China has crossed the renminbi-con.
The value of China’s currency, the renminbi, has weakened past seven renminbi to one U.S. dollar. If you wished to buy an American dollar with China’s currency, in other words, it would cost you more than seven renminbi. (At press time, it cost 7.05 RMB.)
Why does this matter? For years, official policy in Beijing held the line under seven, keeping the nation’s currency from deteriorating beyond that (somewhat arbitrary) psychological threshold. As of Monday morning, the currency’s value breached the self-imposed limit—something that has not occurred since the global financial turmoil of 2008. The event—a seemingly minor devaluation—signals a major ramp up in the trade conflict between the world’s two superpowers, and it demonstrates how states can turn their currencies toward macroeconomic combat.
Consider how a weaker renminbi might tilt trade to China’s advantage. In such a scenario, a Chinese exporter could cut prices, listed in U.S. dollars, and yet continue to reap the same amount of renminbi in sales as it did pre-discount. So, say you’re a factory in Guangzhou used to pulling in 700 renminbi on $100 worth of electronics; at the present rate, you would bring in 705 renminbi on $100 worth of those same electronics—a slight edge that could help to offset the impact of higher tariffs, which U.S. President Donald Trump has indicated he plans to levy.
If Beijing continues to allow the renminbi to weaken, the strategy will almost certainly come back to bite the Middle Kingdom. Inflation could rise. Consumer spending could drop. Money could take flight overseas. The currencies of neighboring countries could face similar markdowns. Commodities, such as soybeans and oil, could become more expensive to purchase. And paying down debt to foreign lenders could become more expensive. These are all possible negative knock-on effects.
Investors, fearing the worst from such geopolitical brinkmanship, are responding by de-risking. So far, the S&P 500, the Down Jones Industrial Average, and the Nasdaq Composite have all suffered their worst drops of the year.
Like Trump’s proposal to boost tariffs, Beijing’s willingness to indulge the renminbi’s decline represents a weapon in the U.S.-China trade skirmish (which is looking more pessimistic by the day). In a post on Twitter, Trump accused China of currency manipulation, and called it “a major violation which will greatly weaken China over time!” The People’s Bank of China, meanwhile, blamed U.S. policies for the price movement and Yi Gang, the central bank’s governor, asserted that China will “not engage in competitive devaluation.”
All this tumult is, of course, feeding interest in cryptocurrencies, an asset class whose boosters claim to be decoupled, mostly, from the vagaries of nation state strife. To wit: Bitcoin’s price rose as much as 15% on Monday.
The die has been cast, as an old Roman once said.
Robert Hackett | @rhhackett | robert.hackett@fortune.com
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