Chinese stocks plunge 5% as trade tensions escalate

  • Chinese stocks have plunged more than 5% on Monday, dragged lower by escalating trade tensions with the United States.
  • The benchmark Shanghai Composite Index has fallen more than 5%, putting it on track to record the largest one-day percentage decline since October last year.
  • The offshore traded yuan has also fallen to the weakest level against the greenback since February.
  • Commodity futures and stocks across Asia are also down heavily, as are most Asian currencies.
  • On Sunday, US President Donald Trump threatened to lift tariffs on Chinese imports entering the US, the first tranche set to increase on Friday. There are reports that China may cancel scheduled trade talks following the threat.

Chinese stocks have been hammered on Monday with all major indexes located on the mainland down by more than 5%.

The Chinese yuan has also been hammered while Hong Kong’s Hang Seng is also down by 3.3%.

Here’s how Chinese markets are currently faring midway through the session.

Shanghai Composite 2,918.65 , -5.19%
SSE50 2,793.51 , -5.15%
Shenzhen Composite 1,540.71 , -5.86%
CSI300 3,697.41 , -5.51%
CSI500 4,982.68 , -6.12%
Hang Seng 29,384.01 , -3.28%
USD/CNY 6.7818 , 0.71%
USD/CNH 6.7961 , 0.95%

Yes, it’s really ugly, reflecting a sudden escalation in trade tensions with the United States following a pair of tweets from US President Donald Trump before Asian markets opened on Monday.

“For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods,” Trump tweeted.

“These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars… of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%.”

Trump cited slow progress in reaching a trade deal with China as the reason behind the decision, wrong-footing investors, especially those in China, who had been expecting this week to potentially bring a lasting trade truce between the two nations as soon as Friday.

Now it appears US tariffs may actually be increased on this date.

In response, several media outlets have reported that trade talks between the two sides, originally scheduled to resume in Washington D.C on Wednesday, may be cancelled based on sources familiar with discussions.

One source told CNBC that Trump’s decision to lift the tariff rate was meant to send a message to China’s trade delegation, led by Chinese Vice Premier Liu, not to come to the US with more “empty offers”.

Chinese stock investors, at least at this juncture, have wasted little time in trimming expectations for a lasting trade agreement being reached between the two sides.

The benchmark Shanghai Composite Index has tumbled 5.19% to 2,918.6, leaving it at the lowest level since late February this year. The index has now fallen 11.25% from the multi-year high of 3,288.5 struck less than a month ago.

Monday’s decline is currently on track to be the largest in percentage terms since October 11, 2018.

The losses on the Composite are being mirrored by other major mainland indexes which have also fallen over 5% from Tuesday’s closing level, when Chinese markets last traded before Labour Day holidays.

The tech-heavy ChiNext Composite is bearing the brunt of the selling pressure, nursing a decline of 6.5% at the mid-session break.

News that China’s central bank, the PBoC, will cut the required reserve ratio (RRR) for some small and medium-sized banks from May 15 has done little to stymie the selloff.

The decision to cut the RRR for around 1,000 smaller lenders to 8% is expected to free up around 280 billion yuan in cash to finance loans to China’s private sector, the People’s Bank of China said in an online statement.

Along with renewed monetary policy support, the Chinese yuan — whether traded on the Chinese mainland or in offshore markets — has also fallen sharply on Monday in response to the trade headlines.

The USD/CNH — yuan traded in offshore markets — has surged close to 1%, leaving it at levels not seen since early February this year. It briefly traded above 6.82 earlier in the session, a level not seen since early January.

A higher USD/CNH rate indicates the US dollar has strengthened against the yuan.

The weakness in Chinese stocks and currencies has spilled over into Asian markets, although the declines are more muted at this point.

Here’s how stocks across the region are currently faring. It’s worthwhile noting that Japanese markets remain closed for public holidays.

Australia ASX 200 6278.40 , -0.91%
NZ NZX 50 9950.06 , -1.07%
Sth Korea KOSPI 2196.32 , -0.74%
Sinagpore STI 3273.11 , -3.51%
Taiwan TAIEX 10890.58 , -1.85%
Philippines PSI 7915.56 , -0.66%
Indonesia JKSE 6248.26 , -1.13%
Malaysia KLCI Index 1627.07 , -0.62%
Thailand SET 1679.05 , -0.01%
India Nifty 50 11612.15 , -0.85%
S&P 500 Futures 2886.5 , -2.07%

Asian currencies have also fallen against the greenback, including the Australian and New Zealand dollars which are often used to express sentiment towards the Chinese economy among those traders located outside of China.

AUD/USD 0.6978 , -0.64%
NZD/USD 0.6616 , -0.42%
USD/JPY 110.57 , -0.47%
USD/CNY 6.7818 , 0.71%
USD/CNH 6.7961 , 0.95%
USD/HKD 7.8457 , 0.01%
USD/KRW 1171 , 0.66%
USD/SGD 1.3642 , 0.29%
USD/TWD 30.93 , 0.23%
USD/PHP 51.95 , 0.37%
USD/MYR 4.147 , 0.14%
USD/IDR 14325 , 0.53%
USD/THB 31.93 , 0.09%
USD/INR 69.40 , 0.46%
US Dollar Index 97.53 , 0.01%

Commodity futures, especially in China, have also been hit hard. Crude oil futures in the US are also down by more than 2%.

Reflecting the risk off tone on Monday, government bond yields have also fallen in response to safe haven buying.

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