US-China Trade Tensions Flare Ahead of APEC as Rare Earth Clash Deepens

Neither side looks willing to step back ahead of President Trump and President Xi’s meeting at the end of the month. However, recent Chinese economic indicators and concerns about slowing US growth could give Beijing the upper hand in trade talks.

China’s Economic Strength Adds Pressure The US administration is looking to cut its reliance on China for rare earth minerals. However, Trump appears to be aggrieved by China’s shift away from US soybeans, an area where the US has been reliant on Chinese demand. Meanwhile, China’s September trade data indicated that manufacturers successfully sourced new trade partners, removing their reliance on US demand.

On Wednesday, October 15, UBS raised China’s 2025 export growth forecast from 1% to 4.5%. The upward revision followed September’s impressive trade data. Exports soared 8.3% year-on-year in September, while imports jumped 7.4%, signaling a sustainable boost in demand for Chinese goods.

CN Wire reported the UBS export growth projection, stating:

“While renewed US-China trade tensions could weigh on its export shipments to the US, “the probability of another much further slump may not be as high,” the economist says. Meanwhile, China’s overall export momentum has seen support from shipment growth to the rest of the world, he says.”

The UBS U-turn on the potential impact of US tariffs on demand for Chinese goods followed a wave of revisions to GDP growth forecasts. Notably, the World Bank upped its 2025 GDP growth forecast from 4.0% in April to 4.8%.

US and EU Inflation Concerns Grow Meanwhile, markets are betting on the Fed cutting interest rates in October and December to bolster the US economy. The Fed is facing stagflation risk, as economic momentum slows while prices remain elevated.

Adding to the US administration’s troubles are concerns from the EU about the potential impact of placing restrictions on Chinese goods on Euro area inflation. Restrictions could curb Chinese shipments to the Euro bloc, leaving more expensive goods on offer. The US could face a similar dilemma in the event of a full-blown trade war. Beijing appears unconcerned about US threats. China has warned that it is prepared for a trade war if provoked.

Trade War or Posturing? US Trade Representative Jamieson Greer commented on the threat of additional 100% levies on Chinese shipments to the US, stating:

“We think we’ll be able to work through it, but again, we can’t have a situation where the Chinese keep this regime in place, where they want to have veto power over the world’s high-tech supply chains. I think they have realized that they’ve overstepped.”

Greer also downplayed speculation about China having an upper hand, stating that the US has its own leverage. He highlighted China’s own export-driven economy, property slump, and high unemployment.

China’s unemployment rate rose from 5.2% in July to 5.3% in August, with youth unemployment soaring to 18.9% (July: 17.8%). While the rebound in Chinese exports could ease labor market woes, Beijing remains committed to transitioning toward a consumption-driven economy.

China Targets Domestic Demand According to CN Wire, Beijing announced plans to enhance financial support for expanding consumption, stating:

“To guide financial institutions to innovate products and services that support financial support for consumption.”

China’s Communist Party will meet for a plenum (October 20-23) to lay out its next five-year plan. Economists expect lawmakers to announce measures to drive household spending, while also focusing on high-tech manufacturing research and industrial upgrading. Notably, the plenum will take place before the APEC Summit.

Mainland Equity Markets Gain Despite Tensions Mainland equity markets advanced on Thursday, October 16, extending their gains from the previous day. Expectations of a pickup in GDP growth and further policy measures lifted sentiment.

Nevertheless, the indices continue to drift below their 2025 highs, with fears of a full-blown US-China trade war limiting the gains.

The CSI 300 climbed 0.24% in early trading on Thursday, October 16, while the Shanghai Composite Index rose 0.17%. However, the Hang Seng Index led the gains, advancing 0.41%.

Markets are betting on further stimulus to boost consumption, address high unemployment, and support the real estate sector.

US tariffs have failed to hit demand for Chinese goods, boosting demand for Mainland-listed stocks. The CSI 300 has rallied 17.4% year-to-date in 2025, with the Shanghai Composite Index up 16.8%.

Despite the strong gains for 2025, downside risks linger. A full-blown trade war could derail the rally without meaningful political support from Beijing.

China CSI 300 – Daily Chart – 161025 What’s Next: Economic Data, Fourth Plenum, and APEC The next few weeks could be crucial for Hong Kong and Mainland equity markets as US-China trade tensions simmer.

Chinese economic data will provide insights into China’s economic resilience to US tariffs. Third-quarter GDP and September’s house prices, retail sales, industrial production, and unemployment figures will face scrutiny.

Economists expect a lower unemployment rate, a rebound in retail sales, and stronger GDP growth. A pickup in economic momentum could ease fears over US trade policies impacting the Chinese economy, boosting demand for risk assets. Beijing may view upbeat data as a stronger bargaining chip in trade talks.

The Fourth Plenum will also be in focus, with political pledges likely to influence risk appetite.

Meanwhile, the APEC Summit will be the main event. Will President Trump and President Xi reach a trade deal, or will they extend the trade war truce? Extending the trade war truce by a further 90 days could disappoint markets hoping for an end to the tit-for-tat maneuvers.

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