China hits back at Trump with weaker yuan, halts crop imports

Bloomberg

China responded to Donald Trump’s tariff threat with another escalation of the trade war on Monday, letting the yuan tumble to the weakest level in more than a decade and asking state-owned companies to suspend imports of US agricultural products.
The moves are likely to further antagonise Trump, who has criticised Beijing for managing its currency unfairly and failing to keep promises to buy more US crops.
Stocks and emerging-market currencies sank on concern a prolonged conflict between the superpowers will weigh on global economic growth, while haven assets including the Japanese yen, US Treasuries and gold climbed. Investors increased bets on Federal Reserve interest-rate cuts.
“It’s among the worst-case scenarios,” said Michael Every, head of Asia financial markets research at Rabobank in Hong Kong. “First markets sell off, then Trump wakes up and this all gets far, far worse.”
The White House didn’t immediately respond to a request for comment.
Trump last week proposed adding 10% tariffs on another $300 billion in Chinese imports from September 1, abruptly ramping up the trade war between the world’s largest economies shortly after the two sides had restarted talks. Chinese bureaucrats were stunned by Trump’s announcement, according to officials who’ve been involved in the negotiations.
The threat of more tariffs came just as Chinese President Xi Jinping and other senior members of the Communist Party gathered for a secretive summer getaway in Beidaihe, a seaside town about a three-hour drive from Beijing. Xi had already faced pressure for weeks to take a harder stance on trade — particularly after the US blacklisted telecom equipment giant Huawei Technologies Co.
Editorials in state-run newspapers suggested Xi will reject any deal that either retains punitive tariffs or forces China to make concessions on issues like state-run enterprises that could weaken the party’s grip on power.
The harder line underlines a growing feeling in Beijing that Trump can’t be trusted to cut a deal, and that China would be better off waiting to see if a Democratic presidential candidate — many of whom have criticized the use of tariffs — takes office. The halt in agricultural purchases could hurt Trump in politically sensitive states ahead of the 2020 election.
The MSCI Asia Pacific Index headed for its biggest decline since March on Monday, with shares slumping more than 2% in markets from Tokyo to Hong Kong and Seoul. Equities in Shanghai saw a more modest drop amid speculation that state-linked funds may act to prop up the market, while US equity-index futures dropped 1.1 percent.
The yuan tumbled 1.3% to 7.0324 a dollar at 2:42 p.m. Hong Kong time, after the People’s Bank of China set its daily reference rate at a weaker level than 6.9 for the first time since December. The offshore yuan sank as much as 1.9% to a record low.
“Breaking seven is due to a mix of factors: an escalation of trade war, the softening of China’s economy and a willingness for the PBOC to tolerate higher volatility for the yuan,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “The PBOC has entered uncharted waters, so it has to manage expectations carefully.”
The central bank attributed the yuan move to protectionism and expectations of additional tariffs on Chinese goods, while saying it can still maintain a steady currency.
By linking today’s devaluation with the renewed tariff threat, the PBOC “has effectively weaponized the exchange rate,” said Julian Evans-Pritchard at Capital Economics in Singapore. “The fact that they have now stopped defending 7 against the dollar suggests that they have all but abandoned hopes for a trade deal.”