China answered President Donald Trump’s latest tariffs on Monday by allowing its tightly-controlled currency to slide to an 11-year low against the dollar, a move that threatened to turn the U.S.-China trade conflict into a global economic contagion.
On Wall Street, the Dow Jones industrial average at one point fell more than 800 points or 3 percent and Treasury yields plunged as investors anticipated further slowing of the global economy.
In Washington, President Donald Trump accused the Chinese government of “currency manipulation” and said incorrectly that the yuan was near a “historic low.”
The Chinese currency on Monday punctured the 7 yuan-per-dollar level that had not been broken since 2008. The central bank, the People’s Bank of China, downplayed the significance of the milestone but linked the drop to the dispute with Washington.
The currency move came after Trump announced new tariffs Thursday on $300 billion in Chinese goods, effectively escalating the trade war with no end in sight.
“This puts us into a new phase and it’s not a good phase,” said Marc Chandler, chief market strategist for Bannockburn Global Forex. “It’s hard to see how there won’t be a lot of collateral damage.”
Apart from the president’s tweets, the administration offered no official comment about the developments roiling global markets.
When the stock market falls precipitously because of concerns about government policy, it often falls to the Treasury Secretary or another senior economic adviser to calm investor fears.
Treasury’s view was potentially even more important on Monday, because Trump alleged China was manipulating its currency, a practice that is expressly in the department’s purview.
But Treasury Secretary Steven Mnuchin and his top aides did not comment publicly on the market volatility or China’s actions as of midday Monday.
A weaker Chinese currency will make products from the United States more expensive while making made-in-China merchandise more attractive. That will offset some of the effects of Trump’s planned 10 percent tariff, which is scheduled to be imposed beginning September 1.
The currency shift also will effectively counter the Federal Reserve’s recent interest rate cut by leading to tighter financial conditions in the United States, said Robin Brooks, chief economist of the Institute of International Finance.
Consumers watching the stock market sink will likely respond by cutting some discretionary spending, removing a key prop from the slowing economy. “Consumption is in many ways the bedrock of our economy,” said Brooks.
David Dollar, a Treasury Department official assigned to the U.S. Embassy in Beijing from 2009 to 2013, said: “This is clearly bad for the U.S. economy . . . You’re throwing a lot of sand in the wheels of commerce. You’d expect things to slow down globally and it’ll certainly be felt by Americans.”
Trump, while accusing Beijing of “currency manipulation,” also appeared to call on the Federal Reserve to do more to prop up the economy.
“China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation,'” Trump tweeted Monday. “Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”
Global markets fell on the fraying relationship between the world’s two biggest economies.
As of midafternoon, all three major U.S. stock indexes were having their worst day of 2019, falling more than 3 percent – fresh off having their worst week of the year. The Dow Jones industrial average was down more than 800 points, or more than 3 percent. The Standard & Poor’s 500 was off by nearly 93 points, or 3.1 percent, and the tech-heavy Nasdaq was down nearly 303 points, or nearly 3.8 percent. – a six-day losing streak. Trade bellwethers Caterpillar and Boeing were down 2 percent.
The yuan’s move will likely make it difficult for developing countries that need to cut interest rates to spur growth, such as India. Instead, they will pressure to raise interest rates to attract investment, a move that would further curb growth.
Commodity exporters such as Colombia and Russia suffered during an earlier episode of yuan weakness in 2015-2016 as did South Africa, Indonesia, Argentina and Turkey, said Brooks.
Unlike some currencies whose values are freely dictated by supply and demand, China’s central bank sets a daily target price around which the renminbi, also known as the yuan, can fluctuate. The bank steps in when the price strays too far. For a decade, it has not allowed the renminbi to fall past 7 to the dollar, which financial markets consider a psychologically important threshold.
“Influenced by unilateralism, trade protectionism and tariff expectations imposed on China, the renminbi has depreciated against the U.S. dollar today, breaking through 7,” China’s central bank said in a statement on its website.
China’s central bank said it was confident it could keep the currency at a “reasonable and balanced level.”
Trump has long complained that the renminbi is too weak and the dollar too strong. He has lobbied the Federal Reserve to cut interest rates to help U.S. exporters and boost the U.S. stock market.
China, for its part, has argued that it has kept its currency at a reasonably high level to assuage U.S. concerns. It has also feared that a tumbling currency could spark panic about its slowing economy and trigger an outflow of capital.
Beijing is expected to try to prevent an unrestrained plunge by the yuan, fearing it would encourage Chinese citizens to take their wealth out of the country, economists said.
Currency markets this year have told a story of broad dollar strength. The greenback, reflecting the U.S. economy’s relative strength and nine Fed interest rate increases, has risen against the euro, the British pound and many other U.S. trading partners.
The yuan has actually held up better against the surging dollar than most U.S. trading partners. Its year-to-date decline against the dollar of 2.4 percent is much less than the currencies of two U.S. allies, the Taiwan dollar at 3.4 percent and the South Korean won at 8.6 percent.
“The Chinese have been resisting the pressure,” said Chandler. “Trump’s tweets last week and his insistence on talking the dollar down made them just give up. They surrendered to market forces.”
Trump’s latest tariff escalation, which the president announced Thursday on Twitter, sparked a rush of Chinese state media commentary suggesting that the Chinese government was caught flat-footed. State media lashed out at the United States on Sunday, accusing it of negotiating in bad faith and suggesting that Beijing may hold out from negotiating further with the Trump administration.
On Monday, propaganda authorities unveiled a new commentary series to boost popular confidence in the economy and a sense of self-reliance.
“Some people in the United States have reneged on agreements and broken the basic principles of international exchanges and conduct,” said an editorial by the People’s Daily, the Communist Party mouthpiece.It pointed out that Trump raised tariffs 27 hours after the White House released a statement calling the most recent round of talks “constructive.”
The drop in global stock prices in recent days, the commentary said, could be blamed “on the tyrannical capriciousness of certain people in America.”
Beijing appeared to mount other forms of retaliation on Monday. The government has asked state-owned firms to stop their U.S. agricultural purchases, according to a Bloomberg report Monday that was widely cited by Chinese media. The crop purchases, which came from states that comprise Trump’s political base, were supposed to be a sign of Chinese goodwill as trade talks progressed.
Late Monday, China’s state broadcaster aired an interview with a top economic policy official who denied that China was breaking its promise to buy U.S. agricultural products. But some of the products China agreed to buy were “not able to enter the Chinese market,” he said, because they were too expensive due to the trade war and “lacked competitiveness.”
As the dispute drags on, analysts wonder whether China could set off a new phase of an all-out currency war by simply ignoring U.S. pressure and allowing its currency to plunge. That could be a powerful trade weapon against Washington, but it would also exacerbate the flight of capital from companies and elite Chinese looking to shuttle their wealth out of the country, which Beijing has sought to stem for years.
Still, some Chinese analysts wondered Monday whether the yuan could fallan additional 40 percent, to as low as 10 per dollar.
“The first question, at this point, is whether China wants to weaponize its currency to retaliate in a messy trade war. It remains arguable,” Commerzbank economist Hao Zhou wrote in a research note.
But because China hasheld the line at 7 for so many years, Monday’s breach could set off a “wave of depreciation” among Asian currencies and roil the financial markets, Hao observed.
“The market implications of breaching 7.0 are tremendous,” he wrote. “It looks like a tsunami is coming.”