Illustration: Xia Qing/GT

Against the backdrop of the escalating China-US trade war, the yuan dropped below 7 - an important psychological level - against the US dollar on August 5. The US Department of the Treasury later designated China a currency manipulator in a move that further escalated the trade row. The exchange rate clash between China and the US has been widely interpreted as a trade war upgraded to a currency war or financial war. Some market analysts have even made predictions for the China-US financial war.

The available measures for China regarding financial sanctions are different from those for the US. An all-round financial war has more downsides than benefits for China. The US government's financial sanctions could include restricting US companies from investing in China, prohibiting Chinese projects from gaining US financing, excluding China from the US government procurement list, putting pressure on Chinese companies listed on the US stock market through "long-arm jurisdiction," or even cutting off Chinese financial and non-financial institutions' SWIFT payment channel. In contrast, China has limited resorts to counter any such hit.

Beyond that, financial sanctions will have an obvious negative impact on China's financial sectors and brick-and-mortar businesses. The Chinese banking industry has accumulated assets in the US. If China makes the move to counter US sanctions, the US interest in China will take hit as well. A situation like this will set the trade war on a rapidly escalating course.

The yuan exchange rate slipping past 7 does not necessarily mean the currency is on its way to sharp depreciation. In fact, the exchange rate for the yuan against the US dollar stabilized following the drop. Additionally, the People's Bank of China reiterated its confidence in keeping the exchange rate basically stable. Measures such as issuing the off-shore central bank securities were launched to safeguard the currency from plunging. Moreover, it is not feasible to mitigate the trade war impact with deprecation. Some believed that depreciating the yuan to levels of 7.2 to 7.4 against the US dollar offsets the trade war's impact. 

The US can impose tariffs on more Chinese products in many sectors as the trade conflict escalates. Tariffs may increase to 25 percent, or even 40 percent, from the 10 percent at which they currently stand. China's current account surplus has decreased significantly over the years. The US accusing China of currency manipulation is an obvious political decision. 

Though the yuan's fall to 7 has increase the flexibility of its exchange rate, it is still important to curb the risk of a currency war and to avoid an evolution of the trade war into a financial war. Economic and trade ties are the ballast stones of China-US relations. It is easier for the two sides to achieve consensus and thus mutual victory in the economic sector. The differences between China and the US, in the areas of technology, ideology and institutions, are bigger than those in economic sectors. Once the conflict between the two countries reaches a tipping point, the negative impact for the Chinese side will become more obvious.

The US side also has various problems. Unlike certain hawkish US politicians such as Stephen Bannon, Robert Lighthizer and Peter Navarro,  some elites and entrepreneurs have great economic interest in China. US President Donald Trump has the motive to gain re-election and cut a trade deal. Trump's top economic adviser Larry Kudlow told the press last week that Trump wants a trade deal with China.

China needs to make full use of the US' motives to reach a trade deal with China, keeping disputes to a minimum, instead of letting the trade war sprawl into other areas and worsen bilateral relations.

If the US economy continues to fall back in the third quarter, and its financial market continues to fluctuate, it is still possible for China and the US to return to the table for negotiations. At this moment, it is still beneficial for China to continue its financial opening-up, stress intellectual property protection, lower tariffs and implement competitive neutrality. These moves suit China's own development demand, and will also create conditions for trade talks. 

The author is chief economist with JD Finance. bizopinion@globaltimes.com.cn