On Monday, China’s yuan fell to its lowest since February 2008. The value of the Chinese currency slid to its lowest point in 11 years amid concerns over the trade war with the U.S. and the risk of a global recession.
In early Asian trading, the onshore yuan was said to be around 7.1425 to the U.S. dollar. This was also the second one-day drop of the month.
As for the offshore market, the yuan fell to 7.1850. This is yuan’s weakest point since external currency trading started in 2010.
The CSI300 Index closed at around 1.4% while the Shanghai Composite Index (.CSI) ended with 1.2%.
With the weakening of the yuan’s value, this has affected currencies around the region. Combined with central bank interest rate cuts, this is leading to the acceleration of capital outflows from the Asian region this year.
There have been indications that China has been getting the economy ready if the face-to-face negotiations between the U.S. and China next month fails to make any progressions.
This month, China has allowed its currency to go down to about 3.6%. This comes after the tensions over trade between the U.S. and China have intensified, leading to escalating fears of a global currency war.
The decrease in the value of the yuan comes after an interest rate reduction by the People’ Bank of China (PBOC). China’s central bank established a new one-year lending prime rate at 4.25%. This is down from its old 4.35% lending benchmark rate.
According to the co-founder of Singapore-based Valour Markets, Stephen Innes, “Perhaps the PBOC is sending a message to the US trade hawks that it will let the yuan gradually weaken as a policy weapon to neutralize the effect of increased tariffs.”
“The gloves are coming off on both sides and as such yuan, depreciation is an obvious cushion against US tariffs,” adds Toronto-Dominion Bank senior emerging markets economist, Mitul Kotecha.
Kotecha also said: “As long as China can ensure that yuan weakness is well controlled, i.e. it does not provoke strong outflows, expect to see further depreciation in the currency.”
In early August, U.S. State Treasury announced that for the first time since 1994, it has determined that China has been manipulating its currency. This currency manipulation by China has forced the U.S. dollar to fall and for the prices of gold to increase to a six-year high.
China’s alleged control over the yuan has prompted U.S. President Donald J. Trump to brand the country as a “currency manipulator.”
On his Twitter account, Trump said: “China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation.’ Are you listening, Federal Reserve? This is a major violation which will greatly weaken China over time!”
Trump has also accused China of manipulating its currency to “steal American businesses and factories.”
The issue regarding the manipulation of the yuan by Chinese authorities added more fuel to the intensifying trade war between China and the United States.
On September 1, the United States is set to impose the first round of its 10% tariff on $300 billion worth of Chinese manufactured consumer goods. However, financial markets around the world were shocked by Trump’s announcement last Friday about an additional 5% duty on targeted Chinese goods.
The Nasdaq Composite (COMP) and the S&P 500 (SPX) closed at 3% and 2.6% respectively. The DOW (INDU) dropped more than 700 points but closed at 623 points or 2.4%.
Trump’s declaration last Friday came after China reported that it would enforce a $75 billion tariff on U.S. goods.
Beijing said it will add two rounds of tariffs on U.S. goods. The first round is scheduled to begin on September 1. China will impose a 5% to 10% tariff on U.S. goods including agricultural products like coffee, oil, and soybeans. On December 15, it will be adding a 25% and 5% on the U.S. made automobiles and automobile parts respectively.