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.

Tariffs on Chinese imports will increase to 54% from 20% previously imposed. Countries in China's supply chain were hardest hit, with Vietnam, Cambodia and Laos facing tariffs between 46% and 49% respectively.

"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.

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%.

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

Trump has also signed an order to close a trade loophole used to ship low-value packages duty-free from China, known as "de minimis", which will take effect on May 2.

YUAN SUPPORT

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

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

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

China's major state-owned banks bought yuan, and the PBOC set the midpoint rate, around which it allows the yuan to trade, above market estimates, in a sign it aims to contain depreciation.

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

But mainland Chinese investors snapped up HK$28.8 billion ($3.70 billion) worth of Hong Kong shares on Thursday through the Stock Connect scheme, just shy of the HK$29.6 billion record set last month.

Stock Connect is an investment channel that connects the Hong Kong, Shanghai, and Shenzhen stock exchanges, and allows mainland investors to trade Hong Kong stocks.

"At least for value investing, Hong Kong stocks are still much cheaper than A-shares amid an asset shortage," said Zeng Wenkai, fund manager at Shengqi Asset Management Co.

Investors purchased a record HK$435 billion in Hong Kong shares during the first quarter to capitalise on the rally spurred by Chinese AI startup DeepSeek, and diversify portfolios.

But a recent pullback in Hong Kong markets may have attracted potential dip-buyers as well, according to Kenny Ng, strategist at China Everbright Securities International.

($1 = 7.7779 Hong Kong dollars)

(This story has been corrected to fix the description of Stock Connect scheme in paragraph 14)

(Reporting by Jiaxing Li, Summer Zhen, Li Gu and Vidya Ranganathan; Graphics by Kripa Jayaram; Editing by Shri Navaratnam, Christopher Cushing and Rachna Uppal)