Chinese stocks rebound as authorities boosts policy support economy, contain trade war

China stocks rebounded on Tuesday morning from Monday's sharp losses as authorities took further steps to support the economy and contain the effects of an escalating trade war with the United States.

The Shanghai Composite index was up 0.5 per cent at the midday break, after flirting with losses. The blue-chip CSI300 index, which also fell briefly into negative territory, was up 0.3 per cent.

The CSI300 financial sector sub-index was 0.25 per cent higher, the consumer staples sector added 1.26 per cent, the real estate index lost 0.56 per cent and the healthcare sub-index gained 0.22 per cent.

Hong Kong's Hang Seng index added 0.4 per cent, while Chinese H-shares listed in Hong Kong rose 0.87 per cent.

The smaller Shenzhen index was up 0.14 per cent and the start-up board ChiNext Composite index was 0.13 per cent weaker.

But the major indexes' gains paled in comparison to Monday's rout, which saw the CSI300 plunge 4.3 per cent, its biggest loss since February 2016.

Analysts had attributed Monday's losses to Chinese investors playing catch-up after a week-long holiday, during which a sharp sell-off in global bond markets had dragged down equity markets.

The Shanghai Composite index finished 3.7 per cent lower, its worst day since June 19.

The blue-chip index is second only to the Greek benchmark as the world's worst-performing major index this year, having fallen 18.1 per cent. The Shanghai Composite is down 17.5 per cent this year.

Chinese market weakness comes despite authorities taking steps to support the economy amid concerns over growth and the impact of the trade war. On Sunday, China's central bank cut the reserve requirement ratio (RRR) of cash Chinese banks must hold in reserve by 100 basis points.

"In our view, the performance of external markets may hamper the near-term sentiment uplift of the RRR cut, so the effect may not be obvious," Gao Ting, Head of China Strategy at UBS Securities, said in a note.

On Monday the State Council, China's cabinet, said it will increase export tax rebates from Nov. 1 and will speed up export tax rebate payments in a new bid to boost the real economy and support trade growth.

"The export tax rebate is the most effective way to counter the negative impact of a trade war on Chinese exporters to stabilize the job market. As such, we think the near-term shock to Chinese growth is likely to be limited," analysts at OCBC said in a note.

China's attempts to increase policy support come at a time of rising external pressure due to the trade war, and as higher U.S. interest rates weigh on China's currency and constrain Beijing's ability to loosen policy to support growth.

The official China Daily newspaper said in an editorial that Monday's fall was a normal reaction and that the central bank's reserve ratio cut would help channel funds into the real economy and boost growth.

But citing trade policy tensions, the International Monetary Fund cut its global economic growth forecasts for 2018 and 2019 on Tuesday and predicted that China could face particularly severe consequences in the event of an all-out U.S.-China trade war.

Tensions between the two countries remain high, with a senior U.S. Treasury official saying on Monday that the U.S. remains concerned about China's recent currency depreciation.

U.S. Secretary of State Mike Pompeo and Chinese Foreign Minister and State Councillor Wang Yi also aired grievances in the open on Monday during a brief visit to Beijing by Washington's top diplomat.

The yuan strengthened on Tuesday after falling sharply on Monday to its lowest official close in seven weeks.

It was trading at 6.9170 per dollar at 0404 GMT, 0.17 per cent firmer than Monday's close of 6.9285 despite the central bank setting a weaker midpoint for the yuan's daily trading band.

(With inputs from agencies.)