China May Have an Edge in the Trade War. That’s a Risk for Stocks.

The U.S. and Chinese flag, shown during a meeting in 2024. (Pedro Pardo / AFP / Getty Images)

Key Points

• China’s economy shows unexpected strength, with a 4.8% GDP advance in the third quarter and an “around 5%” growth target for the year.
• Solid September export gains of 8.3% and a nine-month advance of 6.1% indicate China’s economic resilience despite U.S. tariffs.
• The U.S.-China trade dispute continues, with potential for further tariffs and non-tariff escalations, creating market uncertainty.

Unexpected strength in the Chinese economy could intensify one of the stock market’s biggest risks, a shift that could make shares more volatile, and investors more hesitant, over the coming months.

The U.S.-China trade war worsened this month as Washington and Beijing jockeyed for leverage ahead of a potential meeting between Donald Trump and Xi Jinping toward the end of the month. Beijing responded to a move by Washington to deepen the list of blacklisted China-based entities by threatening to impose controls on exports of rare-earth minerals.

President Donald Trump pushed back against that by saying the U.S. could impose a further 100% tariff on Chinese goods, which would effectively result in an embargo on exports from the world’s second-largest economy. China has already ceased buying soybeans from U.S. farmers, following $12.6 billion in purchases last year.

The two sides are attempting to make nice. Treasury Scott Bessent is hoping to establish terms this week for the summit between Trump and Jinping during the APEC meeting in South Korea. Talks between the two could defuse tensions before the current U.S.-China trade truce expires on Nov. 10.

But now, China is developing what could be a crucial edge in its negotiations with Washington. Its economy is doing just fine on its own, regardless of the U.S.’s tariffs and export controls, which might prove to be a significant risk for U.S. markets.

Officials in Beijing said Monday that they expect to meet their goal of “around 5%” growth in gross domestic product this year following a better-than-expected 4.8% advance over the three months ending in September.

China also posted solid September export gains of around 8.3%, taking the nine-month advance to around 6.1% and an overall tally of $2.78 trillion. That was despite a 27% slump in goods sold in the U.S. as big gains in Europe, Asia, and Latin America offset the impact of trade tensions between Washington and Beijing.

That could suggest Xi has a bit more room to maneuver as he prepares for talks with Trump. “Regardless of how talks go, China’s export resilience suggests that trade is about more than just U.S. tariffs, and external demand should support growth for the rest of the year,” said ING’s chief China economist, Lynn Song.

Another big change under way in Beijing in the focus of the Communist Party’s Central Committee meetings, which are taking place this week. While the gatherings have historically focused on ideology and the rule of law, they were reset this year to map out an economic agenda tied to issues of tech self-reliance, boosting domestic consumption, and national security.

None of those issues would seem to be resolved through a capitulation to Trump’s recent demands, which include the free flow of rare-earth elements and the resumption of soybean purchases.

“Language and signaling suggest that both sides would prefer to reach some sort of agreement to continue the current uneasy truce rather than see a re-escalation back to, or beyond, this year’s peak tensions in April-May,” said Song at ING.

“The odds of miscalculation remain, though, and while we see a diminishing marginal impact from further tariff hikes, the prospects of non-tariff escalations represent a notable uncertainty,” he added.

Rising tensions could be reflected in the U.S. move to support Argentina’s peso with a $20 billion currency swap line through the Treasury.

William Jackson, chief emerging markets economist at Capital Economics, argues that “China’s presence in Latin America is increasingly seen as a strategic threat by the U.S.”, given Beijing’s need to secure commodities for its domestic growth.

“The U.S. may provide financial incentives to bring countries closer to its orbit, as shown by the announcement of financial support for Argentina,” he said.

With tariff rates at the highest since 1934 and adding upward pressure on U.S. inflation readings, the last thing investors need to grapple with is a prolonged trade dispute between the world’s two biggest economies. But that certainly appears to be where we’re heading.

Write to Martin Baccardax at martin.baccardax@barrons.com