HONG KONG: Chinese stocks tumbled along with the yuan as a pair of tweets by President Donald Trump undermined confidence in a trade agreement. Bonds climbed.
The CSI 300 Index sank as much as 4.8%, its biggest loss in nearly seven months, as it traded for the first time since April 30. The yuan weakened the most in three years. China is considering delaying a trip by its top trade negotiators to Washington this week after President Donald Trump threatened China with steeper tariffs citing slow progress in talks that were set to enter the home stretch, according to people familiar with the matter. The yield on 10-year government debt fell 6 basis points to 3.34%.
The news “distracts the market’s focus from a nascent economic recovery to short term volatility. Risk assets will be under pressure for now,” said Hao Hong, chief strategist at Bocom International Holdings Co. “Because both parties want a deal, I continue to believe that the long-term uptrend trumps short-term volatility.”
If Chinese equities see significant selling pressure, authorities are likely to intervene to support the market, Hong said.
Optimism that China and the US would reach a deal on trade helped make Shanghai equities the hottest in the world earlier this year, although lackluster corporate earnings and concern Beijing is easing back on stimulus dragged the Shanghai Composite Index down nearly 6% from its April high before Monday. The benchmark has also failed to hold above a number of key support levels as popular trades unraveled.
The offshore yuan fell as much as 1.3% to 6.8218 per dollar, its lowest since Jan 10, before trading at 6.8025 at 10.30am Hong Kong time.
“Investors will remain bearish on the yuan, as they reprice in trade war risks because the new developments are a reversal of previous positive progress,” said Ken Cheung, a senior foreign-exchange strategist at Mizuho Bank Ltd in Hong Kong. “The news was unexpected. Stop loss orders will push the yuan even lower.”
Trump previously delayed increasing tariffs on US$200 billion in goods to 25% from 10% after agreeing to a Dec 1 truce with Chinese President Xi Jinping to give their negotiators time to work out a comprehensive agreement.
“The Trade Deal with China continues, but too slowly, as they attempt to renegotiate,” Trump said in his tweet. “No!”
Trade-war proxy stocks tumbled, with ZTE Corp tumbling as much as 11% in Hong Kong and pork producer WH Group Ltd falling 12%. Exporters including Lens Technology Co and Luxshare Precision Industry Co also declined in Shenzhen, as did airlines and port developers. Gold producers climbed as investors fled to haven stocks.
The Hang Seng China Enterprises Index dropped 3.4% in Hong Kong, while the Shanghai Composite Index retreated 4.3%.
News that China’s central bank will set lower reserve requirement ratio for mid- and small-sized banks focusing on local economies, effective May 15, had a limited impact on markets.
It’s also a busy week on the economic front in China, with manufacturing, trade and inflation data for April all scheduled. While recent readings showed signs of stability, they’ve brought volatility to bonds as traders assessed whether an improving economy is bad news for stimulus.