China stocks sink as Trump's fresh trade threats herald 'darkest hour'

SHANGHAI (Reuters) - Shanghai stocks tumbled nearly 4 percent on Tuesday to a two-year low, while the yuan fell to a more-than-five-month low against the dollar as Washington's fresh tariff threats against China raised the specter of a full-blown trade war.

The equity slump, which comes despite a surprise liquidity injection by the central bank, risks triggering a downward spiral that could derail Beijing's bid to lure large international listings, particularly from high-tech giants.

The Shanghai Composite Index plunged more than 5 percent at one point in late trade before finishing the session down 3.8 percent at 2,907.82 points. The blue chip CSI300 index fell 3.6 percent to 3,621.12.

Meanwhile, the yuan weakened to a low of 6.4754 in afternoon trade, the weakest since Jan. 12, while China's benchmark 10-year treasury futures jumped, as bond yields fall.

"It's the darkest hour and the most agonizing moment in the first half of this year...there are disaster victims everywhere," Zhang Yidong, strategist at Industrial Securities wrote on Tuesday, wrote in a note.

Zhang said investors faced the triple-whammy of the Sino-U.S. trade spat, Beijing's regulatory crackdown on riskier lending practices and tighter global liquidity.

Stirring memories of the 2015 equity market crash, more than 1,000 stocks slumped by their 10 percent daily limit as Chinese investors dumped stocks across the board, which sent jitters through China's retail investment community.

"It will have a big affect on us normal people," said Gu Xiaoliang, a 31-year-old personal investor, who was watching market prices at the entrance of the Shanghai Stock Exchange in the city's financial district

"As an investor, I am not optimistic with my investments. Right now, I don't have clear judgment so I'm just going to wait and see."

Shanghai-based hedge manager David Dai said the rapidly escalating trade tensions between Washington and Beijing have added woes to an already fragile stock market and make calling the bottom very difficult.

On Tuesday, China's commerce ministry said the country would take "qualitative" and "quantitative" measures, and "fight back firmly" against additional tariff measures by the U.S. government.

The statement came after U.S. President Donald Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, a move he said was in retaliation for China's decision to raise tariffs on $50 billion in U.S. goods.

China's central bank pumped 200 billion yuan ($31 billion) into the banking system via its medium-term lending facility on Tuesday. The move failed to mollify investors, who had their first chance to react to trade-related news after returning from a long weekend.

TECH WOBBLES

The market ructions and trade barbs also pose a challenge for China's push to boost the profile of the booming tech sector on mainland bourses.The tech-heavy start-up board ChiNext tumbled nearly 6 percent to its lowest level since January 2015.

In a surprising move, Chinese smartphone marker Xiaomi said on Tuesday that it would postpone its application for a mainland share offering until after it completes a separate listing in Hong Kong.

"The rising risk of a disruptive trade conflict makes a bad situation tentatively worse" for an economy already clouded by a sharp slowdown in investment growth, a mounting debt burden and rising credit defaults, Nomura said in a note on Tuesday.

"With this potential double whammy, we believe Beijing will very likely introduce further easing measures in the months ahead."

Hong Kong stocks were also hit hard, with the benchmark Hang Seng index dropping nearly 3 percent to its lowest closing level in six months.

Underscoring the impact on Chinese companies from worsening Sino-U.S. relations, shares of ZTE Corp, the technology firm caught in the cross-fire of the trade spat between the two countries, slumped further on Tuesday.

Its Hong Kong-listed shares tumbled 25 percent to a two-year-low, while its Shenzhen shares fell by their daily limit of 10 percent for a fourth consecutive session.

U.S. tariffs on Chinese products including steel, aluminum, and those that benefit from China's industrial development subsidy programs including the "Made in China 2025" technology upgrade plan, could hurt a broad number of China-listed companies, said fund manager Dai, who is general manager of Shanghai Wisdom Investment.

Further market falls could also trigger a vicious cycle of selling, as a large proportion of shares in China's stock market are pledged against loans, and could potentially face margin calls, he said.

According to the official China Securities Journal, the value of pledged stocks total 5.5 trillion yuan ($850.83 billion), and an estimated 900 billion yuan of such shares have fallen below prices at which margin calls or broker warnings of margin calls are triggered.

Dai said regulators now face the tricky task of balancing market stabilization with the need to reduce lending risks.

"Fresh stimulus could make its deleveraging campaign a failure," he said.

(Reporting by Samuel Shen, Winni Zhou and Andrew Galbraith; Additional reporting by Jiang Xihao; Editing by Kim Coghill and Sam Holmes)