US-China Proxy Trade War Brews as US Cracks Down on Chinese Transshipments

“$3.4 billion of China’s exports were rerouted via Vietnam in May, a +30% YoY increase. Trade routed through Indonesia also saw a notable jump of +25% YoY.”

Notably, Indonesia is absent from the first batch of tariffs for August, suggesting the administration could be targeting the Southeast Asian country with a Vietnam-style trade deal.

China Economy and a US Proxy Trade War

June’s private sector PMIs signaled weaker overseas demand as domestic competition intensified, pressuring profit margins. US trade deals with China’s transshipping routes to the US could exacerbate Beijing’s challenge in addressing price wars, labor market weakness, and domestic consumption.

Private sector employment in China fell in June, potentially affecting consumer sentiment and private consumption. A further weakening in corporate profits could increase pressure on China’s labor market, putting Beijing’s policy measures under the spotlight. Corporate profits slid 9.1% in May, underscoring the impact of tariffs on competition and pricing.

Mainland China and Hong Kong Markets Respond to Tariff Silence

Market reaction to Trump’s latest tariff hikes and the absence of fresh tariffs on China boosted demand for Mainland and Hong Kong-listed stocks. However, the threat of a proxy trade war likely capped the gains on Tuesday, July 8.

US transshipment tariffs could strain US-China relations. An escalation in the US-China trade war, including renewed restrictions on rare earth mineral exports and China’s access to US tech, could impact sentiment.

In July, the CSI 300 and Shanghai Composite Index have gained 0.96% and 0.98%, respectively, while the Hang Seng Index has dropped 0.14%. US markets have also struggled as concerns that tariffs could delay Fed rate cuts weigh on market sentiment. The Nasdaq Composite Index is up just 0.21% in July.