SHANGHAI/HONG KONG (Reuters) - China’s yuan fell to an 11-year low against the dollar on Monday and stocks dropped as the Sino-U.S. trade war sharply escalated, threatening to inflict more damage on the world’s largest economies.

FILE PHOTO: A U.S. dollar banknote featuring American founding father Benjamin Franklin and a Chinese yuan banknote featuring late Chinese chairman Mao Zedong are seen among U.S. and Chinese flags in this illustration picture taken May 20, 2019. REUTERS/Jason Lee/File Photo

Share prices also tumbled in Hong Kong as trade tensions mounted and after a weekend flare-up in violence during anti-government protests.

The onshore yuan CNY=CFXS slumped as much as 0.7% in the first few minutes of trading to 7.15 per dollar, its weakest since February 2008 and its second biggest one-day drop of the month. The offshore yuan CNH=D3 fell to a record low of 7.1850.

But the currency later pared losses after U.S. President Donald Trump said on Monday he believed Beijing wanted to make a trade deal. Trump said China had contacted U.S. trade officials overnight to say it wanted to return to the negotiating table.

The Chinese authorities have allowed the tightly-managed yuan to slide some 3.6% so far this month as trade tensions between Beijing and Washington have worsened, sparking fears of a global currency war. It was trading around 7.1456 by 0745 GMT.

The benchmark CSI300 Index .CSI300 ended down 1.4% while the Shanghai Composite Index fell about 1.2%, with Trump's comments hitting trading screens just before the close. Chinese 10-year Treasury futures rallied 0.3% in early trade on Monday but eased later in the day.

On Friday, Trump announced an additional duty on some $550 billion of targeted Chinese goods, hours after China unveiled retaliatory tariffs on $75 billion worth of U.S. goods.

“This tit-for-tat escalation shows how unlikely a trade deal and de-escalation have become,” Louis Kuijs, of Oxford Economics, wrote in a note late on Sunday.

“The impact of the new tariffs on China’s economic growth will be sizeable,” he said.

Oxford now expects China’s economic growth could fall significantly below 6% next year, even assuming more policy support measures.

Capital Economics said the impact of U.S. tariffs on China’s economy was starting to add up.

“With the drag on GDP growth set to rise to nearly one percentage point before long, it is significant enough to warrant looser monetary policy and a weaker exchange rate,” it said in a note to clients.

Earlier on Monday, Chinese Vice Premier Liu He, Beijing’s lead negotiator in the trade talks, helped take some of the edge off market jitters when he told a conference that China is willing to resolve the trade dispute through “calm” negotiations and resolutely opposes the escalation of the conflict.

WHERE IS THE BOTTOM LINE?

China’s central bank had been trying to stabilize the yuan in recent weeks after allowing a sudden slide in its value in early August following new U.S. tariff threats. On Friday, traders thought it was signaling a floor at the 7.1 level.

But Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, expects further weakness in the yuan for the rest of this year following the latest dramatic escalation but no major devaluation.

“The PBOC has not yet signaled its bottom line for the yuan,” Cheung said, referring to the People’s Bank of China, the central bank.

“And given the United States is holding its presidential election next year, the situation is unlikely to deteriorate too much as that could trigger a backfire.”

In Hong Kong, the Hang Seng Index .HSI dropped more than 3% in morning trade as investor confidence continued to weaken amid the darkening trade outlook and the latest anti-government protests. Protests on Sunday saw some of the fiercest clashes yet between police and demonstrators.

The Hang Seng ended down 1.9%.

“The sentiment toward local companies is really bad. People have been pessimistic on the rental and tourism outlook and what happened over the weekend doesn’t help,” said Alex Wong, director at Ample Finance Group in Hong Kong.

With the economic outlook souring rapidly, analysts expect more growth measures from Beijing in coming weeks and months.

On Monday, the Chinese central bank injected 150 billion yuan worth of funds into the financial system via its medium-term lending facility, or MLF. It kept the interest rate on the instrument unchanged at 3.3%.

Markets had expected the PBOC to keep key rates steady this week, but a cut is expected by mid-September after a policy review by the U.S. Federal Reserve, as Beijing steps up efforts to lower borrowing costs to support growth.

Investors are closely watching to see if Beijing will resort to more aggressive easing measures as the trade war erodes confidence, dents business profits and discourages new investment.