China’s senior officials will meet to discuss economic measures in response to U.S. tariffs. Attendees will include representatives from the state council, central bank, and finance ministry, focusing on strategies to stabilise capital markets.
This development has positively affected domestic markets, with the Shanghai Composite index increasing by 1% and the Hang Seng index reducing its losses to 0.5%.
Conciliatory Approach Over Retaliation
Rather than implementing countermeasures against the U.S., China is favouring a conciliatory approach, which may help alleviate market tensions during a period of considerable risk.
This recent shift in sentiment, brought about by Beijing’s focus on internal fiscal and monetary planning rather than immediate retaliation, provides much-needed clarity. For those of us watching closely, it’s not just about the official tone—it’s what follows. With senior economic leadership convening in the coming days, we anticipate a more detailed framework that could influence foreign exchange levels and domestic credit cycles.
The response from equity markets reflects this. There’s clear relief that damaging tit-for-tat policies are, at least for now, off the table. The 1% rise in the Shanghai Composite signals more than optimism—it suggests that investors are repositioning in anticipation of policy action weighted more heavily toward domestic economic support. The narrowing of declines in the Hang Seng indicates that regional capital is also beginning to absorb the implications of a steadier policy environment.
One of the likely outcomes will be a technical adjustment in liquidity operations. Based on Li’s recent guidance, stabilisation efforts may begin with state-backed purchases of equities or long-term credit easing. If the central bank adjusts repo rates or expands existing relending facilities, we may see a tangible impact on short-term volatility in benchmark equity and interest-rate derivatives.
Shifting Economic Strategies
We’ve also noticed growing alignment between the finance ministry’s public spending priorities and broader capital stabilisation objectives. Depending on how they coordinate this with the People’s Bank, it could filter through to interest rate expectations. This would directly influence curve positioning. Directional bias may start to shift, and the pricing of risk premium across front-end versus long-end contracts should be watched closely.
For now, we avoid directional exposure that assumes a hawkish follow-up. Instead, the safer move is to trade relative spreads between local and offshore markets that are likely to de-couple briefly if liquidity assurances materialise domestically faster than abroad. Deviation between dollar-yuan volatilities and comparative Asian FX contracts could allow some targeted calendar spreads where liquidity risk is mispriced.
Any signal from He or other senior officials about fiscal outlays being front-loaded in Q3 should be taken seriously. That would unlock room for defensive steepener positions on the local bond curve; the probability for this increases if central banks elsewhere remain on hold. Those viewing this from a rate perspective need to adjust inflation assumptions only marginally—inflation remains subdued, and any GDP prints above 5% will more likely reflect policy timing than organic demand.
If Zhao’s group leans toward broad capital market reform packages, this may introduce sectors with outsized sensitivity. Those with exposure to equity-linked notes may find early re-hedging is warranted—we’re already modelling outer-range movement to be less symmetrical over the coming fortnight.
Event risk, followed by policy signals, should continue to suppress outright volatility in the near term. But we wouldn’t expect this compression to last long. As talks progress, use recent pricing changes to recalibrate hedges. Adjust delta exposures where intraday liquidity has deepened, and widen limit orders slightly to capture the reactive inefficiencies that often appear post-statement.
All told, the clearer the forward policy track becomes, the more discernible pricing errors will be in short-dated instruments. We’re already analysing gamma decay on weekly options for local indices to spot early reversals or surges where the implieds remain slow to adapt.
