As a weaker yuan and a stronger dollar mean higher costs of U.S. goods for Chinese customers.
The tit-for-tat trade war between China and the United States escalated Monday after the People’s Bank of China announced that the yuan weakened past the seven-per-dollar level, its lowest in 11 years as a result to U.S. threats of further tariffs.
A researcher with the international financial research institute in the Bank of China, Wang Youxin, regarded the currency devaluation as a normal response to external changes.
"The additional tariff hikes on Chinese goods will undoubtedly bring shocks to China's exports and forex revenue. Thus, it is in line with expectations that the yuan's exchange rate fluctuates in accordance with external changes," the expert added.
Meanwhile, U.S. President Donald Trump accused Beijing of being “currency manipulators” for the first time since 1994 and warned that it will engage with the International Monetary Fund to eliminate unfair competition.
The term is used by the U.S. Department of Treasury to designate countries that artificially manipulate the exchange rate to prevent an effective balance of payments adjustment or gain a competitive advantage in international trade.
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!— Donald J. Trump (@realDonaldTrump) August 5, 2019
However, and according to a statement of the Bank of China, the reasons for the devaluation are the unilateral and protectionist sanctions, as well as the announcement of additional tariffs on Chinese goods.
"China is the victim of U.S. trade bullying," Zhang Yansheng, a researcher with the China Center for International Economic Exchanges said.
Last week, Trump announced that it will impose a 10 percent tariff on the remaining US$300 billion worth of Chinese imports starting Sept. 1, after U.S. and Chinese negotiators failed to reach a trade deal in Shanghai.
China said it would temporarily not rule out the possibility of additional tariffs on imported U.S. farm products with deals made after Aug. 3, and related Chinese companies have halted purchases, according to the National Development and Reform Commission and the Ministry of Commerce Monday.
As a weaker yuan and a stronger dollar mean higher costs of U.S. goods for Chinese customers, the events of last week and Monday’s devaluation rocked international markets.
The benchmark S&P 500 fell about three percent to its biggest one-day percentage decline since Dec. 4. The decline amounted to a US$766 billion paper loss for the index, according to Refinitiv data.
The Nasdaq Composite, Japan's Nikkei, Hong Kong's Hang Seng, London Stock Exchange, France's CAC 40, Germany's Dax and China's Shanghai Composite all recorded falls of over two percent in average.
“It’s the escalation of the trade war,” Steven DeSanctis, equity strategist at Jefferies in New York told Reuters, adding that “the dollar strengthening presents another issue. For companies that do a lot of business outside the U.S., it all adds up.”
Despite recent weakening, the yuan has strengthened 20 percent against the dollar over the past two decades.
"The PBOC has the experience, confidence, and capability necessary to keep the yuan's exchange rate basically stable at a reasonable and balanced level," the bank’s statement assured.
Chinese and U.S. negotiating teams will intensify trade consultations at the work level in August to prepare for the meeting of chief trade negotiators which will restart in September, hoping to reach a trade deal.