China and the US have found themselves in a peculiar standoff: yes, both are engaged in a tit-for-tat escalating trade war (the worst kind, as diplomatic offramps are no longer an option and a full blown capitulation will be eventually required), and as of this morning, the trade war appears to be escalating into currency war as the offshore yuan crashed to an all time low…
… with much more coming as we previewed several days ago, but for now what matters is optics and posturing.
What we mean by that is China – where 40% of GDP is trade – is now desperate to pull off its best “none of this impacts me” impression, because once the market senses weakness, it will tear apart the eventual loser.
It also means that China will do everything in its power to avoid a plunge in its stock market, especially now that its currency is collapsing after the PBOC set the onshore yuan below the “line in the sand” level of 7.20 on Tuesday, and hinted that much more currency weakness is coming.
Beijing just crossed a line in the sand. The PBOC fixing was on the other side of the closely watched 7.20 “devaluation” line, first time since 2023. China telegraphing what comes next will be much bigger https://t.co/QKnEaC52aO pic.twitter.com/C2L6o5NAcu
— zerohedge (@zerohedge) April 8, 2025
Sure enough, both China and Hong Kong stock market rebounded after yesterday’s record rout, seemingly shrugging off President Trump’s threats of further 50% tariffs if Beijing doesn’t call off its retaliatory countermeasures: HSI +1.5%, HSCEI +3.8%, CSI300 +1.7% defiant even as China vowed to “fight to the end”, raising the risk of more tit-for-tat measures.
What drove the market higher today? Here there is the official explanation and the real one.
According to the former, Beijng’s approach was laid out in a People’s Daily opinion piece said yesterday, according to which China should “focus on its own matters” and that “the sky will not fall”:
- Consumption push: President Xi vowed to “fully unleash” consumption, and that expanding domestic demand and enhancing investment efficiency are on top of the country’s agenda. Of course, if it feels like Xi “vows” to do this every other week, and never actually does anything, it’s because, well, nothing actually ever happens. Just jawboning. But this time he has no choice.
- Frontloading stimulus: top leadership considered moving forward some stimulus measures that were planned even before Trump’s tariffs. Same thing here: China has been vowing countless stimulus measures for the past year. Unfortunately, after Japan, China has the world’s highest consolidated debt load and their fiscal space is zero (especially since unlike the USD, the yuan is .
- PBOC ensuring sufficient funding: says it firmly supports the state funds to increase its holdings of stock market index funds and stands ready to provide lending
- Insurance funds to come: NFRA will raise the upper limit for insurance companies’ equity asset allocation ratio
- Corporate buybacks: dozens of listed companies announced share buyback initiatives and stake increase plans by major shareholders and executives. They learned this lesson from the Mag 7. Only problem: unlike the Mag 7, Chinese companies don’t have tens of billions in cash flow, as such they can only pull this off once or twice and that’s it.
But, in the tradition of Occam’s Razor, the true reason for the bounce was also the simplest one, and it had to do with an unprecedented surge in China’s Plunge Protection Team, aka the National Team both vowing support (state funds including Central Huijin / China Chengtong / China Reform Hldgs all vowed support for China’s equity markets) and stepping into markets with massive buy orders.
Underscoring the unprecedented nature of China’s “National Team’s” effort, Goldman notes that a basket of eight ETFs favored by the state-backed plunge protecting funds saw record net inflow of 42b yuan ($5.7bn) yesterday, while today’s turnover reached a new record of 105b yuan (US$14.3bn) vs the YTD daily average turnover of only 16.3b yuan. This was the 3rd highest daily turnover for this basket of ETFs, on record.
Furthermore, Goldman also writes that the volume of the CSI500 this morning surpassed 2x of yesterday’s full volume, indicating the support from national team may have expanded from large-cap to middle-cap. And yes, by the time the trade war is done, the National Team will buy anything and everything that trades.
Aside from the record PPT buying, Goldman also goes on to note that flow wise, the bank’s cash pad saw 1.3x sell skew across China/HK with onshore market (2.3x seller) driving the sell skew while HK actually saw net inflow (1.2x buyer). LOs were a net buyer across the two markets, adding in Consumer / Comm Svcs / Info Tech vs seller in Utils and Staples as they rotate out of defensive names. HFs were outright sellers across onshore and offshore, weighed down by supply in H/W Tech and Home Appliance space even as we there was opportunistic dip buying in China Internet space.
Here Goldman asks a key question: the bank says that while Trump has his reasons and perhaps a grand plan, would he really want to fight Beijing as it seems determined to defend its equity market stability? To this point, Goldman notes that China could implement further domestic policy easing to offset growth drag, and the lays out the following policy levers at its disposal.
On the other hand, all Trump (and Elon Musk in the background) needs is a challenge, and if there is one thing the US is good at is manipulating markets – its own upward, and when necessary, everyone else’s sharply lower.
Those paying attention during the first trade war in 2018 would remember similar wording from the MOFCOM in Apr 2018 when the spokesperson also said Beijing will “fight to the end” yet the two sides entered into talks just the month after.
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