China and US mutual mistrust brought economic superpowers to brink of currency war, analysts say

China allowed the yuan to weaken beyond a key level on Monday to follow market trends, but the timing was off, according to market watchers

Washington labelling China as a currency manipulator ratcheted up trade war but neglected Beijing’s rationale for allow the yuan to fall, others observed

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Traders work at the New York Stock Exchange on August 5, 2019 at Wall Street in New York City. Selling on Wall Street accelerated early on Monday as a steep drop in the Chinese yuan escalated the US-China trade war following President Trump's announcement of new tariffs last week. Photo: AFP

Published: 9:30pm, 7 Aug 2019Updated: 10:09pm, 7 Aug 2019

This week’s escalation of the US-China trade war into a broader conflict over currencies shows the dangers of diminishing trust and goodwill on both sides, leading to unintended policy consequences, analysts said.

On Monday, the People’s Bank of China (PBOC) allowed the yuan to weaken beyond the key psychological threshold of 7 to the US dollar, which led to the United States to officially labelling the world’s second biggest economy a “currency manipulator” for the first time since 1994.

However, analysts say that China’s central bank had found the yuan increasingly burdensome to defend and, therefore, its decision to allow it to drop below 7 was reasonable and long overdue, amid lower growth and escalating trade tensions with the US.

Trang Thuy Le, a forex strategist with Macquarie Group in Hong Kong, who correctly predicted in July that yuan would weaken below 7 in the third quarter, said the move was not an indication that Beijing intended to start a currency feud. “It is a delayed adjustment to economic fundamentals rather than the start of a currency war,” Trang said.

But to US President Donald Trump, the yuan’s decline was a clear signal that Beijing was manipulating its currency. “China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation’,” he tweeted.