China's yuan slumps beyond 7 per dollar as trade war escalation raises economic fears

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China’s yuan skidded against the US dollar on Monday, weakening beyond the key 7-per-dollar level for the first time in more than a decade, as pressure mounted on the world’s second-biggest economy from an escalating trade row.

US President Donald Trump stunned financial markets on Thursday by vowing to impose 10 percent tariffs on the remaining $300 billion of Chinese imports from September 1, abruptly breaking a ceasefire in the trade war since his meeting with Chinese President Xi Jinping at the G20 summit in June.

After opening the onshore session at 6.9999 per dollar, the yuan had weakened to 7.0240 per dollar by 0155 GMT, the first time it had breached the 7-per-dollar level since May 9, 2008.

The drop in the yuan came after the People’s Bank of China (PBOC) set the midpoint for the yuan’s daily trading band at 6.9225 per dollar, its lowest level since December 2018.

The offshore yuan also slumped, hitting a record low against the dollar of 7.1094 before rebounding to 7.0655 around 0200 GMT.

The flare-up in trade tensions has renewed global financial market concerns over how much China will allow the yuan to weaken to offset heavier pressure on its exporters.

But Frances Cheung, head of macro strategy, Asia, at Westpac in Singapore, said that “some depreciation in the renminbi is not going to help counteract much of the tariff impact, given high tariff rates.”

“With additional tariffs on the way, the PBOC is likely to come up with more easing to support growth,” she added.

Analysts have previously said that authorities will keep depreciation in check due to concerns about potential capital outflows.

Shares also dropped, with a sharp decline in Hong Kong equities weighing on the overall market, Gerry Alfonso, director at Shenwan Hongyuan Securities Co, said in an emailed comment.

Hong Kong’s Hang Seng index was 1.6 percent lower as the city braced for major disruptions to business as a general strike threatens to paralyze parts of the Asian financial center.

The benchmark Shanghai Composite Index fell 0.44 percent and the blue-chip CSI300 index lost 0.5 percent.

“The news of the CNY reaching 7 is also putting some pressure on FX sensitive sectors such as airlines,” said Alfonso.

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