Bloomberg
Published Aug 06, 2018 01:33
Updated Aug 06, 2018 02:11
China's Yuan Pares Gains, Stocks Decline as Trade Worry Persists
(Bloomberg) -- China’s yuan pared gains and mainland equities declined, as markets tried to find direction after trade tension with the U.S. escalated further over the weekend and Chinese authorities announced a measure to support the yuan late Friday.
The onshore yuan trimmed earlier gains and was little changed at 6.8300 per dollar as of 1:15 p.m. The People’s Bank of China set the daily reference rate at 6.8513, the weakest since May last year, though in line with analyst expectations. The Shanghai Composite Index fell 0.6 percent and the ChiNext gauge slid 1.5 percent. Hong Kong’s Hang Seng Index held on to gains after falling every day last week.
“The market is still worried about the outlook in the trade war, so people are very cautious,” said Qian Qimin, an analyst with Shenwan Hongyuan Group Co. “They are dumping smaller caps first as their valuations are higher.”
Shanghai-based Qian said the next key level to watch for the Shanghai Composite is 2,691, a low it hit on July 6. If the index falls below that, it would hurt confidence and the selloff could escalate, he said. The benchmark was at 2,723 Monday, down 23 percent from its January high.
Here’s a look at some of the moves on Monday:
Zhang Gang, Shanghai-based strategist with Central China Securities Co.:
On Friday evening:
The timing of the announcements seemed coordinated to avoid kneejerk declines in China’s currency from the tariff proposal, according to Deutsche Bank AG (DE:DBKGn). Imposing a levy on forward trades is a tactic that the central bank used to stabilize the yuan against the dollar in the aftermath of its shock devaluation in 2015. China’s currency and stocks are both among the world’s worst performers over the past three months.
“The yuan kept falling when China did this last time in 2015, so I don’t think the PBOC’s move will significantly change the market tone,” Hao Hong, chief strategist at Bocom International Holdings Co., said by phone. “The trade war is nowhere near its end and China’s economy is slowing down, so why would the trend reverse?”
The Ministry of Finance said that duties ranging from 5 percent to 25 percent will be levied on more than 5,000 categories of American imports if the U.S. delivers its proposed taxes on another $200 billion of Chinese goods. The list targets everything from planes and computers to wigs and textiles, with the highest tariff applying to more than 2,400 products such as meat, wheat, wine and liquefied natural gas.
The effective additional tariff rate is about 13 percent, which is much less than a proportional retaliation, Goldman Sachs Group Inc (NYSE:GS). economists wrote in a note. “Nevertheless, this measure still marks a step up in US-China trade tensions.”
“The news headlines from Friday will have some negative impact on share market sentiment,” said Dai Ming, Shanghai-based fund manager with Hengsheng Asset Management Co., who added that he doesn’t expect Chinese equities to recover until there’s evidence that the trade dispute is being resolved. “The stock market isn’t the government’s priority.”
China’s stock woes have caught the attention of U.S. President Donald Trump, who tweeted about the market’s underperformance versus U.S. shares on Saturday and told a rally in Ohio that the declines are weakening that nation’s bargaining power in the trade war. And White House economic adviser Larry Kudlow suggested Friday that China is letting its currency fall to offset losses from the trade war, though he added that the decline is partly due to weak economic fundamentals.
Eight straight weeks of losses have brought the yuan close to 7 per dollar, a level it hasn’t reached in more than a decade. Analysts had identified that as a key milestone where officials may seek to arrest declines, to counteract the mounting risk of capital outflows. China burned through foreign reserves propping up its currency after the devaluation almost three years ago spurred a rush to take money out of the country.
The levy on forwards is aimed at preventing macro financial risks as the foreign-exchange market shows signs of volatility amid recent trade frictions, and shouldn’t be interpreted as a capital control, according to the PBOC.
What else to watch:
Here are additional analyst comments on the Friday night news, and how it may impact markets:
Deutsche Bank (Alan Ruskin, global co-head of foreign-exchange research)
Hengsheng Asset Management Co. (Dai Ming, fund manager)
Everbright Sun Hung Kai Co. (Kenny Wen, strategist)
Goldman Sachs (economists including MK Tang)
CIBC (Bipan Rai, strategist)
Banco Bilbao Vizcaya Argentaria (Xia Le, chief Asia economist)
ING (Viraj Patel, strategist)
Written By: Bloomberg
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