China Market tumbles as US tariff deadline looms

Headline indices of the Mainland China equity market ended steep lower on Monday, 02 July 2018, the first trading day of the July month and second half of the year, due to weaker-than-expected Chinese manufacturing data. Meanwhile, continued trade frictions with the US also hurt the sentiments as the US administration due to activate tariffs on Chinese goods worth US$34 billion on July 6. The benchmark Shanghai Composite Index declined 2.52%, or 71.86 points, to 2,775.56, while the Shenzhen Composite Index, which tracks stocks on China's second exchange, fell 1.58%, or 25.36 points, to 1,582.26. The blue-chip CSI300 index slipped 2.93%, or 103.02 points, to 3,407.96.

China manufacturing sector continued to expand in June with a manufacturing PMI score of 51.0, the latest survey from Caixin revealed on Monday. That's down from 51.1 in May, although it remains above the boom-or-bust line of 50 that separates expansion of contraction. Data out last week showed that China's industrial profit rose 21.1% year-over-year in May, slower than the 21.9% increase in April. In the first five months of this year, industrial profits advanced 16.5% annually compared with a 15% rise in the first four months.

Trade tensions are set to remain high, with the US administration due to activate tariffs on Chinese goods worth US$34 billion on July 6, which is expected to prompt a tit-for-tat response from Beijing. U.S. President Donald Trump has shaken the world trade order by seeking to renegotiate the terms of some of the United States' trading relationships, in particular with China. Beijing is expected to respond with tariffs of its own on U.S. goods.

CURRENCY NEWS: China's yuan depreciated against greenback on Monday, despite a firmer-than-expected midpoint set by the central bank. China's yuan was trading at around 6.6363 late afternoon on Monday from a close of 6.6225 on Friday, as a bitter Sino-U.S. trade row threatened to rattle the world's second-biggest economy. The yuan fell 3.25% against the dollar in June.

China's central bank drained 20 billion yuan from the financial system on Monday to ensure stable liquidity. The People's Bank of China (PBOC) didn't pump any money into the market through reverse repos on Monday, with 20 billion yuan in contracts maturing, leading to a net withdrawal of 20 billion yuan. The PBOC announced last month that it would cut the reserve requirement ratio (RRR) for some commercial banks by 50 basis points, expecting to release a total of 700 billion yuan into the banking system. PBOC said the cut, the third this year following reductions in January and April, was "a targeted, precision regulation" to boost funding for small and micro firms as well as to support the debt-to-equity swap program. The cut will take effect on July 5.

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