China's Stocks Lurch Lower as Weakening Currency Adds to Risks

(Bloomberg) -- Chinese stocks resumed a $1.7 trillion selloff on Monday and the currency slid to a six-month low as investors braced for the next round in a trade dispute with the U.S.

While the Shanghai Composite Index opened higher after a widely expected reserve-ratio cut by the central bank, those gains gave way to a 1.1 percent slump by the close. The yuan sank as much as 0.74 percent to 6.5433 per dollar, its lowest since Dec. 28, while the offshore exchange rate fell for an eighth day.

"The yuan's weakness is quite negative for the whole sentiment," said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. "Fear about the trade war is the major reason for current weakness in the stock market."

A slew of negative factors -- from the trade tensions between the world's two biggest economies to the risk of a credit crunch -- have weighed on China's financial markets in recent weeks. The Shanghai stock index is on the brink of a bear market after tumbling almost 20 percent from its recent high, while the speed of the yuan's descent is blindsiding analysts.

The Treasury Department is planning to heighten scrutiny of Chinese investments in sensitive U.S. industries under an emergency law. Under the plan, the White House would use one of the most significant legal measures available to declare China's investment in U.S. companies involved in technologies such as new-energy vehicles, robotics and aerospace a threat to economic and national security, according to eight people familiar with the plans.

Air China Ltd. and China Eastern Airlines Corp. sank by the 10 percent daily limit amid concern a weaker yuan and higher fuel price will increase costs. Industrial & Commercial Bank of China Ltd. tumbled the most in two months. Unlike previous RRR cuts, the money unlocked for the nation's five biggest state-run banks and 12 joint-stock commercial lenders will be used for debt-to-equity swaps.

Hong Kong's Hang Seng Index dropped 1.3 percent to its lowest close since Dec. 15 as Macau casinos and Chinese developers slumped.

The yuan's Monday slide took its retreat this month to 2 percent, while the offshore currency was poised for its longest losing streak since October 2016.

“The yuan is faced with a double whammy –- escalating trade tensions are hurting sentiment and the easier monetary policy is also pressuring the currency," said Gao Qi, a currency strategist at Scotiabank in Singapore. "Traders will step up shorting the yuan in the offshore market, but we won't likely see massive fund outflows considering the capital curbs in place."

Investors have been piling into the relative safety of government debt as stocks sold off, but even there investors were disappointed. The last time the PBOC cut the reserve ratio, in April, the 10 year-yield fell the most since 2016. This time round, it rose 1 basis point to 3.6 percent.

“Many traders were expecting a one-percentage-point cut and some of them took profit,” said David Qu, an economist at Australia & New Zealand Banking Group Ltd. in Shanghai. “The room for further declines in the yield is limited, as interest rates are rising globally and a marginally loose Chinese monetary policy is already priced in.”

--With assistance from Emma Dai.

To contact the reporters on this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Sarah McDonald

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