The Chinese yuan slumped to a new 11-year low against the dollar on Monday and stocks fell as the China-US trade war sharply escalated, threatening to inflict more damage on the world's largest economies and weigh further on global growth.
In Hong Kong, continued protests added to pressure on share prices.
The onshore yuan fell 0.6 per cent in early trade to 7.15 per dollar, its weakest since February 2008 and its second biggest one-day drop of the month. The offshore yuan fell to a record low of 7.1850, before regaining some ground to about 7.1595.
The Chinese authorities have allowed the tightly-managed yuan to fall about 3.6 per cent so far this month as trade tensions between Beijing and Washington worsened, sparking fears of a global currency war.
On Friday, US President Donald Trump announced an additional duty on some $550 billion (Dh2.02 trillion) of targeted Chinese goods, hours after China unveiled retaliatory tariffs on $75bn worth of US goods.
"This tit-for-tat escalation shows how unlikely a trade deal and de-escalation have become," Louis Kuijs, of Oxford Economics, wrote in a note late on Sunday.
"The impact of the new tariffs on China’s economic growth will be sizeable," he said.
Oxford Economics now expects the economic growth of China could fall significantly below 6 per cent next year, even assuming more policy support measures.
The benchmark CSI300 Index sank 1.2 per cent by the midday break, while the Shanghai Composite Index fell about 1 per cent. Chinese 10-year Treasury futures rallied 0.3 per cent in early trade on Monday.
The central bank of China had been seen trying to stabilise the yuan in recent weeks after allowing a sudden slide in its value in early August following new US tariff threats. On Friday, traders thought it was signalling a floor at the 7.1 level.
But Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, expects further weakness in the yuan for the rest of this year following the latest escalation.
"The PBOC [Peoples Bank of China] has not yet signalled its bottom line for the yuan," Mr Cheung said, referring to the Chinese central bank.
"And given the United States is holding its presidential election next year, the situation is unlikely to deteriorate too much as that could trigger a backfire."
In Hong Kong, the Hang Seng Index dropped more than 3 per cent in morning trade as investor confidence continued to weaken amid the deteriorating trade outlook.
It was trading down 2.7 per cent at 0333 GMT.
With the economic outlook souring, analysts expect more growth measures from Beijing in coming weeks and months.
On Monday, the Chinese central bank injected 150bn yuan worth of funds into the financial system via its medium-term lending facility. It kept the interest rate on the instrument unchanged at 3.3 per cent.
Markets had expected the central bank to keep key rates steady this week, but a cut is expected by mid-September after a policy review by the US Federal Reserve, as Beijing steps up efforts to lower borrowing costs to support growth.
Investors are closely watching to see if Beijing will resort to more aggressive easing measures as the trade war drains confidence, dents business profits and hurts overall growth.
