China shares, yuan slump as US tariff deadline looms

Chinese investors watching an electronic board showing the stock index and prices at a securities brokerage house in Beijing on June 26, 2018.
Chinese investors watching an electronic board showing the stock index and prices at a securities brokerage house in Beijing on June 26, 2018.PHOTO: EPA-EFE

SHANGHAI (REUTERS) - Chinese stocks on Monday (July 2) handed back their gains from a bounce late last week as worries mount ahead of a US move to impose US$34 billion (S$46.5 billion) of tariffs on Chinese exports.

The yuan, fresh off its worst month on record, continued to lose ground against the US dollar, trading at around 6.6450 at 0606 GMT from a close of 6.6225 last Friday.

Chinese 10-year treasury futures for September were down in the morning but reversed course in the afternoon, inching up about 0.1 per cent.

After rising last week to a more than one-year high on trade war fears, the cost to insure exposure to Chinese debt fell on Monday. The spread of the five-year credit default swap rate on Chinese sovereign debt fell 4.7 per cent to 69.79 basis points.

Markets are jittery ahead of a July 6 deadline when the United States is due to impose the tariffs on Chinese exports. Beijing is expected to respond with tariffs of its own on US goods.

Even before the tariffs kick in, a private survey showed that manufacturing activity in the world's second-largest economy slowed slightly.

China's Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) declined to 51 in June from May's 51.1, with a sub-index showing new export orders contracting for the third straight month and the most in two years.

Last Friday, Chinese stocks and the yuan bounced with benchmark share indexes having one of their best days since mid-2016.

Still, June represented the worst month for Chinese stocks in more than two years and the yuan's biggest monthly fall on record.

By 0637 GMT on Monday, the blue chip CSI300 index was down 3.1 per cent, while the Shanghai Composite Index fell about 2.6 per cent. Financial stocks led declines, with the CSI financial sub-index off 4 per cent.

Chen Xiaopeng, an analyst with Sealand Securities, said more pessimism was on the cards for Chinese stock investors, with the country's economic outlook hurt by prospects of a full-blown trade war between Beijing and Washington.

"It could take at least several months for the major stock indexes to bottom out," he said.

Uncertainties will reinforce investors' inclination to"huddle together for warmth" in outperforming sectors such as consumers and healthcare, Chen said.

An index tracking healthcare firms is up nearly 20 per cent so far this year, while the Shanghai index is down around 15 per cent.

Concerns about the world's second-largest economy heightened following more signs of slowdown in the manufacturing sector.

Hong Kong's markets were closed on Monday for a public holiday to mark the 21st anniversary of the former British colony's return to Chinese rule.

The yuan fell 3.25 per cent against the dollar in June and continued its slide despite a firmer-than-expected midpoint set by the central bank on Monday.

"Investors don't care and spot yuan rates continued weakening," a trader said.

If the yuan's decline intensifies, the Chinese central bank, the People's Bank of China, may step up intervention, Morgan Stanley economists wrote in a note on Monday.

"CNY may overshoot with shifting market expectations of policy stance amid higher trade tensions, but we don't expect policymakers to encourage material RMB depreciation. The PBOC could step up intervention if depreciation risk intensifies," they wrote.

On Friday, the last trading day of the month, ING lowered its yuan forecast to 7 per dollar by the end of the year from a previous forecast of 6.6, citing risks to the policy outlook.

"A weaker currency would, at most, be a shield, safeguarding wider damage from a trade war and the hurdles faced by Chinese companies operating in the US," it said.

ING added it did not see any panic in the market.

ING's shift follows a similar move on June 24 by Deutsche Bank, which said it expected the yuan to depreciate to 6.8 per dollar by the end of this year and 7.2 by the end of 2019. It had previously forecast 6.4 yuan per dollar in each year.

The depreciation will be "driven by an important change of policy stance from tightening to loosening", it said.