Impact of US-China Tariffs

The recent US-China tariff agreement, signed on May 12, has temporarily reduced US tariffs on Chinese goods from 145% to 30% (in addition to previously existing and product-specific tariffs), while Chinese tariffs on US goods have fallen from 125% to 10% (again, in addition to previously existing and productspecific tariffs).

Although market participants have interpreted this pause as a positive step in trade relations, tariffs remain significantly higher than pre-trade war levels. Further volatility in the trading relationship cannot be ruled out. The U.S. administration may still pursue other avenues for country-specific or additional product tariffs, as demonstrated by the doubling of steel and aluminium tariffs from 25% to 50%.

Equity markets have responded optimistically in both the US and Asia. However, underlying concerns persist in bond and currency markets, which could have significant implications for Hong Kong’s banking sector.

One of the most notable trends in recent months has been the general weakening of the US dollar, including against major Asian currencies. This defies its traditional role as a safe-haven currency during periods of stress. The depreciation stems, in part, from declining trust in the surety of the US dollar. If the dollar were to tumble from the pedestal as the world’s reserve currency, there is no clear successor, creating the possibility of currency chaos.

Recently, US Treasury debt was downgraded by the last major credit rating agency that was still holding it on the highest rung. Congressional dysfunction and expanding government debt contributed to this move. Institutional investors now hold more Treasuries and show greater willingness to sell during market stress, which increases volatility. This has contributed to higher term premia and helped form structurally higher interest rates. Barring a financial crisis that causes central banks to resurrect Great Financial Crisis-era policies, rates are unlikely to return to the levels of the 2010s.

For Hong Kong banks, these currency and yield movements produce both challenges and opportunities. A weaker dollar affects USD-denominated transactions that form the backbone of many banks’ international business. Higher US Treasury yields could tighten global liquidity, potentially increasing borrowing costs for Asian corporations that rely on Hong Kong’s financial institutions for capital. These issues may support the rise of other currencies.

The uncertainty around future tariff negotiations presents another layer of complexity. While the recent reductions provide some relief, material duties remain on critical Chinese exports like steel and aluminium, while tariffs on copper and semiconductors may be levied later in the year. This may accelerate the ongoing trend of supply chain relocation, with low-margin manufacturers increasingly moving operations from China to Southeast Asia. For firms with exposure to the current supply chain order, this shift raises important questions about credit quality and risk management.

In this environment, Hong Kong banks must navigate several pressing issues. Loan growth may slow as corporations hesitate to make major investments amid ongoing trade policy uncertainty, while consumer credit could tighten if economic conditions worsen across Asia. Historically, credit conditions tend to tighten in times of uncertainty, meaning both supply and demand for credit may degrade.

Yet within these challenges there are significant opportunities. While KPMG Economics expects global growth to cool in 2025 before regaining some ground in 2026 (Figure 1), Asia is expected to remain the primary driver of growth. Moderating growth in China and the US account for a sizeable portion of slowing global growth. The ongoing manufacturing shift to Southeast Asia likely creates new demand for trade financing in emerging markets like Indonesia, Vietnam and Thailand. However, these countries also face the risk of “reciprocal” tariffs being reinstated.

The path forward is fraught with uncertainty and navigation requires both caution and adaptability. While short-term volatility may persist, long-term resilience in the face of economic and policy shifts remains possible.