By late afternoon local time Monday, one Chinese yuan was worth 14.2 cents. It hasn't been that low since February 2008, and that puts it "below the politically sensitive" seven-per-dollar level. The "breaking seven" news garnered comments from President Trump and triggered Wall Street's worst day of 2019, with the Dow closing down 767 points, or 2.9%. The S&P 500 lost 2.91%; the Nasdaq finished down 3.5%, per MarketWatch. Read on for explanation and analysis:
- The US perspective: The weakness of the yuan is among US grievances against Beijing. American officials complain it makes Chinese export prices unfairly low, hurting foreign competitors and swelling Beijing's trade surplus. The AP explains that the level of seven yuan to the dollar has no economic significance, but it could revive US attention to the exchange rate. It comes after Trump last week threatened 10% tariffs on an additional $300 billion of Chinese goods, effective Sept. 1. That would extend penalty duties to almost all US imports from China.
- Trump's perspective: On Monday morning the president tweeted, "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!"
- China's perspective: CNBC reports the People's Bank of China denied it was engaging in "competitive devaluation" and said it wouldn't use the yuan "as a tool to deal with external disturbances such as trade disputes." The network notes the Trump administration has on five occasions decided not to label China a currency manipulator, which, as the US Treasury explains, means a country where the exchange rate against the dollar is manipulated "for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade." The last time any country was branded as such was in 1994. The country? China.
- The world perspective: Globally, a weaker yuan might lead to more volatility in currency markets and pressure for the dollar to strengthen, Louis Kuijs of Oxford Economics said in a report, per the AP. That would be "unwelcome in Washington," where Trump has threatened to weaken the dollar to boost exports. A weaker dollar "would be bad news" for Europe and Japan, hurting demand for their exports at a time of cooling economic growth, Kuijs said.
- Bloomberg's take: Bloomberg reports that there's a growing sentiment in China that, rather than make a deal with Trump, the country would be better served by hanging tight and seeing if a Democrat wins in 2020. Many of the 2020 candidates "have criticized the use of tariffs ... [and China's reported] halt in agricultural purchases could hurt Trump in politically sensitive states ahead of the 2020 election."
- Further reading: This October 2018 Wall Street Journal article, titled "This Is How China Keeps a Firm Grip on the Yuan," is a good explainer of how the currency works.
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