The Shanghai index plunged more than 5 percent, with the Chinese yuan also taking a battering after the president threw a spanner into the high-level negotiations, which many observers were expecting to wrap up imminently.
“For 10 months, China has been paying Tariffs to the USA of 25 percent on 50 Billion Dollars of High Tech, and 10 percent on 200 Billion Dollars of other goods,” Trump tweeted Sunday night. “The 10 percent will go up to 25 percent on Friday.”
He added: “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”
The warning will throw a shadow over the next round of talks ahead of a visit by a Chinese delegation to Washington this week.
European equities also dived, with key euro zone exchanges Frankfurt and Paris down by around 2 percent. London was closed for a public holiday.
However, while a number of news outlets reported that China was considering delaying or canceling the meeting, a foreign ministry spokesman said a delegation would head to the US as planned.
“Trump has taken the proverbial sledgehammer to the walnut this morning and the only two words likely to be on the minds of traders and investors this week are ‘trade talks’,” said OANDA senior market analyst Jeffrey Halley.
Shanghai shares sank 5.6 percent as investors returned for the first time since Tuesday. News that the People’s Bank of China would slash the amount of cash lenders must keep in reserve, to support small businesses, had little impact in the face of Trump’s warning.
Hong Kong tumbled 2.9 percent, Singapore was off 3.1 percent and Taipei shed 1.8 percent, while Sydney dropped 0.8 percent and Wellington was 1 percent down.
“Trade had been put to the side by many market participants,” said Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs.
But Trump’s threat now “raises the specter of a significant hit to growth should these tariffs escalate and should the uncertainty associated with that weigh on investment going forward,” he told Bloomberg TV.
The yuan sank 1.3 percent at one point against the dollar, its heaviest fall in more than three years.
“Investors will remain bearish on the yuan, as they reprice in trade war risks because the new developments are a reversal of previous positive progress,” said Ken Cheung, senior foreign-exchange strategist at Mizuho Bank. “The news was unexpected.”
On oil markets, both main contracts were hammered by worries that a trade war between the world’s top two economies could hit demand.
However, Stephen Innes at SPI Asset Management remained positive.
“We do know the president tends to retreat from more aggressive displays, so I am viewing this thinly veiled threat as political posturing or a tactical decision to apply more pressure on China to put through a trade deal that aligns with the best USA economic interest at heart.
“Despite US-China trade talks hitting an apparent impasse based on (the) tweet, I think a deal will be signed shortly.”
Warren Buffett said on Monday that a trade war between the US and China would be “bad for the whole world.”
His conglomerate Berkshire Hathaway owns or invests in many companies that do business in China, including Apple, in which it has a more than $50 billion stake.
“If we actually have a trade war it will be bad for the whole world,” Buffett said. “With some people in negotiations, the best technique is to act half-crazy.”
A full-scale trade war “would be bad for everything Berkshire owns,” Buffett added, though the probability it might happen is low.
He added that Trump’s threat raises the stakes for Chinese leader Xi Jinping.
“You’re talking about two personalities who are very much used to getting their way in politics, and talking about how they will be perceived in their own country in terms of their behavior,” he said. “It gets very complicated.”