The People’s Bank of China (PBOC) dropped the dollar’s reference rate to 6.7671 Yuan – the most radical weakening of the currency in two years.
A cheaper yuan will make Chinese exports less expensive and has the potential to boost sales overseas.
The move came just hours after President Donald Trump threatened to slap tariffs on $500billion worth of Chinese goods.
Trump has previously accused China of manipulating its currency to gain an unfair advantage over American businesses, a message he reiterated via Twitter yesterday.
And analysts have warned the devaluation of the Yuan could be the first signs the ongoing trade war is descending into a currency war.
Jens Nordvig, CEO of Exante Data said: ”It’s starting to smell like it. We’ve had a trade war that’s been going on for a while, and now we’re starting to hear talk about ‘you shouldn’t be doing that with your currency.”
China’s central bank is responsible for setting a daily exchange rate for the yuan.
And while the currency has been weakening in recent weeks, Nordvig said Thursday’s sharp adjustment appeared to be a deliberate move.
He added: “It looked pretty deliberate to me it has been moving so fast.
“Clearly, the currency moving this fast negates the tariffs so from that perspective it’s pretty understandable that Trump doesn’t like what he’s seeing.”
America and China are already engaged in a tit-for-tat trade war on import tariffs, with Trump imposing levies on $34bn worth of Chinese goods and Beijing responding in kind.
But the president threatened to escalate the war even further yesterday when he vowed he was “ready to go to 500” on tariffs – a reference to the $500bn worth of products China exported to the US in 2017.
By comparison, American firms sold $129.9bn of goods to America during the same period.
Following his tariffs threat, Donald Trump took to Twitter to blast China and the European Union for what he views as unfair trade practices.
He said: “China, the European Union and others have been manipulating their currencies and interest rates lower, while the US is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge.
“As usual, not a level playing field…”
Trump has voiced his opinions on trade with China since before his election, and on the campaign trail promised to label Beijing a currency manipulator within the first 100 days of his presidency – a pledge he has not yet fulfilled.
But while the real estate mogul declined to officially accuse China of deliberately devaluing its currency, he has continued to talk tough on the issue on Twitter.
In April, he tweeted: “Russia and China are playing the Currency Devaluation game as the US keeps raising interest rates. Not acceptable!”
