A surprise re-escalation in US-China trade tensions sent Asian stocks into a tailspin as President Donald Trump threatened to raise tariffs on Chinese imports, sparking fears that Beijing would cancel trade talks scheduled for this week.
Leading the sell-off was Shanghai, which slipped 5.6 per cent, and Shenzhen, which slumped 7.4 per cent. Singapore and Hong Kong lost around 3 per cent each, while Taiwan fell 1.8 per cent and Jakarta lost 1 per cent. Markets in Japan and South Korea were closed yesterday.
Investors were caught off guard, as stock markets had been rallying on trade optimism.
Mr Eli Lee, head of investment strategy at Bank of Singapore, said Mr Trump's latest hardball tactics are likely aimed at exerting maximum pressure before Chinese Vice-Premier Liu He's planned visit to wrap up talks this week.
While Mr Trump has said he wants to have a trade deal, "we believe he could be inclined to walk away from a weak deal that is not politically accretive for him, ahead of his 2020 re-election campaign," Mr Lee said.
Maybank Kim Eng economist Chua Hak Bin said he is "praying that the threats are just part of Trump's endgame to try to close the deal".
"The projections of a recovery in Asian trade and global investments in the second half of the year hinge on the success of a trade deal. If there is a collapse in trade talks, Singapore's GDP could be headed below 1 per cent for 2019. And we could be facing a manufacturing recession," he added. The Government expects growth to come in "slightly below the mid-point" of a 1.5 to 3.5 per cent forecast for 2019.
Mr Trump threatened on Sunday to raise tariffs on US$200 billion (S$273 billion) worth of Chinese imports to 25 per cent from 10 per cent. He also floated the possibility of extending a new 25 per cent duty on another US$325 billion worth of imports.
China's Foreign Ministry said officials are still planning to go to the US for the talks, but it was unable to confirm when this would happen, amid signs a delay is being considered.
"It's a guessing game now," Phillip Capital trader Marcus Toh said. "A three-digit fall in the STI (Straits Times Index) is rare. But the market has been bracing itself for a correction, and this is the catalyst."
The STI lost 101.67 points yesterday to close at 3,290.62.
UOB economist Ho Woei Chen said the latest development suggests there are "still significant unresolved differences in the bilateral trade relations that could potentially derail the trade deal". But she believes the US and China will continue working towards a resolution this year.
Mr Lee said: "The key developments to watch for now are whether the Chinese would continue, delay or cancel talks, and whether the US does hike tariffs from 10 per cent to 25 per cent.
"One concern is that President Trump's gambit could backfire on him if the Chinese policymakers do not want to be seen as weak and negotiating with a gun held to their heads."