Chinese yuan down as US trade tariffs kick in, stocks recover

Chinese stocks jumped in afternoon trade on Friday, reversing earlier losses, but the yuan remained weaker against the dollar as U.S. tariffs on Chinese goods kicked in, escalating the trade row between the world`s two largest economies. The United States imposed tariffs on $34 billion of Chinese imports at 0401 GMT. Beijing has promised to retaliate in kind.

At 0517 GMT, the benchmark CSI300 Index was up 0.9 percent, after ending the morning session down 0.1 percent and earlier falling as much as 1.4 percent. The Shanghai Composite Index was 0.6 percent higher after falling 0.3 percent to the midday break.

The Shanghai Index had flirted with two-year lows in the morning session. As stocks turned around, Chinese treasury futures fell. Chinese 10-year treasury futures for September delivery, the most-traded contract, fell 0.2 percent to 95.640.

China`s yuan was 0.3 percent weaker against the dollar at 6.6550. "The chances are slim for China and the U.S. to reach an agreement on trade issues, and trade war worries will be a long-term uncertainty for at least the next two years," said Yan Weixiao, an analyst with Founder Securities, adding that things could be "dangerous" for Chinese stocks.

Yan said the psychologically key level of 2,638 points for the SSEC, which was hit in March 2016, will probably be broken.

At 0413 GMT, the yuan was at 6.6570 per dollar and trading in a tight range after ending the late session on Thursday at 6.6371.

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"There shouldn`t be huge volatility in the market because it`s all expected. Investors know what`s going to happen and it has already been priced in," said Li Liuyang, senior foreign exchange analyst at China Merchants Bank in Shanghai, referring to the yuan market.

"The market will pay attention to any follow up, whether Trump escalates further, or anything unexpected happens."

Gao Qi, FX strategist at Scotiabank, said in a note on Friday he expected the Chinese authorities to step in to calm the market and prevent the yuan from sharply depreciating if need be.

"We see a strong resistance of 6.70 for now and the 6.90 level seems China`s bottom line for the yuan exchange rate. The yuan will certainly face intensifying depreciation pressure again going forward if China fails to de-escalate trade tensions with the U.S.," he wrote.

The United States is set to impose tariffs on $34 billion of Chinese imports from 0401 GMT on Friday and has warned it may ultimately target over $500 billion worth of goods, or roughly the total amount the United States imported from China last year.

Beijing has vowed to immediately respond with an equal amount of tariffs of its own against U.S. autos, agricultural and other products, though it is unclear how swiftly the actions could escalate into an all-out trade war.