It added that the US move has “undermined global multilateral consensus on exchange rate issues” and will “generate serious negative impact on the stable operation of the international monetary system”.

The PBOC set a stronger-than-expected daily central parity price for the yuan exchange rate on Tuesday, signalling that it does not want to see the currency slide too dramatically. It also announced the sale of 30 billion yuan (US$4.3 billion) worth of yuan bills in Hong Kong next week, a move that could see offshore liquidity used to prop up the currency.

Washington’s labelling of China as a currency manipulator for the first time since 1994 marked a significant escalation in the trade war and roiled global markets.

The Shanghai Composite Index fell 1.6 per cent to its lowest close since February, while the Hang Seng Index closed at its lowest point since January. The Nikkei – a stock market index for the Tokyo Stock Exchange – briefly hit a seven-month low on Tuesday.

In the US, meanwhile, the Dow Jones Industrial Average plunged nearly 3 per cent on Monday, while the S&P 500 and Nasdaq Composite lost 3 per cent, as well. Meanwhile, the price of gold hit all-time highs against sterling and yuan.

Larry Summers, a former US treasury secretary, wrote in a tweet that the world was at “the most dangerous financial moment since the 2009 financial crisis with current developments between the US and China”.

Trump blamed China for not buying enough US agricultural goods and for failing to stop the flow of fentanyl, an addictive opioid, into America.

China says ‘no such thing’ as currency manipulation despite US claim

This broke the truce reached by Trump and President Xi Jinping at their Osaka summit in June. China has responded by suspending purchases of US farm products.

Analysts suspect that the US’ designation of China as a currency manipulator will lead to a further escalation in trade war tariffs.

According to the US law, there is no direct provision linking currency manipulation with the imposition of tariffs.

However, under section 701 (c) of the Trade and Facilitation Enforcement Act of 2015, Trump may bypass traditional courses of action, where it is judged that currency manipulation has “an adverse impact on the United States economy greater than the benefits of taking remedial action”, or where it “would cause serious harm to the national security of the United States”.

More conventional courses of action, according to the law, include a ban on US government procurement from China, a request for “rigorous surveillance” of China’s exchange rate and macroeconomic policies by the International Monetary Fund, as well as a reassessment of whether the US should even be involved in trade negotiations with Beijing.

“The manipulation label provides political cover for the imposition of more tariffs, whether or not the administration creates the legal fig leaf of a rule making currency manipulation grounds for anti-dumping duties, as the Department of Commerce proposed in May,” said Arthur Kroeber, founder and head of research at Gavekal Dragonomics.

US labelling China currency manipulator ‘absurd’ and threatens recession

Shen Jianguang, chief economist at JD Digit and a veteran Chinese economy watcher, said the timing is not good for Beijing to allow the yuan to slide below seven, and that a currency war would not favour China.

“It is not in China’s interest to escalate the trade war into currency or financial fields,” Shen said. “The countermeasures available for Beijing are quite limited.”