Is China’s ‘currency manipulator’ tag the start of a global recession, currency war?

China allowed the yuan to weaken below 7 to the dollar on Monday, raising fears of a financial crisis and global recession

The value of the yuan has been a key focus for US President Donald Trump during the trade war

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Analysts have warned that a potential currency war could result in a global financial crisis and recession. Photo: Felix Wong

Published: 7:15pm, 8 Aug 2019Updated: 10:31am, 12 Aug 2019

The United States’ decision to label China a “currency manipulator” after the yuan’s exchange rate weakened beyond a closely watched barrier is raising the question of whether the world’s two largest countries have started a currency war as part of a broadening economic conflict.

China, which had prevented the exchange rate of the yuan, also known as the renminbi (RMB), from breaching the psychologically important level of 7 to the US dollar from the last 11 years, let the currency slip below that threshold on Monday, signalling that it was opening the door to let its currency weaken as it braces for higher US tariffs and more trade retaliation.

Traders and analysts worry that a sliding yuan could trigger a global currency war, also known as competitive devaluations, where two or more countries take steps to lower the value of their currencies in a vicious cycle to gain a competitive advantage for their exports.

The threat of a currency war and rapid escalation of trade tensions could easily spiral into a sharp global financial crisis and global economic downturn, they added.

“This could be the first step in the race to the bottom for currencies,” said Bank of America Merrill Lynch. “The trade war has escalated and threatens to worsen from here. This means greater uncertainty which weighs on business investment.”