WE THINK: The U.S. Trifecta Selloff and Prospects for U.S.-China Trade Negotiations

The global capital markets faced severe turbulence in early April following the Trump administration's imposition of reciprocal tariffs. China's immediate retaliatory measures amplified concerns over an uncontrolled trade war escalation. Between April 2-7, the Nasdaq plunged 15.98%, bottoming at 14,787. On April 7, post-Qingming holiday trading saw A-shares and Hong Kong equities mirror the selloff, with the Wind All-A Index and Hang Seng Tech Index dropping 9.26% and 17.16%, respectively. Market stabilization efforts emerged swiftly, with state-backed entities (Huijin, Chengtong, Guoxin) stepping in to support ETFs and blue chips, backed by PBOC liquidity provisions.  

The April 2 tariff announcement marked the final end of the trade order that had been maintained in recent years, initiating a contentious phase of renegotiation and adjustment.

Why has there been a rare triple killing of currency, bonds and stocks in the US recently? What is the probability of the recent opening of trade negotiations between the United States and China to reach an agreement? This issue of WE THINK, we on the above two topics to discuss.

Why the U.S. Faces a Triple Sell-off in Currency, Bonds, and Stocks? What Are Investors Worried About?  

Historically, simultaneous plunges in currency, sovereign bonds, and equities have been more common in emerging markets—typically triggered by rapid capital flight and a collapse in long-term investor confidence.

Before delving deeper, we recommend reviewing A User’s Guide to Reshaping Global Trade (Nov 2024) by Stephen Milan, now Chair of the White House Council of Economic Advisers. The report, widely discussed among Wall Street and Chinese investors, examines the root causes of U.S. manufacturing outflow and proposes solutions. Its insights resonated strongly with policymakers, securing Milan his current role.

The report identifies the Triffin dilemma as a key structural flaw: the dollar’s reserve-currency status perpetuates overvaluation, eroding U.S. manufacturing competitiveness and widening trade deficits.

4 Policy Priorities:

1. Reduce Current Account Deficits – Trim trade imbalances.  

2. Revitalize Manufacturing – Onshore critical production capacity.  

3. Boost Corporate Competitiveness – Enhance export-driven growth.  

4. Cost-Sharing for Dollar Hegemony – Incentivize allies to bear a greater share of reserve-currency burdens.  

The Milan Report recommends 3 primary policy instruments to achieve these objectives:

1. Tariffs

Ÿ A tool frequently used by the Trump administration.

Ÿ Serves to: Increase fiscal revenue; Protect domestic industries; Provide leverage in international negotiations

2. Exchange Rate Policy

Ÿ Potential pursuit of USD depreciation to enhance export competitiveness.

Ÿ Implementation methods: Multilateral agreements (e.g., coordinated actions with other nations);  Unilateral measures if necessary

3. Security-Linked Measures

Ÿ Leveraging U.S. security provisions to link with trade and financial policies;

Ÿ Objectives: Secure concessions from partner nations; Ensure effective execution of exchange rate policies; Restructure trade and financial systems to favor U.S. interests

The report extensively addresses the Triffin Dilemma and proposes policy solutions, but critical questions remain. While I thoroughly reviewed its analysis, substantial concerns persist regarding potential large-scale reforms under a determined Trump administration. The Milan Report exhaustively analyzes the negative impacts of the dollar's reserve currency status on the U.S. economy and manufacturing sector, yet completely overlooks its substantial benefits. If dollar hegemony brought no advantages, why has every administration since 1945 relentlessly upheld: The petrodollar system; dollar dominance. A weaker dollar may marginally boost manufacturing, but the report fails to quantify. The full scale of potential downside risks, whether benefits truly outweigh costs.

No decision comes without costs—policy choices always involve weighing relative gains or mitigating lesser evils.

The Trump administration's April 2 "reciprocal tariffs" announcement, timed to the U.S. Tax Day, demonstrates a clear pattern: calculating only the perceived "gains" while completely neglecting to consider potential "losses."

The April 2nd events matched the Milan Report's predictions, making its other forecasts more credible. This explains: The dollar's persistent weakness, it’s a early signs of capital flight from dollar assets. Key uncertainties remain: Will events continue as the Report projected? Could establishment economists change Trump's policies? With America's "most flexible" president, outcomes remain unpredictable. Markets now consider: Will USD depreciate sharply to boost manufacturing? Given high uncertainty, prudent investors are rebalancing global portfolios to hedge against potential tariff shocks like April 2's.

Likelihood of near-term US-China trade deal?

In this escalation, US raised China tariffs to 145%, China countered with 120%. This signals not the start, but the climax - and likely endgame - of the trade war. Post-this showdown, major Sino-US trade conflicts may subside long-term.

As China's official statement noted, tariffs exceeding 120% effectively halt trade. Further increases become merely numerical posturing - a game China refuses to play. Trump himself recently acknowledged 145% tariffs are excessive. Recent data shows: Plunging ocean freight rates (China to US East/West coasts), dramatic shipment declines. US retailers' preemptive stockpiling (2023) maintains short-term shelf inventory, but growing out-of-stock risks emerge over time. After Trump's meeting with the CEOs of Walmart, Tajik and other retail giants, there were rumours that Walmart had asked its Chinese suppliers to start continuing shipments. Although this period of time the U.S. side has repeatedly revealed that it hopes to reach a trade agreement with China as soon as possible, and China has denied that it has opened trade talks with the United States. But at the same time, in order to avoid the disruption of the manufacturing supply chain and important consumer goods out of stock, China and the United States are low-key for as soon as possible for the other side of a number of products for tariff exemptions, are in fact to do to the trade conflict to cool things.

This time, the two sides imposed more than 100% tariffs on each other, I understand that it is a ‘trial separation’ between husband and wife. In the past few years, some people in the United States have been clamouring for decoupling from China, and this stage of trade disruption is just a test to see how the days after decoupling will be like. Is it happier? Or a lesser life? Or can we bite the bullet and get on with our lives after decoupling? This ‘trial divorce’ life experience, for both sides of the next negotiation how to talk, to talk or not are very important.

Globalization's 80-year evolution has created deeply interconnected supply chains for critical products like aircraft, autos, and electronics. No nation - not even the U.S. - can fully produce these alone. Complete decoupling from China, the manufacturing leader, is unrealistic. While leaders may act impulsively, voters won't tolerate the severe impact on daily life. The trade system needs rebalancing, but globalization's momentum is unstoppable.

Post-WWII Globalization in Three Phases  

1. Globalization 1.0 (1945-2018): The WTO-ruled free trade era.  

2. Transitional 1.5 (2018-April 2025):  

   - U.S. policy focused on "minimizing China's interests" through alliances and "friendly-shore" outsourcing.  

   - Results: China's surplus with the U.S. shrank, but the U.S. trade deficit kept rising as production shifted to Southeast Asia, Mexico, and Europe—not America.  

3. Globalization 2.0 (April 2025 onward):  

   - Marked by Trump’s "reciprocal tariffs", prioritizing "maximizing U.S. interests" over containing China.  

   - When "America First" clashed with "minimizing China's gains," the U.S. chose self-interest.  

From 2018-April 2025, the U.S. imposed special tariffs only on China. Now, it targets global trade—effectively taxing American consumers. Under these 2.0 rules, only deals with China and the EU are needed to set the framework, as most nations lack bargaining power to resist U.S. terms

China demonstrates stronger resilience in this "trial separation," holding tangible goods versus America's currency—which loses value without goods. While China's endurance is superior, prolonged trade disruption would still hurt its export-oriented businesses. The U.S., quietly exempting key product tariffs to avoid shortages, also seeks to bolster its staying power. Yet "war" benefits neither.  

Recent signs suggest renewed dialogue. China's firm resolve has exposed paper tigers and earned reluctant respect—a foundation for rational negotiations. A mutually acceptable deal is likely, which would solidify trade rules 2.0. While medium/long-term U.S.-China relations remain uncertain, a near-term trade agreement and resumed commerce appear probable.

How to view the next evolution of China's economy and capital market?

China's economic outlook splits analysts: Pessimists fear new tariffs will stifle external demand, hurting growth and stocks. Optimists argue domestic demand drives China's economy, outweighing trade impacts. With 30 years in markets, I find such stark divergence reassuring—it often signals lower risk, not higher.

Despite U.S. tariffs imposed since 2018, China's stock market rallied until early 2021, showing resilience to external pressures. The subsequent downturn aligned with real estate market cooling after regulatory tightening, underscoring domestic demand's pivotal role in driving China's economic and market cycles. Therefore, I personally prefer that domestic demand is the first factor that determines China's economic cycle and stock market cycle.

After four years of declining property sales and prices, the real estate bubble has significantly deflated. Meanwhile, China's capital market valuations remain low, while monetary and fiscal policies shifted supportive since September last year. Policymakers are actively addressing balance sheet recession risks and stabilizing asset prices. Though further easing may be gradual, the likelihood of severe economic or market downturns appears limited.  

While short-term upside may face pressure from weaker global demand, China's economy and markets have already decoupled from major overseas cycles, mitigating external risks. The focus remains on domestic policy effectiveness rather than external factors.  

For skilled asset managers, this flat market offers prime alpha-hunting opportunities.

When there is no systemic downside risk to the overall valuation level, the alpha of the portfolio will be reflected in the yield. This can be seen from the stock pricing model: P=EPS*PE. When PE is stable, if the portfolio we build this year, the portfolio will be able to fully enjoy the growth brought by the improvement in performance. This environment is a bit similar to that from the beginning of 2013 to June 2014.

While the new global order takes shape, obsessing over macro risks may be misguided. Focus instead on deep research and undervalued quality assets. Stay disciplined—what seems turbulent today may appear insignificant in hindsight.

Wu Weizhi

May 5^th 2025

本期《偉志思考》簡體中文版鏈接：

伟志思考：美国为何出现汇债股三杀，中美近期开启谈判达成协议的概率有多大？