Tit-for-tat tariffs, again. The perennial dance of tit-for-tat tariffs between China and the US has once again intensified, disproving the optimistic pronouncements of a detente. Last week witnessed a fresh escalation, with Beijing electing to tighten export controls on rare earth minerals and graphite in direct response to Washington's further restrictions on access to American technology. This strategic countermeasure was swiftly followed by a pronouncement from the Trump administration threatening a punitive 100% additional tariff on Chinese exports. Both nations have adopted an unyielding rhetorical posture, yet paradoxically, have simultaneously affirmed their willingness to remain at the negotiating table.

More noise than actions. Trump Administration’s recent threats to China, while appearing significant at first glance, are viewed by us with a different perspective. Notwithstanding the likelihood that these threats could very well be another negotiation tactic ahead of a prospective meeting later this month, it is crucial to recognise that China has been strategically orienting its economic structure since the onset of the US-China trade tensions during the first Trump administration.

This pivot is evidenced by a substantial decline in exports to the US, which now constitutes merely 10% of total exports in 3Q25 (or c.2% of GDP) - a significant reduction from approximately 20% prior to 2019 (or c.4% GDP) as Beijing actively strengthens its commercial ties with alternative trading partners. Concurrently, US tech-related exports have already been subjected to stringent controls well before the current administration's latest rhetoric. Consequently, even if these threats were to fully materialise, their actual impact appears manageable, and in fact, in some respects, reinforces our constructive outlook on the Chinese market.

Policy stimulus in sight. We contend that added macro uncertainties stemming from these trade salvos could finally prompt Beijing to unleash long-awaited fiscal policy measures. While global capital markets have exhibited growing complacency towards US-China trade tariffs throughout the year, Chinese regulators have evidently adopted a more cautious stance on this front, opting to remain on the sidelines thus far and conserving fiscal "dry powder" for precisely such a contingency.

Greater efforts are now likely to be directed towards technological innovations, particularly in establishing a domestic AI ecosystem akin to that seen in the US, thereby accelerating AI infrastructure and chip manufacturing developments. This strategic push aims to bolster China's self-sufficiency and secure victory in the nascent sovereign AI race. Furthermore, this evolving landscape could also compel regulators to introduce long-anticipated fiscal stimulus measures, specifically targeting a boost in domestic consumption and the stabilisation of the beleaguered real estate sector, thereby providing stronger underpinning for China's domestic economic prospects.

Valuation discount offers downside protection. Crucially, despite a strong rally in 3Q25 fuelled by a resurgence in both domestic and foreign capital flows, valuation discount between China equities and that of their DM counterparts remain significant, standing at 30%-35%. This wide discount positions China equities favourably, serving both as a buffer against uncertainties arising from trade tariffs and as an attractive proposition for investors seeking geographical diversification.

Investors should resist the temptation to extrapolate political noise into investment outcomes as the rhetoric on tariffs or export controls does not alter the secular trajectory of the region’s fundamentals and ecosystems, as the technology supply chain firmly anchor at the heart of the global AI roadmap.

Advocate a barbell approach. We stay constructive on China and Asia ex-Japan equities, advocating a barbell approach, that is to overweight high quality growth names in technology, platform firms, new energy, advanced manufacturing, and beneficiaries of policy pivot such as new retail; and resilient income in Singapore REITs and large China state banks which pay attractive dividend yields.