(Yicai) June 12 -- China-US tariff levels will likely drop to between 30 and 40 percent this year after their 90-day trade truce ends and perhaps to around 20 percent next year, while the notion of American exceptionalism may no longer hold in the investment domain, according to a senior executive at UBS Global Wealth Management.

China holds four key "negotiating cards" in its tariff talks with the United States, Hu Yifan, UBS GWM's chief investment officer for China and head of Asia-Pacific macroeconomics, said in an interview with Yicai yesterday.

The first and foremost is rare earth export controls, she said, noting that China accounts for half of global reserves, 70 percent of production, and 80 percent of refining capacity.

Rare earth minerals -- such as neodymium, dysprosium, and terbium -- are crucial in the defense, new energy, and the automotive industries, Hu pointed out. China began imposing export controls on key metallic elements such as gallium and germanium in August 2023 and has since expanded the scope of restrictions, she said.

China’s second negotiating card is the issues of fentanyl and illegal immigration controls, Hu said. US tariffs on Chinese-origin fentanyl have dropped to 10 percent from 20 percent earlier this year, she said, suggesting that “fentanyl tariffs could be further reduced if China strengthens controls.”

The third card is China's purchasing power, particularly in agriculture, energy, services, and aviation, according to Hu, while the fourth is the US’ dependence on certain Chinese consumer goods, such as electronics, which account for 20 percent of China's exports. Using Barbie dolls as an example, Hu pointed out that their “hair can only be produced in China due to safety standards and chemical material requirements.”

The US holds cards too. It enforces strict controls on high-end chips, artificial intelligence technology, and even AI foundational software, Hu said, adding that both countries remain mutually dependent.

Chinese Policy, Growth Rate

Against the backdrop of higher tariffs, China will maintain an accommodative monetary policy, with possible cuts of 50 to 100 basis points to the reserve requirement ratio, or the share of deposits that banks must hold back as cash, and interest rate reductions of 20 to 30 bps in the second half of this year, Hu said.

If tariff negotiations progress smoothly, China’s fiscal stimulus efforts may be adjusted accordingly, she added.

China can still achieve its economic growth target of around 5 percent for 2025 if tariffs fall to a reasonable level of between 30 and 40 percent with supportive fiscal policy in the second half, Hu said, but noted that the growth outcome hinges on the results of the negotiations.

On the issue of US rate cuts, Hu predicts that given a 15 percent baseline tariff scenario, US inflation would rise by one percentage point, potentially lifting core inflation to 4 percent from 3 percent. “The Fed faces a dilemma of slowing growth plus rising inflation,” she said.

Hu expects US economic growth to slow to 1.5 percent this year from 2.8 percent last year, with the labour market remaining resilient.

US Exceptionalism

US assets, particularly tech stocks, delivered the best returns for investors over the past three years, Hu said. “But this year, we believe the idea of US exceptionalism may no longer hold,” she added.

So-called US exceptionalism describes how in times of global market turmoil, capital tends to flow into the United States, treating the dollar and treasuries as “safe havens.” The greater the turmoil, the stronger the appeal of US assets.

Yet the landscape is changing. A key turning point was Moody's downgrading of the US’ credit rating this month to “Aa1” from “Aaa,” the first such downgrade in 108 years, Hu noted. "After April 2, investors stopped buying treasury bonds and started selling them," pushing the 20-year yield above 5 percent and the 10-year yield to 4.5 percent, she added.

On specific portfolio recommendations, Hu said she "remains positive on China's tech sector," particularly after breakthroughs such as DeepSeek and foreign investors have begun allocating to Chinese assets.

In the long term, AI is one of history's biggest investment opportunities, primarily concentrated in the US and China, with Europe and Japan also poised to benefit, she said, adding that power resources, global electrification, and the longevity economy tied to healthcare also present opportunities.

The US dollar will likely show weakness in the medium term, Hu said, suggesting reducing dollar cash exposure while increasing allocations to the Japanese yen, euro, British pound, and Australian dollar. For the Chinese yuan, the rate is expected to be around 7.1 against the greenback by the end of this year and 7 in the first half of next year, she pointed out.

Hu remains optimistic on hedge funds and gold, with a price target for the precious metal of USD3,500 per ounce by Dec. 31.

Editor: Martin Kadiev