Fears of a trade war between the world's two largest economies jolted China's markets on Friday, with the country's main stock indexes tumbling the most in six weeks, while bond yields fell as investors rushed into less risky assets. But in contrast to stock market ructions, the country's currency markets remained quiet, with analysts expecting that any Chinese response to US trade actions is unlikely to include changes in its foreign exchange policy.
Chinese shares fell sharply after Beijing unveiled plans for tariffs on up to $3 billion of US imports in retaliation for US duties on steel and aluminium products from China and other countries that went into effect on Friday. President Donald Trump also signed a memorandum on Thursday that could impose tariffs on up to $60 billion of imports from China, although the measures have a 30-day consultation period.
China urged the United States to "pull back from the brink", while its embassy in Washington vowed Beijing would "fight to the end" in any trade war. The Shanghai Composite index closed down 3.6 percent at 3,152.76 points, its lowest close since February 9.
China's blue-chip CSI300 index was down 2.9 percent at 3,891.47, its lowest close since February 12. In Hong Kong, the Hang Seng Index closed 2.5 percent lower at 30,309.2, its lowest since March 7.
All three indexes suffered their biggest daily percentage drops since February 9. It was also their worst weekly performance in six weeks. On the mainland, however, the damage could have been worse, with stocks rebounding off lows in the late afternoon.
One analyst at a Chinese brokerage said state-backed investment funds were buying shares in the afternoon to prop up the market. Bloomberg, citing unidentified people familiar with the matter, said state funds bought large-cap stocks, including China Petroleum & Chemical Corp and China Life Insurance Co. Gao Ting, head of China Strategy at UBS Securities, said in a note that tariffs proposed by US President Donald Trump could reduce China's GDP growth by 0.1 percent in 2018.
In a separate note on Friday, the UBS chief investment office said it saw a 20 to 30 percent probability of "damaging retaliation" by China to US trade actions. More than 400 mainland China stocks plunged by the maximum allowed 10 percent, led by tech and materials firms targeted or seen as being most affected by the US tariffs.
The tech-heavy start-up board index ChiNextP closed down 5 percent, while an index tracking major material firms dropped 4 percent. Bucking the broader trend, a slew of local agriculture firms surged, including agricultural products processors, seed and pork producers, as they are seen benefiting from China's potential retaliatory measures against the US
For the short-term, analysts expect soured sentiment for equity markets, though many saw a limited impact. "Strategically, we remain optimistic about Chinese assets, as the rising trade tensions better highlight the importance of (China's) stress on more quality rather than quantity of its economic growth," Shenwan Hongyuan securities wrote in a note.
Commodities did not fare well, either. Chinese steel futures shed more than 6 percent to their lowest in more than eight months, while iron ore slumped to levels unseen in nearly nine months. In Hong Kong, sectors fell across the board, dragged down by IT and industrial firms.
An IT sub-index tumbled 4.3 percent, as the bellwether Tencent extended losses. Tencent fell more than 4 percent after Naspers Ltd. revealed a plan to cut its stake in the Chinese internet giant. Worries about how a trade war could erode global growth led to a flight to safety, sending yields on Chinese bonds lower.
The yield on benchmark 10-year Chinese government bonds fell 5 basis points (bps) to 3.7 percent.
"A trade war is good for bonds," said a fixed-income portfolio manager in Shanghai, adding that he expects the 10-year yield to fall toward 3.5 percent in the near term. The yield on highly liquid 10-year China Development Bank bonds fell 14 bps in early trade to 4.68 percent before rebounding to 4.71 percent in the afternoon.
The price of 10-year treasury futures for June delivery , the most-traded contract, rose as much as 0.91 percent before paring some gains. Prior to the market opening, the People's Bank of China set the midpoint rate at 6.3272 per dollar, 105 pips or 0.17 percent weaker than the previous fix of 6.3167.
Analysts said that despite trade concerns, including threats of retaliatory tariffs and other measures from China, currency is not likely to be a flashpoint.