News Article

US labeling of China as a currency manipulator sees Asia stocks slide

Central bank sets rate at 11 year low as Yuan falls

For the first time since 1994, after Beijing let the yuan lose value Monday, the U.S. Treasury Department designated China as a currency manipulator, marking an escalation of the trade war.

Monday’s fall in the yuan’s significance caused a severe U.S. rebuke. President Donald Trump and a sharp sell-off on Wall Street as conjecture is growing that Beijing is acting on the currency market to raise imports from flagging.

Asia’s financial markets crashed on Tuesday morning with anticipation of increasing pressures between the world’s two largest economies sending stocks down.

Japanese stocks have been opening significantly smaller. At one stage in the evening trade, the Nikkei 225 benchmark dropped more than 600 marks, or 2.9 per cent, from the end of Monday after sharp decreases in New York. The Nikkei 225 completed the trading on Tuesday at 20,585, down 0.65% from the closure of Monday.

The Kospi index of South Korea struck a three-year high at 1917.50, down 1.51 points from Monday, amid confusion not only over the U.S.-China Trade war but also Trade conflicts with Japan. China’s Shanghai Composite Index closed at 2,777.56 on Tuesday, down 1.55 per cent from Monday, while Hong Kong’s Hang Seng Index dropped to 25,976.24 by 0.67 per cent.

U.S. stocks were nose-diving overnight, with the Dow Jones Industrial Average shutting down 767 marks, this year’s most significant drop. At one stage, the Dow dropped 961 marks. The S&P 500 dropped by 3.75% and the Nasdaq Composite by 4.26%.

Tuesday’s yen declined to $106.38-39 at 5 p.m. Compared to 105.95 on Monday at the same moment in Tokyo. The winning South Korean dropped to 1,208.31 compared to the greenback.

The People’s Bank of China, the main party, put the reference rate of the yuan to the dollar at 6,9683 on Tuesday, down 0,0458 from the day before and the highest level since May 2008. The yuan’s spot rates slipped in overseas trade to 7.13, with more shareholders selling the Chinese currency.

The People’s Bank of China said on Tuesday that China profoundly apologies the choice of Washington to designate a currency manipulator for Beijing. “Such a China tag does not satisfy the quantitative requirements established by the U.S. Treasury for the so-called currency manipulator,” the central bank said in a declaration.

Hirokazu Kabeya, Daiwa Securities ‘ leading worldwide strategist, proposed that the banks now take inventory of the recent innovations. “Stocks fell sharply as investors expected tensions between the U.S. and China to intensify further after the U.S. labelled a currency manipulator,” he said. “But the declines in latest trading have eased, indicating that shareholders want to look closely at the scenario.” On Monday, the Chinese currency passed the dollar’s politically delicate 7-yuan limit to its smallest point in about 11 years. But while a stronger currency may increase export-focused firms, it also hazards saving the trust of shareholders in China and pushing assets overseas.

“China fell its currency cost to a near-historic high. It’s called currency manipulation,” Trump tweeted Monday afternoon.

Trump observed that “China has always used currency manipulation to rob our companies and plants, hurt our employment, depress the salaries of our employees, and hurt the rates of our peasants. No more!” Hours after Trump’s tweets, the Treasury Department officially appointed China as a currency manipulator.

DONT MISS: China’s economy can ‘survive’ US trade war

“Secretary[ Steven] Mnuchin has determined today that China is a currency manipulator under President Trump’s guidance,” the Treasury Department said in a press release. “As a consequence of this determination, Secretary Mnuchin will participate with the International Monetary Fund to eliminate the unreasonable competitive advantage generated by China’s recent decisions.” Because of Trump’s critique of the yuan’s vulnerability, China has so far firmly prevented the yuan softening to more than $7. Beijing interfered when the Chinese currency went near to passing the border both following the 2016 U.S. presidential election and the escalation of trade conflicts in 2018.

But Monday’s monetary authorities let the currency shrink beyond the limit, probably in reaction to Trump violating the country’s trade truce with a fresh tariff round. He announced Thursday that beginning Sept. 1, he will impose a 10 per cent tariff on Chinese products lasting $300 billion, which would imply that nearly all Chinese imports would undergo sanctions.

Immediately after Monday’s swap level passed the 7-yuan limit in Shanghai, the People’s Bank of China released a declaration attributing the fall to unilateral and protectionist trade policies, as well as expectations of new Chinese products prices. The statement at the U.S. was an implicit swipe. The Chinese economy is under severe trade war stress. Real economic growth in April-June went to 6.2 per cent, the smallest amount since annual numbers were released in 1992. Production and innovation both decreased as tariffs pressure imports, and global firms placed their hopes on a soft yuan to raise their upper line.

“If the US further escalates trade tensions, we can not leave out the chance that the Chinese government will further strengthen the yuan to assist exporters,” said Zhang Ming, principal study associate at the Chinese Academy of Social Sciences ‘ Institute of World Economics and Politics. More within the state appears to advocate a certain degree of hardness in the yuan.

Nevertheless, there is a danger that the scenario will spin out of command. After a sudden devaluation in 2015, the yuan began to collapse, contributing to massive capital flight and a drop in inventory rates.

READ: Global markets not making progress ahead of payrolls, hopeful of Trade War resolution

It “would do the nation more damage than nice for the yuan to depreciate to the dollar beyond 7,” said Sheng Songcheng, the current director of the statistics department of the PBOC, earlier in May. Devaluation hazards damaging the confidence of the market in the stabilisation of the yuan and could contribute to another episode of extensive migration of assets.

As a responsible country, China will “remain committed to the market-based exchange rate regime, refrain from competitive devaluations, and will not target competitive exchange rates,” PBOC Gov. Yi Gang said in a statement on the website of the central bank.

“Exchange rates will not be used as a tool to address trade conflicts or other internal disruptions,” Yi said.

He probably wished to limit the hopes of the yuan’s further weakness.

Concerns about further financial slowdown might force shareholders to unload the yuan, which might cause unrest in the currency market in turn. The PBOC takes intense action against short-term, speculative assets.

But the bank doesn’t have the means to act once. As a consequence of attempts to stem the deterioration of the yuan since 2015, its foreign reserves have shrunk to $3.1 trillion from nearly $4 trillion. If financial buyers continue, it may bring aggressive measures such as restricting international transactions.

 

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