China's move to devalue its currency could prove to be a double-edged sword in its escalating trade war with the United States, offsetting tariffs but potentially hurting Beijing's efforts to shore up its weakening economy, analysts say.

Although China's central bank governor Yi Gang insisted Monday that the country would "not engage in competitive devaluation", Washington wasted no time in formally labelling Beijing a currency manipulator when the yuan plunged below the key 7.0 per dollar threshold.

China fired back Tuesday, with the bank saying it is "resolutely opposed" to the US designation.

The Chinese yuan, also known as the renminbi, is not freely convertible and Beijing limits its movement against the dollar to a two percent range on either side of a central parity rate, which is set each day.

US President Donald Trump has long accused Beijing of manipulating the currency as a weaker yuan makes Chinese exports -- which lie at the heart of the trade war -- cheaper.

Yi said Beijing would not use depreciation "as a tool to deal with external disturbances such as trade disputes" and insisted the central bank would maintain "a stable and balanced RMB exchange rate."

But some analysts have suggested Beijing will allow the yuan to fall further.

Bo Zhuang, chief China economist at TS Lombard, said the yuan's fall was the obvious result of "active monetary policy intervention" in response to Trump's most recent tariffs threat.

It is now clear that China "is willing to tolerate further currency weakness in the face of the renewed escalation of trade tensions," Bo said.

- 'Severe and destabilising' -

The two sides characterised last week's resurrected trade talks in Shanghai as constructive, but tensions have mounted rapidly since then, as Trump vowed to impose fresh tariffs on $300 billion in Chinese goods from September 1.

This would subject virtually all of the $660 billion in annual merchandise trade between the world's two top economies to punitive duties.

Bo predicted the yuan could weaken another three percent to 7.25 in August, and possibly breach 7.5 in 2020 if the US retaliates by imposing 25 percent tariffs on all Chinese exports.

But depreciation also poses risks to China -- a fact that has not escaped Beijing's policymakers.

"We don't think... (the central bank) will let the yuan wantonly weaken as a significant depreciation could have severe and destabilising effects on the domestic economy," said Stephen Innes, managing partner at VM Markets Pte Ltd Singapore.

Other analysts agree that Beijing's dislike of instability -- and fears of a large capital outflow -- will prevent the central bank from allowing too much dramatic movement.

"In my view, it will probably seek to prevent any rapid, volatile or major renminbi decline through the continued implementation of tight capital controls... and use other tools at its disposal," said Mark Sobel, former official for international and monetary policy at the US Treasury department.

- Blaming Trump -

However the trade war could also serve Beijing's broader ideological needs.

China's economy is already slowing -- growth slipped to its weakest pace in almost three decades in the second quarter -- and the trade spat throws up an easy scapegoat if the situation fails to improve.

"From a political perspective, blaming Trump may now have become a viable strategy for Beijing," said Bo.

"In the event of the negative outcome of China's growth falling short of the longstanding official target... Beijing would be able to point the finger at the US as the cause of China's slowdown, instead of admitting to any wrong policy choices."

But currency movements are only one of the tools which Beijing says it could use to increase pressure on the US, including potentially even a sell-off of its $1.1 trillion pile of US Treasuries.

"Most people didn't think they'd use the currency weapon and they've used that," Stephen Roach, a senior lecturer at Yale University, told Bloomberg.

"So conceivably, they might consider other options, and you can't rule out the Treasuries option."

Beijing has already been trimming its Treasuries holdings, which are the smallest they have been in two years, and deepening tensions mean they could shrink further.

"China is gearing up for a long trade battle with the US", said Rodrigo Catril, senior strategist at National Australia Bank.

"Recent events suggest a US-China trade deal is unlikely... and indeed it seems reasonable to expect trade tensions to get worse before they get better," he added.

Chinese yuan falls to weakest level against dollar since 2010
Shanghai (AFP) Aug 5, 2019 - China's decision to let its currency weaken against the dollar on Monday sent global markets diving further into the red and provoked a Twitter tirade from US President Donald Trump.

The deteriorating picture appeared to worsen as official Chinese media reported Beijing ceased purchases of American farm exports.

The Chinese yuan fell to its lowest level against the dollar since August 2010 in morning trading on Monday, fuelling speculation that Beijing is allowing currency depreciation to counter threatened US tariffs.

US President Donald Trump reacted angrily later in the day, accusing China of deliberately and improperly weakening its currency.

"China dropped the price of their currency to an almost a historic low. It's called 'currency manipulation.' Are you listening Federal Reserve?" he said on Twitter, calling the change "a major violation" which would "greatly weaken China."

Near 1335 GMT, the offshore currency weakened to 7.1114 to the dollar -- the worst since 2010 -- days after Trump announced a plan to impose fresh tariffs on another $300 billion in Chinese goods, sharpening trade war tensions between the world's two biggest economies.

The onshore yuan also tumbled, hitting 7.0536 in Monday morning trade to reach its lowest level since 2008.

Global equity markets were in selloff mode, with major indices in Asia, Europe and the United States down two percent or more.

The Dow Jones Industrial Average was down about 840 points around 1850 GMT.

Both the onshore and offshore yuan breached the 7.0 level against the dollar for the first time in nine years, which investors see as a key threshold in currency value.

Trump has frequently accused China of artificially depreciating its currency in order to support its exports -- charges long denied by Beijing.

So far the US Treasury Department has not formally accused China of currency manipulation.

- A 'weaponised' exchange rate -

Trump jolted global stock markets last week when he announced more tariffs just a day after US and Chinese trade negotiators revived talks aimed at ending the year-long trade dispute.

The extra 10 percent duties Trump plans to implement from September 1 would mean he has now targeted virtually all of the roughly $550 billion in goods America buys from China every year.

Official news agency Xinhua said Monday the new tariffs "seriously violated the consensus" that Trump had reached with Chinese President Xi Jinping in June.

China on Friday had threatened to retaliate against any new US tariffs -- it has already imposed its own duties on $110 billion worth of American goods, almost all of the American products it imports.

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 which the People's Bank of China (PBOC) sets each day to reflect market trends and control volatility.

The daily central rate was at 6.9225 per dollar on Monday, 0.33 percent weaker from Friday.

"It appears that the tariffs hike suggests the return of tit-for-tat moves and a suspension of trade talks, and the PBOC sees no need to keep the yuan stable in the near term," Ken Cheung, a senior currency strategist at Mizuho Bank, told Bloomberg News.

In a statement on Monday morning, the PBOC said the exchange rate against the US dollar had been "affected by unilateralism and trade protectionism measures and the imposition of tariff increases on China".

The central bank said the yuan remained "stable and strong against the basket of currencies" and said it would "resolutely crack down on short-term speculation and maintain stable operation of the foreign exchange market and stabilise market expectations".

It went on to say that it had the "experience, confidence and ability to keep the RMB exchange rate basically stable at a reasonable and balanced level".

Julian Evans-Pritchard, senior China economist with Capital Economics, said the PBOC has "effectively weaponised the exchange rate" by linking the currency with the US trade war.

"Given that their goal is presumably to offset some of the impact from additional US tariffs, they are likely to allow the currency to weaken further, probably by 5-10 percent over the coming quarters," said Evans-Pritchard.

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Trump targets China with tariffs on $300bn in goods
Washington (AFP) Aug 2, 2019
US President Donald Trump announced Thursday he will hit China with punitive tariffs on another $300 billion in goods, prompting Beijing to warn it was the wrong way to resolve the trade war. The sudden deterioration meant the world's two largest economies have now erected trade barriers covering virtually all of their $660 billion in annual trade in merchandise - confirming economists' fears and sending shudders through Wall Street. The 10 percent duties will take effect September 1, and come ... read more