By Noah Sin and Luoyan Liu
HONG KONG/SHANGHAI (Reuters) - Chinese stocks fell on Tuesday as the tariff war between Washington and Beijing escalated though losses were contained after conciliatory comments from U.S. President Donald Trump and amid suspected state-backed buying of equities.
Both the Shanghai Composite and the blue-chip CSI300 opened down 1%, but recovered some of these losses, aided, according to some analysts, by "national team" purchases.
Zhang Qi, analyst at Haitong Securities, said there was "buying of key stocks" by state-backed players, noting that "volume in morning trade is close to half of yesterday's full session".
Earlier, Trump said he is holding fire on taxing the remaining $325 billion of Chinese goods, and announced that he will meet with Chinese President Xi Jinping in June, reigniting hopes for an agreement to end the tariff tussle.
His comments came after China announced on Monday higher tariffs on $60 billion of U.S. goods, effective June 1, in retaliation for Washington's decision last week to hike its own levies on $200 billion in Chinese imports.
By midday, the Shanghai benchmark was down 0.4%, while the blue-chip CSI 300 index was down 0.2%. The smaller Shenzhen market was down 0.5%.
CSI300's sub-indexes for the financial sector was up 0.1%, the consumer staples sector was down 0.1%, healthcare shares slid 0.5% and real estate stocks lost 0.4%.
The start-up ChiNext board fell 0.3% despite MSCI confirming it would include part of the board in its benchmark emerging market index.
"The implementation of the new tariffs are (almost) three weeks away from now, and the talks have not collapsed," Steven Leung, sales director at UOB Kay Hian in Hong Kong, said of the quick recovery in A-shares. "People are also speculating whether China will roll out more policy support measures."
Sticking points in Sino-U.S. negotiations remain, with White House economic adviser Larry Kudlow arguing for "very strong" enforcement provisions in an eventual deal, and Beijing insisting that it would not swallow any "bitter fruit" that harmed its interests.
The Hong Kong stock market, returning from a holiday, shed 1.6% in its first reaction to the tariff retaliation.
Foreign investors took money off the table via the Stock Connect, also closed on Monday, selling a net 7.4 billion yuan ($1.08 billion) worth of A-shares on Tuesday. They have sold more than 20 billion yuan worth of mainland shares via the Connect so far this month, snapping a five-month buying streak.
In the currency market, the offshore yuan climbed on Trump's comments, rebounding from a four-month low in early trade to 6.8933, up 0.28% on the day, while the onshore yuan firmed over 0.1% against the greenback to 6.8724. [FRX/]
"The market desperately wants to believe in a deal and takes any headline to ignite renewed optimism," said a Hong Kong-based FX sales banker at an international lender.
Prior to the onshore market open, the People's Bank of China set its midpoint at its weakest in four months, after the currency wiped out its year-to-date gains on Monday. But traders said the fix was still higher than market expectations.
($1 = 6.8714 Chinese yuan)