Global Markets React to China Rate Cuts and Trade Tensions

Asia-Pacific markets rose on Tuesday following China's cut to its key lending rates by 10 basis points to boost its economy amid trade tensions. The People's Bank of China reduced the 1-year loan prime rate to 3.0% and the 5-year LPR to 3.5%. Hong Kong's Hang Seng index gained 1.28%, while mainland China's CSI 300 added 0.48%. Japan's Nikkei 225 rose 0.45%, South Korea's Kospi climbed 0.29%, and Australia's S&P/ASX 200 increased 0.39%. Australia's central bank also cut its policy rate to 3.85%, its lowest level since May 2023, as inflation concerns recede. The world's largest battery manufacturer, Contemporary Amperex Technology, saw its shares jump over 11% in its Hong Kong trading debut. US stock futures were little changed, with S&P 500 futures rising less than 0.1%.

China's central bank, the People's Bank of China, cut its benchmark lending rates for the first time in 7 months, reducing the 1-year loan prime rate to 3.0% and the 5-year LPR to 3.5%. The rate cuts are part of a broader effort to boost the economy, which has been impacted by a trade war and deflationary pressures. State-backed commercial lenders also cut deposit rates by up to 25 basis points. Economists expect further stimulus measures, but at a slower pace, with some forecasting additional rate cuts by the end of the year. The Chinese economy has shown signs of resilience, with some global investment banks raising their growth forecasts, but deflation and a prolonged housing slump remain concerns.

U.S. stocks saw slim gains as investors looked past Moody's downgrade of the U.S.'s credit rating. The 30-year Treasury yield surged past 5%, a level not seen since November 2023, as the downgrade continues to impact the bond market. China accused the U.S. of undermining their preliminary trade agreement after the U.S. issued a warning against using Chinese chips, singling out Huawei. The British pound rose against the U.S. dollar after the U.K. and EU reached a landmark post-Brexit deal. Experts warned that Trump's push for a comprehensive deal with South Korea on trade and defense could reframe the U.S. as an isolated superpower.

China attracted $17.3 billion in net capital inflow in April despite the US-China trade war, with analysts expecting more foreign investment in Chinese assets as investors move away from US dollar assets due to concerns over unsustainable US debt and tax cuts.

Chinese exporters are using tactics such as under-invoicing and mislabeling goods to evade US tariffs imposed by President Donald Trump's administration. They are also using "delivered-duty-paid" shipping, where the seller pays all import duties, and shell companies to circumvent tariffs. US businesses are partnering with these exporters, often unknowingly, and are at risk of facing civil and criminal liability. Experts warn that claiming ignorance of potential customs fraud is unlikely to be a credible defense. The US Customs and Border Protection is facing challenges in curbing tariff evasion due to the high volume of trade and limited resources.

Despite a 90-day truce in its trade war with the US, China is maintaining tight control over its rare earth exports, preserving a key source of leverage in future negotiations. As part of the trade agreement, China pledged to suspend or remove "non-tariff" countermeasures, but it's unclear if this applies to export controls on rare earth minerals and associated products. US Trade Representative Jamieson Greer claimed China agreed to lift export restrictions, but there's little evidence to support this. Instead, Chinese authorities appear to be strengthening implementation and ramping up oversight, issuing new export licenses under a "one batch, one license" rule. Experts say China's export licensing regime is "here to stay" and allows Beijing to retain leverage in future trade talks.

China has tightened its grip on supplies of rare earths and other critical minerals, despite a tariff truce with the US, allowing it to potentially cut off US access. The US relies on China for 70% of its rare earth imports, and Beijing has weaponised this dependency by placing over a dozen strategic minerals under export restrictions in retaliation against US tariffs, potentially crippling US advanced manufacturing, including the production of military equipment such as the F35 fighter jet.