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Trump’s tariffs spared no country, but China was hit the hardest. Tensions between the two had certainly been bubbling up, but the current escalation has taken matters to an unprecedented level.

A triple-digit tariff rate on Chinese goods defies common sense in theory and in practice. It is not sustainable because it obliterates two-way trade. China is seen as bearing the brunt of this global trade reset, but disrupted trade between the two economies will hurt the US too.

Will the two countries reach a compromise? We believe so, but the timing and extent remain to be seen. In the meantime, Chinese policymakers are taking bigger fiscal and monetary steps to soften the blow, but they won’t be enough to fully compensate for the negative tariff impact.

The initial shock sent global equity markets plummeting worldwide, but the open-ended uncertainty can be more damaging. How will Chinese equities hold up as extreme volatility continues?

This environment makes it very difficult for Chinese entrepreneurs to make well-informed decisions. Exporters and manufacturers face major disruptions in supply chains and business operations, with shipments to the US nearly halted. Although we expect the tariff rate to eventually be significantly lower than the current 145%, it will likely still be substantially higher than the pre-April rate of 25%. This unpredictability requires companies to be flexible and proactively adjust production in response to rapidly changing circumstances.

Market participants tend to only focus on the large Chinese exporters and manufacturers that operate as original equipment manufacturers (OEMs) and supply major US brands. However, there are tens of thousands of small and medium-sized companies within the full-scope supply chain ecosystem, employing hundreds of millions of workers, and they are directly and immediately impacted by the US tariffs. No exporter, regardless of size, could absorb tariffs of this magnitude. We believe US companies that rely on imported products and components will continue to negotiate tariff exemptions with their government for a reprieve.

Not until a trade deal is reached, conditions will too be challenging for Chinese exporters (such as electric cars and solar panels) that have found success in overseas markets in recent years. While this might be a temporary setback for these companies in the US market, we still believe these brands could thrive outside of China in the long run if they continue to show global competitiveness.

Chinese companies will be making significant changes, although these changes won’t happen overnight. Strong cash flow and working capital are now more important than ever. These traits have always been what we look for in a company, as they will allow companies to persevere through prolonged disruptions. They could be better positioned to outperform when conditions become favorable.

Before the Trump tariffs, China’s economy was on track for recovery in the first quarter, partly due to fiscal support. GDP grew 5.1 percent from a year earlier, when other indicators such as retail sales and industrial output beat forecasts for March. The economic impact of tariffs will likely begin to show next month, but Chinese policymakers have already taken several important steps to alleviate the pain.

Firstly, addressing liquidity is a top priority. Even before the crisis, the first stage of bank recapitalization with CNY 500 billion was completed, aiming for a long-term target of CNY 1 trillion. This recapitalization gives big banks the room to manage nonperforming loans, thereby promoting more lending and ensuring a stable capital market. The crisis is expected to hasten the next phase of recapitalization, focusing on exporters with immediate capital needs and avoiding the liquidity trap.

In addition, Chinese leaders have committed to assisting exporters affected by tariffs in diversifying their markets and trade channels while shifting their focus to domestic consumers. Although this may lessen the impact, transitioning production to cater to a different consumer base will require trial and error and it will take time. Despite social media campaigns encouraging people to purchase surplus goods originally meant for the US, boosting Chinese consumption quickly is challenging, just as rebuilding a manufacturing base in the US overnight is unrealistic.

More immediate help will likely come from an acceleration of existing fiscal stimulus measures and further expansion of fiscal deficits, special bonds and special treasury bonds. We anticipate the PBOC to reduce the reserve requirement ratio (RRR) for banks and policy interest rate, and possibly offer more support for technology and innovation. Beijing has a number of policy tools at its disposal, but while fiscal stimulus can cushion the blow from US tariffs, it will not be enough to fill the gap. The upcoming Politburo meeting will be closely monitored.

A trade war between China and the US is a lose-lose situation. Common sense tells us the two nations will eventually come to the negotiation table and reach an agreement. The longer the stalemate lasts, the more damage both economies will endure, as neither side is equipped to handle the chaos from such brinkmanship.

Although the rhetoric has been heated at times, it is crucial to focus on actions rather than distractions. Even if it is the US government’s long-term goal to reduce the trade deficit and reliance on Chinese goods, without a reestablished manufacturing base, the American people will suffer from disorderly trade.

The likelihood of negotiations between the US and China are also influenced by their interactions with other trading partners. While China could form stronger ties with other countries that are hurting from US tariffs, the US could try to isolate China by agreeing to more favorable trade terms with other countries.

Beijing has stepped up efforts to stabilize and strengthen its capital markets, with the so-called national team increasing its purchase of listed shares via ETFs.

On top of that, A-share companies are tapping into re-lending facilities for share buybacks to support prices. It is clear Beijing intends to be a stabilizing force, to maintain normal operation of its capital markets and buoy investor confidence.

The potential ADR delisting could be a strategic move by the US. While it could lead to the de-listings of Chinese ADRs from the US market, its impact today is less significant than it would have been 3-4 years ago. During the past four years, there have been no major ADR issuances or IPOs. Furthermore, the majority of Chinese ADRs are now dual listed on the Hong Kong Stock Exchange, providing investors a viable alternative. Only a few ADRs are not dual listed at this point. Should the US delisting occur, Hong Kong is expected to seize the opportunity by streamlining and fast-tracking the listing process for these companies in Hong Kong.

Staying calm to identify the signal from the noise, while challenging, is always the key to successful investing. At this stage, many questions remain unanswered as tariff developments and potential investment implications change day by day. But we are accustomed to investing and positioning for longer-term gains in a challenging environment, particularly given the past few years for China equities. We remained disciplined and committed to our process, believing high quality companies with solid business models will be able to navigate this tariff shock.