Trump's Trade Tweets Hammer China's Stocks and Currency

(Bloomberg) -- Chinese stocks tumbled along with the yuan as a pair of tweets by President Donald Trump undermined confidence in a trade agreement.

The ChiNext Index of technology companies and small caps dropped the most since January 2016 as trading on mainland markets resumed after last week's holiday. The yuan also weakened the most in three years before paring its drop. People familiar with the matter said Chinese state funds stepped in as they sought to stabilize the equity market, while at least one large bank offered to sell the dollar as the yuan fell, according to traders. State-backed giant PetroChina Co. suddenly erased its decline in afternoon trading before closing lower.

China is said to be considering delaying a trip by its top trade negotiators to Washington after Trump threatened the country with steeper tariffs over the pace of trade talks.

The news “distracts the market's focus from a nascent economic recovery to short-term volatility. Risk assets will be under pressure for now,” said Hao Hong, chief strategist at Bocom International Holdings Co. “Because both parties want a deal, I continue to believe that the long-term uptrend trumps short-term volatility.”

If Chinese equities see significant selling pressure, authorities are likely to intervene to support the market, Hong said earlier.

Optimism that China and the U.S. would reach a deal on trade helped make Shanghai equities the hottest in the world this year, although lackluster corporate earnings and concern Beijing is easing back on stimulus dragged the Shanghai Composite Index down nearly 6 percent from its April high before Monday. The benchmark has failed to hold above a number of key support levels as popular trades unraveled.

The offshore yuan fell as much as 1.3 percent to 6.8218 per dollar, its lowest since Jan. 10, before trading at 6.7797 as of 4:30 p.m. in Hong Kong. The onshore rate slid 0.46 percent to 6.7659 per dollar.

“Investors will remain bearish on the yuan, as they reprice in trade war risks because the new developments are a reversal of previous positive progress,” said Ken Cheung, a senior foreign-exchange strategist at Mizuho Bank Ltd. in Hong Kong. “The news was unexpected. Stop-loss orders will push the yuan even lower.”

Biggest Yuan Drop Since 2016 Catches Options Traders Off Guard

Trump previously delayed increasing tariffs on $200 billion in goods to 25 percent from 10 percent after agreeing to a Dec. 1 truce with Chinese President Xi Jinping to give negotiators time to work out a comprehensive agreement.

“The Trade Deal with China continues, but too slowly, as they attempt to renegotiate,” Trump wrote in a tweet on Sunday. “No!”

Trade-war proxy stocks tumbled Monday, with ZTE Corp. down as much as 13 percent in Hong Kong and pork producer WH Group Ltd. falling 12 percent. Exporters including Lens Technology Co. and Luxshare Precision Industry Co. both declined by the 10 percent daily limit in Shenzhen, while airlines and port developers also dropped. Gold producers rose as investors sought haven stocks.

Oil giant PetroChina briefly climbed as much as 0.8 percent in a sudden late afternoon surge, erasing a loss of as much as 3.5 percent in Shanghai. A similar pattern was seen for China Petroleum & Chemical Corp. as with Shanghai Composite's heavyweight Industrial & Commercial Bank of China Ltd.

Chinese state-backed funds were active in selected stocks on Monday including two large oil companies, people familiar with the matter said. Mainland authorities have a history of intervening to smooth swings in the country's $7 trillion stock market, though their efforts have had mixed success in recent years.

The Hang Seng China Enterprises Index slid 3 percent at the close in Hong Kong, while the Shanghai Composite Index retreated 5.6 percent. The CSI 300 Index sank as much as 6.8 percent, while the ChiNext at one point plunged 8.4 percent. Foreign investors sold onshore equities, offloading net 5.6 billion yuan ($828 million) through trading links, while mainland investors sold HK$4.2 billion ($541 million), the most since February 2018.

While a spokesman for China's Ministry of Foreign Affairs said Monday that a delegation was still preparing to travel to the U.S. for talks, he didn't answer a question about the date or whether the group would be led by the vice premier.

Sovereign bonds climbed, with the yield on 10-year government bonds falling 5 basis points to 3.35 percent.

--With assistance from Tian Chen.

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net;Cindy Wang in Taipei at hwang61@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Richard Frost, Philip Glamann

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