US-China Trade: Rare Earth Approvals Stall and Tariff Woes Mount

Markets Watch China as Rare Earth Truce Faces Breakdown Risk

News of an Iran-Israel ceasefire boosted demand for risk assets on June 23.  Asian markets reacted to the overnight news in early trading on Tuesday, June 24. The de-escalation in Middle East tensions shifts market focus back to US-China trade developments.

The US and China concluded two days of trade talks on June 10, raising hopes of progress toward a trade deal. Negotiators agreed to reinforce the terms of the 90-day trade truce, which included:

• China supplying the US with magnets and rare earth minerals.
• 55% tariffs on Chinese goods.
• 10% tariffs on US goods.

However, since June 10, US companies have reportedly waited for Beijing to approve shipments, fueling speculation about a potential end to the truce agreement.

Natixis Asia Pacific Chief Economist Alicia Garcia Herrero remarked:

“The risk is there for the London deal to fall apart. Because rare earths is a very granular issue and mistakes can be made.”

China’s supply of magnets and rare earth minerals would likely influence the US stance on exports of chips, chip software, jet engines, and ethane, an essential component in making plastic, to China.

While the US administration has been vocal about the terms of the trade war truce, Beijing has remained largely silent. The terms suggest that China is on the weak end of the deal. However, US reliance on China’s supply of magnets and rare earth minerals position China to push for better terms.

Existing licenses to export magnets and rare earth minerals to the US only have a six-month lifespan, potentially triggering an escalation in trade tensions if the US and China fail to reach a comprehensive trade agreement.

Economists Optimistic of a Trade Deal Despite China’s Stance on Rare Earths

Economists believe Trump wants a trade deal, easing fears of an escalation in the trade war. Alicia Garcia Herrero commented:

“Trump wants a deal. Otherwise, he would have shot up China on day one. He ran a campaign which was very aggressive toward China, and on day one shied away from it.”

China Economy at Cross Roads as Tariffs Impact Demand

A trade deal could be crucial, not just for the US but also for China. Recent economic data from China signaled a sharp drop in imports and weaker exports, reflecting the impact of tariffs on demand and domestic consumption.

Exports rose 4.8% year-on-year (YoY) in May, down sharply from 8.1% in April, while imports slid 3.4% (April: -0.2%).

Weakening demand also led to a marked fall in producer prices, signaling intensifying deflationary pressures. Producer prices slid 3.3% YoY in May after falling 2.7% in April. Producers typically lower prices in a weakening demand environment, passing cost savings on to customers.

However, cost savings may not translate into increased domestic consumption. Retail sales rose in May, up 6.4% YoY compared with 5.1% in April, but weak consumer sentiment continues to challenge Beijing’s push for stronger domestic demand. Weak sentiment exposes China’s economy to US tariffs and weak overseas demand, pressing Beijing to introduce fresh stimulus.

Alicia Garcia Herrero also commented on China’s economy and potential stimulus maneuvers, stating:

“China will likely continue its fiscal-led stimulus to stimulate growth, but this will not be sufficient to rebalance the economy towards consumption as the focus is infrastructure. Rebalancing the economy towards consumption requires the PBoC to take the lead and further lower interest rates. A key concern, however, is that further rate cuts could weaken the RMB, particularly given ongoing trade negotiations with the US.”

On June 24, People’s Bank of China advisor Huang Yiping reportedly stated that China’s Q2 GDP growth will likely exceed 5%. Huang Yiping also sees room for further fiscal policy expansion. China’s National People’s Congress Standing Committee convened on June 24. News from China’s top legislature could offe r insights into Beijing’s plans to progress the transition toward a consumption-led economy.

Despite Trade Uncertainties, Hong Kong and Mainland China Hold Monthly Gains

Hong Kong and Mainland China-listed stocks have climbed in June, extending their gains from May. Easing US-China trade tensions and an Iran-Israel ceasefire have fueled demand for risk assets. However, the main indexes remain below March highs, with uncertainty about a US-China trade deal capping gains.

In June, Mainland China’s CSI 300 and Shanghai Composite Index were up 1.55% and 2.03%, respectively, while the Hang Seng Index gained 3.70%.

June’s gains have reduced the year-to-date (YTD) deficit for the CSI 300, down 0.89%, while the Shanghai Composite has gained 1.90%. Meanwhile, the Hang Seng Index has surged 20.40% YTD, boosted by demand for tech stocks. The Hang Seng TECH Index was up 18.76% YTD, despite US restrictions on tech-related exports, outperforming the Nasdaq Composite Index (YTD: +1.66%).

Further progress toward a trade deal may fuel demand for Mainland and HK-listed stocks. However, addressing domestic demand and China’s reliance on US tech could be crucial for longer term trends.

Outlook

US-China trade developments remain a key driver for the US, Mainland China, and Hong Kong markets. A trade deal would likely fuel demand for risk assets. Conversely, renewed trade tensions, either through breaches of the trade war truce terms or stalled talks, could affect the markets.

In the meantime, Beijing will remain in the spotlight as markets await fresh stimulus. The Middle East and progress toward a US-Iran nuclear agreement may also dictate near-term market trends.

Follow our coverage as US-China tech tensions reshape global markets and consult our economic calendar.