China weakens currency signaling further trade escalation with U.S.

The Chinese central bank today set the lowest exchange rate for the yuan against the U.S. dollar in a decade signaling further deterioration in bilateral trade relations.

Laura Hehad the news for CNN:

The Chinese yuan dropped sharply on Monday to its weakest level against the US dollar in more than a decade, raising fears of further dangerous escalation in the US-China trade war.

The yuan fell after the People’s Bank of China set its daily reference rate for the currency at 6.92, the weakest rate since December. China’s central bank sets a “band” every day within which the yuan’s value is only allowed to move 2% up or down.

In mainland China, one US dollar now buys about 7.03 yuan. In trading outside of China, where the yuan moves more freely, it stands at 7.07 to the dollar. Earlier, it had slipped to a record low offshore.

The symbolically important threshold of 7 was last crossed during the 2008 financial crisis.

The central bank said that it is fully capable of keeping the yuan “reasonable and balanced,” adding in a statement that Monday’s weakness was mostly because of “trade protectionism and new tariffs on China.” President Donald Trump announced a new round of tariffs on the country last week.

The Australian Financial Review’s Andrew Galbraith, Winni Zhou, and Noah Sin provided the analysts’ perspective:

The flare-up in trade tensions has renewed global financial market concerns over how much China will allow the yuan to weaken to offset heavier pressure on its exporters.

But Frances Cheung, head of macro strategy, Asia, at Westpac in Singapore, said that “some depreciation in the renminbi is not going to help counteract much of the tariff impact, given high tariff rates”.

“With additional tariffs on the way, the PBOC is likely to come up with more easing to support growth,” she added.

Analysts have previously said that authorities would keep depreciation in check due to concerns about potential capital outflows.

Shares also dropped, with a sharp decline in Hong Kong equities weighing on the overall market, Gerry Alfonso, director at Shenwan Hongyuan Securities, said in an emailed comment.

Kelly Wang of Asia Times provided the background and context:

Trump has frequently accused China of artificially devaluing its currency in order to support its exports – charges long denied by Beijing.

Last week, he shocked global markets when he issued the threat of more tariffs just a day after US and Chinese trade negotiators revived talks aimed at ending the year-long dispute.

The extra 10% duties Trump threatened to implement from September 1 would mean he has now targeted virtually all of the $500 billion in goods America buys from China every year.

US tariffs.

On Friday, China threatened to retaliate to any new US tariffs – it has already imposed its own duties on $110 billion of American goods, almost all of the products it imports from the country.

A report from Bloomberg News also stated that China has also asked its state-owned enterprises to stop buying US farm goods, in a further sign of escalating tensions.

The yuan is not freely convertible and the government limits its movement against the US dollar to a 2% range on either side of a central parity rate, which the People’s Bank of China sets each day to reflect market trends and control volatility.