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By Luoyan Liu and Andrew Galbraith
SHANGHAI, May 6 (Reuters) - Chinese investors, caught off guard by U.S. President Donald Trump’s tariff threats, dumped stocks and sold the country’s yuan on Monday as a fresh deterioration in Sino-U.S. trade tensions roiled Asian financial markets.
China’s major stock indexes extended losses after opening sharply lower. Both the blue-chip CSI300 index and the Shanghai Composite Index tumbled more than 5 percent in morning trade. Hong Kong’s Hang Seng index slumped more than 3 percent.
Fanning expectations that the latest trade developments could lead to new monetary easing, China’s central bank said on Monday it will cut reserve requirement ratios (RRRs) for small and medium-sized banks.
China’s currency, the yuan, dropped to 6.7980 per dollar in early trade, its weakest level in 3-1/2 months, while 10-year treasury futures for June delivery, the most traded contract, rose 0.3 percent.
“The market is re-pricing the situation, as investors had thought trade negotiations were coming to an end,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong.
“If the trade war reignites, some market participants may speculate renewed yuan depreciation to counteract the negative impact from rising tariffs,” he said.
But China’s bond market would benefit from “diversion from equities, and renewed expectation for easing,” said Frances Cheung, head of Asia macro strategy at Westpac in Singapore.
Trump dramatically increased pressure on China to reach a trade deal by announcing on Sunday he would hike U.S. tariffs on $200 billion worth of Chinese goods this week and target hundreds of billions more.
The move marked a major escalation in trade tensions between the world’s two largest economies and a shift in tone from Trump, who cited progress in talks as recently as Friday.
He also said he would target a further $325 billion of Chinese goods with 25 percent tariffs “shortly”.
China’s Vice Premier Liu He is “very unlikely” to go to the United States this week following Trump’s “threat” to hike tariffs, the editor-in-chief of China’s influential Global Times said on Monday. The newspaper is published by the ruling Communist Party’s People’s Daily, but it not considered an official publication and does not speak for the government.
Chinese officials were scheduled to meet their U.S. counterparts in Washington on Wednesday after meeting in Beijing last week for a round that Treasury Secretary Steven Mnuchin described as “productive.”
Investors have been particularly concerned about a re-escalation in Sino-U.S. trade relations, especially since robust gains in Chinese equities this year were partly due to optimism they would reach a deal.
“In the near term, investors are rightfully worried since the lingering threat of a trade war weighed on risk assets in 2018, especially in Asia,” Tai Hui, Chief Market Strategist, Asia Pacific, J.P. Morgan Asset Management, said in a note.
Mizuho’s Cheung said Trump’s threats surprised the market and reversed expectations for the next round of trade talks.
In a move to bolster domestic growth, China’s central bank said on Monday it will cut reserve requirements for small and medium-sized banks.
The People’s Bank of China (PBOC) said in a statement that the reduction will release about 280 billion yuan ($41.25 billion) in long-term funding, which will be used for loans to small and private companies.
While the move failed to provide any immediate support to market sentiment, it was expected to give some help to parts of the economy affected by the trade war and a wider slowdown.
“It is in line with the domestic need, which is targeted, while the timing is convenient in view of the heightened external risk,” said Westpac’s Cheung. ($1 = 6.7886 Chinese yuan) (Luoyan Liu Andrew Galbraith Winni Zhou and Samuel Shen; Editing by Sam Holmes)