Asian Shares Negative on Slumping Chinese Stocks

Asian shares pared their gains on Monday as Chinese stocks dipped into negative territory, pushed lower by the escalating US-China trade war.  However, Beijing’s efforts to halt steep declines in the yuan still buoyed the currency.

MSCI’s broadest index of Asia-Pacific shares excluding Japan gained 0.5 percent, having increased about 1 percent earlier in the day.

Chinese shares were negative with the blue chip share index and Shanghai’s SSE Composite both slipping 0.7 percent.  Japan’s Nikkei was flat.  Australian shares increased 0.5 percent, while Hong Kong’s Hang Seng index upped 0.7 percent.

The trade dispute still stays a live issue for markets, as China proposes tariffs on $60 billion worth of US goods on Friday, while a senior Chinese diplomat cast doubt on prospects of talks with Washington to resolve the disruptive trade friction.

This was followed up by a report in China’s state media stating that Friday’s retaliatory tariffs were “rational,” while accusing the US of blackmail.

Meanwhile, US President Donald Trump stated that his strategy of placing huge tariffs on Chinese imports is “working far better than anyone ever anticipated.”  Trump cited losses in China’s stock market, while also predicting that the US market could “go up dramatically” once the trade deals were renegotiated.

“The drip feed of escalating tariffs threats from Trump and counter threats from China continues,” said Shane Oliver, who is a chief economist at AMP Capital.  “With a 25 percent tariff on… (some) Chinese imports likely to commence soon, Trump is clearly ramping up the pressure on China but China is digging in.”

“A tariff on this magnitude will start to have a significant economic impact on China’s growth, potentially knocking up to 0.5 percent off growth, and probably also on the US,” Oliver added.

China is ramping up measures to buoy its currency, which has received a blow from the escalating trade spat.

Late on Friday, the People’s Bank of China raised th reserved requirement on some foreign exchange forward positions.  This made it more expensive to bet against the Chinese currency, aiding to pull the yuan away from 14-month lows.

The bank’s decision supported the Australian dollar, which is typically seen as a liquid proxy for the yuan.  The Aussie came off two-week lows and climbed to reach $0.7412 after the announcement.  It was last at $0.7389.

“Leaning against bearish CNY sentiment is important because a rapidly weakening currency risks triggering residential outflows and destabilizing domestic asset prices,” said analysts from JPMorgan.  “Our economists think that PBOC likely will take further action if CNY depreciation continues or capital outflow pressure increases.”

Wall Street indexes increased on Friday with the Dow adding 0.54 percent.  The S&P 500 gained 0.46 percent, while the Nasdaq Composite 0.12 percent.  They were supported by strong corporate earnings.  However, the gains were capped by concerns over the heightening trade friction.

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