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Asian stock markets tumbled on Tuesday after the US accused China of manipulating the yuan in a sharp escalation of the year-long trade war between the world’s two largest economies that threatens global growth.
On Monday, the US Treasury labelled China a currency manipulator for the first time since 1994, opening the door to sanctions, such as exclusion from US government contracts, and potentially new and higher tariffs on Chinese imports.
“The purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade,” the Treasury said.
The move by Washington – which propelled US stocks to their biggest loss since December on Monday – followed the yuan’s plunge to an 11-year low, above the important level of seven to the dollar.
China rejected the accusation and suspended purchases of US agricultural products.
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In a separate salvo, an editorial in the People’s Daily, the official newspaper of the Chinese Communist party, accused the US of destroying the international order and holding its own citizens hostage.
“Today some in America are obsessed with American privilege to the point of destroying international rules and the international system,” the editorial said without mentioning Mr Trump or the Treasury’s manipulator label. “These Americans need to wake up!”
The People’s Bank of China has supported the yuan when it deemed necessary over the past year, through targeted buying, but on Monday it let the currency weaken above the seven-per-dollar level for the first time since 2008.
Chinese policy sources told Reuters that the yuan was allowed to fall against the dollar so that markets could finally factor in concerns over the trade war’s impact on China’s growth, especially after Donald Trump announced new tariffs on Chinese imports last week.
The dollar has been particularly strong recently against many Asian currencies, as well as the euro.
The yuan pared back some losses on Tuesday, helped in part by a slightly stronger-than-expected benchmark rate set by the central bank in the morning.
“It really does look like both sides are digging in for a protracted fight,” said Marc Ostwald, chief economist at ADM Investor Services International, chiming with other analysts.
Mr Trump has pledged to impose a 10 per cent tariff on $300bn (£246bn) of Chinese imports from September and said the rate could be raised above 25 per cent. Some economists think the higher tariff could tip the global economy into recession.
“The direct economic impact of the latest round of Trump’s tariffs seems fairly small – the indirect impact on business sentiment and expansion plans is the bigger concern,” said Paul O’Connor at asset manager Janus Henderson.
“Any further deterioration in business sentiment could undermine already-weakening capital expenditure and employment plans in manufacturing and spill over into the hitherto-resilient service sector and consumer spending ... Every escalation in trade tensions is rightly being interpreted as yet another threat to global growth.”
A broad index of Asia-Pacific shares outside Japan, run by MSCI, closed 0.75 per cent lower. It has lost 3.7 per cent so far this week.
US stocks regained some lost ground, buoyed by China’s steps to stabilise the yuan on Tuesday, while the country’s central bank governor said the bank is “committed to maintaining the basic stability” of the yuan “at a reasonable and balanced level”.
Additional reporting by agencies
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