China says US currency manipulator labelling could cause chaos

China’s central bank said on Tuesday that Washington’s decision to label Beijing as a currency manipulator would “severely damage international financial order and cause chaos in financial markets”.

Washington’s move to ratchet up currency tensions on Monday would also “prevent a global economic and trade recovery,” the People’s Bank of China (PBOC) said in the country’s first official response to the latest US salvo in the two sides’ rapidly escalating trade war.

China “has not used and will not use the exchange rate as a tool to deal with trade disputes,” the PBOC said in a statement on its website.

“China advised the United States to rein in its horse before the precipice, and be aware of its errors, and turn back from the wrong path,” it said.

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The US currency accusation, which followed a sharp slide in the yuan on Monday, has driven an even bigger wedge between the world’s largest economies and crushed any lingering hopes for a quick resolution to their year-long trade war.

The dispute has already spread beyond tariffs to other areas such as technology, and analysts caution tit-for-tat measures could widen in scope and severity, weighing further on business confidence and global economic growth.

The US Treasury Department said on Monday it had determined for the first time since 1994 that China was manipulating its currency, taking their trade dispute beyond tariffs.

The US decision was driven purely by political motive to “vent its anger”, said Global Times, an influential Chinese tabloid published by the Ruling Communist Party’s People’s Daily.

China "no longer expects goodwill from the United States", Hu Xijin, the newspaper's editor-in-chief, tweeted on Tuesday.

The US decision to label China a manipulator came less than three weeks after the International Monetary Fund (IMF) said the yuan's value was in line with China's economic fundamentals, while the dollar was overvalued by 6 per cent to 12 per cent.

The US law sets out three criteria for identifying manipulation among major trading partners: a material global current account surplus, a significant trade surplus with the United States, and persistent one-way intervention in foreign exchange markets.

CHINA’S RETALIATION OPTIONS

Chinese state media had warned that Beijing could use its dominant position as a rare earths exporter to the United States as leverage in the trade dispute. The materials are used in everything from military equipment to high-tech consumer electronics.

Shares in some of China’s rare earth-related firms surged on Tuesday amid speculation the sector could be the next front in the trade war.

Beijing could also step up pressure on US companies operating in China, analysts say.

Beijing in June issued a travel advisory warning Chinese tourists about the risks of travelling to the United States, citing concerns about gun violence, robberies and thefts.

Air China said on Tuesday that it was suspending its flights on the Beijing-Honolulu route starting on August 27th, following a review of its network.

In a further sign of deteriorating ties, China’s commerce ministry announced overnight that its companies had stopped buying U.S. agricultural products in retaliation against Washington’s latest tariff threat.

“In the end, the United States will eat the fruit of its own labour,” the PBOC said.

FALLING YUAN

Chinese monetary authorities let the yuan fall past the closely watched 7 level on Monday so that markets could finally factor in concerns around the trade war and weakening economic growth, three people with knowledge of the discussions told Reuters on Monday.

The yuan has tumbled as much as 2.7 per cent against the dollar over the past three days to 11-year lows after president Donald Trump’s sudden declaration last week that he will impose 10 per cent tariffs on $300 billion of Chinese imports from September 1st.

But it appeared to steady on Tuesday amid signs that China’s central bank may be looking to stem the slide, which has sparked fears of a global currency war.

The offshore yuan fell to a record low of 7.1397 per dollar before clawing back losses after the central bank said it was selling yuan-denominated bills in Hong Kong, a move seen as curtailing short selling of the currency.

The PBOC has insisted the value of its yuan is determined by the market, though it has maintained a firm grip on the currency and supported it when it neared sensitive levels over the past year.

US Treasury Secretary Steven Mnuchin said the government will engage with the IMF to eliminate unfair competition from Beijing.

- Reuters