Insights 
VT 
The trade tensions between the US and China have eased, with a recent agreement leading to mutual tariff concessions. China’s approach has included strategic use of rare earth controls and an expectation that tariffs will remain steady until 2026, with negotiations focusing on pragmatic arrangements.
Despite increased tariffs, China’s exports have remained robust, largely due to diversification, upgrading, and innovation. In the third quarter, net exports were a crucial growth driver, balancing weak domestic demand. Reduced import intensity, due to domestic rebalancing and self-reliance, has also contributed to the current account surplus, which is at its highest since 2011.
Rising Total Factor Productivity
China’s total factor productivity growth is on the rise, driven by automation and digitalisation, which enhance export competitiveness, particularly in manufacturing. The 15th Five Year Plan emphasises technology and services exports, leading to an upward revision in current account forecasts for 2025-2027. Projections now anticipate surplus levels of 3.3%, 2.5%, and 2% of GDP, compared to previous forecasts of 2.8%, 1.7%, and 1.4% respectively.
We believe the peak fear surrounding the US-China trade situation is now behind us, suggesting tariffs will likely stay at their current levels into 2026. This stability reduces the likelihood of sudden market shocks, which should dampen currency volatility in the coming weeks. Traders should therefore shift their focus from headline risk to underlying economic fundamentals.
China’s large current account surplus, now projected to hit 3.3% of GDP for 2025, creates a fundamental tailwind for the Yuan. With recent data from China’s General Administration of Customs showing October exports grew a robust 7.1% year-over-year, this supports a view of continued currency strength. We should consider strategies that benefit from a stronger Yuan, as the USD/CNH pair has already tested multi-month lows around the 7.15 level.
Since a major escalation now seems unlikely, selling volatility on the Yuan could be a prudent strategy for the weeks ahead. Implied volatility for one-month USD/CNH options has already compressed to levels not seen since before the trade tensions began in 2018, recently trading near 4.2%. This environment is favorable for option-selling strategies which profit from a stable or slowly grinding currency pair.
Turnaround in Trade Dynamics
This situation marks a clear reversal of the trend we saw for most of the 2010s, when China’s surplus was shrinking and the Yuan was under pressure. The renewed rise in productivity is helping keep export prices competitive and is a key reason for this turnaround. This disinflationary export strength suggests China can maintain its global market share, underpinning the value of its currency.
This export resilience should also support industrial commodity prices, as China’s manufacturing sector remains a key engine for global demand. However, the noted weakness in domestic consumption may cap the upside for assets tied more closely to China’s internal economy. For derivatives on equity indices like the Hang Seng, the reduced geopolitical tension is a clear positive.
