(Bloomberg) -- Chinese traders are on tenterhooks ahead of Wednesday's market reopen as the resumption of a trade war with the US shakes up the investment landscape.
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President Donald Trump's 10% levy on Chinese goods has just come into effect. Beijing is fighting back with its own retaliatory measures including an antitrust investigation into Google -- though some see the response as measured to avoid a full-blown standoff.
Volatility is set to stay high as investors brace for an escalation while also hedging against the odds of a sudden breakthrough. The offshore yuan recovered after a knee-jerk slide on Tuesday. Chinese stocks in Hong Kong have displayed surprising resilience, as some dismiss the tit-for-tat moves as posturing ahead of real negotiations by Trump and President Xi Jinping.
"I still believe Trump tariffs are a means of bargaining chips, and there is good reason to believe China may be keen to negotiate," said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. "Any sign that both Xi and Trump have had a good talk or both countries expressed commitment to work on a deal should qualify as a temporary truce and be supportive of sentiment."
The Hang Seng China Enterprises Index ended 3.5% higher on Tuesday. The offshore yuan reversed losses to advance 0.2% versus the dollar as of 4:45 p.m. in Hong Kong.
With Mexico and Canada reaching last-minute deals to avert tariffs, a similar de-escalation in Sino-American tensions is also possible. Yet regardless of what happens on the trade war front, China's moribund economy will be a major overhang for markets.
China's manufacturing activity unexpectedly slowed for a second straight month in January, a private survey showed. Residential sales resumed falling last month, suggesting the property sector still has some way to go before it can show a sustained recovery.
Consumer spending during the holidays will offer the latest insight into the health of the world's second-largest economy.
Yuan Pressure
As trade tensions and economic weakness pressure the yuan, currency traders are waiting for Wednesday's daily reference rate to gauge how authorities plan to deal with any further depreciation.
Read: China May Loosen Grip on Yuan If Trump Reignites Trade War