Global Stocks Fall Sharply as U.S.-China Spat Over Yuan Escalates Trade War

Stocks and government bond yields fell on fears that fresh trade tensions between the world’s two biggest economies could dent economic growth.

But the Chinese yuan—the focus of the latest escalation in friction between the U.S. and China—stabilized, a sign that Beijing might not permit a steep depreciation.

In Tuesday morning trading in Asia, benchmark stock indexes in Japan, Australia and Hong Kong were among the major decliners with each falling more than 2%. China’s Shanghai Composite fell 1.9%, while South Korea’s Kospi declined 1.6%, all building on retreats the previous day.

On Monday, the U.S. Treasury labeled China a currency manipulator after Beijing let the yuan depreciate beyond 7 a dollar for the first time since 2008. A weaker yuan makes Chinese goods more competitive abroad, and makes U.S. products and other imports into China more expensive.

Mansoor Mohi-uddin, senior macro strategist at NatWest Markets, said the label of currency manipulator was largely symbolic, given the U.S. was already levying tariffs on Chinese goods. But he said it had damaged sentiment by reminding investors that trade talks could fall apart.

Bond prices and gold rallied. The yield on U.S. 10-year Treasury notes fell 0.01 percentage point to 1.72% Tuesday, and government bonds in Australia, South Korea, Japan and China all rallied. Bond yields fall as prices rise. The Japanese yen, considered a haven currency, was little changed at 106.32 a dollar.

China’s central bank set the daily midpoint for onshore yuan trading at 6.9683, 0.7% weaker than the previous day but still stronger than 7. The People’s Bank of China also said it would issue 30 billion yuan ($4.25 billion) of central bank bills in Hong Kong—a move seen as limiting possible short selling of the currency.

The more freely traded offshore yuan strengthened 0.2% in Hong Kong to 7.0828, a day after it hit a record low. The onshore yuan was little changed against the greenback at 7.0476.

Mr. Mohi-uddin said he expected the yuan to trade between 7.05 to 7.25 a dollar, ahead of a new round of trade talks in September.

Write to Joanne Chiu at joanne.chiu@wsj.com

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