China Allows the Yuan to Weaken Past a Symbolic Level

The tightly controlled Chinese yuan was allowed to weaken past the symbolic 7-to-1 level against the dollar for the first time since 2008 yesterday. A new chapter in this epic economic battle has begun.

Because the People’s Bank of China (PBOC) keeps a tight leash on the yuan, the central bank’s decision to allow the currency to sink past that 7-to-1 threshold is interpreted by some as an opening salvo in a currency war—and a clear signal that Beijing isn’t backing down in the trade war with D.C.

• About 7-to-1: Crossing that level is like hurtling the fourth graders in red rover. China had for years defended the barrier with aggressive policy even as the dollar strengthened. But now, as a WSJ China policy reporter put it, the “gloves are off.”

Why it matters

When currencies weaken significantly versus the dollar, goods in their home countries become more competitive in the global marketplace.

In a tweet yesterday, President Trump said China was engaging in "currency manipulation."

@realDonaldTrump

After months of punting on that label, the Treasury Department late yesterday designated China a currency manipulator and called on the IMF to "eliminate the unfair competitive advantage created by China’s latest actions."

Over in Beijing, Chinese officials insist this was the market’s doing, not the PBOC's. The central bank blamed “protectionist measures and expectations of further tariffs against China.”

This is not good for anyone

China’s move could force other countries to devalue their own currencies, which would hamstring global growth across a number of fronts. In the U.S., relative dollar strength could undermine economy-boosting strategies like last week’s Fed rate cut.

Looking ahead...in 26 days, President Trump’s 10% tariffs on the remaining $300 billion of Chinese imports will go live. The trade war ceasefire is off, and Beijing looks ready to use its currency as a weapon in the dispute. If the yuan continues to sink, expect more retaliation from D.C.