HONG KONG (Reuters) - China's yuan dropped to its lowest level in seven weeks and stock markets slumped on Thursday after U.S. President Donald Trump unveiled a sweeping set of reciprocal tariffs that were particularly heavy on China and its main trading partners.

While investors had been bracing for these tariffs over the past week, Washington's latest punitive measures turned out to be more aggressive than expected.

Chinese imports will be hit with tariffs of 34%, on top of the 20% Trump previously imposed, bringing the total new levy to 54%. Countries in China's supply chain were hardest hit, with Vietnam, Cambodia and Laos getting slapped with tariffs between 46% and 49% respectively.

China's blue-chip CSI 300 Index fell 0.6% to a two-month low, while Hong Kong's Hang Seng Index fell 1.5%.

"The tariff hike was larger than most market participants were expecting, so the initial market reaction is likely going to be a continuation of risk-off sentiment," said Lynn Song, chief economist for Greater China at ING.

While immediate yuan depreciation pressure is likely, Song did not foresee an intentional devaluation as that would lead to more tariffs and undermine currency stability benefits.

YUAN SUPPORT

Analysts said they are scrutinising China's intent to defend the yuan, to indicate how keen it is to both contain contagion in emerging markets and negotiate with Trump.

China's onshore yuan ended the domestic session at 7.3043 per dollar, the weakest close since February 12. The offshore yuan hit a fresh one-month low overnight.

China's major state-owned banks were seen buying yuan, and the People's Bank of China (PBOC) set the midpoint rate, around which it allows the yuan to trade, above market estimates, in a sign it aims to contain depreciation.

The currency has already given up most of its year-to-date gains over the past month, despite efforts by the PBOC to keep it steady through changes to its daily benchmarks.

Trump also signed an order to close a trade loophole used to ship low-value packages - valued at $800 or less - duty-free from China, known as "de minimis". The order covers goods from China and Hong Kong, and will take effect on May 2, according to the White House.

Expectations that monetary easing will follow drove down Chinese bond yields on Thursday.

Analysts said Trump and China might now be closer to starting trade negotiations, but foreign investors will for now stay away from a market they have poured billions into, chasing a rally spurred by Chinese AI startup DeepSeek.

"China's recent tech re-rating is mostly insulated from tariffs," said Eugene Hsiao, head of China equity strategy at Macquarie Capital, adding that concerns centre mostly around the global risk-off sentiment which could limit further inflows.

The trade war could also complicate Beijing's plan to spur economic growth, targeted at roughly 5% in 2025.