Chinese stocks declined as the country’s trade war with the US worsened, after US President Donald Trump promised to push ahead with even bigger tariffs.
The Hang Seng China Enterprises Index dropped as much as 4.4%, while the onshore CSI 300 Index fell 1.7% at its lowest. That drew a line under a brief rebound Tuesday.
Market sentiment in both China and the US has been badly hit by the trade war, but a series of threats and defiant responses have forced investors to confront the possibility that the worst is still to come.
Trump has pledged an overall 104% levy against Chinese goods, rapidly increasing his previous tariff after Beijing retaliated.
“With Trump signaling a tough stance on China, markets are bracing for more pressure, and sentiment around Chinese equities remains fragile,” said Charu Chanana, chief investment strategist at Saxo Markets. “A lot now hinges on China’s response. A strong retaliation from Chinese authorities could further hurt investor sentiment unless it comes with a massive domestic stimulus — not just policy promises.”
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China has vowed to “fight to the end” in response to the latest tariffs, calling the escalation “a mistake on top of a mistake”.
The trade war is providing a test of China’s ability to coax the stock market higher during times of turmoil. While Trump has largely shrugged off the market impact, Beijing has pulled out all the stops: easing its grip on the currency, promising loans to state funds, loosening investment rules for insurers and turning to a group of state-backed funds to buy stocks and exchange-traded funds.
Inflows into ETFs linked to the so-called national team were 87 billion yuan ($16 billion) on Tuesday, hitting an all-time record for the second day running. That suggests state funds stepped in en masse to prop up the market.
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Chinese state media outlets struck a triumphant tone as these measures helped push markets higher on Tuesday. The China Securities Journal said authorities had developed a more optimized approach to stabilising markets, and still had room to boost investor confidence. Shanghai Securities News talked of a new stage in the construction of China’s capital market stabilization mechanism.
But investor sentiment remains on a knife edge. Chinese securities brokerages have increased monitoring of their margin financing businesses in response to the volatility, according to local media. Foreign investors are calling for a big program of fiscal stimulus to offset the damage of tariffs.
Chinese Premier Li Qiang said his country has ample policy tools to “fully offset” any negative external shocks. Beijing is considering frontloading its stimulus to counter the hit, Bloomberg News previously reported.
Stocks around the world have plummeted in response to Trump’s tariffs, with the S&P 500 now down more than 15% this year. Still, Trump continues to tout the positives, saying Tuesday that he expects the levies to bring in revenues for the US Treasury and shield critical industries.
China’s offshore yuan hit its weakest level on record Tuesday as the central bank loosened its grip. The currency breached the closely-watched level of 7.20 yuan per dollar, which many traders saw as a soft red line. The central weakened the fixing again on Wednesday.
Chart: Bloomberg
