U.S. trade action on China hits home – Renminbi falls to new low

As a result of the Renminbi breaching this threshold, the Chinese will have to shell out a lot more to service their debt especially if they want to boost exports. This is even more important given Beijing’s holding of the USD.

On Tuesday, in a significant development, China’s Renminbi hit a record low, thus fuelling fresh selling in global financial markets.

The development comes in the wake of the United States branding China as a “currency manipulator” in a rapidly escalating trade war.

In a strongly-worded editorial, China’s Communist Party, which essentially underscores that U.S. actions have in fact hit their intended targets, the People’s Daily reacted to the news saying, the United States’ was “deliberately destroying international order”.

For the very first time, the U.S. Treasury Department has determined that since 1994 China has been manipulating its currency. This announcement comes in the wake of Beijing letting the Renminbi fall through a key threshold of 7 Renminbi per dollar for the first time in more than a decade.

This is an indication that China is willing to tolerate more weakness in its currency and is likely to significantly impact the cost of its external borrowings.

The offshore yuan fell to 7.1397 per dollar in early Asian trade on Tuesday but climbed back up following a statement by China’s central bank saying, it was selling yuan-denominated bills in Hong Kong, in a move that is in most probability aimed at curtailing short selling of the Renminbi.

Onshore yuan also opened weaker around 7.0699 and was the weakest in more than a decade.

According to three sources familiar with the matter at hand, Chinese monetary authorities allowed the Renminbi to slide past the 7 threshold to allow markets to factor in concerns revolving around the U.S.-China trade war and the weakening of its economy.

The People’s Bank of China (PBOC) however insisted on doing the ostritch act and stuck to its position that the value of the Renminbi is determined by market forces; traders however know otherwise. According to them, the PBOC has been supporting the currency every time it threatened to breach the key level in the last 1 year.

The development will escalate the trade war and the U.S. action will further weaken the Chinese economy.

In a development that once again reinforces the effectiveness of U.S. trade action, China’s commerce ministry reacted to the development by announcing that its companies will no longer buy U.S. agricultural products.

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