By Shen Hong and Mike Bird 

Chinese stocks on Tuesday logged their steepest declines since trade tensions between the U.S. and China began simmering, sending stocks around the world sharply lower and marking a turning point in markets' reaction to the escalating trade war.

Stocks fell Tuesday after President Donald Trump asked for $200 billion in Chinese exports to be identified for a fresh round of tariffs. Any further response from Beijing would lead to yet more American tariffs, according to Mr. Trump.

Trade tensions have been a major focus for investors this year. But the latest escalations suggest that investors have underestimated the willingness of the world's two largest economies to retaliate against one another, analysts said.

Rather than de-escalation, some analysts predict the situation will worsen -- stoking further market volatility -- in the run up to the implementation of an earlier round of U.S. tariffs, on July 6.

Dow Jones Industrial Average futures were down 1.4% ahead of the U.S. open. The export-heavy German DAX index fell by 1.7%, despite a 0.6% drop in the euro, a move that would usually support stocks with large international revenues, demonstrating how concerns about trade are driving international markets.

Chinese shares were hit hardest, falling to their lowest level in nearly two years, as investors dumped everything from large insurers to small tech firms.

The benchmark Shanghai Composite Index plunged 3.8% to 2907.82, its lowest since June 22, 2016, marking its worst single-day performance since Feb. 9 when Chinese stocks were caught up in a world-wide selloff.

"We think the risk of a trade war is becoming much higher at this stage. In particular, the risk of misjudgment on both sides looks high," said Haibin Zhu, chief China economist at J.P. Morgan.

The Shenzhen-based ChiNext board, where most of China's most promising tech firms are listed, finished down 5.8%, its biggest one-day slide since June 13, 2016.

The trade tensions also pressured the Chinese yuan: It fell 0.9% to 6.4710 against the U.S. dollar in onshore trading, its lowest level in five months and its biggest one-day drop since Feb. 8.

Earlier this year, many investors had hoped that any tariffs applied would be limited in scope or that both sides would eventually back away from their announced restrictions.

"It's mainly the trade war that has created such panic in the market because the latest developments have surpassed the expectations of many people in China," said Zhang Gang, senior analyst at Central China Securities.

The U.S. last week applied tariffs on $50 billion worth of imports from China. On Saturday, Beijing targeted high-value American exports by expanding its list of U.S. products targeted by tariffs from 106 to 659 types of goods.

It is "highly unlikely" that sufficient progress will be made by the two governments to limit the tariffs ahead of July 6, UBS economist Tao Wang said.

As the talk moves from rhetoric to action, the effects will continue to spread across markets, analysts say.

Export-focused firms were hit hardest in Europe Tuesday, with the Industrial goods and services sector and the autos and parts sectors of the Stoxx 600 index down 1.6% and 1.7% respectively.

U.S. Treasury yields could also be hit, according to Lauréline Chatelain, fixed income strategist at Pictet Wealth Management.

"Importantly, the Fed could be forced to pause its hiking cycle. In this scenario, it would be more important to watch the impact of tariffs on U.S. payrolls and business confidence," she said in a research note.

10-year Treasury yields declined to 2.88% Tuesday after closing at 2.926% Monday.

These tensions were reflected in commodities.

Iron ore futures traded in Dalian fell 4.6% while rubber futures in Shanghai were off 5.7%. Chicago-traded soybean futures were last down 2.7%, London Metal Exchange copper futures fell 1.9%. There was one relative winner: Chinese soybean meal futures jumped 3.6% in response to Beijing's announcement last Friday that it plans to impose tariffs on U.S. imports of soybeans.

The rising concerns over global trade come amid other negative notes for global markets. The synchronized global growth that had sent markets rallying appears to have ended amid signs of a slowdown in Europe. Political risk in Europe is also on the rise.

Aggravating the impact in China are signs that Beijing remains committed to its campaign to reduce the country's high debt load and leverage in financial markets.

China's total debt could reach nearly 250% of its gross domestic product by the end of this year, according to S&P Global Ratings, up from 170% in 2012.

"It's very easy for Chinese stocks to fall on a day like this because we have close to 90 million, emotionally very fragile retail investors," said Honglin Gu, a retail investor from the eastern Jiangsu province. "Herd mentality works the best here.".

Write to Shen Hong at hong.shen@wsj.com and Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

June 19, 2018 08:47 ET (12:47 GMT)

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