SYDNEY (News Wires) - Asian shares pared gains on Monday as Chinese stocks swung into negative territory, dragged lower by the escalating Sino-U.S. trade war, though Beijing's efforts to stop sharp declines in the yuan helped support the currency. Spreadbetters pointed to a tentative start for European shares with futures for London's FTSE FFIc1 up 0.07 percent. E-Minis for the S&P 500 ESc1 were up 0.08 percent. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS climbed 0.3 percent, after having risen about 1 percent earlier in the day. Chinese shares turned negative with the blue-chip share index .CSI300 and Shanghai's SSE Composite .SSEC down more than 1 percent each. Japan's Nikkei .N225 and South Korea's Kospi index .KS11 slipped 0.1 percent. Among the gainers, Australian shares added 0.6 percent and Hong Kong's Hang Seng index .HSI rose 0.5 percent. The trade dispute remains a live issue for markets with China proposing tariffs on $60 billion worth of U.S. goods on Friday, while a senior Chinese diplomat cast doubt on prospects of talks with Washington to resolve the bitter trade conflict. That was followed by a report in China's state media saying Friday's retaliatory tariffs were "rational" while accusing the United States of blackmail. At the same time, U.S. President Donald Trump said his strategy of placing steep tariffs on Chinese imports is "working far better than anyone ever anticipated", citing losses in China's stock market. He predicted the U.S. market could "go up dramatically" once trade deals were renegotiated. "The drip feed of escalating tariff threats from Trump and counter threats from China continues," said Shane Oliver, chief economist at AMP Capital. "With a 25 percent tariff on...(some) Chinese imports likely to commence soon, Trump is clearly ramping up the pressure on China but China is digging in," Oliver added. "A tariff of this magnitude will start to have a significant economic impact on China's growth, potentially knocking up to 0.5 percent off growth, and probably also on the U.S." At the same time, China is stepping up measures to support its currency, which has been hit by the worsening trade skirmish. Late on Friday, the People's Bank of China raised the reserve requirement on some foreign exchange forward positions, making it more expensive to bet against the Chinese currency and helping pull the yuan away from 14-month lows. The move boosted the Australian dollar AUD=D3, which is often played as a liquid proxy for the yuan. The Aussie came off two-week lows to climb as high as $0.7412 after the announcement, and was last at $0.7386. "Leaning against bearish CNY sentiment is important because a rapidly weakening currency risks triggering residential outflows and destabilizing domestic asset prices," JPMorgan analysts said in a note. "Our economists think that PBOC likely will take further action if CNY depreciation continues or capital outflow pressure increases." Wall Street indices gained on Friday, helped by strong corporate earnings, although gains were capped by worries over the escalating trade tensions. According to Bespoke Investment Group, mentions of tariffs in S&P 500 company earnings reports for the second quarter have more than doubled from the first quarter of this year. While the risk of a trade war was the main worry for investors, other factors were weighing on sentiment too. "Investors are also closely watching the rising value of the U.S. dollar, slowing global economic growth and the risk of the Federal Reserve tightening short-term interest rates too quickly and dampening domestic economic growth," said Lachlan McPherson, Senior Investment Consultant at Charles Schwab Australia. The dollar index .DXY, which measures the greenback against a basket of six other currencies, has risen 3.4 percent so far this year with strong rallies since April when Trump first announced the tariffs. The index was last up 0.2 percent at 95.32. Traders see further upside in the dollar as they maintained a significantly large long position on the currency, while net short bets on the Aussie were their largest since November 2015.
