China has taken counter measures against the US in their escalating trade war, allowing the yuan to weakens and stopping the purchase of US agriculture produce.
China has let the yuan weaken past the key 7-per-US dollar level for the first time in more than a decade and says it will stop buying US agricultural products, inflaming the trade war with the United States.
The sharp 1.4 per cent drop in the yuan on Monday comes days after US President Donald Trump stunned financial markets by vowing to impose 10 per cent tariffs on the remaining $US300 billion ($A443 billion) of Chinese imports from September 1, abruptly breaking a brief ceasefire in a bruising trade war that has disrupted global supply chains and slowed growth.
Mr Trump on Monday accused Beijing on Twitter of manipulating its yuan currency.
"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!" Mr Trump tweeted.
Mr Trump did not reveal any specific US response. Some analysts said the yuan move could unleash a dangerous new front in the trade hostilities: a currency war.
After Mr Trump's comment, China's commerce ministry said Chinese companies have stopped buying US agricultural products and that China will not rule out imposing import tariffs on US farm products that were bought after 3 August.
The yuan's sharp slide sent a shiver through global financial markets. In China, the benchmark Shanghai Composite Index lost 1.62 per cent for its weakest close since February 22, and stock market losses spread rapidly around the world.
MSCI's main measure of global stock performance was down two per cent, its biggest drop since February 2018.
On Wall Street, the S&P 500 Index tumbled 2.8 per cent and the Nasdaq Composite slid 3.4 per cent, the largest daily losses since last December.
The moves were emblematic of volatility that beset markets in May when tensions between the two superpowers flared up after China reneged on key elements of a deal that was then seen coming together.
The People's Bank of China provided the early impetus for yuan bears by setting a daily rate for the currency at its weakest level in eight months, weakening a long defence that kept the yuan stronger than 7 to the US dollar.
The move was made with the blessing of policymakers to factor in market concerns around the Sino-US trade war and its effect on China's weakening economic growth, three people with knowledge of Chinese monetary deliberations told Reuters
PBOC governor Yi Gang, who has been a key player in US-China trade negotiations, said in a statement posted to the bank's website that the yuan was now at an appropriate level given China's economic fundamentals.
He said China would not engage in a competitive devaluation and would maintain the stability and continuity of foreign exchange management policies.
Some analysts said China had been propping up the yuan to avoid derailing trade negotiations with Washington but with tensions escalating, currency may be added to Beijing's trade war arsenal.
"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," said Capital Economics Senior China Economist Julian Evans-Pritchard