China's yuan falls below sensitive level of 7 to US dollar

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(By Associated Press)

BEIJING (AP) — China allowed its yuan to fall below the politically sensitive level of seven to the U.S. dollar for the first time in 11 years on Monday, raising the possibility Beijing might use devaluation as a weapon in a tariff war with Washington.

The central bank blamed the exchange rate's decline on "trade protectionism." That followed President Donald Trump's threat last week of more tariff hikes on Chinese goods in a bruising fight over Beijing's trade surplus and technology policies.

The currency weakened to 7.0267 to the dollar by midday, making one yuan worth 14.2 cents, its lowest level since February 2008.

"The thought of a currency war is crossing more than a few traders' minds," said Stephen Innes of VM Markets in a report.

The weakness of the yuan, also known as the renminbi, or "people's money," is among U.S. grievances against Beijing. American officials complain a weak currency makes Chinese export prices unfairly low, hurting foreign competitors and swelling Beijing's trade surplus.

China's central bank sets the exchange rate each morning and allows the yuan to fluctuate by 2 percent against the dollar during the day. The central bank can buy or sell currency — or order commercial banks to do so — to dampen price movements.

The bank "likely sees no urgent need" to keep the yuan stable "and 7 is no longer a line of defense," said Innes.

The level of seven yuan to the dollar has no economic significance, but could revive U.S. attention to the exchange rate.

Until now, economists said the potential jolt to financial markets of falling beyond that level was big enough that the People's Bank of China would step in to put a floor under the currency.

A central bank statement Monday blamed "unilateralism and trade protectionism measures," a reference to Trump's tariff hikes. But it tried to play down the significance of "breaking seven."

"It is normal to rise and fall," said the statement. It promised to "maintain stable operation of the foreign exchange market."

Chinese leaders have promised to avoid "competitive devaluation" to boost exports by making them less expensive abroad — a pledge the central bank governor, Yi Gang, affirmed in March. But regulators are trying to make the state-controlled exchange rate more responsive to market forces, which are pushing the yuan lower.

Trump's tariff hikes have put downward pressure on the yuan by fueling fears economic growth might weaken.

The U.S. Treasury Department declined in May to label China a currency manipulator but said it was closely watching Beijing.

The yuan, also known as the renminbi, or "people's money," has lost 5 percent since hitting a high in February of 6.6862 to the dollar.

That helps exporters cope with tariffs of up to 25% imposed by Trump on billions of dollars of Chinese goods. But it raises the risk of inflaming American complaints.

Trump rattled financial markets Thursday by announcing plans for 10% tariffs on an additional $300 billion of Chinese goods, effective Sept. 1. That would extend penalty duties to almost all U.S. imports from China.

The Treasury report in May urged Beijing to take steps "to avoid a persistently weak currency."

A weaker yuan also might disrupt Chinese efforts to shore up cooling economic growth. It would raise borrowing costs by encouraging an outflow of capital from the world's second-largest economy.

The central bank tried to discourage speculation last August by imposing a requirement that traders post deposits for contracts to buy or sell yuan. That allows trading to continue but raises the cost.

Beijing imposed similar controls in October 2015 after a change in the exchange rate mechanism prompted markets to bet the yuan would fall. The currency temporarily steadied but fell the following year.