Citi analysts said on Monday that the recent reduction in trade tariffs between the U.S. and China is more favorable than expected. They predict Chinese stocks will likely see significant gains due to the move.
According to Citi, the deescalation will have a much smaller impact on China’s exports and GDP than previously anticipated. Further negotiations could lead to additional tariff reductions, particularly the 20% levy related to China’s involvement in the fentanyl trade.
Citi expressed an optimistic outlook for Hong Kong and Chinese equities, pointing to improving U.S.-China relations and low local valuations.
“The tariff reductions were sharper and more encouraging than expected, which should boost sentiment in Hong Kong and Chinese stocks,” Citi analysts noted in a report on Monday.
On Monday, Washington and Beijing announced a deal to significantly reduce trade tariffs over the next 90 days. U.S. tariffs on China will drop from 145% to 30%, while Chinese tariffs on U.S. goods will fall from 125% to 10%.
Given China’s large trade surplus with the U.S. and the rest of the world, Citi believes these tariff reductions will benefit the Chinese economy.
The analysts also highlighted that the 20% tariff tied to fentanyl is an area where both sides could make further progress, suggesting that more cooperation from China could lead to its removal.
However, Citi warned that while the deescalation benefits Chinese trade, it lessens the urgency for Beijing to implement additional stimulus measures. The possibility of 1.5 trillion yuan ($210 billion) in fiscal stimulus has significantly decreased, and Chinese policymakers may adopt a more cautious approach moving forward.
Recent weak economic data from China has increased pressure for further stimulus, as the country faces ongoing disinflationary challenges.
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