The Chinese yuan fell to its lowest level in nearly eight years on Tuesday, trading at more than 6.85 to the dollar

 

China should stay alert about the possibility of the US-China trade war escalating to embroil the financial sector and insist on market-driven financial reforms to enhance China's monetary market stability, a prominent Chinese economist warned on Wednesday. 

The US has been blaming China for its trade deficit, but Washington has long run a trade deficit as the Bretton Woods system, based on the US dollar, has triggered a global imbalance, Li Yang, senior director-general of government think-tank National Institution for Finance & Development (NIFD), said during a conference held in Beijing on Wednesday. 

"The US dollar, as the largest global reserve currency, always exists with a deeper paradox," he said, noting that increasing supply of the US dollar can only be fulfilled by running a current account of trade deficits. 

"There were always financial factors behind US-initiated trade wars throughout history," Li told the Global Times during the conference. The economist also warned that China should accelerate financial reforms while keeping the Chinese yuan flexible to the market regulation, which could help maintain stable foreign reserves.   

Amid a deteriorating trade war between the two largest economies, investors have been keeping a close eye on whether the yuan would breach 7 yuan per dollar rate, which is considered a crucial point for the Chinese currency. 

"It won't make any difference if we defend the level of 7 or not. As a floating currency, the yuan has a market-driven exchange rate mechanism, and the US can't find any fault on that," Li said. 

The US Treasury recently didn't label China a currency manipulator in its semi-annual foreign exchange report, and the Chinese side considered this in line with common understanding, according to media reports in May. 

"Currency volatility will also help us to maintain a stable foreign reserve. Meanwhile, China's finance sector needs to strengthen its capability in countering external pressure and our money supply should not be influenced by foreign reserves," the economist noted. 

Some analysts suggested that China may use its holdings of US debt as a "nuclear option" for containing the US in a trade war. 

"It's not an option on the table," Li said, noting that as China cannot completely get rid of the US dollar now, which is still an eminent reserve currency, a rush sell-off of US Treasuries will only cause market turbulence.