China Risks Renewed Trade War Amid Rare Earth Curbs and Weak Demand

The US-China trade truce faced increased scrutiny amid shifting policies on both sides of the Pacific, raising concerns over trade relations.

President Trump and Chinese President Xi Jinping reached a trade agreement in October, rolling back key restrictions, boosting hopes for a full trade deal. However, the one-year trade truce leaves US-China trade relations on a knife-edge. Concerns over China winning the AI race and its chokehold over rare earth supply set the stage for a tempestuous 12 months ahead.

The US Supreme Court review of the legality of Trump’s tariff policies could be another curveball as Beijing grapples with domestic challenges and waning external demand.

Beijing Maintains Control on Rare Earth Exports

Chinese President Xi agreed to delay restrictions on rare earth exports and revive imports of US farm products such as soybeans in October. President Trump reduced tariffs on fentanyl-related goods from 20% to 10%, lowering overall levies on Chinese goods from 57% to 47%.

Despite October’s trade truce, Beijing has yet to remove all restrictions on rare earth exports. According to CN Wire, China has laid out plans to ease controls on rare earths and other restricted material exports to the US. However, the plan reportedly includes introducing a ‘validated end-user’ (VEU) system, which excludes firms linked to the US military.

Rare earths are essential for production across the automotive and aerospace sectors. However, they are also critical in military applications, including fighter jets and attack drones.

China Cuts US Soybean Purchases

While rare earth restrictions could be a potential trigger point, Chinese demand for US farming products may also draw US scrutiny.

China has reportedly cut back on US soybean purchases despite the October truce. CN Wire reported:

China’s purchases of US soybeans appear to have stalled less than two weeks after a wide-ranging trade truce suggested thawing relations between the world’s two largest economies. Traders reported no new shipments following last month’s initial orders, raising doubts over whether China will meet the purchasing targets cited by the Trump administration.”

The US administration announced that Beijing committed to purchasing 12 million tons of soybeans over the remainder of 2025. Beijing is also set to acquire 25 million tons yearly over the next three years. However, US soybeans face tariffs while shipments from the LatAm region have no tariffs, potentially dampening demand for US soybeans.

Will the Supreme Court Unravel Trump’s Tariffs?

President Xi could be monitoring developments in Washington, given the Supreme Court’s ongoing review of Trump’s trade policies.

The US administration could face more than a $3 trillion refund bill if the Supreme Court deems Trump’s tariffs illegal. President Trump commented on the potential impact of an adverse ruling on Monday, November 10, stating:

“The US Supreme Court was given the wrong numbers. The ‘unwind’ in the event of a negative decision on tariffs, would be, including investments made, to be made, and return of funds, in excess of 3 Trillion Dollars. It would not be possible to ever make up for that kind of a ‘drubbing.’ That would truly become an insurmountable National Security Event, and devastating to the future of our Country – Possibly non-sustainable!”

Concerns about the US and China sticking to the one-year truce have weighed on sentiment.

Mainland Equities Reflect Investor Caution

Mainland China’s equity markets have fallen back from October’s highs despite the October Trump-Xi agreement. Recent trade developments have raised fears of a potential re-escalation in the trade war.

The CSI 300 has fallen 2% from its October 30 high of 4,761.

Despite the pullback, Mainland China equity markets hover near their 2025 highs.

Notably, the CSI 300 has rallied 18.6% year to date (YTD), while the Shanghai Composite Index has gained 19.53%. The two indices have closely tracked the Nasdaq Composite Index, which has gained 21.21% YTD.

However, the CSI 300 and Shanghai Composite Index remain well below their all-time highs, underscoring investor caution. Weakening external demand for Chinese goods and the absence of fresh stimulus from Beijing have dampened investor sentiment.

Nevertheless, Mainland investors could consider the CSI 300 and Shanghai Composite Index as a potential relative-value opportunity. Both indices trail the Hang Seng Index’s YTD gain of 33.76% gain.

Near-term trends will likely hinge on several factors, including incoming economic data, Beijing’s stimulus policies, and US-China relations.

Outlook: China Economy in Focus

Traders will consider the potential risks of an escalation in the US-China trade war. Meanwhile, incoming Chinese economic data will likely reveal whether Beijing is weathering the Trump storm.

Industrial production, house price data, retail sales, and unemployment figures will face scrutiny on Friday, November 14. Rising unemployment, weaker retail sales, and a sharper drop in house prices could weigh on sentiment. These trends would suggest Beijing’s efforts to boost domestic demand have failed to gain traction.

Updates from China’s Single Day shopping festival painted a gloomy picture of the consumer demand backdrop. CN Wire reported:

“China’s Singles’ Day shopping festival ended after over a month of promotions on major e-commerce platforms, but failed to reignite broad consumer enthusiasm amid continued economic strain from a property crisis and job insecurity.”

Discover strategies to navigate this week’s market trends here.