China Market tanks on Trump renews tariff threat

Headline indices of the Mainland China equity market stumbled on Monday, 06 May 2019, after returning from three-day national holiday, as trade negotiations between China and the United States deteriorated suddenly, reversing apparent progress made in recent months, after after U.S. President Donald Trump unexpectedly jacked up pressure on China to reach a trade deal in the midst of negotiations, saying he would hike U.S. tariffs on Chinese goods this week. The drop in Chinese shares came despite a move on Monday by China's central bank to cut reserve requirements for small banks to help boost lending to small and private firms. At closing bell, the benchmark Shanghai Composite Index stumbled 5.58%, or 171.87 points, to 2,906.46. The Shenzhen Composite Index, which tracks stocks on China's second exchange, tanked 7.38%, or 120.79 points, to 1,515.80. The blue-chip CSI300 index dropped 5.84%, or 228.59 points, to 3,684.62. Mainland markets were closed from 1st May to 3rd May 2019.

US President Donald Trump dramatically increased pressure on China to reach a trade deal by announcing he will hike tariffs on $200 billion worth of Chinese goods this week and target hundreds of billions more soon. The announcement via Twitter marks a major shift in tone from Trump, who has cited good progress in the talks and praised his relationship with Chinese President Xi Jinping.

Any sign of an escalation in the months-long trade war is almost sure to roil financial markets, which have reacted sensitively to developments in the talks between the world's two largest economies. Trump's announcement comes ahead of another round of talks between US and Chinese officials in Washington scheduled for this week.

Trump's move is a reversal of his decision in February not to increase tariffs from 10% to 25% on $200 billion of goods, thanks to progress in the trade talks. That increase will now go into effect on Friday, Trump said in a tweet. The president also said he would target another $325 billion of Chinese goods with 25% tariffs "shortly" and he suggested that the measures were not leading to price increases for American consumers.

The tweets upended the previously calm market mood that had benefited from signs of improving economic growth in China and the United States, and from comments from Trump and other senior U.S. officials that trade talks were going well.

The twist in the China-US trade talks exacerbated the sell-off on Chinese stocks, which were earlier rattled by concerns that top policymakers would pare the stimulus to bolster growth amid improving economic data and first-quarter earnings would be lacklustre.

The decision by China's central bank to cut the reserve requirement ratio for some banks was met with a muted response by investors. Rural commercial banks with assets no more than 100 billion yuan (US$14.7 billion) will have the amount of reserves they must set aside lowered to 8% starting next week, unleashing 280 billion yuan into the financial system, the People's Bank of China said on Monday.

Port operators and transport-linked stocks led the decliners on concern the escalation of the trade spat will hurt businesses. Shanghai International Port Group plummeted 9.5% to 7.30 yuan and Ningbo Zhoushan Port tumbled 9.9% to 4.82 yuan. China Eastern Airlines retreated 9.2% to 6.21 yuan and Cosco Shipping Energy Transportation sank 9.9% to 6.21 yuan.

CURRENCY NEWS: China's yuan declined against the U.S. dollar on Monday, as China's central bank lowered its official yuan midpoint to 6.7334 per dollar on Monday, the weakest level in two and a half months, after U.S. President Donald Trump threatened increased tariffs on Chinese good. The offshore Chinese yuan tumbled as much as 6.82 against the dollar, marking a drop of more than 1.4% from highs of around 6.72 last week. The onshore yuan also dropped, to levels past 6.78, from around 6.73 last week.

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