Chinese stocks plunge, recording the largest falls in years

Jie Zhao/Corbis via Getty Images
  • Chinese stocks plunged on Monday, dragged lower by escalating trade tensions with the United States.
  • The benchmark Shanghai Composite Index fell 5.6%, the largest one-day percentage decline since February 2016.
  • The offshore traded yuan has also fallen to the weakest level against the greenback since February.
  • Commodity futures and stocks across Asia were hit hard, as were most Asian currencies.
  • On Sunday, US President Donald Trump threatened to lift tariffs on Chinese imports entering the US, the first tranche set to increase on Friday. There are reports that China may cancel scheduled trade talks following the threat.

Chinese stocks were hammered on Monday will all major indexes falling between 4.8% to 8%.

The Chinese yuan was also hit hard while Hong Kong’s Hang Seng slumped 3.3%.

The final scoreboard shows the scale of the falls seen during the session.

Shanghai Composite 2,906.46 , -5.58%
SSE50 2,805.04 , -4.76%
Shenzhen Composite 1,515.80 , -7.38%
CSI300 3,684.62 , -5.84%
CSI500 4,908.80 , -7.51%
Hang Seng 29,384.01 , -3.39%
USD/CNY 6.7745 , 0.61%
USD/CNH 6.7862 , 0.80%

Yes, it was really ugly, reflecting a sudden escalation in trade tensions with the United States following a pair of tweets from US President Donald Trump before Asian markets opened.

“For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods,” Trump tweeted.

“These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars… of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%.”

Trump cited slow progress in reaching a trade deal with China as the reason behind the decision, wrong-footing investors, especially those in China, who had been expecting this week to potentially bring a lasting trade truce between the two nations as soon as Friday.

Now it appears US tariffs may actually be increased on this date.

In response, several media outlets have reported that trade talks between the two sides, originally scheduled to resume in Washington D.C on Wednesday, may be cancelled based on sources familiar with discussions.

One source told CNBC that Trump’s decision to lift the tariff rate was meant to send a message to China’s trade delegation, led by Chinese Vice Premier Liu, not to come to the US with more “empty offers”.

Chinese stock investors, based on the moves seen today, wasted little time in paring expectations for a lasting trade agreement being reached between the two nations.

The benchmark Shanghai Composite Index tumbled 5.6% to 2,906.5, leaving it at the lowest level since late February. The index has now fallen over 11.5% from the multi-year high of 3,288.5 struck less than a month ago.

Monday’s decline was the largest in percentage terms since February 25, 2016.

Investing.comShanghai Composite Daily Chart

The losses on the Composite were being mirrored by other major mainland indexes which also fell between 4.8% to 8% from Tuesday’s closing level, the day when Chinese markets last traded before Labour Day holidays.

The tech-heavy ChiNext Composite bore the brunt of the selling pressure, nursing a decline of 8.1%.

News that China’s central bank, the PBoC, will cut the required reserve ratio (RRR) for some small and medium-sized banks from May 15 did little to stymie the selling pressure.

The decision to cut the RRR for around 1,000 smaller lenders to 8% is expected to free up around 280 billion yuan in cash to finance loans to China’s private sector, the People’s Bank of China said in an online statement.

There were also reports circulating during the session that China was readying state-backed institutions — referred to as the “National Team” in markets — to step in to help curb the losses in stocks. However, that too had next to no impact on Monday.

Like stocks, the Chinese yuan — whether traded on the Chinese mainland or in offshore markets — also fell sharply in response to the trade headlines.

The USD/CNH — yuan traded in offshore markets — surged close to 1%, leaving it at levels not seen since early February this year. It briefly traded above 6.82 earlier in the session, a level not seen since early January.

Investing.comUSD/CNH Daily Chart

A higher USD/CNH rate indicates the US dollar has strengthened against the yuan.

The weakness in Chinese stocks and currencies spilled over into other Asian markets.

Here’s how stocks across the region were faring at 5.20pm in Sydney. It’s worthwhile noting that Japanese markets were closed for public holidays.

US S&P 500 futures are currently off more than 1.8%, mirroring similar declines in Europe.

Australia ASX 200 6283.70 , -0.82%
NZ NZX 50 9960.62 , -0.97%
Sth Korea KOSPI 2196.32 , -0.74%
Sinagpore STI 3284.02 , -3.19%
Taiwan TAIEX 10897.12 , -1.80%
Philippines PSI 7865.81 , -1.28%
Indonesia JKSE 6247.48 , -1.14%
Malaysia KLCI Index 1624.52 , -0.78%
India Nifty 50 11615.9 , -0.82%
S&P 500 Futures 2893.25 , -1.84%

Asian currencies also fell against the greenback, including the Australian and New Zealand dollars which are often used to express sentiment towards the Chinese economy among those traders located outside of China.

AUD/USD 0.6994 , -0.41%
NZD/USD 0.6624 , -0.30%
USD/JPY 110.79 , -0.27%
USD/CNY 6.7747 , 0.61%
USD/CNH 6.7864 , 0.81%
USD/HKD 7.8450 , 0.00%
USD/KRW 1171 , 0.60%
USD/SGD 1.3630 , 0.20%
USD/TWD 30.92 , 0.20%
USD/PHP 51.94 , 0.35%
USD/MYR 4.146 , 0.12%
USD/IDR 14320 , 0.49%
USD/THB 31.93 , 0.09%
USD/INR 69.34 , 0.38%
US Dollar Index 97.57 , 0.05%

Commodity futures, especially in China, have also been hit hard. Crude oil futures in the US also slumped by more than 2%.

Reflecting the risk off tone on Monday, government bond yields also fell in response to safe haven buying.

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