China stocks fall sharply despite central bank's move to support economy

China's stocks fell sharply on Monday despite Beijing's weekend announcement that it will slash the level of cash that banks must hold as reserves, a sign of underlying investor anxiety over a heated Sino-U.S. trade war.

The yuan was also down after the central bank set the reference rate at its weakest level against the dollar since May 11, 2017, and analysts expect the currency's weakening trend to continue.

Monday was the first chance for mainland investors to react to the escalating trade tensions and a sell-off in Hong Kong markets last week after a week-long holiday on the mainland to celebrate National Day.

On Sunday, the People's Bank of China (PBOC) announced a 100-basis-point cut to banks' reserve requirement ratio, stepping up efforts to support the economy and calm market worries.

"An RRR cut is not enough to counter the impact of the trade war. The economy is quite weak, and I see a growing number of companies selling their assets," said David Dai, general manager of Shanghai Wisdom Investment Co Ltd, a hedge fund.

"And today's fall is not surprising after a weak performance in external markets during the holiday."

The blue-chip CSI300 index was down 2.3 per cent at the open and off more than 3 per cent by 0215 GMT, while the Shanghai Composite Index dropped some 2.5 per cent.

Hong Kong's Hang Seng slumped 4.4 per cent last week as investors worried about the escalating trade row between the United States and China. It was off 0.55 per cent by mid-morning.

Last week, U.S. Vice President Mike Pence intensified Washington's pressure campaign against Beijing by accusing China of "malign" efforts to undermine President Donald Trump ahead of next month's congressional elections and of reckless military actions in the South China Sea.

And on Friday, Chinese technology stocks listed in Hong Kong, including Lenovo and ZTE Corp, slumped on a Bloomberg report that the systems of multiple U.S. companies had been compromised by malicious computer chips inserted by Chinese spies.

China's IT sector fell sharply on Monday, tumbling over 3.4 per cent in early trading. Shenzhen-listed shares of ZTE Corp tumbled more than 8 per cent at market open, before paring losses.

Some analysts say the central bank's reserve requirement cut as a sign of more easing to come.

"The RRR cut announced today sends a clear easing signal," Bank of America Merrill Lynch said in a research note.

"Timing-wise, it suggests policymakers wish to stabilize the market sentiment given the recent stress in financial markets and rising growth concerns as U.S.-China trade tension further escalate."

(With inputs from agencies.)