China shares drop, yuan lower as U.S. raises tariff stakes

SHANGHAI – China’s stocks slumped on Wednesday and the yuan was weaker as the United States threatened further import duties on Chinese goods in a sharp escalation of the trade conflict between the world’s two biggest economies.

China’s commerce ministry said it was “shocked” by Washington’s latest move, which comes just days after both countries imposed tit-for-tat tariffs on $34 billion of each other’s goods, and ups the ante in a heated trade dispute that has rattled global financial markets.

The Shanghai Composite index <.SSEC> was 2.4 percent lower in afternoon trade. The blue-chip CSI300 index <.CSI300> was also down 2.4 percent.

Investors are particularly worried the trade row could harm an already slowing Chinese economy in a blow to global investment and growth, but analysts said domestic concerns would also weigh on shares.

“Judging from (China’s) economic fundamentals and corporate earnings expectations, which are under pressure amid the trade war with the United States, the stock market is yet to reach a bottom,” said Yan Kaiwen, an analyst with China Fortune Securities.

Beijing’s commitment to its ongoing deleveraging campaign means that tight credit conditions will continue, Yan said.

Airline shares remained under heavy pressure amid fears that a falling yuan could add to fuel costs and the debt-servicing load of companies with dollar-denominated debts.

China Southern Airlines <600029.SS>, Air China <601111.SS> and China Eastern Airlines <600115.SS> extended falls, with the shares of all three companies falling nearly 8 percent. The broader CSI300 transport sub-index <.CSI300TRANS> was down 3.4 percent.

Hong Kong’s Hang Seng index <.HSI> was 1.7 percent lower.

Investors were wary of China response to the latest U.S. tariff threat, as the country’s assistant commerce minister said the proposed U.S. duties harm the World Trade Organization system and globalization.

“It is impractical for China to match tariffs by quantity,” said Frances Cheung, head of Asia macro strategy at Westpac in Singapore. “If the U.S. goes ahead with more, China needs a combination of tools and it is prudent to guard against downside risk to growth too.”

She said the downside risk to growth mainly stemmed from trade tensions.

RISK TO EXPORTS

The threat of additional tariffs on $200 billion worth of goods “would mean that around half of Chinese exports of goods to the U.S. would face significant U.S. punitive tariff measures,” Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit, said in a note.

“China’s export sector will therefore suffer a significant deterioration in export competitiveness to the U.S. compared to other emerging markets’ manufacturing exporters.”

The trade war anxiety extended to China’s yuan. Traders said they were keeping an eye on the key 6.7 per dollar level as pressure mounted on the currency.

However, the market wasn’t aggressively testing that level due to concerns it could prompt intervention, they said.

The onshore yuan <CNY=CFXS> opened at 6.6694 per dollar and was changing hands at 6.6648 as of 0607 GMT.

The offshore yuan <CNH=D3> was at 6.6805 per dollar after hitting a low of 6.6918, down nearly 0.5 percent on the day, at one point in early Asian trade.

Chinese 10-year treasury futures for September delivery <CFTU8>, the most-traded contract, were 0.21 percent higher at 95.715.

(This version of the story has been refiled to add dropped word in headline and second paragraph)

(Reporting by Andrew Galbraith and Winni Zhou; Additional reporting by Luoyan Liu; Editing by Sam Holmes & Shri Navaratnam)


Published on Tue, 10 Jul 2018 23:38:22 -0700

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