After the Chinese yuan fell to its lowest in a decade on Monday, the US Treasury officially released a statement labeling China as a "currency manipulator."
Experts say that China's central bank usually supports the currency which is why it came as a surprise when it allowed yuan to fall below the politically sensitive level of seven to the US dollar as it weakened to 7.0240 on Monday. This level was last breached during the 2008 financial crisis.
On Tuesday morning, the People's Bank of China set the yuan fixing at 6.9683.
How does this worsen the US-China trade war?
The USA has had a series of complaints on China's trade practices, a major reason for the ongoing trade tensions between the two countries. A fall in yuan, the American officials say is a tactic to make China's exports inexpensive, giving them an edge over competitors. This allegation could further fuel the trade dispute that started over a year ago.
While ideally such a situation would be dealt with negotiations between the two countries, talks have not proven to have solved the disagreements over trade between the two countries for more than a year now.
The US government said that its Treasury Secretary Steven Mnuchin will have talks with the International Monetary Fund (IMF) "to eliminate the unfair competitive advantage created by China's latest actions".
While it cannot be predicted as to what the talks would yield, political ramifications can be expected.
China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!— Donald J. Trump (@realDonaldTrump) August 5, 2019
In retaliation, on Tuesday, China's Commerce Ministry said Chinese companies have stopped buying American agricultural products, hurting US farm exports further.
How did it all start?
In 2018, US president Trump imposed tariffs on Chinese goods so as to force Beijing to narrow the trade deficit (a gap between the exports and imports) between the two countries. He complained that China buys fewer goods from the US than the other way round. The tactic was implemented as part of Trump's 'America First' approach to trade.
The gap between the imports and exports between the two stood at $419.5 billion last year. He also accused Chinese firms of stealing intellectual property of American companies.
Last week, Trump announced additional tariffs of 10 percent, making all Chinese goods entering the USA from 1 September 2019 subject to some kind of duties.
How does it affect the rest of the world?
As the two largest economies in the world continued to impose tariffs on each other's exports, international trade growth was hampered and business investments were stalled due to the uncertainty over trade.
While US points a finger at the Chinese authorities, investor interests will be further rattled as they expect Beijing to retaliate, further intensifying the trade war.
If the currency is indeed being manipulated, this could hurt competitors of Chinese goods sold in the US as a cheaper yuan will reduce the effect of the tariffs imposed on China's exports, making them cheaper than earlier anticipated.