Renminbi hits new 11-year low on rising US-China trade tensions
China’s renminbi weakened to a new 11-year low and stock markets in Asia-Pacific turned sharply lower after US-China trade tensions worsened further over the weekend.
On Monday morning, the onshore renminbi weakened as much as 0.8 per cent against the dollar to its lowest since February 2008 following comments from the White House that US President Donald Trump’s only regret was not raising tariffs more than he had already.
The currency has weakened 3.8 per cent in August, putting it on track for its worst month since it moved to a managed floating exchange rate in 2005. The offshore renminbi, which is more freely traded, weakened as much as 0.7 per cent to Rmb7.1858 to the dollar, a new record low.
Equities also took a hit after sharp falls on Wall Street on Friday. The CSI 300 of Shenzhen and Shanghai stocks was 1.2 per cent lower while Japan’s Topix was down 1.7 per cent, Seoul’s Kospi dropped 1.5 per cent and Australia’s S&P/ASX 200 fell 1.4 per cent.
The Hang Seng index in Hong Kong was down 3 per cent on the trade tensions and after anti-government protests turned violent again over the weekend following a week of more peaceful demonstrations.
The market reaction in Asia comes after Beijing announced on Friday that it would slap new tariffs of between 5 and 10 per cent on $75bn of US imports from September. In response, Mr Trump upped tariffs on $250bn of Chinese imports from 25 per cent to 30 per cent and increased levies on $300bn of Chinese goods set to start on September 1 to 15 per cent from 10 per cent.
On Sunday, the White House clarified Mr Trump’s comments from earlier in the day, saying his reply to the media at the G7 meeting that he had had “second thoughts” on additional tariffs was “because he regrets not raising the tariffs higher”.
“There is an uneasy feeling that the very fragile negotiations are spiralling out of control,” ANZ analysts said in a note. “The escalation suggests uncertainty will continue to weigh on global trade, industrial production and investment, with no sign of a resolution.”
Our view was that if the US kept imposing fresh rounds of tariffs it wouldn’t be inconceivable for the renminbi to reach 7.5 or higher. This is starting to become reality
Jason Daw, head of emerging markets strategy at Société Générale
In terms of the outlook for the renminbi, Gao Qi, currency strategy, emerging markets, Asia at Scotiabank, expects the renminbi to trade around Rmb7.1 to Rmb7.2 but that “if the trade tensions escalate again, it will rally through the 7.2 mark”.
Jason Daw, head of emerging markets strategy at Société Générale, said China might not act to slow the depreciation of the currency “as much as in the past”. “Our view was that if the US kept imposing fresh rounds of tariffs it wouldn’t be inconceivable for the renminbi to reach 7.5 or higher. This is starting to become reality and could happen quickly if neither side backs down.”
Wall Street dropped sharply on Friday following the tariff increases with the S&P 500 ending the day down 2.6 per cent while the Nasdaq Composite shed a hefty 3.2 per cent.
That fall was set to continue with S&P 500 futures pointing to a further 0.8 per cent drop when the market reopens on Monday.
Moves into perceived havens pushed gold up 1.1 per cent to a six-year high while the Japanese yen strengthened 0.1 per cent to ¥105.28 to the dollar. The yield on the 10-year US Treasury, which moves inversely to price, dropped as much as 8 basis points to the lowest since July 2016.
Elsewhere, the Australian dollar, which is seen as vulnerable in the trade war, slid 0.3 per cent against its US counterpart, recouping some of its earlier losses.
Brent crude and West Texas Intermediate fell 1.1 per cent and 1.4 per cent respectively, dropping further after China included US oil in its list of goods that will face further tariffs.
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