Business

China hits back at Trump with weaker yuan, halt on crop imports

Bloomberg

After trying to placate Donald Trump for more than a year only to face tariffs on virtually all of its shipments to the United States, China is signaling it’s ready to play hardball.

In a stark escalation of the trade war that has roiled financial markets and weighed on economic growth worldwide, Beijing let the yuan tumble Monday to the weakest level in more than a decade and asked state-owned companies to suspend imports of U.S. agricultural products.

The moves emerged within days of Trump’s threat to impose additional tariffs on China and struck at the heart of two of the U.S. president’s fiercest criticisms — that Beijing manages its currency unfairly to help exporters and has failed to keep promises to buy more U.S. crops after a trade truce in June.

Investors responded by dumping Asian stocks and emerging-market currencies in favor of haven assets including the yen, U.S. Treasurys and gold.

“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.”

Trump last week proposed adding 10 percent tariffs on another $300 billion in Chinese imports starting Sept. 1, ramping up the trade war between the world’s largest economies shortly after the two sides restarted talks.

Bureaucrats in Beijing were stunned by Trump’s announcement, according to Chinese officials who have been involved in the trade talks, and Beijing has pledged to respond if the U.S. insists on adding the extra tariffs.

China’s state media has issued a flood of criticism in recent days at Trump’s threat, even raising the prospect that Beijing may consider cutting off engagement on trade.

The MSCI Asia Pacific Index headed for its biggest decline since March on Monday, with shares slumping around 2 percent or more 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.

The yuan tumbled 1.3 percent to 7.0292 a dollar after the People’s Bank of China (PBOC) 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 percent to a record low.

“Breaking 7 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 PBOC attributed the yuan move to protectionism and expectations on additional tariffs on Chinese goods, while saying it can still maintain a steady currency.

By linking Monday’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.”

Bloomberg economists David Qu, Qian Wan and Ye Xie said: “China appears to be posturing for worse to come in the trade war. Letting the yuan weaken past 7 against the dollar suggests it’s looking to buffer the economy from a more severe trade shock.”

Allowing the yuan to weaken is not without risk for China. A mid-2015 devaluation spurred capital outflows and destabilized global markets, though tighter capital controls this time around should help prevent another exodus.

A cheaper currency also risks triggering yet more reprisals from Trump, who has frequently warned that tariffs could go much higher. At a rally in Cincinnati last week he boasted of “taxing the hell out of China” until there’s a deal.

The biggest damage from the trade war is through increased uncertainty that hurts business activity and confidence, rather than the tariffs themselves, according to Wang Tao, China economist at UBS Group AG. For that reason, the weaker yuan may do little to offset the blow, she said.

China’s crop imports from the U.S. are another weapon at Beijing’s disposal. The country’s state-run agricultural firms have now stopped buying American farm goods, and are waiting to see how trade talks progress, people familiar with the situation said, declining to be identified as they’re not authorized to speak to the media. Corn and soybean futures fell on the news.

Trump has repeatedly complained that China hasn’t made the “large quantities” of agricultural purchases that he claims President Xi Jinping promised when they met in Osaka at the Group of 20 summit. China’s commerce ministry didn’t respond to a fax seeking comment.

“China is giving up on its softer diplomatic strategy and is no longer willing to be Trump’s punching bag,” said Chua Hak Bin, an economist at Maybank Kim Eng Research. “Trump’s tariffs threats are backfiring and triggering a full-scale trade war.”