Investors watch the stock trading board at a securities exchange house in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

China Stocks Plunge to Two-Year Low on Tariff Threat; Yuan Sinks

(Bloomberg) -- China’s benchmark equity gauge tumbled to a two-year low and the yuan weakened as a worsening trade dispute with the U.S. spurred panic selling. Bonds gained.

The Shanghai Composite Index plummeted almost 5 percent in intraday trading before paring losses, while a gauge of technology shares sank the most in two years. China’s currency fell to a five-month low against the dollar and the 10 year-yield on government debt dropped two basis points.

U.S. President Donald Trump threatened to slap tariffs on another $200 billion in Chinese imports, prompting Beijing said it would take “strong” countermeasures if new levies are issued. The latest threat from Trump comes before the first wave of 25 percent import tariffs takes effect on July 6. Those are aimed at President Xi Jinping’s Made in China 2025 plan that seeks to develop sophisticated manufacturing capabilities.

"It is truly a bloodbath," said Margaret Yang, a strategist at CMC Markets Singapore Pte. "Things may turn more sour should China retaliate."

About 1,000 stocks tumbled by the daily 10 percent limit on mainland Chinese bourses as the Shanghai Composite Index fell 3.8 percent, closing below the key 3,000 level for the first time since September 2016.

Guotai Junan Securities Co. paced losses by brokerages, while Apple Inc. supplier BOE Technology Group Co. slumped almost 9 percent. The ChiNext gauge of tech shares retreated 5.8 percent. ZTE Corp.’s Hong Kong shares sank as much as 27 percent after U.S. lawmakers passed legislation to restore penalties on the company. The Hang Seng Index declined 2.8 percent.

Quicktake: Can Trump Win a Trade War? We May Soon Find Out

The ratcheting up of tensions is a blow to sentiment in China’s struggling $7.2 trillion equity market, where turnover has been dwindling on concern the trade dispute will hurt the country’s already-slowing economy. The high-tech investing themes being challenged were some of the hottest plays last year.

“Investors are worried the U.S. may impose further restrictions on Chinese tech and Internet products and cause greater uncertainty for the domestic economy,” said Zhang Gang, Shanghai-based strategist with Central China Securities Co. “The Shanghai Composite is unlikely to bottom out any time soon.”

Today’s losses take the Shanghai gauge’s decline from its January high to 18 percent, approaching the 20 percent threshold that marks the start of a bear market. At 14 times earnings, the index hasn’t been this cheap for two years, while the measure has fallen to its lowest level relative to the MSCI All-Country World Index since 2014.

Read more: Here’s How a Trade War Between the U.S. and China Could Play Out

“If the tariffs are implemented, the selloff in stocks will get worse in the coming month and China will have to slow the opening of the financial industry, the push to internationalize the yuan and also the drive to tighten financial regulations,” said Ken Peng, an investment strategist at Citi Private Bank in Hong Kong.

©2018 Bloomberg L.P.

With assistance from Editorial Board

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