China’s currency broke through the psychologically important level of 7 yuan to the dollar, prompting President Trump to accuse Beijing of manipulating its currency in a way that would backfire.
Monday’s depreciation sent the currency to a record low for offshore trading, and came days after Mr. Trump threatened to broaden U.S. tariffs to cover essentially all Chinese imports. He and many other U.S. officials have long accused China of weakening the yuan to make its exports cheaper and gain an unfair advantage in trade. Beijing has denied doing so.
Even so, China’s central bank suggested that the depreciation was in response to Mr. Trump’s decision last week to extend punitive tariffs to almost all Chinese goods.
The currency’s slump was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China,” the People’s Bank of China said in a statement.
In a tweet about 12 hours after the yuan crossed the 7 threshold, Mr. Trump described the move as “currency manipulation.” He 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!”
The yuan slid as much as 1.9% to a record offshore low of 7.1087 to the dollar in Hong Kong on Monday, according to data from Refinitiv. That put it on course for the biggest single-day loss since August 2015, when Beijing allowed a sudden depreciation of the currency. China has let the yuan trade offshore, in locations such as Hong Kong, since 2010.
In mainland China, the yuan also weakened beyond the 7 level—which policy makers in recent years have defended at various points—for the first time since 2008.
China’s central bank “has effectively weaponized the exchange rate, even if it is not proactively weakening the currency” through direct intervention, Julian Evans-Pritchard, senior China economist at Capital Economics, wrote in a note to clients. His company now forecasts the yuan will end the year at 7.30 to the dollar, and stand at 7.5 a year later.
Weiqi Zhu, a fund manager at Gao Zheng Asset Management in Hong Kong, said many investors had expected the yuan to weaken in the coming weeks, but Chinese authorities’ allowing it to breach 7 now prompted a selloff in stocks and other riskier assets. Stock indexes in Japan, South Korea and Hong Kong dropped more than 2% each.
The yield on the benchmark 10-year U.S. Treasury note, a traditional haven asset, fell to 1.81%, the lowest since November 2016. Yields move inversely to prices.
Aside from the Japanese yen, which often rallies during market stress, other Asian currencies sold off, including the Indonesian rupiah, the Indian rupee and the South Korean won.
Given that China’s central bank isn’t independent, it would likely need approval from the political leadership to allow the yuan to depreciate below the 7 level. On Monday, the PBOC said the yuan remains stable and strong against a trade-weighted basket of currencies. The central bank also said it would clamp down on short-term speculation in the yuan.
A weaker yuan makes it cheaper for U.S. buyers to purchase Chinese goods, helping offset the impact of higher tariffs. However, China doesn’t want to prompt an exodus of capital, which in turn could lead to further currency depreciation, and so economists and analysts say Beijing is unlikely to allow a sharp and potentially destabilizing selloff.
Betty Wang, an economist at ANZ, said the PBOC had plenty of tools to control the yuan’s slide, including spending some of its vast foreign-exchange reserves, withdrawing liquidity from offshore yuan markets and ordering state banks to shore up the currency.
China botched the yuan’s surprise devaluation in 2015, adjusting the currency lower against the dollar without engaging in any of the signaling that central banks of major economies usually do. Global markets widely saw the devaluation as an admission that China’s economy was weaker than the government had previously acknowledged, and stocks, crude oil and emerging-market currencies all slumped.
Mr. Evans-Pritchard at Capital Economics said Chinese authorities now have a much better handle on capital outflows than in 2015, and had been holding back mainly to avoid derailing trade negotiations.
Shuang Ding, chief economist for greater China and north Asia at Standard Chartered Bank, said China was unlikely to tolerate a much larger depreciation because it wanted to avoid deterring foreign financial investors or hobbling trade talks with the U.S. “The ultimate goal of Beijing would still be assuring foreign investment confidence as it continues to open up its financial market,” said Mr. Ding.
Throughout the year-and-a-half trade conflict, Beijing has largely shied away from a sharp weakening of the yuan. Mr. Trump has threatened to take action against Beijing if it were to do so. In trade talks this past spring, U.S. negotiators sought to include specific penalties should Beijing manipulate the yuan’s value to boost exports. Chinese leaders have also wanted to avoid a weaker yuan because it makes needed imports more expensive and crimps the purchasing power of the country’s consumers.
But as President Trump further ratchets up tariffs, Beijing finds itself with dwindling options. Because China exports far more to the U.S. than it imports, Beijing cannot continue its earlier strategy of matching Washington tit-for-tat on tariffs. Business groups in the U.S. have warned about intrusive inspections, bureaucratic delays in licensing and other non-tariff retaliation by China, as well as a weakening of the yuan.
In a statement on its website, the PBOC said crossing the threshold of 7 wasn’t an irreversible event, like aging or a dam breaking. Instead, it said the exchange rate was more like the water level in a reservoir, which can rise or fall depending on the season.
—Grace Zhu contributed to this article.
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