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SHANGHAI, Oct 8 (Reuters) - China stocks tumbled when the market reopened on Monday after a long holiday, despite Beijing's weekend move to slash the level of cash banks must hold as reserves, underscoring growing investor anxiety about the escalating Sino-U.S. trade war.
The yuan was also down, as expectations of more easing measures by China, plus surging U.S. bond yields, exert downward pressure on the Chinese currency.
Beijing has stepped up liquidity support across the financial system this year as policymakers have focused on calming fears of capital outflows and sought to soothe battered markets even as anxiety grows that the trade war with the United States could deal a damaging blow to the broader economy.
On Monday, the blue-chip CSI300 index opened 2.3 percent lower and at midday was down 3.6 percent at 3,315.01 points. The Shanghai Composite Index lost 3.0 percent, to 2,738.04 points at the end of the morning session.
Hong Kong's Hang Seng slumped 4.4 percent last week as investors worried about the escalating trade row between the United States and China. It was off 0.9 percent on Monday morning.
Monday was the first chance for mainland investors to react to the escalating trade tensions and a sell-off in Hong Kong markets last week after a week-long holiday on the mainland to celebrate National Day.
On Sunday, the People's Bank of China (PBOC) announced a 100-basis-point cut to banks' reserve requirement ratio, stepping up efforts to support the economy and calm market worries.
"An RRR cut is not enough to counter the impact of the trade war. The economy is quite weak, and I see a growing number of companies selling their assets," said David Dai, general manager of Shanghai Wisdom Investment Co Ltd, a hedge fund.
"And today's fall is not surprising after weak performance in external markets during the holiday."
Last week, U.S. Vice President Mike Pence intensified Washington's pressure campaign against Beijing by accusing China of "malign" efforts to undermine President Donald Trump ahead of next month's congressional elections and of reckless military actions in the South China Sea.
And on Friday, Chinese technology stocks listed in Hong Kong, including Lenovo and ZTE Corp, slumped on a Bloomberg report that the systems of multiple U.S. companies had been compromised by malicious computer chips inserted by Chinese spies.
China's IT sector fell sharply on Monday, tumbling over 4 percent in the morning session. Shenzhen-listed shares of ZTE Corp tumbled more than 6 percent.
Real estate, consumer and healthcare sectors were also among the biggest casualties, all tumbling more than 4 percent.
The market's obliviousness toward the RRR cut - China's central bank said the move would inject a net 750 billion yuan ($109.2 billion) in cash into the banking system - highlights concerns that monetary easing alone would do little to heal battered confidence.
"Cutting RRR at a time of relatively ample liquidity in the banking system is not likely to have much effect," wrote Zhao Jian, a finance professor of the University of Jinan.
"Liquidity is not the issue. The issue is the loss of confidence," said Zhao, adding China is in a "liquidity trap" where there's a shortage of credit demand from the real economy, especially the private sector.
China's RRR cut reinforces expectations of more policy easing ahead, putting China on a divergent path of monetary policies with the United States, where 10-year treasuries yields hit seven-year highs as the Federal Reserves keeps raising rates.
Yields of China's 10-year central government bonds have been trending lower this year, standing at 3.64 percent at lunch break on Monday. That compares with the 3.227 percent yield for U.S. bonds..
"The narrowing interest rate differentials between China and the US will exert more downward pressure on the RMB," wrote Nathan Chow, strategist at DBS Group Research.
The spot market opened at 6.9000 per dollar and was changing hands at 6.8979 at midday, 254 pips away from the previous late session close and 0.03 percent away from the midpoint.
Reflecting expectations of further yuan weakening, the one-year non-deliverable yuan futures in Hong Kong fell to the lowest level in 15 months, to 7.0095 against the dollar.
"In the face of rising trade frictions, moderate yuan depreciation aids exporters and is what the market expects to see," Tang Xiangbin, currency analyst at China Minsheng Banking Corp said, predicting additional U.S. rate hikes would help strengthen the dollar further. (Reporting by Samuel Shen and John Ruwitch; Editing by Richard Borsuk)