US-China Trade Tensions: Navigating Hong Kong Equities Through Sector-Specific Opportunities

The U.S.-China trade framework agreement, tentatively agreed upon in late June 2025, has injected cautious optimism into global markets. However, the deal's uncertain timeline—pending final approval by both leaders—and ongoing legal battles over tariffs leave Hong Kong equities in a precarious balancing act. While sectors like pharmaceuticals, real estate, and aluminum are emerging as resilient performers, tech and gaming stocks remain vulnerable to regulatory and trade pressures. This article dissects the evolving landscape, highlighting where investors can find value and where caution is warranted.

Pharmaceuticals: A Beacon of Policy-Backed Resilience

The pharmaceutical sector is thriving as domestic policy support and tariff exemptions insulate it from trade headwinds. Companies like CSPC Pharmaceutical Group (0109.HK) and Hansoh Pharmaceutical (603126.SS) are benefiting from China's push to bolster its healthcare industry amid aging demographics and rising demand for generics.

Key advantages include:
- Domestic Demand Focus: 80% of CSPC's revenue comes from mainland China, shielding it from U.S. tariffs.
- Regulatory Tailwinds: Beijing's initiatives to reduce drug prices have accelerated industry consolidation, favoring scale-driven firms like Hansoh.
- R&D Momentum: Investments in biosimilars and oncology drugs position these companies to capitalize on long-term growth.

Investors should consider long positions here, as these stocks are underpinned by structural tailwinds rather than volatile trade dynamics.

Real Estate: A Quiet Rebound in Conservative Markets

While the broader property sector remains subdued due to China's debt-laden developer crisis, China Overseas Land & Investment (0688.HK) is outperforming peers through its conservative balance sheet and focus on high-margin urban development projects.

Strengths include:
- Debt Discipline: The company's net gearing ratio of 30% (vs. 70% for peers) avoids regulatory scrutiny.
- Urban Renewal Projects: Beijing's urbanization policies favor firms with expertise in redeveloping older urban areas.
- Residential Demand: Affluent households in first-tier cities continue to drive sales of premium properties.

This stock offers a defensive play in a sector otherwise prone to cyclical volatility.

Aluminum: Navigating Tariffs with Domestic Dominance

The U.S. decision to hike aluminum tariffs to 50% on June 4 has raised costs for global manufacturers. However, China Hongqiao Group (1396.HK)—Asia's largest aluminum producer—thrives due to its vertical integration and reliance on domestic demand.

Key insights:
- Domestic Market Share: 70% of its output serves China's construction and automotive industries, minimizing exposure to U.S. tariffs.
- Cost Efficiency: Its bauxite mines in Guinea and Indonesia provide low-cost raw material access.
- Green Transition: Aluminum is critical for EVs and renewable energy infrastructure, aligning with China's carbon neutrality goals.

While global aluminum prices may fluctuate, this stock is a prime example of how domestic demand can offset external pressures.

Sectors to Avoid: Tech and Gaming Under Regulatory Siege

The tech sector faces a dual threat: U.S. sanctions on semiconductors and Beijing's tightened data regulations. Firms like SMIC (0981.HK)—targeted by U.S. export restrictions—are struggling to secure advanced chip-making equipment, hampering their growth. Meanwhile, gaming stocks (e.g., NetEase (9999.HK)) face headwinds from China's limits on online gaming hours and content controls.

Investment Strategy: Selective Bets Amid Uncertainty

Go Long on:
1. Policy-Backed Sectors: Pharmaceuticals (CSPC, Hansoh), real estate (China Overseas Land), and aluminum (China Hongqiao) offer stability.
2. Defensive Plays: Utilities (e.g., China Southern Power Grid (0107.HK)) and energy stocks (e.g., CNOOC (0883.HK)) provide ballast against volatility.

Avoid Until Trade Clarity:
- Cyclical industries (steel, autos) exposed to U.S. tariffs.
- Tech/gaming stocks until regulatory and trade risks subside.

Conclusion

Hong Kong equities remain a mosaic of opportunity and risk as U.S.-China trade tensions linger. Investors should prioritize sectors insulated by domestic policy support and avoid those vulnerable to tariff disputes or regulatory overhang. A concrete trade deal by the June 9 deadline could unlock broader market optimism, but until then, selectivity—and a dash of patience—will be key.