SHANGHAI (Reuters) - Chinese stocks took a battering on Monday in an ominous start to July, days before U.S. tariffs on Chinese exports are due to take effect, with the Shanghai bourse hitting over two-year lows and the yuan falling amid worries the trade row could put the economy on the skids.
Investors are jittery ahead of a July 6 deadline when the United States is set to impose tariffs on $34 billion worth of goods from China, the epicenter of a heated trade dispute between Washington and major economies that has convulsed financial markets.
Beijing is expected to respond with tariffs of its own on U.S. goods as the trade fight between the world two biggest economies threatens to damage global trade and investment.
There was little relief for investors in Chinese assets as, even before the tariffs kick in, a private survey showed manufacturing activity in the world’s second-largest economy slowed slightly.
“Expectations for the country’s economic growth have worsened a lot, as investors worry that external risks will increase in the second half of the year,” said Zhu Xiaochun, an analyst with Lianxun Securities.
The yuan CNY=CFXS, fresh off its worst month on record, lost more ground against the dollar, trading at around 6.6549 at 0738 GMT from a close of 6.6225 on Friday.
In the equity markets, the blue chip CSI300 index .CSI300 fell 2.93 percent, while the Shanghai Composite Index .SSEC shed 2.52 percent to close at 2775.77 points - its lowest level since March 1, 2016.
The fall erased Friday’s gains which came on the last trading day of a turbulent month, when markets bounced in one of their best days since mid-2016.
Just before the markets opened, a private Caixin/Markit manufacturing survey showed factory growth in China cooled a touch in June, yet more worrisome was a contraction in new export orders for the third straight month and the most in two years.
The exports data provided a sobering reminder of the potential fallout of the intensifying Sino-U.S. trade dispute, which investors fear will ripple through global supply chains in a blow to world growth.
Zhu said price/earnings ratios for banks, steelmakers and coal miners were low by historical standards, but general concern over the health of the economy was keeping investors on the sidelines.
Chen Xiaopeng, an analyst with Sealand Securities, said that bodes ill for investors in Chinese stocks.
“It could take at least several months for the major stock indexes to bottom out.”
Uncertainties will reinforce investors’ inclination to “huddle together for warmth” in outperforming sectors such as consumers and healthcare, Chen said.
An index tracking healthcare firms .CSI300HC is up nearly 20 percent so far this year, while the Shanghai index is down around 15 percent.
June represented the worst month for Chinese stocks in more than two years and the yuan’s biggest monthly fall on record.
The yuan fell more than 3 percent against the dollar in June and continued its slide despite a firmer-than-expected midpoint set by the central bank on Monday.
“Investors don’t care and spot yuan rates continued weakening,” a trader said.
If the yuan’s decline intensifies, Morgan Stanley economists wrote in a note on Monday that the Chinese central bank, the People’s Bank of China (PBOC), may step up intervention.
“CNY may overshoot with shifting market expectations of policy stance amid higher trade tensions, but we don’t expect policymakers to encourage material RMB depreciation. The PBOC could step up intervention if depreciation risk intensifies,” they wrote.
On Friday, the last trading day of the month, ING lowered its yuan forecast to 7 per dollar by the end of the year from a previous forecast of 6.6, citing risks to the policy outlook.
“A weaker currency would, at most, be a shield, safeguarding wider damage from a trade war and the hurdles faced by Chinese companies’ operating in the U.S.,” it said. ING added it did not see any panic in the market.
ING’s shift follows a similar move on June 24 by Deutsche Bank, which said it expected the yuan to depreciate to 6.8 per dollar by the end of this year and 7.2 by the end of 2019. It had previously forecast 6.4 yuan per dollar in each year.
The depreciation will be “driven by an important change of policy stance from tightening to loosening”, it said.
Chinese 10-year treasury futures for September CFTU8 dipped in the morning but reversed course in the afternoon to inch up about 0.13 percent.
After rising last week to a more than one-year high on trade war fears, the cost to insure exposure to Chinese debt fell on Monday. The spread of the five-year credit default swap rate on Chinese sovereign debt CNGV5YUSAC=R fell 4.7 percent to 69.79 basis points.
Hong Kong’s markets were closed on Monday for a public holiday to mark the 21st anniversary of the former British colony’s return to Chinese rule.
Additional reporting by Winni Zhou and Andrew Galbraith; Editing by Sam Holmes, Jacqueline Wong & Shri Navaratnam