Stock Market Implications of Trump-Xi Diplomatic Tensions

US-China Summit: Investors Eye Easing Tensions for Boost to Chinese Markets

Investors are eagerly awaiting signs of easing tensions between President Donald Trump and his counterpart Xi Jinping, which could help remove an overhang on Chinese markets. Geopolitical and trade issues are in focus, with expectations for a concrete deal between the world's two largest economies remaining low.

Analysts believe that a successful meeting between the two leaders on May 14-15 could provide an extra boost for Chinese equities, which have lagged their Asian peers even as regional markets rallied last month on easing concerns over the Iran war. Optimism over a stronger yuan is also building as the dollar has retreated. Any structural disagreements, on the other hand, could reignite volatility in local stocks.

Market participants are watching several key areas ahead of the summit, including trade tariffs. According to Macquarie Group Ltd, the base case for tariffs is for them to remain in place without a meaningful escalation. Current US levies on Chinese goods at an effective rate of around 22%, according to a JPMorgan Chase & Co estimate, are subject to an ongoing investigation, and China has pointed to those probes as a source of friction.

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An absence of further tensions "marginally improves visibility for broader China exporters by easing escalation risk and providing better supply-chain certainty, even as existing tariffs continue to cap upside," said Eugene Hsiao, head of China equity strategy at Macquarie in Hong Kong.

Companies related to energy security or the tech global supply chain are likely to get waivers, while higher levies will be particularly challenging for biotech firms with significant US revenue exposure.

The Iran war adds an additional layer of strain to US-China tensions. Washington's efforts to tighten pressure on Tehran are increasingly affecting China, which remains Iran's largest trading partner and a major buyer of its oil exports. The US has also sanctioned refiners in the Asian country that process Iranian oil. Trump has said he would discuss the Iran war with Xi during their summit.

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A signal of easing tensions on that front may help improve risk sentiment, with analysts pointing out that meetings between the two leaders have often triggered sharp swings in shares.

Tensions over chip technology have intensified ahead of the meeting, with US regulators reportedly halting tool shipment to Hua Hong Semiconductor Ltd. This followed Beijing's move to block Meta Platforms Inc.'s $2 billion bid for AI startup Manus to keep cutting-edge technology inside its borders.

It's possible for the US to moderately relax chip equipment export controls by allowing tools for more advanced 14 nanometer and 7 nanometer chips, or unofficially offer exemptions to specific companies such as Hua Hong and Shanghai Huali Microelectronics Corp., which will bode well for local players, according to Jefferies Financial Group Inc. analysts including Edison Lee.

Rare earths are expected to be a key topic as Trump looks to secure shipments from China, which accounts for more than 70% of the global supply. Since late October, US-China policy has revolved around a fragile detente, with Xi pausing export restrictions on rare earth elements and Trump putting off curbs on Chinese access to vital American technology.

The meeting between Trump and Xi will "likely focus narrowly on trade and export controls — including tariffs, Chinese purchases of US goods such as soybeans, energy, and airplanes, and stable rare earth flows," according to Goldman Sachs Group Inc. economists including Andrew Tilton.

Beijing may provide new purchase commitments for US exports, possibly including soybeans, other agricultural products, oil and gas, and civilian aircraft, said Gabriel Wildau, managing director at advisory firm Teneo. Greater soybean purchases may improve cost structures for Chinese food producers, such as Foshan Haitian Flavouring & Food Co., Jonjee Hi-Tech Industrial and Commercial Holding Co. and Qianhe Condiment and Food Co., according to JPMorgan. China may also opt to buy more pork, beef and poultry from the US, which may impact the local hog industry already weighed down by slumping prices.