Rating China's retaliation in the trade war: 'On a scale of 1-10, it's an 11'

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Chinese President Xi Jinping stands by national flags.

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The trade war between the United States and China ratcheted up over the weekend to a level that Cowen says, “on a scale of 1-10, it’s an 11.”

“Overnight, Chinese government retaliated against new U.S. tariffs, and it’s designed to get the President’s attention,” Cowen analyst Chris Kruger said in a note to investors on Monday.

China responded on Monday in two ways to President Donald Trump announcing the U.S. will add 10% tariffs to $300 billion worth of Chinese goods.

First, China’s central bank allowed its currency the yuan to fall “below 7 to the dollar, which is a psychologically significant threshold,” Kruger said.

The People’s Bank of China, the country’s central bank, denied that it is intentionally devaluing its currency to counter tariffs. The bank claimed the drop was “driven and determined by the market.” But China has historically controlled its currency and, on Monday, the yuan dropped to its lowest level against the dollar since 2008.

“While the currency had been weakening recently, the sharp move … clearly signaled a change in policy and will be interpreted as a signal the Chinese are not seeking a near-term deal,” Kruger said.

Second, Kruger noted that the Chinese told state-controlled buyers “to halt all purchases of U.S.agricultural imports. “

“It looks like those rotting soybeans will continue to rot, and is a tough hit to Midwestern (Trump states) farm interests after the President promised relief,” Kruger said.

Trump claimed in June that Chinese President Xi Jinping had agreed to large amounts of agricultural purchases. Additionally, Trump’s administration last month announced a $16 billion aid package for U.S. farmers.

But Trump says the new 10% tariffs are the result of Xi not making those purportedly agreed upon purchases. Although China claims it’s not true that it halted buying agricultural products, Bloomberg News reported that China intends to wait and see how trade negotiations play out before it makes any purchases.

On top of those two responses, Kruger also said China may clamp down on the companies operating within its borders.

“There is increased anecdotal evidence that the Chinese government is tightening its overview of foreign firms, including through creation of a “undesirable entities’ list and practices,” Kruger added.

– CNBC’s Michael Bloom contributed to this report.

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