The decline of China’s yuan to its lowest level in 11 years against the U.S. dollar has led to the U.S. to designate China a “currency manipulator”. Up to now the U.S. had always refrained from slapping the designation on China. The move indicates a sharp deterioration in the trade war and in relations between the two countries. Treasury Secretary Steven Mnuchin said his agency would engage with the IMF ‘to eliminate the unfair competitive advantage created by China’s latest actions’. The Treasury Department justified its actions by citing China’s “concrete steps” in recent days to devalue its currency while maintaining substantial foreign exchange reserves. “The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade,” it added in a statement. China was the last country to be officially designated a currency manipulator by the administration of U.S. President Bill Clinton in 1994. The People’s Bank of China (PBOC) has denied that it devalued the yuan in response to U.S. tariffs. In a statement, PBOC Governor Yi Gang said China will “not engage in competitive devaluation, and not use the exchange rate for competitive purposes and not use the exchange rate as a tool to deal with external disturbances such as trade disputes.”

Financial markets fell from the Americas to Asia, with stock indexes plunging from Seoul to Wellington. Hong Kong’s Hang Seng Index gave back nearly all of its gains this year.

According to analysts, the yuan’s drop could continue into 2020 as the Chinese authorities are showing increasing reluctance to provide concessions to resolve the trade war with the United States. The Chinese currency’s drop has also rattled the currency market, sending 11 regional currencies lower. The break in the yuan below the key threshold of 7.0 to the U.S. dollar, analysts said, was likely to be a deliberate decision made by the People’s Bank of China (PBOC), China’s central bank, which has now decided that the currency can be part of its arsenal in fighting the trade war. It was also a reversal from Chinese policymakers’ steadfast defense of the 7.0 level in recent years, including last year in the early months of the trade war and in 2016 after the stock market rout and sharp capital outflows in 2015. U.S. President Trump hit out at the yuan’s decline, calling it “currency manipulation”. Trump’s threat to impose new tariffs on Chinese imports also sent investors scrambling for the safe-haven yen, lifting it to a 16-month high against the dollar.

Some analysts believe the PBOC will let the yuan settle at about 7.2 to the dollar in the coming months. That would represent a devaluation of about 5% compared to the yuan’s value before the start of the trade war. “Due to the effects of unilateralism and trade protectionist measures and the imposition of tariff increases on China, the yuan has depreciated against the U.S. dollar today, breaking through CNY7, but the renminbi continues to be stable and strong against a basket of currencies,” the PBOC said in the statement.

The Swiss franc, another currency widely viewed as a safe-haven, reached a two-year high against the euro, but the U.S. dollar did not benefit from the scramble for safety. “I’m looking for the yen to continue to move towards all time highs, but not seeing it through yet,” said Neil Jones, head of European hedge fund sales at Mizuho. Jones said he has seen more yen demand coming through, describing it as “a convenient hedge” against increased global risks sparked by U.S. protectionism.

The Pound Sterling also dropped, although for different reasons. Most market participants remain wary of the pound, concerned that the chances of a disorderly Brexit grew after Boris Johnson took over as Prime Minister last month and after Britain’s pro-European Union Liberal Democrats won a parliamentary seat from the governing Conservative Party, the South China Morning Post reports.

China’s “big four” state-owned banks, which together control more than USD14 trillion of assets, tumbled to record-low valuations amid mounting concern that Beijing will encourage them to bail out smaller peers. Smaller Chinese banks tracked by UBS Group need an estimated USD349 billion of fresh capital – a sum they may struggle to raise without support from big banks. The Industrial and Commercial Bank of China (ICBC) lost USD11 billion of market value in one week. Stock investors have never been so downbeat on the world’s biggest banks. The plight of smaller banks has been a major focus of investors since May, when Beijing surprised markets by seizing control of Baoshang Bank in the first government takeover of a Chinese lender in two decades. That was followed two months later by a capital injection into the Bank of Jinzhou by ICBC and two other state-owned financial firms.

China’s large number of fintech companies has helped the country to take the lead worldwide in developing the industry, according to the Global Fintech Hub Report released during the Money 20/20 China conference. Five of the top 10 global fintech hubs are in China, and Chinese cities comprise seven out of the top 30, the report showed. It was jointly released by the Academy of Internet Finance at Zhejiang University, the Center for Alternative Finance at the University of Cambridge, and the Zhejiang Association of Internet Finance. Ben Shenglin, Dean of the Academy of Internet Finance at Zhejiang University, said consumer demand, technology advances, policies and the regulatory environment are the key drivers for the development of the country’s fintech industry.

Beijing was crowned as top of the list among all the 70 surveyed global cities. A total of 58 Beijing-based fintech companies have seen their respective cumulative financing top USD50 million, more than all the other cities. Lead by JD Finance, Du Xiaoman Financial and Qudian, the combined financing of the 58 companies has reached over USD21 billion. Shanghai came in at No 5 on the list, the second-highest among Chinese cities, with 26 fintech companies based in the city reporting respective accumulative financing of over USD50 million. As a global financial center, the added value of the financial industry contributed 17% to Shanghai’s GDP last year.

Hangzhou in Zhejiang province – the home of Alibaba and its financial arm Ant Financial – stood just one position below Shanghai on the list. Although only 13 fintech companies in the city have seen their respective accumulative financing reaching over USD50 million, their total financing value has topped USD23.9 billion, the highest worldwide. Furthermore, Hangzhou leads the world in terms of fintech consumer experience, with about 91.5% of the city’s population using fintech products and services. Ye Jinwu, Founder and Chairman of Hangzhou-based fintech company Ying Ying Group, said that Hangzhou still lags behind first-tier Chinese cities, such as Beijing and Shanghai, in terms of the size of its fintech industry. But, the city has demonstrated unparalleled vibrancy in terms of business activity and entrepreneurship, and the sufficient talent supply in the city is an important reason for the large number of fintech startups in Hangzhou, he said.

Embattled financial technology businesses in China, which have come under tightened regulatory scrutiny, are becoming acquisition targets for banks accelerating their digitalization drive, according to global management consultancy McKinsey. Joe Ngai, Managing Partner for Greater China at McKinsey, said that tremendous changes are taking place in China’s fintech sector amid the clean-up campaign by regulators to ward off financial risks. “The fintech businesses originally envisioned mounting a challenge on established banks, but the new trend is that more partnerships and acquisitions will be seen as the lenders count on the latest technologies to bolster their development.”

Since 2011 peer-to-peer (P2P) lending platforms, third-party mobile payment service providers and online insurers rapidly penetrated into people’s daily lives in the absence of efficient supervision. A wave of collapses in the P2P sector is estimated to put several hundred billions of yuan of investors’ money at risk as many of the operators are found to have illegally raised funds from savers while re-lending them to cash-hungry businesses at high interest rates. The People’s Bank of China (PBOC) is also conducting a thorough inspection of online payment firms across the nation to uproot irregularities. Players including Ant Financial Services, Union Mobile Financial Technology and Gopay have been fined.

A stepped-up regulation is a boon for banks as fintech companies, once perceived as a headwind to the lenders, will have to consolidate their ties with the established and licensed financial institutions to survive the crackdown. “They developed financial technologies, only to find that they are not allowed to offer financial services,” said Ngai. “By the end of the day, big banks will come out and buy them over to boost their digitalization drive.” Chinese banks have become increasingly aware of the significance of developing digital banking as the economy moves towards a cashless society spurred by the widespread use of mobile payments among residents, the South China Morning Post reports.

China surpassed North America in attracting venture capital for the first time in the second quarter, helped by a record USD14 billion fundraising round by Alibaba Group Holding affiliate Ant Financial Services. Start-ups in China accounted for 47% of the world’s VC funding in the three months ended June, compared with a combined 35% for the U.S. and Canada, according to a report by Crunchbase, which tracks and compiles fundraising data.

The surge in China fundraising in the second quarter could be attributed to Ant Financial, which raised about USD14 billion last month. Investors, including Singapore’s GIC and Temasek Holdings, Warburg Pincus, Canada Pension Plan Investment Board and Silver Lake, took part in the fundraising, while existing shareholders supported a yuan-denominated tranche. The financing brought Ant Financial’s valuation to more than USD150 billion, which is roughly double Uber Technologies’ valuation. Excluding Ant Financial, China’s start-ups raised just slightly more than they did in the first quarter, taking up 36% of the global total, according to Crunchbase.

China has seen a surge in the number of start-ups in recent years as the government vowed to do more to implement an innovation-driven development strategy to make the country more competitive and transform itself from the factory floor of the world into a global innovation powerhouse. Venture capitalists poured billions into areas from artificial intelligence to blockchain, lured by the prospect of backing the next Alibaba, Tencent Holdings or Baidu, while start-up founders aspired to become billionaires like Jack Ma or Pony Ma, the South China Morning Post reports.

The threshold at which people pay personal income tax is expected to be lifted to CNY5,000 a month from the current CNY3,500, according to a draft amendment to the Individual Income Tax Law, as the National People’s Congress (NPC) – China’s legislature – is revising the personal income tax code in a sweeping overhaul of the tax system. Specific personal income tax changes aim to reduce taxpayers’ burdens and boost consumption. The draft was submitted to the NPC Standing Committee’s bimonthly session for its first discussion on June 26. A draft revision usually receives three readings before adoption.

According to the draft amendment, the previous method of taxing monthly income will be replaced with a new calculation that focuses on taxing annual income. “The new method will be fairer and more reasonable for those whose monthly salary vary,” said Zhang Bin, an expert from the National Academy of Economic Strategy of the Chinese Academy of Social Sciences. If the revisions are adopted, those whose monthly salary ranges from CNY5,000 to CNY20,000 will see their tax cut by more than 50% and those whose monthly salary ranges from CNY20,000 to CNY80,000 will see their tax cut by 10% to 50%. The amendment defines resident individuals and non-resident individuals as two types of taxpayers. In addition, the length of time used to distinguish between the two groups will be adjusted to 183 days from the previous 365 days.
The move is expected to increase residents’ income and enhance consumption power because it reduces the tax burden for individual taxpayers, especially people of low to medium income, Finance Minister Liu Kun wrote in the draft.

The revision is the biggest tax overhaul in over two decades. China’s income tax rates for individuals, comprising seven brackets with rates ranging from 3% to 45% of income, are expected to be adjusted. For the first time, items deductible for personal tax will include such expenses as the cost of children’s education, medical fees for major illnesses, interest on housing loans, and housing rent. The government will set specific rates for tax deductions in each category once the draft amendment is approved by the NPC Standing Committee. For the first time, taxation will cover four income categories – salaries, remuneration for personal services, authors’ remuneration and royalties. Yan Yuejin, Research Director at E-house China’s R&D Institute, said deductible real estate items are expected to benefit a wide group of residents who either rent or hope to purchase a home.

In 2017, China’s total tax revenue rose by 10.7% year-on-year to CNY14.4 trillion, and tax revenue from individuals went up by 18.6% year-on-year to CNY1.2 trillion, the China Daily reports.