Asian markets bounce back on positive news for US-China trade talks

Hong Kong(CNN Business) Asian markets regained some lost ground on Tuesday, but investors are still wary about the US-China trade war.

Hong Kong's Hang Seng Index (HSI) was slightly up earlier, but down about 0.2% around 2 p.m. Hong Kong time. It tumbled 1.9% on Monday.

China's Shanghai Composite Index (SHCOMP) rallied 1.3%.

Chinese government statistics showed Tuesday that profits at China's industrial companies increased 2.6% in July, reversing a 3.1% drop in June.

But the Chinese economy still faces "relatively big downward pressure," said Zhu Hong, senior statistician from the National Bureau of Statistics, in a statement.

The turnaround in growth was mostly because of infrastructure spending, including railway projects, wrote Iris Pang, an economist for ING Group, in a Tuesday report.

She said there are still some risks that manufacturers face — private businesses that are contracted to help with such projects risk default if the time it takes for them to get payment from their work takes too long. Pang wrote that the Chinese central bank could help with that issue with supportive economic policies, like offering targeted liquidity to those types of firms to help keep them stable.

Japan'sNikkei (N225) rose 1.1%. South Korea's Kospi (KOSPI) also gained 0.3%.

Markets in the region dropped Monday in the wake of tariff hikes announced by the United States and China. But the trade war took a positive turn after signs that the two sides could come back to the bargaining table. European and US stocks bounced higher.

While the mood now isn't as "dire" as it was after the weekend's escalations, "there remains doubts with regards to how concrete the latest turn is," wrote Jingyi Pan, a market strategist for IG Group, in a research note Tuesday.

US President Donald Trump told reporters in France on Monday that "China called last night" to relay a desire to return to negotiations. Asked later about Trump's remarks, Chinese Foreign Ministry spokesman Geng Shuang said he hadn't "heard about the weekend phone calls that the US mentioned."

He added that China hopes that the United States will "not let emotions sway their feelings" in relation to trade talks.

Pan noted the "lack of confirmation from China" in her research note, adding that "few may be expecting a straight road towards a deal of late regardless of the type of conciliatory remarks."

China's central bank also set its daily reference rate for the yuan at 7.081 for one US dollar — yet another 11-year low. But the currency traded more strongly than it did Monday in both onshore and offshore trading.

Analysts at Bank of America Merrill Lynch forecast that the exchange rate will reach 7.50 yuan to one US dollar by the last quarter of the year. They expect that the currency will gradually weaken, but it could drop more sharply "when tariff increases are confirmed or escalated."

Other analysts have said that China shows no signs of engaging in a full-blown currency war, but have added that the escalating trade war likely has given Beijing less incentive to prop up its currency in the face of mounting pressure on the economy.