(Bloomberg) -- China’s yuan is likely to test the 7 per dollar level sooner than previously expected after Donald Trump’s abrupt decision to escalate the trade war, which could also prompt more easing by Beijing to support the economy, analysts say. The threat will weigh on stocks too, presenting buying opportunities if the benchmark falls below a key level, they said.
The yuan fell as much as 0.76% to 6.9394 per dollar Friday morning, its weakest since November, while the Shanghai Composite Index dropped 2% to 2,851.44, the lowest in nearly two months. Technology stocks were among the hardest hit. The yield on 10-year Chinese government bonds slid 4 basis points, the most in a month, to 3.11%.
Chinese Stocks Slide With Yuan as Trump Shatters Market Calm
Here’s a roundup of views from analysts:
“Expectations that the yuan will remain stable are shattered,” said Zhou Hao, a senior emerging market economist at Commerzbank AG (DE:CBKG) in Singapore. “Once the era of low volatility has ended, many traders will have to stop loss. Investors will test the PBOC’s resolve to defend 7 today or in the coming days.”
“The risk of the yuan breaking 7 has risen visibly” and could happen any time, said Christy Tan, head of markets strategy at National Australia Bank Ltd. in Singapore. The central bank won’t allow disorderly movements in the currency.
Beijing may be tempted to allow further depreciation to support growth, said Ken Cheung, a senior Asian FX strategist at Mizuho Bank Ltd. The Politburo’s emphasis on stability means China is likely to keep a smooth pace of depreciation, and given concerns over capital outflow risk, “we do not expect the onshore yuan to breach the 7 handle immediately.”
RATES
The odds have built for more Fed rate cuts, while China’s economic growth will likely drop below 6% next year, said Koon How Heng, head of markets strategy at United Overseas Bank Ltd. “I’m not so worried about Chinese outflows, but this may well intensify the relocation of manufacturing capital away from southern China into various ASEAN countries like Vietnam, Thailand, Malaysia and Indonesia,” he said.
The escalation in trade tension adds downside risk to growth, which is generally bond supportive, said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. “More importantly, China is likely to focus on supporting domestic growth and the market may expect more liquidity and credit support,” she said. “The yield differential remains favorable for China government bonds.”
The new tariffs impact the growth outlook much more, because many high-tech consumer goods are included, said Zhaopeng Xing, a markets economist at ANZ Bank China, adding that the yield on China’s 10-year government bond could fall another 10-15 basis points to 3.0%.
STOCKS
Most people were expecting some compromise in the latest round of trade talks, said Banny Lam, head of research at Ceb International Inv Corp. Selling pressure could be more intense as it is Friday and investors are uncertain about what may happen over the weekend. “China should be really tough in response to the U.S. moves,” he said.
There’s a higher likelihood that China will use fiscal tools over the weekend to bolster confidence, said Wang Zhihong, managing director at Whiterock Asset Management Co. “We will increase our short position on industrial commodities,” he said.
It could be an opportunity to buy if the Shanghai Composite falls below 2,700, especially consumer and infrastructure-related stocks, said Kenny Wen, strategist at Everbright Sun Hung Kai Co. “The Chinese government may boost infrastructure spending and tax cuts to boost domestic consumption to offset the tariff impact.”
Sun Jianbo, president of China Vision Capital Management in Beijing, said he’s waiting to bottom fish consumer electronics stocks after the tariff news. “The trade war is going to last for a while, so our internal consensus has always been buying stocks after the tensions ratchet up and selling after it cools down a bit. Things can’t go too extreme on either side.”
“There’s no need to get over-pessimistic as the U.S. can’t afford to lose the China market and the trades will go on even after more tariffs,” Sun said. “Stocks in the consumer electronics supply chain will drop for sure, but as long as their earnings growth potential remains intact, we would start buying after the correction.”