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Tumbling yuan, a new twist in US-China trade war

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The yuan plummeted Monday to an eleven-year low versus the dollar, adding fuel to the China-US trade war.

The dollar soared to 7.0536 onshore yuan — the Chinese currency’s weakest level since 2008.

At the same time, the greenback surged to 7.1114 offshore yuan, China’s more-freely traded currency.

– What Determines the Yuan’s Level? –

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Ordinarily, the yuan’s exchange rate is determined by the currency’s supply and demand, a result of factors including China’s trade balance and the country’s interest and inflation rates.

The yuan is not freely convertible and the government limits its movement against the US dollar to a two-percent range on either side of a central parity rate that the People’s Bank of China sets each day to reflect market trends and control volatility.

Unlike its Western counterparts, the PBOC is not independent and thus inevitably faces accusations of interference when large swings occur in the yuan’s value, albeit less than two percent as was the case Monday.

While the PBOC said the exchange rate had been “affected by unilateralism and trade protectionism measures and the imposition of tariff increases on China”, US President Donald Trump in a tweet called it “currency manipulation” and “a major violation which will greatly weaken China over time!”

– Consequences for China? –

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A weaker yuan makes Chinese exports cheaper, which is at the heart of Trump’s trade war on Beijing.

After Trump last week threatened more tariffs on Chinese imports into the US, Monday’s drop in the yuan “is seen as an easing measure to negate the impact from the tariffs”, noted Phillip Futures analyst Samuel Siew.

Julian Evans-Pritchard at Capital Economics said the fact China had “stopped defending 7.0 (yuan) against the dollar suggests that they have all but abandoned hopes for a trade deal with the US”.

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Such a weakening of the yuan meanwhile also makes imports into China more expensive, risking higher inflation and causing holders of the currency to instead invest in other assets.

“There is an expectation that this… yuan devaluation could see Chinese nationals shift a greater amount of their savings into the likes of gold and bitcoin”, said Joshua Mahony, senior market analyst at IG trading group.

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– Consequences on global growth? –

Ricardo Evangelista, analyst at ActivTrades, said that “adding a new currency front to the ongoing trade conflict, between the world?s two economic superpowers, is likely to increase tensions even more, potentially hampering the growth of the global economy”.

Global stock markets and oil prices tumbled on Monday over such concerns.

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“This weaker yuan also risks exerting downward pressure on other currencies for export-reliant economies across Asia and the emerging-market complex,” said FXTM analyst Han Tan.


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