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By Samuel Shen and John Ruwitch
SHANGHAI, Sept 18 (Reuters) - China's yuan currency inched lower on Tuesday after U.S. President Donald Trump said Washington will impose duties on an extra $200 billion worth of Chinese imports, drawing a sharp rebuke and warning from Beijing that it will be forced to retaliate.
The escalation in the trade row between the two economic giants caused some wobbles in Chinese stocks in early trade.
However, they bounced in afternoon trade and held up after Beijing vowed to fight back. A rally in infrastructure stocks supported the broader market, with some betting that Beijing will step up investment in roads and bridges to offset the impact of the latest tariff salvo from Trump, much of which has already been priced in by the markets.
Trump on Monday imposed 10 percent tariffs on about $200 billion worth of Chinese imports, and threatened to levy duties on an additional $267 billion of Chinese goods if Beijing retaliates.
China's commerce ministry responded in a statement that Beijing had no choice but to hit back and hoped the United States would 'correct' its behavior.
The offshore yuan slipped from 6.8635 per dollar at 0700 GMT, when the commerce ministry statement was made public, to a low of 6.8730 at 0711 GMT.
After trading sideways in the morning session, China's blue-chip CSI300 index rose 2 percent to 3,269.43 points, while the Shanghai Composite Index gained 1.82 percent to 2,699.95 points.
In Hong Kong, the Hang Seng index was up 0.44 percent, to 27,051 points. The Hong Kong China Enterprises Index gained 0.9 percent.
"The fresh U.S. measures are fully within expectations," said Wen Feng, investment manager at hedge fund house Shanghai V-Invest Co Ltd.
"China has suffered worse hardships in the past, and I believe some Chinese companies will emerge out of trade war much stronger."
Still, he suggested investors avoid sectors most vulnerable to trade disputes, such as electronics and machinery, as market sentiment will likely remain subdued for some time.
Indeed, with around a 20 percent loss so far in 2018, Shanghai's stock market has joined the crisis-hit trio of Turkey, Argentina and Venezuela among the world's four worst performers. Besides the headline drop in share values, China’s currency has fallen sharply and share transaction volumes have shrunk.
Liu Shijin, a Chinese central bank adviser, told a conference in the city of Tianjin the impact of the trade war on China's economy was not significant, but the impact on stock and currency markets needed to be monitored.
"Monetary policy should react especially when the downward pressure is relatively big, but at the same time we should pay attention that policy cannot be too loose," Liu said.
Chinese infrastructure stocks jumped over 3 percent in afternoon trading, reflecting hopes that Beijing will accelerate investment on tollways and bridges to counter the negative impact from trade frictions.
That optimism quickly spread to other sectors in China.
Technology and consumer discretionary stocks , which were among the worst performers in morning trading, also reversed losses.
The yuan dipped slightly against the dollar.
Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.8554 per dollar, 45 pips weaker than the previous fix 6.8509.
The spot market opened at 6.8760 per dollar and was last changing hands at 6.8604, 51 pips weaker than the previous late session close.
Traders said the renewed Sino-U.S. trade tension piled pressure on the yuan, but market participants refrained from aggressively testing lows for fear the authorities may quickly step in.
Investors were "spontaneously" liquidating their short yuan positions, which lifted the offshore yuan from its intraday low, said a trader at a Chinese bank.
"Market will watch out for China's possible reaction to the new round of trade tariffs. China is likely to reject the invitation from the U.S. Treasury for the new round of trade talk," OCBC Bank said in a note on Tuesday.
Liu Li-gang, chief China economist at Citi said in a note to clients that the yuan might face more downside pressure.
"The risk and the sluggish domestic demand may exert depreciation pressure on the RMB, which may partly offset the tariff impact."
He said China's best policy option was to "accelerate domestic reforms and grow out of the tariff war". (Reporting by Samuel Shen and Winni Zhou and John Ruwitch Editing by Shri Navaratnam)