tariff policies will lead to an increase of about 2 percentage points in the global weighted tariff level. Additionally, with China accounting for 10% of global total imports in 2024, the imposition of a 10% tariff by the U.S. will raise China's total tariff level by about 0.6 percentage points, further increasing the global total tariff level by about 0.06 percentage points.

4. The impact on U.S. growth and inflation will decrease, and the probability of a "soft landing" for the U.S. economy will increase.

After this U.S.-China tariff downgrade, the probability of a U.S. recession decreases, while the risk of a soft landing increases. Our calculations indicate that the latest version of the tariff policy will reduce the drag on U.S. growth to 1-1.5 percentage points and may push up U.S. core inflation by about 1-1.5 percentage points. Considering that the Federal Reserve regards the impact of tariffs as a one-time factor, this tariff downgrade does not change the long-term policy logic. Therefore, after the tariffs are settled, the pace of interest rate cuts by the Federal Reserve will mainly be anchored to labor data, and we maintain our baseline judgment of about 75 basis points in interest rate cuts by the Federal Reserve this year.

5. The pressure on China's exports to decline will significantly weaken in the short term, and there may even be a resurgence of export grabbing.

In the short term, the demand for export grabbing and capacity going overseas is expected to boost China's exports. Since November of last year, "export grabbing" has driven strong overall performance in China's exports. Considering the uncertainty after the 90-day "exemption period" for reciprocal tariffs, "export grabbing" is expected to continue during the 90-day window period At the same time, from the three dimensions of intermediate goods trade, raw materials and machinery exports, and changes in China's overseas ODI, Chinese enterprises are accelerating their overseas expansion again after 2023 (see "Export or Go Abroad?", 2024/8/8). In the face of the current fluctuations in U.S. tariff policies, enterprises still have concerns about long-term uncertainties, which may continue to diversify supply chain risks, and the initial outflow of equipment and capital for production capacity will also be reflected as exports.

6. Overall, compared to expectations before April 2, the level of U.S. tariffs on the global market is basically in line with expectations, but China's (current) tariff treatment is better than expected.

It is expected that U.S. tariffs on the global market may ultimately rise by about 15 percentage points, while China's (current) tariff treatment is better than expected. Earlier this year, the market generally expected the U.S. to impose tariffs of 10-20% on global goods, and U.S. inflation swaps also accounted for an expected tariff increase of 5-10 percentage points. The U.S.-UK trade agreement indicates that a 10% tariff increase on the global market is becoming a baseline scenario. Due to the special strategic partnership between the U.S. and the UK, and the relatively small total export volume of key UK goods to the U.S., the consensus on tariff reductions for steel, aluminum, and automotive exports between the U.S. and the UK is unique and difficult for other countries to replicate (see "Can the U.S.-UK Trade Agreement Framework Serve as a 'Model'?", 2025/5/12). It is expected that tariffs on five major categories of strategic key goods—steel, aluminum, automobiles, copper, pharmaceuticals, and semiconductors—are unlikely to be completely lifted, leading to an expected overall increase of about 15 percentage points in U.S. tariffs on the global market. In contrast, the current tariff level imposed by the U.S. on China is lower than the approximately 60% expectation at the beginning of the year.

7. Compared to the beginning of the year before Trump's inauguration, U.S. growth expectations have been downgraded, while China's growth expectations have risen.

The significant increase in tariffs, coupled with the unexpected impact of government reforms, has led the market to continuously downgrade U.S. growth expectations for 2025. Although the reduction in U.S.-China tariffs has slightly lowered the weighted average tariff level in the U.S., since the beginning of the year, U.S. tariff levels have cumulatively risen by more than 15 percentage points, still the highest since 1940, and significantly higher than last year's 2.4% (Charts 4 and 5). At the same time, the cost-reduction and efficiency-enhancing reforms conducted by the Department of Government Efficiency (DOGE) have had a significant impact on the U.S. economy (see "DOGE: Can Cost Reduction and Efficiency Enhancement Meet Expectations?", 2025/4/1). As a result, Bloomberg's consensus forecast for U.S. growth in 2025 has significantly dropped from 2.3% at the beginning of the year to 1.35%, and with the impact of tariffs becoming evident, further downgrades cannot be ruled out (Chart 5).

On the other hand, with the reduction of U.S.-China tariffs, the market is expected to raise China's growth expectations for 2025. Following the significant increase in tariffs imposed by the U.S. on China in early April, Bloomberg's consensus forecast for China's growth in 2025 has dropped from 4.5% at the beginning of the year to 4.2%. After this reduction in U.S.-China tariffs, the tariffs imposed by the U.S. on China are lower than the approximately 60% level expected by the market at the beginning of the year. Additionally, China's strong manufacturing competitiveness and the relatively stable exchange rate of the RMB against the USD will help alleviate the downward pressure on China's exports and improve China's growth expectations 8. Although there has been a "roller coaster" of tariffs, the three major logics for the revaluation of Chinese assets at the beginning of the year remain

In our report published on February 3, titled "Three Catalysts Expected to Boost the Relative Performance of Chinese Assets" and a series of subsequent reports, we analyzed the logic behind the relative valuation increase of Chinese assets by 2025 (see "What is Different About This Round of Revaluation of Chinese Assets?", 2025/2/25).

1. The tariffs imposed by the United States on China are relatively not too high compared to the global context, at least (for now) temporarily effective again, and China's relative "positioning" is better than expected;

2. The emergence of DeepSeek has boosted the revaluation space and investment enthusiasm for China's AI+ industrial chain, revealing that part of China's price competitiveness also comes from productivity improvements (rather than solely from insufficient demand);

3. After four years of deleveraging, the Chinese real estate cycle has begun to "bottom out," with related risks alleviating, and the related consumer sentiment is also continuing to bottom out and recover (see "Chinese Real Estate: Positive Signals in Divergence and Their Macroeconomic Implications," 2025/3/24, and "On the Potential for Consumption Recovery in the Second Half of Real Estate Adjustment," 2025/3/25).

After the extreme situation of China-U.S. trade friction has come to a close, we refocus on the logic of the relative performance of Chinese assets—some of these logics continue to be effective, while others are being further validated.

It is worth noting that after Trump's "100-day new policy," the narrative of "de-dollarization" has strengthened (see "Quick Commentary on Trump's Tariff Changes," 2025/4/10), thus, compared to the beginning of the year, the logic of the relative performance of Chinese assets has been further reinforced.

9. Looking ahead, it is estimated that the U.S. may only be making a "tactical" retreat on tariff issues, especially regarding tariffs on China

It is not ruled out that the tariff issue may be brought up again by the U.S. in 1-2 quarters, but the likelihood of a repeat of the disorderly rise seen after April 9 is low. Tariffs are a hallmark of Trump's administration upon his return to power, as evidenced by his mention of President McKinley's high tariffs in his inaugural speech. At the same time, in this round of tariff negotiations, the U.S. may primarily sign agreements with various countries in the form of memorandums of understanding (MOU), which do not have long-term binding effects. Considering that the U.S. continues to push for the return of manufacturing and to reduce trade imbalances, if domestic pressures for tax cuts and deregulation ease, the U.S. may reintroduce tariffs at an appropriate time. Additionally, the U.S. Section 232 investigations into specific industries are still ongoing, and future tariffs on investigated goods will also raise the U.S. weighted average tariff level.

10. The trend of "de-dollarization" remains unchanged, and Asian assets, especially those from China and Japan, are expected to receive higher relative allocations

Although the U.S. dollar index has rebounded significantly after the de-escalation of China-U.S. tariffs, the underlying logic of "de-dollarization" in global asset allocation remains unchanged.

On one hand, the trend of declining credibility of the U.S. government has not been broken, and even strengthened after the tariff "roller coaster," while the trend of the U.S. reducing its provision of global public services and shaking the fundamental support for the dollar's premium remains unchanged. Furthermore, from the current trade negotiation processes with multiple countries, it can be seen that the U.S. government is committed to reducing its current account deficit, which means that the reduction of the capital account surplus, i.e., the slowdown of capital inflow into U.S. assets, is also an inevitable "side effect" (Chart 6, Refer to "On the Inevitability of the Disorderly Rise of U.S. Treasury Yields" (April 9, 2025). Finally, even if U.S.-China tariffs are downgraded, global tariff barriers continue to rise, and the slowdown of globalization corresponds to a decline in the relative status of the U.S. dollar; this trend may just be beginning.

The recent rapid appreciation of the New Taiwan Dollar reminds us that Asian currencies have a considerable valuation discount against the U.S. dollar, and Asian financial institutions (including those in Taiwan and Japan) and export enterprises hold a large amount of dollar assets, significantly overweighting dollar assets, forming a long-term "arbitrage trade" that essentially borrows local currency assets to hold dollar assets. Once this trend begins to reverse, gain momentum, and accelerate, the allocation and premium of dollar assets will further disappear (see "Insights from the Significant Appreciation of the New Taiwan Dollar," May 8, 2025), while the trend of global de-dollarization will continue.

Strategy: Assessment of the Outcomes, Impacts, and Future Policy Outlook of the U.S.-China Geneva Talks

Core Viewpoints

On May 12, the U.S. and China issued a joint statement following the Geneva economic and trade talks, significantly reducing tariffs. The U.S. canceled the escalated reciprocal tariffs imposed after April 8 (up to 91%) and suspended 24% of tariffs for 90 days, with China responding in kind while each side retained 10% of the tariffs. Compared to the peak, both sides have now reduced tariffs by 115%, exceeding market expectations, and the anticipation of trade conflict has cooled. The greater significance of the May 12 Geneva talks lies in the U.S. abandoning its previous retaliatory stance against China's counter-tariffs, returning to the negotiation track. The U.S. expressed a desire to avoid decoupling and hopes to resolve differences through negotiation. We summarize the basic outcomes of the Geneva talks, impact assessments, and the outlook for future policies.

1. The focus of the talks was on reciprocal tariffs, with both sides achieving a reduction of 115%, but the discussions did not yet involve fentanyl tariffs and Section 232 investigation tariffs. The U.S. has effectively abandoned its retaliatory stance since China's comprehensive countermeasures against U.S. unilateral tariff policies on April 4. On April 2, after the U.S. announced the reciprocal tariff plan, China took comprehensive countermeasures against the three rounds of tariff measures and their escalation initiated by the U.S. According to the May 12 joint statement, both China and the U.S. agreed to cancel a total of 91% of the two rounds of escalated tariffs. At the same time, regarding the so-called 34% reciprocal tariff announced by the U.S. on April 2, both sides retained 10%, and agreed to suspend 24% for 90 days. On April 8, the U.S. suspended the portion of reciprocal tariffs over 10% for other countries for 90 days.

We believe that the May 12 joint statement means that China has returned to a negotiating position similar to that of other countries regarding reciprocal tariffs, and we see this as a victory of China's strategy of "seeking unity through struggle". The U.S. has effectively abandoned its retaliatory stance since China's comprehensive countermeasures against the unilateral tariff policy on April 4; this is set against the backdrop of persistently high domestic inventory levels and inflationary pressures in the U.S.

Additionally, regarding fentanyl: the so-called fentanyl tariffs imposed by the U.S. have not been removed. On May 12, the U.S. stated that the 20% tariff imposed earlier this year concerning the fentanyl issue still exists, and the additional tariff measures of 20% since 2018 remain unchanged.

On May 12, the U.S. stated that it is engaging in constructive dialogue with its Chinese counterparts, and that the fentanyl-related tariffs are progressing along their own track, with very positive developments.

As for the Section 232 tariffs: there has been no mention yet. Since Trump took office again, the U.S. has initiated a Section 232 national security investigation against countries worldwide, which has currently been implemented in the steel, aluminum, automotive, and parts sectors, and may be extended to copper and copper products, wood and wood products, semiconductors and electronic products containing semiconductors, pharmaceuticals, and critical mineral products. China and other countries and regions around the world share a consistent stance against the Section 232 tariffs and firmly oppose them.

II. After the May 12 talks, the overall tariff level imposed by the U.S. on China is expected to drop to around 50%, and some interrupted trade is likely to resume, with the "rush to export" trend among exporting companies possibly continuing in the second quarter of this year.

Overall, before May 12, the overall level of tariffs imposed by the U.S. on Chinese imports reached 164.3%; after May 12, the overall tariff level dropped to 49.3% (according to the Peterson Institute for International Economics report, Trump 1.0's 19.3% + 20% fentanyl + 10% reciprocal tariff).

When the first phase agreement between China and the U.S. was reached in January 2020, the tariff level imposed by the U.S. on China was about 19.3% after multiple rounds of increases and exemptions during the Trump 1.0 period. Entering the Trump 2.0 era, the total of the two rounds of fentanyl tariffs in February and March was 20%, and on April 2, a reciprocal tariff of 34% was imposed on China, followed by two rounds of escalated tariffs totaling 91%. Before May 12, the overall statutory tariff level imposed by the U.S. on China may have reached 164.3% The Geneva talks on May 12 effectively broke the high tariff wall between China and the United States since the reciprocal tariffs on April 2, and some trade between China and the U.S. is expected to resume. The impulse for enterprises to "rush to export" is likely to continue within the 90-day time window.

III. Three Major Significances of the May 12 Geneva Talks and Outlook for the Subsequent 90 Days of Negotiations

We believe that the three major significances of the May 12 Geneva talks are:

1. It broke the U.S. side's "rule" that tariffs cannot be retaliated against. China's responsible attitude in defending the multilateral trading system at the WTO headquarters in Geneva, Switzerland, serves as encouragement for other countries;

2. China and the U.S. have returned to the negotiation track, with both sides agreeing to establish an economic and trade consultation mechanism, reducing the risk of "derailment";

3. Negotiations in other areas between China and the U.S., such as diplomacy, defense, technology, and security, are also expected to restart. We are highly concerned about the interactions between China and the U.S. at the 22nd Shangri-La Dialogue ("Shangri-La Meeting") held in Singapore at the end of May.

We believe that since Trump 2.0, China's basic position on tariffs has been consistent: China opposes any unilateral tariff actions by the U.S. and does not accept any abuse of tariffs or coercive threats—"There are no winners in a trade war. China does not want to engage in a trade war, but is not afraid to fight one. If the U.S. insists on infringing on China's rights and interests, China will resolutely retaliate and accompany it to the end." Currently, it appears that the U.S. may still retain a considerable level of unilateral tariffs (including the 301 tariffs from the Trump 1.0 era and the current 232 investigation tariffs), posing long-term and complex challenges to China-U.S. trade negotiations.

Future focus: 1) Fentanyl tariff negotiations; 2) 24% suspension of some reciprocal tariff negotiations; 3) Currency and exchange rate negotiations. During the May 12 Geneva talks, both sides did not discuss fentanyl or currency issues, only trade conditions. We believe that there remains a certain degree of uncertainty in the reciprocal tariff negotiations over the next 90 days. U.S. Treasury Secretary Janet Yellen stated in a subsequent media interview that the tariff level on April 2 is the upper limit for tariffs on China (referring to the reciprocal tariff of 34%), but the current tariff is a bottom (34% with 10% retained, and 24% pressed the pause button for 90 days), which is consistent with the U.S. stance and attitude towards negotiations with other countries.

On May 12, the spokesperson for the Ministry of Commerce stated that both sides agreed to establish a China-U.S. economic and trade consultation mechanism, maintaining close communication on each other's concerns in the economic and trade fields and conducting further consultations. The Chinese representative is Vice Premier He Lifeng, while the U.S. representatives are Treasury Secretary Janet Yellen and Trade Representative Katherine Tai. Both sides will regularly or irregularly take turns conducting consultations in China, the U.S., or in a mutually agreed third country. As needed, both sides may conduct working-level consultations on relevant economic and trade issues.

IV. Outlook for Future Policies: Observing the Timing of Incremental Fiscal and Monetary Policy Introductions

The 90-day pause on reciprocal tariffs will prompt exporters to seize the time window to rush exports, and the market is expected to readjust its outlook for export growth and GDP growth in the second quarter. With improved export expectations and considering the dual reduction (cut in reserve requirement ratio and interest rates) policy implemented on May 7, the urgency for subsequent incremental monetary and fiscal policy introductions may decrease We believe that in response to external shocks, the core of incremental policy is fiscal policy. Since increasing the deficit and issuing special government bonds require authorization from the Standing Committee of the National People's Congress, the upcoming Standing Committee meeting in June may be the first window to observe incremental fiscal policy; if the growth pressure in Q2 eases, the pace of fiscal incremental policy may be delayed.

Regarding monetary policy, considering that the dual reduction has already been implemented, the subsequent pace of easing will depend on the internal and external macro environment.

Strategy: How to Trade After the US-China Joint Statement Exceeds Expectations?

The US and China released a joint statement, and the progress of the first phase of tariff negotiations exceeded expectations.

According to Xinhua News Agency, on May 12, Beijing time, the US and China released a joint statement following the Geneva economic and trade talks: 1) Among the tariffs imposed by the US on China, 20% of the fentanyl tariff and 10% of the tariffs imposed on April 2 will be retained, while the remaining 24% of the tariffs will be suspended for 90 days, and all tariffs imposed on April 8 and April 9 will be canceled; 2) The 24% tariffs imposed by China on the US will be suspended for the initial 90 days, while retaining the remaining 10% tariffs on these goods and canceling other subsequent tariffs. We believe that the reduction in tariffs in this joint statement exceeds the general expectations of investors, which may help elevate the volatility center of the domestic equity market. Looking ahead, although there is still uncertainty regarding the path of tariff policy, as the US and China return to the negotiation track, there may be room for the market to repair the risk premium accounted for the escalation of trade frictions.

Currently, the winning rate of A-shares has increased, and there may be moderate positivity in the short term, while continuing to grasp internal certainty clues in the medium term.

In our weekly view on May 11, 2025, titled "Rotation Accelerates, Continue to Trade Internal Certainty," we indicated that if the US-China negotiations release unexpectedly positive signals, risk appetite is likely to further increase, and the export chain may have repair opportunities. With expectations of substantial progress in negotiations, today the A-share market opened high and closed up, with power equipment, machinery, automobiles, electronics, and other export chain varieties leading the gains, basically validating our judgment; after the joint statement was released, Hong Kong stocks and A50 futures continued to rise, and the RMB exchange rate strengthened, reflecting that the market has not fully priced in the unexpectedly positive negotiation progress, and short-term risk appetite is likely to further increase. We believe that the recent multiple favorable factors have improved the winning rate of A-shares: 1) On May 7, "a package of financial policies supports stabilizing the market and expectations," with the dual reduction slightly exceeding investor expectations in terms of scope and pace, and statements similar to a stabilization fund are expected to solidify the lower support of the market; 2) April's inflation and export data show resilience; 3) External uncertainties such as US-China tariffs and the India-Pakistan conflict have eased. On the funding side, we have previously observed a series of positive signals: 1) On the domestic side, last week the financing balance fluctuated at a high level, with the activity of financing transactions still close to the upper range of 2018, reflecting that leveraged funds are still quite active. Although there was a slight net outflow of ETFs and industrial funds, it was not enough to cause a key marginal impact; 2) On the foreign side, after the Qingming Festival, foreign capital once significantly flowed out. According to EPFR data, as of the end of March, the A-share positions of regional allocation funds have fallen back to levels close to September last year, showing a relatively low allocation state. Last week, passive allocation funds have turned to net inflows. If factors such as tariffs that previously constrained foreign capital return weaken, there is some room for foreign capital to increase positions.

In terms of space, from a static perspective, the risk premium of A-shares is driven by both the domestic credit cycle and the dollar cycle. Assuming the fluctuation center of the dollar index is around 100 and the annualized growth rate of commercial housing sales area is around -10%, the corresponding reasonable PETTM for the entire A-share market is about 21x, currently about 19x (Chart 1). From a dynamic perspective, the current comprehensive environment may lie between early April this year and early November last year (corresponding to the landing of "equivalent tariffs" and the US election), and the above positions may constitute the lower and upper bounds of the market range. Considering the downgrade of tariffs to the market expectation level of March this year, the fluctuation center of the entire A-share market is expected to align with the oscillation platform at that time. In terms of rhythm, benefiting from improved risk appetite in the short term, the market may experience a phase of upward trend; in the medium term, the index-level trend still relies on fundamental improvements, with tariff downgrades promoting the upward shift of the oscillation center. A more robust domestic demand policy is needed for further support of the economic fundamentals for a trend-driven market.

In terms of allocation, in the short term, technology and export chains may benefit from improved risk appetite, while in the medium term, continue to grasp internal certainty clues. The upward momentum in the short term is increasing. We previously suggested a long volatility barbell strategy (dividends + technology + domestic demand), with marginal increases in technology, including AI (Alibaba, Tencent, DeepSeek, etc. releasing new generation large models), robotics (World Humanoid Robot Sports Competition, etc.), and cloud computing with high visibility of demand. In the export chain, industries that have not yet filled the gap from April 7 include pharmaceuticals, power equipment, electronics, etc. However, after emotional repair, the impact of tariffs on the supply chain still exists, so it is recommended to hold stocks primarily and avoid chasing highs; among them, varieties with high US income exposure and low overseas gross margins (such as textile manufacturing) remain relatively cautious, while those with domestic technological advantages or rigid supply may be more resilient (Chart 2). In the medium term, it is recommended to grasp internal certainty clues: 1) New public offering regulations promote the entry of medium- and long-term funds into the market and guide fund allocation towards benchmarks, large-cap weighted stocks and industries with low public allocation such as large finance, public utilities, and oil and petrochemicals are expected to benefit, and the effectiveness of factors such as value, low volatility, and dividends may improve; 2) The direction of improvement in the first quarter report, from the perspective of the inventory cycle, includes replenishment or "quasi-replenishment" in precious metals, minor metals, food processing, condiments, military electronics, general equipment, etc.; from the perspective of the capacity cycle, clearance or "quasi-clearance" in minor metals, general equipment, wind power equipment, plastics - paper - packaging printing, personal care products, beverages and dairy products, chemical raw materials, cement, glass fiber, etc.; among these, military electronics, minor metals, wind power equipment, and dairy products that show dual improvement in supply and demand can be focused on. In addition, improvements in trade conditions are also expected to transmit to financial conditions, and under domestic policy support, there may be left-side opportunities in financial real estate.

Hong Kong stocks may still have relative returns, recommending an increase in allocation to technology + consumption

We reiterate the view published in the report "Constraints Weaken, Moderately Positive" on May 5, holding a positive outlook on the Hong Kong stock market. The results of the China-U.S. economic and trade talks exceeded expectations, overall benefiting the improvement of risk sentiment in the Hong Kong stock market. Currently, tariffs have temporarily dropped to the market expectations level of March (at that time, a 20% tariff on fentanyl was announced, and a 34% equivalent tariff had not yet been imposed, with market expectations for subsequent tariff increases not high). Assuming the ERP of the Hang Seng Index falls back to the March average of 6%, it may drive the dynamic PE of the index from 10.0 to about 10.4 times. If there are further significant developments in subsequent negotiations, under unchanged earnings and interest rates, a drop in ERP to 5.7% could drive the dynamic PE of the Hang Seng Index up to around 11 times. As of last Sunday’s close, the dynamic PE of the Hang Seng Index was 10 times, rising to 10.3 times after Monday's close. The elasticity of Hang Seng Technology may be greater.

Industry allocation can further shift to offense, recommending an increase in allocation to technology + consumption. Industries with significant supply chain exposure may experience rapid rebounds driven by valuation in the short term, making participation more challenging, and may still face profit adjustment pressures from fundamental downturns. In contrast, we recommend that investors increase allocation to Hong Kong stock sectors such as technology, consumption, and finance from a configuration perspective. 1) Policy and narrative support: Against the backdrop of economic data pressures in China not yet reflected, the State Council Information Office has released a package of financial policies with clear intentions to stabilize expectations. Technology innovation + consumption are also key areas of policy support this time. The technology sector in U.S. stocks reported first-quarter results that generally exceeded expectations from models to applications, driving related indices to a cumulative increase of 10% since April 1. In contrast, the average PEG of leading Chinese technology stocks is around 1, far below the average level of nearly 2 for the U.S. MAG 7, indicating room for revaluation. The broader consumption sector also benefits from policy support expectations and domestic demand themes, adding allocation value. 2) Earnings support: As of last Friday, the difference between the number of companies raising and lowering earnings expectations for 2025 and 2026 among overseas Chinese stocks has significantly narrowed. Major characteristic sectors of Hong Kong stocks, such as technology hardware, continue to see earnings revisions upward, while internet, pharmaceuticals, and broader consumption earnings expectations have turned upward, and the downward revision of earnings expectations for the MSCI China Index has slowed. Subsequent uncertainties in tariffs and macroeconomic pressures may cause repeated disturbances to expectations, and high dividends can continue to serve as a core allocation From a medium to long-term perspective, the reallocation of overseas funds and the domestic public offering reform seeking excess return demands are expected to enhance the overall demand for the Hong Kong stock market. Our calculations show that whether incorporating the Hang Seng Hong Kong Stock Connect Index or the Hang Seng Technology Index into the CSI 300 allocation portfolio may yield a better risk-return ratio than simply allocating to the CSI 300 Index. For example, with a 50% allocation to the Hang Seng Technology Index and a 50% allocation to the CSI 300, the compound annual return of the portfolio from 2015 to present would rise to 4.8% (compared to only 0.9% for the CSI 300 Index), with a return/volatility ratio of 3.1 (compared to 0.6 for the CSI 300 Index).

Key Charts Overview

Fixed Income: Interest Rate Range After Tariff Negotiations

On May 12, 2025, after three days of trade negotiations, China and the United States issued a joint statement announcing the simultaneous cancellation of counter-tariffs and the suspension of the 24% reciprocal tariff for 90 days, while retaining the remaining 10% tariff, without mentioning the 20% fentanyl tariff. In addition, both sides agreed to establish a China-U.S. economic and trade consultation mechanism to maintain close communication on respective concerns in the economic and trade fields. The results of this meeting exceeded market expectations, leading to significant fluctuations in global assets, and our comments are as follows: 1. The overall tariff reduction exceeds expectations

The release of the joint communiqué itself carries strong signaling significance. Today's market has priced in the direction of tariff easing and sentiment recovery, with overall stock prices rising and bond prices falling, and the final tariff reduction has exceeded expectations.

After the adjustment, the U.S. tariffs on China: part of the countermeasures has been canceled + the 20% tariff on fentanyl is retained + the reciprocal tariff temporarily retains only the 10% portion, while the remaining 24% is deferred for 90 days = implemented at a phased tariff rate of 30%. Additionally, the average tariff rate on China before 2024 is slightly over 10%, with the average U.S. tariff rate on China just above 40%.

2. What do the significant changes in tariffs mean?

The U.S.-China tariffs over the past month resemble a test, with the U.S. ultimately choosing to reduce tariffs without additional conditions. The reasons may be related to the financial market, inflationary pressures, or rare earth export bans. According to the May 10, 2025 report "Short-term Resilience and Sustainability of Exports," the U.S. has only about a month of excess imports, making it difficult to endure a prolonged trade decoupling. This interaction reflects both sides' strengths and the U.S.'s tolerance, which is symbolically crucial, boosting short-term risk appetite and pulling up fundamental expectations, and should receive a positive market response. After the joint statement was released, domestic bond market yields rose further, and Hong Kong stocks surged. There are also positive implications for global market risk appetite and U.S. economic expectations, and the market may experience a "basic step in place" repricing in a short time, similar to when the unexpected tariffs were announced on April 2.

However, the logic behind this tariff adjustment is actually similar to other countries' 90-day reciprocal tariff exemptions, maintaining 10% first, with the remaining portion to be discussed later, while the fentanyl portion remains unchanged, indicating that there is still a risk of fluctuations in overall tariffs.

From the results of the U.S.-U.K. negotiations, the 10% reciprocal tariff is likely to be upheld globally; we also judge that the final U.S. tariff rate on China may remain relatively high globally. This means that the 20% fentanyl tariff can also be negotiated and may be further canceled; however, there is a risk that the 24% reciprocal tariff could be reimposed. In other words, the current 30% tariff rate may already be at a relatively lower bound, with limited room for further tariff easing.

Therefore, this tariff adjustment is more like pulling the tariff scenario back from a relatively extreme position to a more optimistic phase. After the sentiment recovery, the market still faces uncertainties in the subsequent negotiation process, with the historical experience of 2019 fresh in mind. The market's implied expectations are crucial; easing is expected, but fluctuations are inevitable. If there are overly optimistic expectations in the future, there may be risks of reverting to previous expectations.

3. What impact does this have on the economy?

(1) Upgrading our export outlook, with clear short-term benefits, but medium-term uncertainties remain.

We can refer to the tariff scenario from March: ① In absolute terms, the tariffs on China have increased by 10% compared to the 20% in March. ② However, in terms of country comparison, the current situation is 30% on China vs. 10% on other countries, while in March it was 20% on China vs. 0% on other countries except for the U.S. and Mexico Considering the new 232 tariffs on several categories of goods added on April 2, as well as the tariff exemptions for integrated circuits and other products, the current tariff pressure on our country is slightly better than in March.

Therefore, we expect this tariff adjustment will strengthen the pace of export by domestic enterprises and import by American companies, and in the short term, China's exports are likely to maintain resilience, necessitating an upward adjustment of export growth and economic growth expectations for the second quarter.

However, we believe it is still necessary to pay attention to the potential overdraft effect of excessive imports in the United States. The U.S. has already formed a certain degree of excessive imports in the first quarter, and the current easing of tariffs between China and the U.S. may further strengthen the pace of imports. In the absence of a significant increase in U.S. demand, this may lead to a certain degree of overdraft effect, which may manifest at some point.

(2) For domestic policy, the risk of a significant decline in short-term exports has been somewhat alleviated, and export and growth expectations for the second quarter have been revised upward, while domestic policy may temporarily enter an observation period. However, currently, it is more about delaying uncertainties related to exports and policies rather than eliminating them, and it is still necessary to continue tracking high-frequency data from China-U.S. ports and the effectiveness of domestic policy implementation.

(3) There is also a certain pull on the U.S. economy. The U.S. household sector may experience a surge in consumption, providing a boost to the short-term U.S. economy, but the medium-term economic trend in the U.S. remains a key factor determining China's export trends and global capital and risk preferences.

After the reduction of tariffs on China, the recession and inflation pressures in the U.S. may be temporarily alleviated, but the overall tariff rate still shows a significant increase, which may still bring certain inflationary pressures. Moreover, the impact of U.S. policy uncertainty is difficult to completely eliminate, and combined with the potential overdraft effect, the U.S. economy still faces downward pressure, necessitating attention to the pace of Federal Reserve interest rate cuts and the progress of tax reduction legislation, as these "standing" factors are crucial for the U.S. economic trend and China's medium-term export trends.

(4) For domestic enterprises and the endogenous momentum of the economy, a 30% tariff rate is relatively delicate. Enterprises may choose to maintain production and exports, but inevitably need to bear a certain degree of tariff burden; furthermore, the external industrial chain layout of enterprises will accelerate, leading to a certain amount of idle capacity. The impact chain of tariffs on prices and employment has not been completely eliminated, and it will still constrain the elasticity of variables such as enterprise profits and prices to a certain extent, and may be more lagging, increasing the difficulty of proactive policy responses. Attention should still be paid to the transmission of endogenous momentum in the domestic economy; in addition, land transfer income has not met expectations since the beginning of the year, which is another key clue affecting domestic economic operations.

The future of the 20% tariff on fentanyl is worth monitoring.

For the market, this joint statement exceeded expectations, and the bond market is inevitably under pressure in the short term. However, considering that there is still a lot of uncertainty in subsequent negotiations, policy interest rates have already been lowered, and the capital center has also retreated, the probability of bond market rates hitting new lows has decreased, but it is also difficult for sentiment to return to the pessimistic state of mid-March. We have emphasized increasing holdings during adjustments in the past three weeks, which has implicitly responded to the uncertainties of tariff negotiations. At the point, on the day the U.S. announced the equivalent tariffs in early April (34%), the ten-year Treasury yield fell to 1.72%. Subsequently, during the Qingming Festival, countermeasures escalated, and after the holiday, the yield dropped again to 1.64%. Since then, it has entered a phase of continuous fluctuations. Currently, the impact of tariffs is relatively weak; although there are benefits from interest rate cuts, the difficulty of returning to 1.6% or 1.5-1.6% has greatly increased. The ten-year Treasury may first return to the 1.7% platform, but the further upward space is also limited, mainly due to the restraining effect of broad interest rates, with 1.7-1.8% being the resistance area. Of course, if negotiations achieve greater results within 90 days, such as the cancellation of the 20% tariff on fentanyl, and if exports and domestic demand resonate, it will drive a recovery in financing demand, shaking the logic of bullishness in the bond market. Even if negotiations do not go smoothly, a rush to export will bring about a temporary improvement in data. In summary, the window for bullishness in the bond market in the second quarter is difficult to grasp, reiterating the need for substantial odds to support it, and the principle of increasing holdings during adjustments remains unchanged.

Fortunately, under the influence of monetary policy, the funding situation is expected to remain stable and slightly loose, and the ticket interest leverage strategy still has some room. On one hand, the progress of China-U.S. negotiations still faces challenges, and the fundamental reality does not support a tightening of monetary policy. Last week, the central bank's execution report stated, "We will do our utmost to consolidate the fundamentals of economic development and social stability," indicating that the easing cycle has not yet ended. On the other hand, recently, with the adjustment of long-term and ultra-long-term interest rates, the curve has initially steepened, which also aligns with the central bank's policy orientation of stabilizing interest rate spreads and preventing risks. Currently, funding rates have gradually approached 1.5%, and it is expected to remain stable in the future, but there is not much downward space.

In terms of operations, we continue to recommend short- to medium-term varieties with positive carry, such as 3-5 year urban investment bonds, where the ticket interest leverage strategy is relatively advantageous. For long-term and ultra-long-term interest rate bonds, it is advisable to wait for opportunities to increase holdings during adjustments. The bond market has likely not fully reflected the impact of this round yet, and in the short term, we do not rule out certain redemption disturbances caused by a strengthening stock market, with a large supply of interest rate bonds this week. It is recommended to enter the 1.7-1.8% range for ten-year Treasury bonds and above 2.0% for thirty-year Treasury bonds, before turning to focus on opportunities.

Regarding the stock market, the results of negotiations boost short-term risk appetite and will bring performance improvement expectations for the second quarter. After the stock index recovered the tariff gap last week, sentiment is expected to continue to strengthen, but the pace of development will also be quick. The export chain has seen some recovery, with technology and domestic substitution remaining hot topics, while varieties betting on stable growth are weak in the short term, and the precious metals sector faces adjustment pressure.

Electric New: New Energy - Tariff reductions exceed expectations, optimistic about the profit elasticity and valuation recovery of sub-sectors like energy storage

New Energy: Tariff reductions exceed expectations, optimistic about the profit elasticity and valuation recovery of sub-sectors like energy storage

On May 12, China and the U.S. issued a joint statement following the Geneva trade talks, with the U.S. announcing modifications to the previous April 2 executive order imposing a 34% "equivalent tariff" on China. Among them, 24% of the tariffs will be suspended for the initial 90 days, while the remaining 10% will still be retained, and the tariffs imposed on China on April 8 and April 9 (50%, 41%) will be canceled. The results of this meeting will significantly reduce U.S. tariffs on China, far exceeding market expectations. We believe that after the tariff reductions, sectors such as energy storage, photovoltaics, and AIDC are expected to welcome profit and valuation recovery "Reciprocal Tariffs" Significantly Reduced, Exceeding Market Expectations

The negotiations did not involve the 20% fentanyl tariff and the 25% Section 232 tariff, and the reduction of "reciprocal tariffs" exceeded expectations. We estimate that after the tariff reduction, the domestic export tax rates for various links are as follows: 1) Power batteries: basic tariff 3.4% + previous additional tariff 45% + Section 232 tariff 25%, totaling 73.4% (power batteries are subject to Section 232 and are not affected by "reciprocal tariffs"); 2) Energy storage batteries/systems: 40.9% (expected to be 58.4% in 2026); 3) Lithium battery materials: basic tariff + additional tariff 45% + "reciprocal tariff" 10%, totaling 56%-60.8%; 4) Inverters: basic tariff 2.5% + additional tariff 45% + "reciprocal tariff" 10%, totaling 57.5%. After the tariff reduction, China-U.S. trade is expected to gradually recover.

Energy Storage: Previous Tariffs Led to Order Cancellations or Slowdowns, Optimistic About Companies with Large U.S. Exposure Restoring Profits

The previous high tariffs led to the cancellation of some existing orders for energy storage companies and a slowdown in new orders. Companies in the battery and integration segments had previously seen their U.S. exposure drop to zero in the most pessimistic scenarios, resulting in significant valuation pressure. The substantial reduction in tariffs this time may lead to a recovery in profits and valuations for companies in the supply chain.

Photovoltaics: Limited Impact from Tariff Adjustments, Optimistic About Companies with Production Capacity Outside the Four Southeast Asian Countries and in the U.S.

Considering that domestic companies primarily export to the U.S. through overseas bases, with virtually no direct exports from China, we believe that the tariff adjustments will have a limited impact on the fundamentals of photovoltaic companies. Previously, the stock prices of supply chain companies were under pressure mainly due to market concerns about the impact of U.S. tariffs on Southeast Asia on corporate profitability, as well as a decline in demand after the domestic rush to install ended. This tariff adjustment is expected to help improve market sentiment and drive a recovery in photovoltaic industry valuations. We anticipate that U.S. market demand will mainly be met through battery production outside the four countries and component capacity in Southeast Asia/U.S. Given the significant gap in domestic battery production capacity in the U.S. and limited supply from the four Southeast Asian countries, we expect U.S. component prices to rise significantly, benefiting companies with domestic production capacity in the U.S. and battery production capacity outside the four Southeast Asian countries.

AIDC: Concerns About Slowing Overseas Demand Due to Tariff Disturbances Have Eased, Optimistic About AIDC Export Chains

Previously, the market was concerned that high tariffs would lead to price increases for data center products (server power supplies, HVDC, etc.) exported to the U.S., raising the construction costs of overseas data centers and thereby affecting demand in overseas markets (overseas cloud providers reducing investments). The stock prices of AIDC export chain-related targets have been under continuous pressure. The significant reduction in tariffs this time is expected to restore the valuations of related targets. We remain optimistic about the growth of overseas market demand.

Optimistic About Profit Elasticity and Valuation Recovery in Sub-sectors like Energy Storage

We believe that after the tariff reduction, sectors such as energy storage, photovoltaics, and AIDC are likely to see a recovery in profits and valuations.

Authors of this article: Yi Han, Shi Jinfeng, He Kang, Zhang Jiqiang, Shen Jianguo, etc., Source: Huatai Ruis, Original Title: "Huatai | Joint Interpretation: Can Tariff Disturbances Turn Around?" Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk