China bets on Xi-Trump summit to sustain trade-deal rally

Chinese financial markets are pricing in a continuation of the recent trade détente between the US and China, with investors betting heavily that the Xi Jinping-Donald Trump summit will deliver just enough concessions to sustain the rally that has fuelled stock gains and yuan appreciation over recent weeks. The prospect of the meeting is driving speculative positioning in commodities (grain and oilseed futures are rising) and sentiment surveys showing cautious optimism in Chinese investor circles. This narrative is fragile, however, dependent on Trump maintaining a pragmatic stance on trade rather than escalating tariffs as part of a broader negotiating strategy.

The summit is expected to cover trade tensions alongside the Iran conflict, which complicates the calculus. If Trump uses Iran policy divergence as leverage on trade negotiations, the détente narrative could collapse. Conversely, if both sides view the summit as an opportunity to reset from the tense rhetoric of early 2026, Chinese equities could extend gains. The timing is critical: the summit occurs as the Middle East conflict is roiling commodity markets, giving both sides a shared interest in stability. However, if the US continues to pressure China on tech exports, semiconductors, or rare earths, the détente could unwind quickly.

China's central bank has already warned of imported inflationThe rate at which prices rise across an economy. risks from higher oil and commodity prices, signalling that Beijing is viewing the geopolitical crisis as a threat to its own macro stability. If oil remains elevated, import costs will pressure China's current account and foreign-exchange reserves, potentially forcing policy shifts that could cool the recent rally in Chinese equities. Moreover, the yuan has appreciated alongside Chinese equity strength, which could trigger capital controls or reserve management adjustments if the PBOC grows concerned about outflows.

The bull case assumes that both Washington and Beijing have incentives to avoid escalation: the US wants to keep energy markets stable ahead of summer travel season, and China wants to avoid further deterioration in growth momentumThe empirical fact that winners keep winning over the medium term.. However, sceptics note that Trump's negotiating style often involves brinkmanship and threats, meaning the summit could easily turn into a high-stakes confrontation. If that occurs, Chinese equities would suffer, and the trade détente narrative would collapse. Until the summit occurs, this narrative remains data-dependent and highly sensitive to rhetoric from both capitals.