As the trade war escalates, China appeared to take a wrecking ball to the global money-go-round on Monday.

Just days after the United States President Donald Trump imposed fresh tariffs on Chinese imports worth US$300 billion, President Xi Jinping’s administration was accused of “weaponizing” its currency.

The value of the yuan plunged to an 11-year low of 7.0304 against the US dollar and 7.0807 in offshore trading. “[The People’s Bank of China has] effectively weaponized the exchange rate,” Julian Evans-Pritchard, a senior China economist with Capital Economics, told the media.

“Given that their goal is presumably to offset some of the impacts from additional US tariffs, they are likely to allow the currency to weaken further over the coming quarters.”

Since the yuan is still not freely convertible, the PBOC sets a 2% range against the greenback on a daily basis. The Monday rate of 6.9225 was below the sensitive seven-yuan mark against the dollar.

“The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US,” Evans-Pritchard said.

Other analysts tended to hedge their bets.

‘Panicky selling’

“This could well be the biggest moment for the yuan this year. The impact of US-China trade is turning out to be very big,” Masashi Hashimoto, a senior currency analyst at MUFG Bank, told Reuters.

“Looking at the mid-point, the People’s Bank of China is trying to stem the fall. The PBOC doesn’t look like it is trying to use a weaker yuan to counter US trade pressure.

“The yuan’s fall seems to be stemming from panicky selling,” he added.

To put the “fall” into perspective, the currency dipped to its lowest level since the global financial crisis in 2008. The PBOC blamed “trade protectionism” and US tariffs for the fluctuation.

“[But the central bank] has the experience, confidence and capacity to keep the renminbi exchange rate fundamentally stable at a reasonable and balanced level,” it said in a statement.

Still, Trump in the past has accused Beijing of deliberately manipulating its currency to make Chinese exports more cheaper in the year-long trade conflict, an allegation the Communist Party government has denied.

Last week, the White House upped the ante by hiking tariffs after trade talks resumed in Shanghai.

In turn, this triggered an angry backlash from Beijing in China’s state-run media and fueled fears that next month’s round of discussions in the US would be canceled by Beijing.

Threats of retaliation were issued with China’s Foreign Minister Wang Yi making Beijing’s position crystal clear.

“I am aware of [the announcement],” he told a media briefing on the sidelines of the ASEAN Foreign Ministers’ summit in Bangkok on Friday. “Adding tariffs is definitely not a constructive way to solve the economic and trade frictions. It is not the correct way.”

Yet to illustrate how polarised the dispute has become, Trump believes Xi will delay hammering out a deal until after the 2020 US presidential election in the hope he fails to win a second term in office.

“I think that China will probably say ‘let’s wait,’” he told a media conference. “‘Let’s see if one of these people who gives the United States away, let’s see if one of them could get elected.’”

Protracted battle

Beijing is certainly digging in for a protracted battle over the detail of any potential agreement despite the International Monetary Fund warning that trade tensions were having a major impact on global economic growth.

Markets have also been spooked by the confrontation, which is starting resemble an economic Cold War.

On Monday, Hong Kong lost more than 3% before staging a slight recovery as pro-democracy protesters and strikes brought the city to a standstill, adding to Beijing’s geopolitical problems.

In Japan, the Nikkei dropped 1.7% while Shanghai fell 1.6% and Singapore tumbled 1.8%.

“Financial markets are still working on pricing in a complete collapse of trade talks amongst the Chinese and Americans,” Edward Moya, a senior market analyst at OANDA, the forex group, told the AFP news agency.

“The base case still remains for a deal to get done but talks are likely to get a lot messier before we see anything … that resembles a deal.”

In the meantime, there are concerns China’s money-go-round will spin out of control.