Global stockmarkets have fallen after China devalued its currency to under seven to the US dollar, its lowest level in a decade.
This was the first time the yuan had fallen below seven since May 2008 and was sparked by the ongoing US/China trade war, leading to fears it could turn out into a global currency war.
In reaction to the move, the Dow Jones was down 1.8 per cent, the FTSE 100 was down 2.4 per cent and the Hong Kong Hang Seng index was down 2.8 per cent.
It was believed the Chinese government was letting the yuan weaken to offset the impact of US tariffs and make Chinese goods more competitive for overseas buyers.
Tom Elliott, international investment strategist at deVere Group, said the move had occurred for three reasons.
Firstly, the weaker renminbi would export deflationary pressure across global manufacturing industries. Secondly, the direction of the renminbi was a key calculation for economists forecasting global prices due to the size of the Chinese export sector and thirdly, the devaluation occurred against the backdrop of the US/China trade war.
“Policymakers in Washington will be wondering if Beijing’s refusal to intervene more heavily in the currency markets to support the renminbi is a strategic decision to put pressure on the US in regard to the trade talks. Is it an ‘aggressive’ devaluation? If they conclude it is, we can expect furious reaction from Trump,” said Elliott.
“Or is it that Beijing sees a weaker currency as inevitable, given China's slowing growth? After all, currencies do go up and down, why should China be different just because we have become used to it being managed in the past through currency intervention.
“It would be ironic for the US to be demanding a more liberal attitude towards trade from China, but to object to China's currency being allowed to find a new rate in line with market conditions.”