China lets yuan slide as trade war worsens

Andrew Galbraith and Winni Zhou
China's central bank has allowed the yuan to slide past the key 7-per-US dollar level

China has let the yuan breach the key 7-per-US dollar level for the first time in more than a decade, in a sign Beijing might be willing to tolerate more currency weakness that could further inflame a trade conflict with the United States.

The sharp 1.4 per cent drop in the yuan comes days after US President Donald Trump stunned financial markets by vowing to impose 10 per cent tariffs on the remaining $US300 billion of Chinese imports from September 1, abruptly breaking a brief month-long ceasefire in the bruising trade war.

Some analysts said the yuan move could unleash a dangerous new front in the trade hostilities - a currency war.

The People's Bank of China (PBOC) provided the early impetus for yuan bears by setting a daily rate for the currency at its weakest level in eight months.

Capital Economics Senior China Economist Julian Evans-Pritchard said the PBOC had probably been holding back against allowing a weaker yuan to avoid derailing trade negotiations with the United States.

"The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US," he said.

On Monday, the central bank linked the yuan's weakness to the fallout from the trade war, but said it would not change its currency policy and that two-way fluctuations in the yuan's value are normal.

The central bank set the yuan's daily midpoint at 6.9225 per dollar before the market open, its weakest level since December 3, 2018.

After opening the onshore session at 6.9999 per US dollar, the yuan had weakened to 7.0313 per dollar, down 1.27 per cent.

With the escalating trade war giving Beijing fewer reasons to maintain yuan stability, analysts said they expect the currency to continue to weaken.

"In the short-term, the yuan's strength would be largely determined by the domestic economy. If third-quarter economic growth stabilises, the yuan could stabilise around 7.2 or 7.3 level," said Zhang Yi, chief economist at Zhonghai Shengrong Capital Management in Beijing.

Monday's slump past the 7-per-US dollar level could further intensify the economic conflict between the United States and China.

Trump has long been critical of Beijing for manipulating its currency to gain a trade advantage, and further yuan weakness could draw Washington's wrath.