Countdown to the Trump-Xi meeting: 48 hours! Hopes for Trump's tariff reductions ignite, Asian stocks soar and the Nikkei breaks 50,000.

The China-Japan summit is scheduled to be held on October 30, just 48 hours before the increase of tariffs on Chinese goods to 155%. The trade negotiations between the U.S. and China prior to the Asia-Pacific Economic Cooperation summit have sparked optimistic sentiment in the market regarding the potential cancellation of tariffs, with the Nikkei 225 index breaking the 50,000-point barrier for the first time in history.

Trade negotiation framework reaches rare earth tariff exchange transaction

In the last week of October, the market was bustling as people eagerly anticipated the highly publicized Asia-Pacific Economic Cooperation summit. Trade negotiation representatives from China and the United States consulted on the trade agreement framework that President Trump and Chinese leaders ultimately reached. The Xi-Trump meeting is scheduled to be held on October 30, just 48 hours before Chinese goods' tariffs are raised to 155%, adding immense pressure to the negotiations.

The main content of the two-day trade negotiations in Malaysia has been revealed, showing that both sides have made substantial progress on key issues. The removal of 100% of US tariffs will take effect from November 1, which is the punitive tariff that Trump threatened to impose on Chinese goods earlier this year. The implementation of export controls on rare earths to the US has been delayed by one year, which is a significant concession made by China, as rare earths are critical materials for the US defense and high-tech industries. China is resuming soybean imports, which has important political significance for American agricultural states.

The US-China trade truce will continue to be extended after the deadline of November 10, which means both sides will maintain the current tariff levels without further escalation. The handling of Section 301 fees is also under discussion, which are additional tariffs imposed by the US on China's unfair trade practices. Measures related to fentanyl and drug trafficking cooperation have become another focus of the negotiations, which is a topic of high concern in US domestic public opinion.

List of Negotiation Topics for the China-Japan Meeting:

Tariff Reduction: Eliminate 100% of U.S. tariffs, effective from November 1.

Rare Earth Concession: China Delays Implementation of Export Controls to the U.S. by One Year

Agricultural Product Procurement: China resumes soybean imports

Trade War Extended: Status quo to continue after November 10

Fentanyl Cooperation: Strengthening Drug Enforcement Cooperation

TikTok Transaction: American investors hold the majority stake, ByteDance retains less than 20%.

The TikTok deal has been finalized, with American investors holding a majority stake, while ByteDance will retain less than 20% of the shares. This deal addresses the long-standing concerns of the Trump administration regarding TikTok's national security threats, while avoiding a complete ban on the social media platform that has hundreds of millions of American users. U.S. President Trump has heightened hopes for reaching a trade agreement, stating, “I think we will reach an agreement with China. I will go to China at the beginning of next year.”

Nikkei first breaks 50,000 points, but the Chinese stock market lags behind

(Source: Trading View)

It is worth noting that the Nikkei 225 index broke through the 50,000-point mark for the first time in history on October 27. This historic breakthrough indicates that the Asian market has very high expectations for the trade easing that may come from the Xi-Trump meeting. As an export-oriented economy, Japan will directly benefit from the improvement in Sino-US trade relations, as the easing of the trade war will boost global trade conditions and supply chain stability.

Despite the news stimulating demand for risk assets, the performance of stocks listed in mainland China and Hong Kong has lagged behind the broader Asian stock market. The failure to reach a trade agreement, the possibility of negotiations getting stuck, and the potential extension of the truce agreement in the trade war have kept mainland investors on alert. The CSI 300 Index and the Shanghai Composite Index rose by 1.19% and 1.18%, respectively, while the Hang Seng Index increased by 1.05%. These gains indicate that investors are maintaining a certain level of caution ahead of the Xi-Trump meeting.

The relatively lagging performance of the Chinese stock market reflects the complex mentality of the market. On one hand, investors are hopeful for improvements in trade relations; on the other hand, they are concerned that negotiations may not reach a concrete agreement before October 30. With many key discussion points, including existing U.S. transshipment tariffs and fees, plans to impose U.S. tariffs based on rules of origin, U.S. export restrictions on goods containing U.S. software exported to China, U.S. restrictions on semiconductor exports to China, the Russia issue, and the Taiwan issue, the likelihood of reaching a practical trade agreement before the Xi-Trump meeting seems very low.

On October 27, the Australian dollar rose 0.71% against the US dollar, closing at 0.65550 USD, while gold prices plummeted 3.16%, closing below 4,000 USD for the first time since October 9. The sharp decline in gold reflects a significant improvement in market risk appetite, with investors shifting from safe-haven assets to riskier assets, driven by positive expectations that the Xi-Trump meeting may lead to trade easing.

Challenges and Policy Responses of the Chinese Economy

The latest US-China trade news comes at a critical moment for China's economy. Recent trade data and industrial profit figures indicate a rebound in external demand, boosting profit margins. Exports in September grew by 8.3% compared to the same period last year, higher than the 4.4% in August. Industrial profits increased by 21.6% year-on-year, up from 20.4% in August. These figures show that China's manufacturing sector is recovering driven by external demand.

However, the overcapacity and supply surplus continue to exacerbate the deflationary pressure troubling the economy. The production of electric vehicles, lithium batteries, and solar panels has exceeded demand, leading manufacturers to lower prices, flooding the global market with products. Alicia Garcia, Chief Economist for the Asia-Pacific region at France's foreign trade bank, commented on China's overcapacity issue: “In the context of a surge in supply, wages remain stagnant, and productivity growth aimed at improving living standards could potentially erode the middle class.”

A trade agreement between the U.S. and China that includes reducing tariffs on Chinese goods or even zero tariffs could reshape trade balance. Given the impact of declining profit margins on China's labor market, wage growth, and ultimately domestic consumption, strong demand from the U.S. may be crucial. Former People's Bank of China policymaker Yu Yongding called for stimulus measures on October 27, advocating for a strong push towards infrastructure in the next five-year plan starting in 2026.

The National Bureau of Statistics of China will release the manufacturing PMI data on October 31, with economists predicting a decline from September's 49.8 to October's 49.6. So far this year, the CSI 300 Index and the Shanghai Composite Index have increased by 19.7% and 19.2%, respectively, while the Hang Seng Index has surged by 31.3%.