China’s currency has weakened to its lowest point in more than a decade, prompting the US to label Beijing a currency manipulator.
The US move came on Monday, after the currency fell below 7 yuan to the US dollar for the first time since 2008.
Beijing has previously sought to prevent the currency from slipping below the symbolic level.
The escalation of the trade war, sparked by fresh US tariff threats, is seen to have prompted the policy shift.
On Monday, the People’s Bank of China (PBOC) said the slump in the yuan was driven by “unilateralism and trade protectionism measures and the imposition of tariff increases on China”.
It comes days after US President Donald Trump said he would impose a 10% tariff on $300bn ($246bn) worth of Chinese goods, effectively hitting all of China’s imports to the US with duties.
The yuan is not freely traded and the government limits its movement against the US dollar.
Unlike other central banks, the PBOC is not independent and faces claims of interference when big moves occur in its value.
Capital Economics Senior China Economist Julian Evans-Pritchard said by linking the yuan’s devaluation to the latest tariff threats, the PBOC has “effectively weaponised the exchange rate, even if it is not proactively weakening the currency with direct intervention”.
A weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currencies.
From the US perspective, it is seen as an attempt to offset the impact of higher tariffs on Chinese imports coming into America.
While it appears a win for consumers around the world – who can now buy Chinese products more cheaply – it carries other risks.