The United States and China traded blows in an unrestrained economic conflict Monday that sent stock markets plunging and threatened to inflict significant damage on a weakening global economy.
Late in the day, Treasury Secretary Steven Mnuchin formally labeled China a “currency manipulator,” a largely symbolic slap at Beijing that is likely to deepen the growing animosity between the two trading partners.
The move, which President Donald Trump had promised to take on his first day in office, only requires Treasury to initiate consultations with China. Beijing has long denied U.S. accusations that it keeps its currency undervalued to make its products more competitive on world markets.
Treasury’s announcement, shortly before 6 p.m., capped an unnerving 24 hours that began with China allowing its tightly controlled currency to slide to an 11-year low against the dollar and continued through a nearly 1,000 point drop in the Dow Jones industrial average.
“This is a big policy mistake. We get recession because of policy mistakes like this,” said Allen Sinai, chief economist and strategist at Decision Economics. “China did not actively drive its currency down. It was a market-driven move. Secretary Mnuchin’s comments are totally political.”
On Wall Street, the Dow fell more than 767 points, or nearly 3%, and Treasury yields plunged to their lowest mark in almost three years as investors anticipated trouble ahead.
The financial meltdown followed China’s decision to answer Trump’s latest tariffs by allowing its currency to fall past a key benchmark of 7 yuan-per-dollar level for the first time since 2008.
The central bank, the People’s Bank of China, downplayed the significance of the milestone but linked the drop to the dispute with Washington.
In Washington, the president accused the Chinese government of “currency manipulation” and said incorrectly that the yuan was near a “historic low.”
The currency move came after Trump announced new tariffs Thursday on an additional $300 billion in Chinese goods,
The latest maneuvers in Washington and Beijing underscored the stunning deterioration in relations since Trump said this spring that the two sides were on the verge of an “epic” trade deal.
“This puts us into a new phase and it’s not a good phase,” said Marc Chandler, chief market strategist for Bannockburn Global Forex. “It’s hard to see how there won’t be a lot of collateral damage.”
Trump’s push to label China a manipulator has been thwarted in the past by Mnuchin and former aides such as Gary Cohn, while being supported by Peter Navarro, a White House trade advisor.
Now, Trump thinks continuing to punish China will spur them to negotiate. But some aides fear his hardline stance will backfire, said one senior advisor who requested anonymity to discuss confidential discussions.
Aides have brought Trump charts to convince him that the currency charge is untrue, but the president remains firm in his beliefs, the official said.
“It’s a good step and long overdue, because China has been guilty of massive currency manipulation for 20 years, and they certainly deserve to be called out,” said Robert Scott, senior economist at the Economic Policy Institute, a left-leaning think-tank.
China did routinely intervene in currency markets for about a decade until roughly 2013, but in recent years has not done so, several economists said. Its once sizeable global trade surplus is roughly one-tenth its 2007 size.
“It’s not accurate to call China a currency manipulator because market forces are driving their currency down. They are not intervening to push it down,” said David Dollar, a former Treasury Department official now at the Brookings Institution.
The administration’s plans were not clear, though some analysts suggested the president could use the designation to justify additional tariffs on Chinese goods. Mnuchin also plans to seek assistance from the International Monetary Fund “to eliminate the unfair competitive advantage created by China’s latest actions,” Treasury said in a statement.
But the U.S. is unlikely to get much support. Just last month, the fund found in its latest annual assessment that China’s financial position “was broadly in line with the level consistent with medium-term fundamentals and desirable policies.”
A weaker Chinese currency will make products from the United States more expensive while making made-in-China merchandise more attractive. That will offset some of the effects of Trump’s planned 10% tariff, which is scheduled to go into force September 1.
The currency shift also will effectively counter the Federal Reserve’s recent interest rate cut by leading to tighter financial conditions in the United States, said Robin Brooks, chief economist of the Institute of International Finance.
For corporate executives, the latest developments in the U.S.-China dispute only make the global picture more unclear. The president’s tariffs on products from China and several other countries have made it difficult to predict future prices for key industrial components and ensure access to individual markets, said David Loevinger, managing director of Los Angeles-based TCW Group.
“The big risk is it adds another element of uncertainty into the global economy,” said Loevinger, a former Treasury Department official. “Right now, when business thinks about making a big investment, they look around the world and see uncertainty everywhere.”
Consumers watching the stock market sink will likely respond by cutting discretionary spending, removing another key prop from the slowing economy. “Consumption is in many ways the bedrock of our economy,” said Brooks.
Dollar,who was assigned to the U.S. Embassy in Beijing from 2009 to 2013, said: “This is clearly bad for the U.S. economy . . . You’re throwing a lot of sand in the wheels of commerce. You’d expect things to slow down globally and it’ll certainly be felt by Americans.”
Unlike some currencies whose values are freely dictated by supply and demand, China’s central bank sets a daily target price around which the renminbi, also known as the yuan, can fluctuate. The bank steps in when the price strays too far. For a decade, it has not allowed the renminbi to fall past 7 to the dollar, which financial markets consider a psychologically important threshold.
China’s central bank blamed “unilateralism, trade protectionism and tariff expectations imposed on China” for the change in exchange rate.
China’s central bank said it was confident it could keep the currency at a “reasonable and balanced level.”
Trump has long complained that the renminbi is too weak and the dollar too strong. He has lobbied the Federal Reserve to cut interest rates to help U.S. exporters and boost the U.S. stock market.
Brad Setser, a senior fellow at the Council on Foreign Relations and a former Treasury Department official, said the president has limited tools to bring about a lasting dollar decline. But even an unsuccessful currency market intervention could rattle the global economy.
“It would signal that the U.S. is not willing to be a global locomotive in a world that still needs a global locomotive,” he said. “The risk is the world economy would end up with no locomotive.
China, for its part, has argued that it has kept its currency at a reasonably high level to assuage U.S. concerns. It also fears that a tumbling currency could spark panic about its slowing economy and trigger an outflow of capital.
Beijing is expected to try to prevent an unrestrained plunge by the yuan, fearing it would encourage Chinese citizens to take their wealth out of the country, economists said.
Currency markets this year have broad dollar strength. The greenback, reflecting the U.S. economy’s relative strength and nine Fed interest rate increases, has risen against the euro, the British pound and other major currencies .
The yuan has actually held up better against the surging dollar. Its year-to-date decline against the dollar of 2.4% is much less than the currencies of two U.S. allies, the Taiwan dollar at 3.4% and the South Korean won at 8.6%.
“The Chinese have been resisting the pressure,” said Chandler. “Trump’s tweets last week and his insistence on talking the dollar down made them just give up. They surrendered to market forces.”
Trump’s latest tariff escalation, which the president announced Thursday on Twitter, sparked a rush of Chinese state media commentary suggesting that the Chinese government was caught flat-footed. State media lashed out at the United States on Sunday, accusing it of negotiating in bad faith and suggesting that Beijing may hold out from negotiating further with the Trump administration.
Beijing appeared to mount other forms of retaliation on Monday. The government has asked state-owned firms to stop their U.S. agricultural purchases, according to a Bloomberg report Monday that was widely cited by Chinese media. The crop purchases, which would benefit states that comprise Trump’s political base, were to be a sign of Chinese goodwill as trade talks progressed.
Zippy Duvall, president of the American Farm Bureau, called the Chinese move “a body blow to thousands of farmers and ranchers who are already struggling to get by.”
Agricultural exports to China fell $1.3 billion during the first half of the year, he said, adding that the organization fears it will lose access to a market that was worth almost $20 billion to farmers in 2017.
“It isn’t clear right now that either side has a plan for de-escalation,” said Setser. “What makes this different is how quickly both sides are ratcheting up the threats.”