China just 'all but abandoned hopes for a trade deal with the US'

  • China’s central bank let its currency slip to it’s lowest value since 2008, which one economist says is a move to “weaponize” the currency.
  • Previously China kept its currency above the 7-per-dollar threshold.
  • Capital Economics says China’s latest currency move is a bad sign for any trade deal.
  • View Markets Insider for more stories.

China’s move to allow its currency to fall to a 2008 low against the dollar shows that the trade war may get a lot worse.

China’s central bank on Monday morning allowed the currency to drift below 7 yuan per dollar, its lowest value since the 2008 financial crash.

Prior to today’s news, China’s central bank had erred on keeping the yuan above that threshold in the hopes of ensuring that a deal was made, says Julian Evans-Pritchard, a senior china economist at Capital Economics.

“The PBOC has effectively weaponised the exchange rate, even if it is not proactively weakening the currency with direct FX intervention,” he wrote.

“They were holding back in order to avoid derailing trade negotiations with the US,” Evans-Pritchard wrote in a note to clients on Monday. “The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US.

Global stocks are crashing on the news, with the Hang Seng closing down 2.8%, while US futures were down at least 1.4% this morning.

And the Chinese currency might go even lower.

“Given that their goal is presumably to offset some of the impact from additional US tariffs, they are likely to allow the currency to weak further, probably by 5% – 10% over the coming quarters,” he wrote. “We had anticipated that the PBOC would eventually devalue the currency in response to trade tensions, but hadn’t expected it to come quite this soon.”

“Although PBOC officials had repeatedly argued that this level is arbitrary, they had previously intervened to prevent the currency from breaching this threshold, no doubt mindful of the headlines it would attract,” Evans-Pritchard said.

The People’s Bank of China linked the currency fall to increased tariffs, though did not explicitly mention the US.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.