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Trump hits out at China as yuan drops to 11-year low

Chinese 100 yuan noteImage copyright Reuters

China has let its yuan currency fall in value below the seven-per-dollar level for the first time since 2008, raising fears of a currency war.

Beijing had been expected to stop the yuan hitting the psychologically important level, but allowed it to hit an 11-year low in its onshore market.

Investors dumped export-oriented Asian currencies and moved to safe havens.

In offshore markets, the yuan fell to its weakest since international trading in the Chinese currency began.

It now takes 7.0835 yuan to buy a dollar. The currency, down 1.5% in offshore markets. is heading for its biggest one-day drop in four years.

‘Fallout’

It comes after Chinese authorities said on Friday that they would fight back against US President Donald Trump’s decision to impose 10% tariffs on $300bn of Chinese imports.

The move brought a month-long trade truce to an end.

“The fallout has been most evident in the Asia region,” MUFG analyst Derek Halpenny said. “We certainly expect to see general FX volatility increase in the coming days, with daily PBOC [People’s Bank of China] yuan fixes an important focus each day.”

While other Asian currencies such as the South Korean won were hit, falling 1.4% against the dollar, it also spurred demand for safe-haven currencies such as the Swiss franc and Japanese yen.

The breaching of the seven-per-dollar limit could lead to a flight out of domestic assets. In the last decade, there have been two periods of yuan weakness, in 2010 and a slower contraction between 2014 and 2016.

Those incidents precipitated bursts of capital flight that distorted the Chinese economy and forced the authorities to prop up the currency by using capital controls and purchases by state-run banks.

Meanwhile, Chinese seed and food company shares and rare-earth firms were boosted on hopes that Beijing will not buy more from the US.

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