(Yicai) April 7 -- China’s financial markets will still be supported by ample policy space and the growth potential of the tech industry, even though US President Donald Trump’s unexpectedly high tariff hikes might suppress investors’ appetite for risk in the short term, several Chinese securities companies said.

Markets around the world have reeled in shock after the Trump administration announced the new reciprocal tariffs on April 3, which have imposed a minimum ‘base rate’ of 10 percent on all trade partners. China was particularly hard hit with an additional 34 percent tariff on top of existing duties.

As of closing today, the Shanghai Composite Index had plunged7.34 percent, the Shenzhen Component Index by 9.66 percent, and Shenzhen’s Nasdaq-style ChiNext Board by 12.5 percent. And last week US stocks fell sharply for two straight days, and the three major European stock indices dropped across the board.

Based on experience from the trade frictions during the “Trump 1.0” era, the new tariffs may lead to the downward revision of profit expectations for mainland stocks and an increase in risk premiums, Huatai Securities said. However, as the market gradually prices in the impact of the tariffs, it will become increasingly ‘desensitized’ to the duties over time.

If reciprocal tariffs stay in place for an extended period, there is a more than 50 percent chance that the US will enter a recession, the Nanjing-based brokerage said.

Global growth, inflation, volatility in risk assets and overall uncertainty are all expected to rise sharply. China is likely to ramp up its counter-cyclical policies, which may include measures to boost consumption, increase government investment and spur the capital and real estate markets.

While Trump’s actions have increased global economic instability, China’s domestic economic cycle is strong enough to give it an edge over the US in terms of the global “comparative disadvantage” logic, said Zhang Jun, chief economist and head of the research institute at China Galaxy Securities.

China’s ample reserves and policy space can provide effective hedging at critical moments, and the fundamentals of the economy are expected to remain stable, helping the Chinese stock market to continue its upward momentum, Zhang said.

If the tariffs are implemented, there will be little room for negotiation with the US, and this will encourage China to strengthen ties with Europe and Southeast Asia, said Fu Peng, chief economist at Northeast Securities.

Exports will come under pressure, and economic growth will be restricted, Fu said. China will likely tap into its fiscal and monetary policy toolbox again, with an increased focus on supporting the domestic economy and boosting local demand. The likelihood of the central bank using interest rate tools has grown significantly, and there’s a clear push to expand domestic demand and establish a non-US demand-driven economic circle.

The main characteristic of the Trump 2.0 era is uncertainty, said Zhang Yi, chief economist at Hengtai Securities. In both macroeconomic and policy aspects, China shows signs of continued marginal improvement. In terms of the tech revolution, while the US leads in original innovation, China excels in digesting, absorbing and reintegrating innovations. In the future, in the field of artificial intelligence, China and the US are likely to embark on a path of competition and cooperation that co-exists harmoniously.

Editor: Kim Taylor