China's stocks pare losses after early sell-off on fresh US trade war salvo

By Samuel Shen and Summer Zhen

HONG KONG/SHANGHAI (Reuters) -A sharp sell-off in China stocks faded in choppy trading on Monday, allowing the market to trim early losses, as investors reassessed the impact of a renewed trade war between Washington and Beijing after taking profit to cut risks.

Analysts and fund managers believe the market downside will be limited compared to the panic-selling seen in April, when U.S. President Donald Trump kicked off a global trade war with sweeping tariffs across the board.

The Shanghai Composite <.SSEC> closed down 0.2%, after falling as much as 2.5% in early trade. The blue-chip CSI300 Index was 0.5% lower.

In Hong Kong, the Hang Seng benchmark tumbled as much as 3.5% before recovering some losses to end down 1.5%. The Hang Seng Tech index lost 1.8%.

Defying the broader selloff, however, China's rare earth sector, which is at the centre of revived trade tensions, jumped more than 6% to a record high, while semiconductor stocks also gained 2.6%.

Trump on Friday unveiled additional levies of 100% on China's U.S.-bound exports, along with new export controls on critical software by November 1, in a reprisal against China curbing its critical rare earth exports.

Later he softened tones on Sunday, posting that everything would be fine and the U.S. did not want to "hurt" China.

"President Trump reminded everyone that there are lots of uncertainties for markets," said Ben Bennett, head of investment strategy for Asia at L&G Asset Management, based in Hong Kong.

He expects near-term wobbles in Chinese stocks after the strong rally of the past few months.

The Shanghai composite hovered around a decade high level before the Monday retreat. The Hang Seng index has jumped 30% so far this year.

"We believe this is a tactical escalation (by Beijing) to shape pre-summit bargaining, not a strategic decoupling," Morgan Stanley analysts said in a note, referring to a potential meeting between President Xi Jinping and Trump at an upcoming APEC summit in South Korea.

An upbeat surprise in China's exports and imports data also helped lift investment sentiment.

Investors should not be distracted by political headlines, said Yeang Cheng Ling, DBS's chief investment officer for North Asia. "We believe rationality will prevail at the end of it," he said.

VOLATILITY SPIKES

To be sure, markets are likely to remain anxious in the short term given the rising geopolitical tensions.

An index tracking expected 30-day volatility in the benchmark Hang Seng surged 30% at one point on Monday to its highest level since April 2025, before easing slightly.

Oriano Lizza, sales trader at CMC Markets in Singapore said the market is still digesting how long this saga will go on for, which "leaves the market on tenterhooks and very fragile at the moment".

China's 30-year bond futures rose on Monday, indicating the rush for safe-havens. The yuan clawed back some of the losses that followed Trump's announcement on Friday, helped by stronger central bank guidance.

Wang Yapei, a Shanghai-based hedge fund manager, expects the turbulence to be short-lived, betting China and the U.S. will eventually work through negotiations, as "the cost of large-scale conflict is too high for both powers."

Beijing described Trump's latest tariffs on Chinese goods as hypocritical on Sunday but clarified that its export control is not an export ban and stopped short of imposing new levies on U.S. products.

"This is a de-escalation move and will cushion the downside for Chinese markets," said Hong Hao, chief investment officer at Lotus Asset Management.

Investors are likely to rotate from growth to value stocks in the coming weeks, he added.

Charles Wang, chairman of Shenzhen Dragon Pacific Capital Management Co, said growing geopolitical uncertainty means China will likely further ease monetary policy to aid economic growth, supporting stocks.

TACO AGAIN?

China Merchants Securities said geopolitical tensions benefit Chinese sectors including artificial intelligence, robots, defence, innovative drugs and chipmaking.

"Any correction would give long-term investors a chance to buy the stocks at lower prices," the brokerage said.

But exporters sensitive to U.S. tariffs such as communications infrastructure, electric motors and electrical equipment, would be under pressure, analysts said.

Many analysts, however, think the chance of a triple-digit tariff is slim.

"This statement is more of Trump's signature negotiation tactic—applying maximum pressure to bolster bargaining leverage and force concessions during trade talks," Changjiang Securities said in a report. "It will likely again play out as TACO (Trump Always Chickens Out)."

"In the near term, both sides are still reliant on one another...so we believe this latest escalation is more about posturing for incoming negotiations and meetings," said Lu Ting, Nomura's Chief China Economist, who sees "a decent chance" of a Xi-Trump in-person meeting during the APEC annual summit later this month.

(Reporting by Summer Zhen in Hong Kong and Samuel Shen in Shanghai, Additional reporting by Rae Wee; Editing by Sam Holmes and Peter Graff)