WE THINK: U.S.-China Trade Hits the Reset Button

In the first half of May, capital markets continued their rebound from April. Following the release of the U.S.-China Geneva Trade Talks Joint Statement on May 12, market sentiment briefly surged, but A-shares and Hong Kong stocks saw a pullback in the latter half of the month. For the full month, the Wind All-A Index, CSI 300, and Hang Seng Index rose by 2.38%, 1.85%, and 5.29%, respectively. Hong Kong’s market outperformed A-shares, with the Hang Seng Index up 16.1% year-to-date, making it one of the best-performing major global markets.  

This month was packed with major events—every morning seemed to bring breaking news:  

- May 12: The U.S. and China reached a first-stage agreement on tariffs in Geneva.  

- May 16: Mood’s downgraded the U.S. sovereign credit rating.  

- May 28: A U.S. trade court ruled that the Trump administration’s tariff war exceeded its authority.  

- Late May saw continued U.S. provocations—restrictions on aircraft engine exports to China, tighter controls on chip design software (EDA), and stricter visa policies for Chinese travelers.  

- Another overlooked but critical event: Japan’s 40-year bond auction flopped, signaling deeper troubles.  

In this edition of WE THINK, we’ll examine:  

1. The implications of the U.S.-China tariff agreement.  

2. The hidden message behind Japan’s failed bond auction.  

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A Trade Truce, But the Road Ahead Remains Foggy  

Before the talks, most expected a prolonged marathon of negotiations, with little hope for a quick deal. Last month, we argued that both sides were suffering under trade restrictions and predicted a high likelihood of an early agreement to resume normal trade.  

On May 12, while meeting with overseas institutions in Washington, I received the news: The U.S. and China agreed to remove 91% of tariffs, suspend 24% of the remaining 34% for 90 days, and keep 10% in place. A bilateral trade consultation mechanism was established to resolve future disputes, with talks to be held in China, the U.S., or third countries.  

The statement emphasized the global importance of U.S.-China trade and pledged to work in a spirit of openness, respect, and cooperation. While this marks a "reset" in trade relations, the next 90 days of negotiations remain uncertain.  

Recent shipping and export data show a surge in orders, with freight rates to the U.S. spiking—likely because American buyers fear future tariff shocks and are rushing to restock. Meanwhile, U.S.-EU trade talks are reportedly stalled, with Trump threatening 50% tariffs on Europe. Treasury Secretary Besant hinted that U.S.-China talks are struggling and may require direct leader-level intervention. Trump’s social media threats to scrap the deal seem like negotiation tactics—given inflation risks and midterm elections, he’s unlikely to follow through.  

The Big Picture: Despite ideological calls for decoupling, 80 years of globalization and China’s manufacturing dominance make a full split impossible in the near term. The U.S. may rebuild a few strategic industries (e.g., national security), but most consumer sectors will remain linked to China. A new trade normal is emerging.  

"Do not fear the fog obscuring the path—the road remains, whether in daylight or darkness."  Eventually, the sun will rise, and the fog will lift.  

For investors uneasy about trade volatility, avoiding highly trade-exposed sectors may be wise. But remember: Market sentiment is temporary; fundamentals and valuations always prevail.  

U.S. Domestic Struggles: Trade vs. Ideology  

On May 28, the U.S. Court of International Trade (CIT) ruled that Trump’s sweeping tariffs were unconstitutional, arguing Congress cannot grant the president "unlimited tariff powers." The White House immediately appealed, calling the ruling an overreach by "unelected judges." If the administration loses, it could still use other trade laws (e.g., Section 122 of the 1974 Trade Act), but its authority would be weakened.  

Meanwhile, on May 22, the Department of Homeland Security revoked Harvard’s SEVP certification (barring international student admissions), citing its "failure to curb anti-Semitism." Harvard sued, and a federal judge blocked the order the next day.  

These clashes—over tariffs, free speech, and institutional power—highlight America’s deep divisions and test its checks-and-balances system. Historically, courts have reined in presidential overreach—but with a conservative-majority Supreme Court, will Trump break precedent?  

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Japan’s 40-Year Bond Debacle: A Silent Crisis  

Japan’s "safest asset" just suffered its worst bond auction in history. On May 28, the 40-year JGB auction saw record-low demand, with yields spiking to 3.135% (highest since 2007). The Bank of Japan (BOJ), which owns 52% of JGBs, has been tapering purchases, fueling fears of a debt spiral.  

The Fallout:  

- Nippon Life Insurance reported ¥3.6 trillion in unrealized losses.  

- Norinchukin Bank (Japan’s agricultural lender) lost ¥1.8 trillion ($126B).  

The BOJ faces a double bind:  

- Hike rates? → Banks face massive bond losses.  

- Hold rates? → Inflation could spiral.  

After decades of deflation, Japan finally hit 2% inflation—but now, rising prices may bring new pain.  

China’s Market Outlook: Steady Growth Amid Global Turbulence  

Despite weak real estate and slow domestic demand, China’s economy stayed resilient in Q1. With trade resuming, Q2 exports are improving. Under policy support, markets remain stable.  

Key Trends:

- Hong Kong’s IPO boom: HK$76.6B raised YTD (+878% YoY), with May alone hitting HK$56B (best since 2021).  

- A-shares range-bound, HK in bull market—matching our earlier forecasts.  

Investment Strategy:  

- Many sectors remain undervalued, with plenty of opportunities.  

- Ignore noise, focus on fundamentals: High-quality, fairly priced firms will deliver long-term returns.  

Wu Weizhi  

June 2025  

本期《偉志思考》簡體中文版鏈接：

伟志思考：中美贸易按下重启键，世界离不开中国！