CHINESE shares ended higher and the yuan strengthened Friday as investors bet China and would be able to salvage a trade deal, despite a hike in U.S. tariffs that sharply escalated their dispute.

Even though the U.S. tariff increase on Chinese goods went into effect at midday as planned, investors took heart that both sides were returning to the negotiating table later Friday for a second day of talks.

Traders also expect China may announce more policy easing and support measures if the latest U.S. move heightens pressure on China’s economy.

“The fact that the two sides have agreed to continue negotiations Friday is offering a glimmer of hope that the relationship between the two powers hasn’t deteriorated beyond repair,” said Jasper Lawler, head of research at London Capital Group.

China’s major stock indexes ended more than 3 percent higher Friday, rebounding sharply in afternoon trade after briefly dipping into the red when the higher U.S. tariffs took effect.

While the quick turnaround sparked questions of State support, Khiem Do, head of greater China investments, global markets at Barings, said whether the markets were “boosted by non-commercial buying support is unknown.”

Despite Friday’s surge, the Shanghai Composite Index and the blue-chip index still shed 4.7 percent and 4.5 percent on the week, pushing them to near three-month lows.

Global markets were stunned by U.S. President Donald Trump’s announcement last Sunday that he would raise existing tariffs on US$200 billion worth of Chinese goods in the midst of trade negotiations. China has said it will retaliate but has not yet given details.

Investors had largely been betting on a U.S.-China trade deal soon, and the escalation comes as China’s economy has started to show signs of stabilization, thanks to a flurry of growth-boosting measures.

“The market has had a couple of days to look at this scenario, and has partially factored in an increase in tariffs from 10 to 25 percent,” said Dennis Lam, equity analyst at UBS Global Wealth Management’s chief investment office in Hong Kong.

“More importantly, these negotiations are still ongoing. There is no concrete evidence that things will get a lot worse,” he said, adding that the market will focus on whether positive news emerges over the weekend from the Washington talks.

The yuan finished the domestic trading session up 0.2 percent at 6.8118 per dollar, but was still down 1.13 percent for the week, on track for its worst week versus the greenback since July 2018. (SD-Agencies)