August 8, 2018 / 5:36 AM / 2 months ago

China shares swing back to red as fresh U.S. tariffs weigh

SHANGHAI (Reuters) - China’s stock markets retreated on Wednesday as fresh U.S. tariffs and the increasingly heated trade war between the world’s two largest economies cast doubt over Beijing’s ability to boost its economy through pro-growth policies.

FILE PHOTO: Men look at an electronic board showing stock information at a brokerage house in Beijing, China, January 5, 2016. REUTERS/Kim Kyung-Hoon/File Photo

The Shanghai Composite index .SSEC fell 1.3 percent, and the blue-chip CSI300 index .CSI300 ended 1.6 percent lower, reversing gains made in a recovery in the previous session.

Both indexes had posted their biggest daily gains since 2016 on Tuesday, rebounding from four days of heavy losses and raising hopes that their dizzying slide into correction territory may be bottoming.

However, stocks returned to the red despite stronger-than-expected July export data on Wednesday, which appeared to show that an earlier round of U.S. tariffs had yet to significantly impact demand for China’s goods.

“China’s monetary and fiscal policies have shifted from prudent to growth supportive. The ongoing and protracted trade tension has elevated uncertainties, which prompted more concerns over downside risks to growth,” Christy Tan, head of markets strategy and research, Asia, at National Australia Bank, said in a note.

Washington said on Tuesday it would begin collecting 25 percent tariffs on another $16 billion in Chinese goods from Aug. 23. These come after it last month slapped tariffs on $34 billion of goods.

The flurry of punitive trade blows from the Trump administration in recent weeks and little sign of compromise from either side have left many investors doubtful of a sustained turnaround for shares in the near term, even with Beijing’s pledges to support the economy and pump priming in the financial system.

To support growth, Beijing is taking steps to ease financing constraints on borrowers, which have been fueled in part by a multi-year campaign to reduce excessive financial risks and slow a rapid build-up in debt.

Last week, a top decision-making body of the ruling Communist Party promised more flexible and effective policy, and authorities are taking steps to offer more credit at cheaper interest rates to small and medium-sized firms which are seen as most vulnerable.

On Wednesday, the state planner said China would use monetary policy such as targeted cuts in the reserve requirement ratio for banks to support debt-to-equity swaps this year as it looks to lower corporate leverage ratios.

The prospect of such policies weighed on bonds Wednesday, with 10-year Chinese treasury futures for September delivery CFTU8 falling 0.4 percent to 95.620.

However, they also offered respite for some investment-intensive companies that were badly mauled in the broad based market selloff in recent weeks

China Railway Construction Corp Ltd (601186.SS), for example, eked out a 0.1 percent gain on Wednesday, a day after jumping the daily 10 percent limit on news the government would boost investment in railways.

While stock markets remain fragile, there are signs that authorities are putting a floor under the yuan and discouraging bets on further losses that could trigger capital outflows.

The yuan strengthened on Wednesday, as the central bank guided the currency higher with its daily fixing, setting the midpoint of the daily trading band CNY=PBOC at 6.8313 per dollar, 118 pips firmer than the previous fixing of 6.8431.

The currency opened at 6.8140 per dollar on the spot market CNY=CFXS and was changing hands at 6.8198 as of 0700 GMT, 80 pips firmer than the previous late session close of 6.8278.

The central bank set a reserve requirement ratio of 20 percent from Monday for financial institutions settling foreign exchange forward dollar sales to clients, effectively raising the cost for investors shorting the yuan.

While many analysts still expect the currency to test the level of 7 to the U.S. dollar, Ken Hu, chief investment officer for Asia Pacific fixed income at Invesco in Hong Kong, said he maintained a more positive outlook in the longer term.

“We see limited depreciation pressure on the RMB in the near future and are confident that Chinese regulatory authorities have sufficient tools to manage any exaggerated one-way market move,” he said in a note.

Reporting by Andrew Galbraith and Winni Zhou; Additional reporting by Stella Qiu in BEIJING; Editing by Sam Holmes and Kim Coghill

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