Trade tensions between the US and China have eased recently. A new agreement has led to mutual tariff reductions. China is strategically using its control over rare earth materials and expects tariffs to stay unchanged until 2026. Discussions are focused on practical arrangements. Even with higher tariffs, China’s exports remain strong. This strength comes from diversifying markets, upgrading technology, and innovating. In the third quarter, net exports helped drive growth, offsetting weak domestic demand. China’s greater self-reliance and reduced imports have boosted its current account surplus, which is now the highest since 2011.

Rising Total Factor Productivity

China’s total factor productivity is increasing. Automation and digitalization are improving export competitiveness, especially in manufacturing. The 15th Five Year Plan highlights technology and services exports, leading to higher current account surplus forecasts for 2025-2027. Updated projections are 3.3%, 2.5%, and 2% of GDP, up from earlier estimates of 2.8%, 1.7%, and 1.4%. We think the peak worries about the US-China trade situation are now behind us. This suggests tariffs will remain steady until 2026, reducing the chance of market shocks and helping stabilize currency volatility in the coming weeks. Traders should focus on economic fundamentals rather than headline risks. China’s growing current account surplus, projected to reach 3.3% of GDP in 2025, will support the Yuan. Recently, data from China’s General Administration of Customs revealed that October exports rose 7.1% from a year earlier, indicating ongoing currency strength. Therefore, strategies that take advantage of a stronger Yuan are worth considering, especially since the USD/CNH pair has recently hit multi-month lows around 7.15. With a major escalation now seeming unlikely, selling volatility on the Yuan might be a smart strategy for the near future. The implied volatility for one-month USD/CNH options has decreased to levels not seen since before the trade tensions began in 2018, recently at about 4.2%. This situation is beneficial for option-selling strategies, which profit from a stable or slowly moving currency pair.

Turnaround in Trade Dynamics

This marks a clear change from the trend of the 2010s, when China’s surplus was decreasing, and the Yuan faced pressure. The renewed productivity is helping to keep export prices competitive, which is key to this turnaround. This export strength suggests that China can hold on to its global market share, supporting the value of its currency. The resilience in exports should also support industrial commodity prices, as China’s manufacturing sector plays a vital role in global demand. However, the weakness in domestic consumption might limit growth for assets tied closely to China’s internal economy. For derivatives tied to equity indices like the Hang Seng, the reduced geopolitical tensions are a positive sign. Create your live VT Markets account and start trading now.

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