Chinese shares, yuan slide on business, economy worries

SHANGHAI (Reuters) – Chinese shares slumped to fresh two-year lows on Thursday and was set for their worst performance in the United States and worries about the outlook for China's economy.

CNY = CFXS, with anxiety pulling it lower, with some badysts saying the currency has more room to fall.

The Benchmark CSI300 Index .CSI300 and the Shanghai Composite Index .SSEC both gave up weak midday gains, deepening the losses that battered them into the market on Tuesday and Wednesday.

The Shanghai index was down 0.9 percent for the day and 10 percent in June, on track for its worst since January 2016, when it tumbled 22 percent. The blue-chip index fell 1.1 percent on Thursday. For both, it was the four-straight losing day.

"In the short term, investor sentiment remains very pessimistic," said Lu Jie, head of research at China's badet manager Robeco.

"The market is in the process of searching for the bottom," he said, expecting the market to stabilize in the second half.

The stumbling indexes once again highlighted the difficulties of a pivotal deleveraging campaign.

In the spot market, the yuan CNY = CFXS opened at 6.6177 per dollar, and ended the onshore trading session at 6.6250 per dollar, the weakest official close in seven months.

BIGGEST DROP SINCE 1994

The yuan has dropped more than 3 percent against the US dollar June, more than in any other month since 1994 when China unified the market exchange rate.

Some badysts said the currency has fallen, given its continued strength against other emerging market currencies.

"I think there is no need for urgent action," said Tommy Xie, an economist at OCBC in Singapore.

He said the People's Bank of China "is in the market to keep volatility in check, but not to change the direction of movement."

However, Xie added that excessive weakening could prompt the central bank to reintroduce its " counter-cyclical factor "in calculating the yuan's midpoint.

The bank introduced the factor last year in what it was said to be a better reflect supply and demand and a possible market "herd effects". Traders said the mechanism helped reduce volatility.

Market volatility in China "is a combination of factors – Sino-U.S. Trade, Asia, Asia, Asia, Pacific, Asia, Asia, Asia, Pacific, Asia, Asia, Middle East, China, Asia Pacific, said in a note.

"Worries over corporate bond defaults are arguably the most dominant factor at this point, since they have been struggling with debtors and debtors.

Chinese 10-year treasury futures for September CFTU8, the most traded contract, were 0.15 percent higher on Thursday.

The cost of insuring exposure to Chinese debt rose on Thursday to the highest in more than a year.

China's five-year credit default swaps (CDS) rose to 73 basis points (bps), the highest since early June 2017, and up 7 bps from Wednesday's close, data from IHS Markit showed.

The CDS have climbed 19 bps in the last 10 days.

A government think-tank report that said briefly that China should be wary of any financial panic stemming from uncertainties, such as bond defaults, tight liquidity and trade frictions with the United States.