Analysts say China's financial markets may level off in the near term as caution grows ahead of high-stakes talks between Chinese President Xi Jinping and his U.S. counterpart Donald Trump at a G20 meeting in Argentina at the end of this month.
But while any progress in dialling down the trade war heat would likely boost Chinese shares, the sugar rush is expected to quickly fade, with markets left to focus on China's slowing economy and the likelihood that Sino-U.S. ties will remain strained.
"Market confidence is highly related to the Sino-U.S. trade frictions ... A genuine bottoming out of the capital markets in the short term depends on whether a deal can be reached" at the G20 meeting, said Cao Yuanzheng, chief economist at Bank of China International.
Investors are not optimistic, but are leaving room for surprises.
"Mr. Trump is unpredictable," said Lin Lu, a professional investor in Shanghai. "You never know when he'll do an about-face."
Even in the case of a deal, however, longer-term prospects are "not very sanguine, if the U.S. treats China as a strategic rival," Cao said.
Moreover, "internally, China still faces heavy economic downward pressure," he added.
Those pressures weighed on the Shanghai Composite index on Thursday, pulling it down to close 0.2 percent lower. The index has tumbled more than 20 percent so far this year.
The blue-chip CSI300 index finished down 0.4 percent, weighed by financial and real estate firms that have risen in recent sessions on hopes that official growth boosting measures will cushion the impact of the trade war and slowing economic growth.
In Hong Kong, gains by Tencent Holdings Ltd lifted the Hang Seng index 0.4 percent in afternoon trade, but the China Enterprises Index was 0.3 percent lower.
Still, stimulus efforts will take some time to kick in, and many analysts believe business conditions in China will get worse before they get better.
Further policy easing also could create pressures of its own.
Recent weak data have sparked speculation that China's central bank could resort to a rare cut in the country's benchmark interest rate to jumpstart economic activity, which was cooling even before the trade dispute flared.
That could put significant pressure on China's yuan, particularly at a time when the U.S. central bank is continuing to raise rates, and add to worries about a further jump in corporate and household debt.
"In addition to the trade war element, the Fed will likely raise rates three times next year," said Jiang Mingde, chief consultant at Shanghai Yixin Weiye Investment Management Co.
"China's economy is on a downward slope. GDP growth was only 6.5 percent in Q3. Next year, GDP will take a step down but we don't know by how much."
Oxford Economics forecasts 2019 growth could cool to 6 percent, the weakest annual expansion on record, if the U.S. proceeds with a sharp hike in tariffs on Chinese goods from Jan. 1 and China retaliates.
Rising U.S. and falling Chinese rates have already pushed the yield on thinly traded one-year Chinese government bonds below that of their U.S. counterparts.
On Thursday, they yielded 2.63 percent, 3.9 basis points (bps) lower than one-year U.S. bills, at 2.669 percent. Spreads on benchmark 10-year bonds have also narrowed to around 30 bps from 150 bps at end-2017, according to Refinitiv Eikon data.
The yuan weakened slightly on Thursday and was trading at 6.9297 per dollar at 0714 GMT, with traders treading cautiously ahead of the G20 meeting. - Reuters