Stocks in China rallied on Friday despite the U.S. carrying out its threat to more than double existing tariffs on $200 billion worth of Chinese goods.
Tariffs increased to 25 percent, up from 10 percent, even as trade talks were under way between the world’s two largest economies. Chinese vice president Liu He flew to Washington, D.C., leading a delegation that is set to enter its second day of meetings.
While the escalation set off an initial wobble, markets quickly bounced back. At Friday close, the Shanghai Composite rose 3.1 percent, while the Shenzhen Component Index soared 4.03 percent. In Hong Kong, the Hang Seng Index closed the day up 0.84 percent.
Beyond China, the reaction was slightly more mixed. The Nikkei fell 0.27 percent, but South Korea’s Kospi rose 0.29 percent as did the ASX by 0.25 percent.
China vowed immediately to retaliate with its own measures although did not specify how.
“China expresses deep regret over the development and will have to take necessary countermeasures,” the Ministry of Commerce said in a statement Friday afternoon. “We hope the United States will meet us halfway, and work with us to resolve existing issues through cooperation and consultation.”
According to Bank of America Merrill Lynch, China would likely retaliate by “raising tariffs on US-manufactured autos, among other goods. China might also clamp down on soybean imports once more: imports have been rising in recent months after a huge decline in 2018.”
The bank predicted that with a 25 percent hike in tariffs, Chinese exports are likely be hit modestly and expects GDP growth to slow to 6.1 percent in 2019, compared to 6.6 percent last year. But the bank viewed the risk of a full-blown trade war in which the U.S. and China on nearly all goods exchanged between the two countries as “very unlikely.”
“We still expect a trade deal in this scenario, but brinkmanship continues for a number of weeks, during which uncertainty is elevated and there are threats of additional tariffs.”
It added: “We think the deal, when it is finally agreed upon, would walk back some of the measures that are in place, including the latest 25 percent tariffs. In addition, since this scenario signals a more hawkish stance by the administration on trade, we assume that the U.S. ratchets up the rhetoric on auto tariffs once a deal with China is achieved. But the tariffs do not get implemented.”