Xi Jinping, China's president, speaking about an open China.
Bloomberg via Getty Images
By Lucinda Shen
April 10, 2018

Markets that have been skittish in recent weeks over trade war fears received a shot in the arm Tuesday from Chinese President Xi Jinping.

The Dow Jones Industrial Average pushed up 1.6% to 24,351, while the S&P 500 popped 1.3% to 2,647 after the Chinese leader struck a placatory tone on trade in a speech Tuesday at the Boao Forum for Asia. The Chinese president said he would lower tariffs on vehicles, while working to enforce protections on intellectual property rights—two areas for which President Donald Trump has previously criticized the Middle Kingdom.

“We encourage normal technological exchanges and cooperation between Chinese and foreign enterprises, and protect the lawful intellectual property rights owned by foreign enterprises in China,” Xi said during the speech, the country’s state-owned newspaper reported. In the same address, Xi promised to reduce tariffs on goods including cars later this year, though he did not specify the size of the reduction.

Investors viewed the speech as a deescalation of the tit-for-tat tariff proposals the U.S. and China have lobbed at each other in recent weeks. In late March, the White House announced a proposed $50 billion in tariffs on Chinese goods, leading the Asian powerhouse to propose its own $50 billion in taxes against U.S. products. Trump is now weighing another $100 billion of tariffs on top of what was previously announced against China.

“I would’ve expected words like ‘China will fight to the end.’ Those are the words that came out from the Chinese embassy the day Trump announced the tariffs,” said Michael Pillsbury, an advisor to Trump during his transition into the White House, and the author of The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower. “[Xi’s speech] was quite conciliatory, which tends to take the steam out of the American trade hardliners.”

Though the speech made no direct mention to Trump or the U.S., investors took it as a sign that the two nations would be able to peacefully negotiate trade agreements without the proposed tariffs turning into a permanent fixture of Sino-U.S. relations.

“Our economists’ overall assessment of today’s speech is that it strengthens their base case that negotiations and deescalation will be the ultimate outcome in settling on a U.S.-China trade framework,” wrote Morgan Stanley strategists in an early Tuesday note to clients.

Still—only time will tell if fears of a trade war are truly off the table.

“It remains to be seen if Xi’s speech will mark a definitive change in trend or, as Ray Dalio noted in an article yesterday, “one should consider the possibility that this trade war could also become a capital war,'” Evercore ISI analyst Dennis DeBusschere wrote in a Tuesday note.

Meanwhile, even within China, officials broadly fall into two camps–the traditionalists, who hope to maintain over the country’s economy, and the reformers, who believe in the free market and hope to privatize much of the country’s state-owned enterprises. Though Xi appeared to favor the latter school of thought during his speech Tuesday, the Chinese leader has gone back and forth.

“This is not necessarily going to last, because the nationalistic voices may recoil and strike again,” Pillsbury said.

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