Edgy with a hint of menace. Markets in China are feeling the heat as growth in the manufacturing sector shows signs of cooling amid rising tensions between Washington and Beijing.
On Monday, the benchmark Shanghai Composite Index dropped by 2.52% to close at 2,775.77 points, while the Shenzhen Component Index fell 1.58%.
Blue chip companies suffered a torrid time with the CSI 300 index plunging almost 3%. Hong Kong was closed for a holiday and escaped the market mayhem.
“It could take at least several months for the major stock indexes to bottom out,” Chen Xiaopeng, an analyst with Sealand Securities, said, sounding a pessimistic note.
As for the renminbi, or yuan, it continued its fall, with the currency trading at 6.6503 to the US dollar in late trading.
Elsewhere, the Nikkei 225 dropped 2.21% to close at 21,811.93 points and the KOSPI in Seoul dipped 2.35% to end at 2,271.54.
Still, turmoil on the Shanghai Composite Index wiped out the 2.2% rally last Friday and came after disappointing manufacturing data.
Tariffs threat
Clouding the issue is the threat that United States trade tariffs, worth up to US$34 billion on a range of Chinese imports, will take effect on July 6. If that happens, Beijing will respond with similar duties on an array of US goods.
Already the looming impact of this tit-for-tat trade battle has seeped through to the real economy.
The Caixin-Markit Manufacturing Purchasing Managers’ Index, or PMI, declined to 51.0 last month from May’s 51.1. Released on Monday, it remained above the 50-point mark which separates growth from contraction.
But the independent survey showed that new export orders contracted for the third straight month.
“The index for new export orders fell to a low for the year so far and remained in contraction territory, pointing to a grim export situation amid escalating trade disputes between China and the US,” Zhong Zhengsheng, the director of Macroeconomic Analysis at CEBM Group, a subsidiary of Caixin Insight Group, said.
“Overall, the manufacturing PMI pointed to strengthening price pressures in June. Deteriorating exports and weak employment, along with companies’ destocking and poor capital turnover, put pressure on the manufacturing sector,” Zong added.
On Saturday, the official manufacturing PMI from the National Bureau of Statistics highlighted that export orders tumbled into negative territory, the clearest sign yet that the spat between Beijing and Washington is having a significant impact on growth.
Although the PMI stood at 51.5 last month compared to 51.9 in May, the sub-index of new export orders fell to 49.8 from 51.2, illustrating a distinct downturn in sentiment.
The China Federation of Logistics and Purchasing, which is involved in producing the survey, confirmed that concerns about trade tariffs were behind the weak “new export” numbers.
“In previous months, companies expedited exports because they had foreseen this complicated situation of international trade,” the federation said in a statement. “As the trade friction between the United States and China escalates, exports start to ebb.”
The country’s stock exchange is already in bear market territory while the renminbi, or yuan, has slumped to its lowest level since the currency’s 2015 devaluation, leaving investors worried.
Last week, the People’s Bank of China, the de facto central bank, announced a cut of 0.5 percentage point in the amount of reserves that banks must hold.
Targeted funds
While that move unlocked about 700 billion yuan (US$106 billion), most of those funds were targeted for the debt-to-equity swap program to clean corporate balance sheets. Around 200 billion yuan will be used to boost small and macro companies struggling to obtain investment.
Yet the central bank will probably cut the reserve ratio by another 50 basis points each quarter for the rest of year, according to a note from economists at Goldman Sachs Asia, Bloomberg reported.
“We continue to expect the PBOC to adjust its policy stance as needed to cushion any domestic growth slowdown and any materialization of trade friction,” Goldman Sachs’ economists wrote in a note.
To add to market fears, the European Union is understood to be preparing tariffs worth $300 billion on US imports if Washington decides to press ahead with extra duties on cars manufactured in the EU, the Financial Times reported.
In a written statement to the US Department of Commerce, the EU set out plans to respond to potential new US threats, according to the FT.
At the weekend, US President Donald Trump increased the rhetoric when he told Fox News that the EU was “possibly as bad as China, just smaller” when talking about trade deficits with other countries. “It is terrible what they do to us,” he said.
“Trump sounded upset about Europeans selling Americans things Americans want to buy,” Paul Donovan, an economist for the global investment bank UBS, told The Guardian website in London.
“The Financial Times reports the EU is threatening to tax a fifth of US exports if the US imposes taxes on consumption of EU autos and auto parts. That would be a trade war,” he warned.