China stocks plunge nearly 5% to two-year low on tariff threat; yuan sinks

[SHANGHAI] China's benchmark equity gauge tumbled to a two-year low in Tuesday and the yuan weakened as a trade dispute with the US intensified.

The Shanghai Composite Index slid almost 5 per cent after US President Donald Trump threatened to slap tariffs on another US$200 billion in Chinese imports. Beijing said it would take "strong" countermeasures if new levies are issued. China's currency fell 0.5 per cent to a five-month low against the US dollar, while a gauge of technology stocks in Shenzhen plummeted as much as 6.7 per cent, the most since February 2016.

The latest threat from Mr Trump comes before the first wave of 25 per cent import levies takes effect on July 6. The tariffs target Chinese President Xi Jinping's Made in China 2025 plan that seeks to develop sophisticated manufacturing capabilities.

"Investors are worried the US 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."

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

ZTE Corp's Hong Kong shares - among standouts in 2017 as they more than doubled in value - slid 26 per cent as of 1:03pm on Tuesday after US lawmakers passed legislation to restore penalties on the company. Its stock has plunged 62 per cent since trading resumed last Wednesday, while in Shenzhen it has fallen by the 10 per cent daily limit every day.

"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.

The Shanghai benchmark's 3,000 level has been seen as a red line that would invite government intervention. Some institutional investors are "proactively" making plans to buy A shares and will buy more if the gauge falls under 3,000, the China Securities Journal reported on Tuesday, without saying where it got the information or identifying the institutions.

Trading in 23 companies on the mainland was halted Tuesday, the most since May 2, bringing the total number of suspended stocks to 261, according to data compiled by Bloomberg. Among the new suspensions was cotton company Kairude Holding Co, which said shareholders face margin calls.

"Margin calls facing some listed companies' shareholders and concerns over big-cap IPOs also added to bearish sentiment," Central China Securities' Mr Zhang said.

BLOOMBERG