July 9, 2018 / 3:26 AM / in 9 days

Chinese stocks have best day in two years, yuan firms despite tariff blow

SHANGHAI (Reuters) - China’s share market and the yuan bounced on Monday despite heightened trade tensions between Washington and Beijing after each imposed major tariffs on the other’s goods last week and investors nervously watched for more policy action.

An investor looks at a board showing stock information at a brokerage office in Beijing, China July 6, 2018. REUTERS/Jason Lee

Monday’s equities rally was seen driven by technical factors and government rhetoric to boost market confidence, but traders and analysts said the rise could be fleeting as a trade war with the United States will hit China’s economy and global growth.

“The rally is in part due to marginal improvement in liquidity conditions...and also thanks to a ‘warm breeze’ from regulators and top officials that helped lift market sentiment,” said Zhou Yu, analyst with Pacific Securities.

But she warned that “investors should not be overly optimistic about the short-term rally, as the mid-term uncertainties including trade war worries and Beijing’s deleveraging campaign persist.”

The Shanghai Composite Index .SSEC, which tracks shares traded on the Shanghai stock exchange, ended 2.5 percent higher, its biggest one-day rise since May 2016. The blue-chip CSI300 Index .CSI300 finished up 2.8 percent, its best since August 2016.

Hong Kong's Hang Seng Index .HSI and a sub-index tracking mainland companies .HSCE were both up more than 1.5 percent in late afternoon trade.

The rebound followed a week of savage selling. Chinese markets fell in the run-up to Friday’s imposition of tariffs on $34 billion worth of Chinese goods, which was immediately matched by equivalent tariffs from China on U.S. products.

More retaliatory measures as promised by U.S. President Donald Trump could add to further pressure on China’s capital markets, although the country’s foreign reserves did not shrink in June - the yuan’s worst month on record.

POSITIVE MESSAGES

Policymakers have tried to soothe investors by reassurances of solid fundamentals, and the Shanghai Stock Exchange exhorted investors to buy in an online post late on Sunday.

“Currently, the general level of valuations of Shanghai-listed companies is relatively low, presenting obvious value investment opportunities,” it said.

“Indeed, several Shanghai-listed companies have disclosed plans for buy-backs for stake increases by shareholders, showing that the companies and shareholders are adamantly confident of listed companies’ operations, profitability and growth prospects.”

Whether sentiment will be optimistic in coming trading sessions remains to be seen. Chinese stocks have tumbled about 15 percent since the start of the year and bearish signs persist.

“The government is trying to inject confidence into the market, so a short-term rebound is possible,” said retail investor Zhu Haifeng.

“But we’re still in a trade war. Investors should be bracing for a painful, and agonizing bear market.”

The yuan CNY=CFXS was trading at 6.6221 per dollar at 0651 GMT, gaining 0.4 percent from its late close on Friday of 6.6489 yuan, after the dollar weakened following U.S. payrolls data.

China’s foreign exchange reserves rose $1.51 billion in June to $3.112 trillion due to asset price changes, the State Administration of Foreign Exchange (SAFE) said on Monday.

“If economic fundamentals and Sino-U.S. relations have no additional changes, rapid and sizable one-way depreciation of the yuan against the dollar should have come to an end. The market will have some consolidation and try to figure out a bottom for the yuan,” Lu Zhengwei, chief economist at Industrial Bank in Shanghai, wrote in a note.

“Markets will watch any new changes in the trade frictions between the United States and China, such as expansion in the size of tariff or deceleration.”

Additional reporting by Winni Zhou and Liu Luoyan; Editing by Sam Holmes and Jacqueline Wong

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