Navigating China's Post-Trade Truce Market: Tactical Bullishness vs. Structural Risks

The U.S.-China trade truce announced in May 2025 has injected a much-needed dose of optimism into global markets, with Chinese equities surging and trade tensions easing temporarily. Yet, beneath the surface, unresolved structural issues—from slowing growth to sector-specific headwinds—lurk as potential spoilers. This article evaluates the sustainability of Nomura’s tactical bullish call, arguing that investors should adopt a strictly risk-managed overweight position, focusing on sectors benefiting from both the truce and domestic stimulus while avoiding cyclical bets tied to sustained policy easing.

Near-Term Catalysts: A Fragile Rally with Immediate Upside

The truce’s near-term benefits are undeniable. The suspension of punitive tariffs—reducing U.S. levies to 30% from 145% and China’s to 10% from 125%—has unlocked immediate relief for businesses and investors.

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The Hong Kong benchmark’s 3% rally in the days following the truce underscores the market’s enthusiasm. Sectors like technology exporters (e.g., semiconductor firms) and financials—which have been under pressure due to trade-related liquidity strains—are poised to benefit directly. Additionally, China’s pledge to remove non-tariff barriers (e.g., rare earth export controls) and the U.S. Treasury’s emphasis on avoiding “decoupling” signal a short-term tailwind for cross-border trade flows.

Lingering Structural Risks: Why Caution Remains Warranted

Despite the optimism, three critical risks threaten to undermine the rally:

1. Slowing Growth and Policy Lag
   China’s Q1 2025 GDP growth of 4.5% fell short of expectations, with private sector investment and consumption lagging. While the central bank’s rate cut and the activation of the stock stabilization fund have provided a floor, the delayed transmission of monetary easing into real activity suggests cyclical sectors (e.g., construction, autos) may underperform.

2. Sector-Specific Headwinds: Iron Ore and Beyond
   The truce has done little to address China’s structural overcapacity in industries like steel, where iron ore prices have fallen 15% since the trade talks began, reflecting weaker domestic demand. This underscores the challenge of relying on exports alone to offset weak domestic consumption.

3. The 90-Day Sword of Damocles
   The truce’s expiration in August 2025 looms large. Analysts like the EU Chamber of Commerce warn that unresolved issues—such as U.S. export controls on semiconductors and China’s “unreliable entity list”—could reignite tensions. A failure to negotiate a lasting deal risks a sharp retracement in equities.

The Case for a Tactical Overweight—With Discipline

Investors should lean into the near-term rally but with a strict exit strategy tied to macro and sector-specific metrics. Focus on:

• Export-Driven Sectors: Technology hardware, logistics, and consumer goods exporters stand to gain from normalized trade flows.
• Financials: Banks and insurers, which had been pressured by trade-related credit risks, now benefit from reduced geopolitical tailwinds and domestic stimulus.

Avoid:
- Cyclical Plays: Construction materials and heavy industry remain vulnerable to slowing GDP and oversupply.
- Pure Policy Bets: Sectors reliant on aggressive easing (e.g., real estate) face uncertainty around Beijing’s willingness to overextend fiscal measures.

Conclusion: Ride the Wave, But Keep an Anchor

The trade truce has created a window of opportunity for tactical investors to capitalize on the relief rally. Nomura’s “tactical overweight” call is justified for the next 3–6 months, particularly in trade-sensitive and financial sectors. However, the 90-day timeline, uneven policy transmission, and sector-specific risks demand vigilance.

Action Items:
1. Overweight technology exporters (e.g., semiconductor firms) and financials.
2. Hedge exposure to cyclical sectors using put options or sector ETFs.
3. Monitor U.S.-China talks post-August; exit if tensions resurface.

The truce is a reprieve, not a revolution. Investors must balance the upside of the current rally with the cold reality of unresolved structural challenges.

Stay informed, stay tactical.