Aug 5, 2019 - Economy

Chinese yuan weakens past key milestone as trade war heats back up

Illustration of a Chinese flag and a US flag chasing rotating

Illustration: Rebecca Zisser/Axios

The Chinese yuan was allowed to weaken past 7-to-1 against the dollar for the first time ever in offshore markets and the first time in more than 10 years in its onshore market.

What it means: The move is seen as a response to President Trump's threat on Thursday to add 10% tariffs to $300 billion of Chinese imports. Wall Street extended its multi-day sell-off after the news: the Dow is down more than 500 points, while the S&P 500 and the Nasdaq are off as much as 2% early on Monday. Meantime, the yield on the U.S. 10-year note fell to multi-year lows.

Why it matters: The People's Bank of China has aggressively defended the psychologically important 7 level as a matter of policy as the dollar has strengthened over the past 3 years.

  • Trump has long accused China of weakening its currency to make its exports cheaper and gain an unfair advantage in trade, though his administration has on multiple occasions declined to officially declare the country a currency manipulator.
  • Chinese officials had vowed not to weaken the currency as a matter of policy, but the accelerated nature of the move overnight certainly has the look of a coordinated and sanctioned maneuver.

What's happening: The PBOC issued a statement early Monday saying the currency had weakened under the influence of “protectionist measures and expectations of further tariffs against China.”

  • In addition to the weakening yuan, China’s state-run agricultural firms have stopped buying American farm goods, Bloomberg reports, "in a move that looks designed to inflame President Donald Trump. 
  • "China's policy on agricultural goods from the Midwest’s 'great patriots' has been one of Trump’s loudest talking points throughout the trade spat and the news could be painful for those politically sensitive states ahead of the 2020 election," Bloomberg notes.

What they're saying: "Gloves are off," WSJ's China policy reporter Lingling Wei said on Twitter. "China’s central bank doesn’t have the authority alone to let the yuan break 7. The move had to be signed off by the top leadership."

The big picture: Analysts expect Trump to hit back, and many have been speculating since last year that the U.S. could begin weakening the dollar as a matter of policy, igniting a currency war.

Go deeper: The world can't afford a trade war right now

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