Hong Kong stocks dip after trade rally

[WORLD] Hong Kong's Hang Seng Index experienced a significant pullback on Tuesday, May 13, 2025, erasing earlier gains spurred by a landmark U.S.-China trade agreement. The index had surged over 3% on Monday after the two economic giants announced a 90-day suspension of elevated tariffs, but investor enthusiasm waned amid profit-taking and lingering uncertainties.

Trade Truce Sparks Initial Optimism

The market's initial rally was fueled by the unexpected announcement that the United States would reduce tariffs on Chinese goods from 145% to 30%, while China would lower tariffs on U.S. products from 125% to 10%. This move, aimed at de-escalating the ongoing trade war, was seen as a positive step toward stabilizing global markets. The Hang Seng Index closed Monday at 23,320 points, marking a 1.65% increase.

The agreement followed several weeks of behind-the-scenes negotiations between trade envoys from both countries, culminating in a surprise joint statement from Beijing and Washington. According to sources close to the talks, key concessions included increased access for American agricultural exports and a pledge from China to curb industrial subsidies. Market watchers interpreted the announcement as a temporary détente rather than a full resolution of long-standing economic frictions.

Market Correction and Profit-Taking

However, the optimism proved short-lived as investors began to take profits on Tuesday. The Hang Seng Index closed at 22,941 points, a 0.28% decrease from the previous session. Analysts noted that the market lacked further momentum following the initial surge, leading to a natural correction.

"Given the current market momentum and our tracking of sentiment on China's social media, the risk of repeating the epic boom and bust in 2015 could rise rapidly in coming weeks," said Ting Lu, chief China economist at Nomura.

The subdued investor response may also reflect broader concerns over China’s domestic economic outlook. While GDP growth for Q1 2025 met expectations at 4.8%, indicators such as industrial output and youth unemployment have shown signs of strain. The People’s Bank of China (PBOC) has signaled its readiness to inject liquidity if needed, but analysts argue that deeper structural reforms may be necessary to sustain long-term confidence.

Lingering Uncertainties and Investor Caution

Despite the tariff rollback, uncertainties remain regarding the long-term implications of the trade agreement. Analysts caution that the deal is a temporary truce rather than a comprehensive resolution to the trade conflict. "The core structural issues between the two nations—particularly China’s state-led economic practices—remain unresolved," noted a report from The Australian.

Furthermore, the U.S. administration's unpredictable policy shifts continue to pose risks to market stability. "Analysts remain cautious due to the potential for rapid policy changes from the Trump administration," reported AP News.

In Washington, political reaction to the deal has been mixed. While business groups welcomed the tariff relief, several lawmakers expressed skepticism about China’s commitment to compliance. Senator Maria Torres (D-WA) warned that the agreement lacked enforcement mechanisms, stating, “We’ve seen promises before. Without a binding framework, there’s no guarantee Beijing will follow through.”

Sector-Specific Impacts

The technology sector, which had led the rally, experienced a pullback as well. The Hang Seng Tech Index, which had risen nearly 1.9% on Monday, showed signs of weakness on Tuesday. Companies like Tencent and Alibaba, which had benefited from the trade optimism, saw their stock prices stabilize or decline slightly.

Conversely, sectors such as retail and travel, which had been buoyed by expectations of improved consumer confidence, experienced mixed performances. While some companies saw gains, others faced challenges due to ongoing economic uncertainties.

International investors are also weighing currency and regulatory risks. The Chinese yuan strengthened slightly following the trade truce announcement, reflecting improved sentiment. However, continued scrutiny of Chinese firms listed overseas and the uncertain regulatory environment have made foreign portfolio managers cautious. "We're watching the yuan and Beijing's regulatory signals very closely," said an equity strategist at BlackRock Asia.

Looking Ahead

As the 90-day suspension period progresses, investors will be closely monitoring developments in U.S.-China relations and the broader global economic landscape. The outcome of this trade truce could have significant implications for market sentiment and economic stability. Analysts recommend a cautious approach, advising investors to stay informed about policy changes and to consider the potential risks associated with geopolitical tensions.