Trump's China tariff escalation hits Asian stocks and yuan

Chinese currency fell to its weakest since November after announcement of 10 per cent tax on remaining $300bn of goods

A Chinese investor uses a computer terminal as he monitors stock prices at a brokerage house in Beijing, Friday, Aug. 2, 2019. Asian stock markets plunged Friday after President Donald Trump's surprise threat of tariff hikes on additional Chinese imports. (AP Photo/Mark Schiefelbein)

Chinese markets slumped on Friday with investors rushing for cover after US President Donald Trump slapped fresh tariffs on China, citing a lack of progress in their bilateral trade talks.

Mr Trump said on Thursday he would tax the remaining $300 billion (Dh1.1 trillion) of Chinese imports with 10 per cent tariffs from September 1, breaking the tariff truce since his meeting with Chinese President Xi Jinping at the G20 summit in June.

The US leader said Mr Xi was moving too slowly in the negotiations, after being briefed by US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on their meeting with Chinese officials this week, which were the first such face to face talks since the June trade truce.

Chinese shares plummeted with the Shanghai Composite Index down 1.7 per cent in the morning session, while the blue-chip CSI300 lost 1.8 per cent. In Hong Kong, the Hang Seng index shed 2.4 per cent and H-shares 2.7 per cent.

Japanese benchmarks fell about 2.5 per cent. South Korean shares hit their lows of the day after Japan took its own trade-restriction move, directed at Seoul.

The Chinese yuan slid to its weakest since November in early trade, before paring some losses. Onshore spot was last seen at 6.9330 per dollar, still down 0.5 per cent on the day - its biggest daily fall in more than two months. The offshore yuan was trading at 6.9572 at 04:10am GMT.

Traders said the yuan's slump was encouraged by a weaker-than-expected official fixing, from which the spot can only trade 2 per cent above or below. The People's Bank of China set the midpoint at a seven-month low on Friday.

"The deteriorating China growth outlook amid the full-blown trade war suggested that the Chinese government would be tempted to allow further renminbi [yuan] depreciation to support the growth," Ken Cheung, senior Asian FX strategist at Mizuho, wrote in a note on Friday.

But given China's priority for stability, he said the central bank might use the yuan fixing to guide a gradual depreciation towards 7 per dollar.

Mr Trump's latest threat came just two weeks after China's second quarter economic growth slowed to 6.2 per cent, its weakest pace in at least 27 years.

Analysts expect the continuing stand-off to be a drag on China's economy but also present trading opportunities.

Beijing could retaliate by curbing rare earth exports, excluding certain US companies from doing business in China and increasing existing tariffs on US goods, Iris Pang, economist for Greater China at ING, said in a note on Friday.

Zhou Yu, analyst at Pacific Securities, said in a note on Friday investors should bet on agriculture products, a sector where tariffs could drive domestic businesses to buy local.

Rare earth and agriculture stocks surged, with Hong Kong-listed China Rare Earth Holdings Ltd rising as much as 30 per cent.

Others said the current turn of events was not entirely surprising.

Zhang Qi, analyst at Haitong Securities, said Chinese investors had been bracing for higher US tariffs, given the lack of progress in the latest round of talks and reflected in the falling share prices before Friday.

"Disputes will be on-and-off. Frictions will be part of life," said Wu Kan, head of equity trading at Shanghai-based Shanshan Finance.