Global financial crisis, recession risks raised as US-China trade war tensions escalate over currency row

Former US Treasury Secretary Lawrence Summers says world at the ‘most dangerous financial moment’ since the 2009 global economy meltdown

Washington labelled China a ‘currency manipulator’ after the yuan exchange rate dropped to its lowest rate for 11 years on Monday

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US stocks plunged on Monday as investors worry that US President Donald Trump's threatened new tariffs on Chinese imports will worsen trade prospects. Photo: Xinhua

Published: 7:51pm, 6 Aug 2019Updated: 11:37pm, 6 Aug 2019

The global stock market rout deepened on Tuesday after the United States tagged China as a currency manipulator, fuelling analysts’ fears that the rapid escalation in trade tensions could spiral into a sharp global financial crisis and economic downturn.

“We may well be at the most dangerous financial moment since the 2009 Financial Crisis with current developments between the US and China,” former US Treasury secretary Lawrence Summers tweeted on Tuesday.

Summers warned that with the collapse in global medium and long-term interest rates, markets are now suggesting “only slightly less than” a 50 per cent chance of a recession over the next year, the highest level of risk since 2011.

Yields on US 10-year Treasury bonds have tumbled to 1.74 per cent, and may possibly test their low of 1.43 per cent reached in 2012, in the aftermath of the global financial crisis, as soon as this week.

“We may well be at the most dangerous financial moment since the 2009 Financial Crisis with current developments between the US and China,” former US Treasury secretary Lawrence Summers tweeted on Tuesday. Photo: AFP

The tumble in the world’s stock markets has only exacerbated the risk, with a sell-off in Asian stocks continuing on Tuesday and European markets also down in early trade.

Yu Yongding, a senior Chinese government adviser, said that there were risks of a global recession even without the US-China trade war, and that the recent escalation of the conflict clearly amplifies those risks.

US President Donald Trump accused Beijing of not making sufficient concessions in the latest round of talks last week in Shanghai and on Friday, threatened to impose a 10 per cent levy on US$300 billion worth of Chinese imports, starting on September 1.

China, which has prevented the yuan’s exchange rate from breaching the psychologically important level of 7 to the US dollar for the last 11 years, let the currency sink below that threshold on Monday, in response to “bad faith” negotiating on the part of the US, according to Bo Zhuang at TS Lombard, a research firm.