China's former central bankers warn of lasting currency war with US

China's central bank allowed the yuan to weaken below 7 to the dollar, which has prompted the US to accuse China of currency manipulation. PHOTO: REUTERS

BEIJING (BLOOMBERG, AP) - Former China central bankers warned Saturday (Aug 10) of currency-war risks with the US after an abrupt escalation of trade tensions between the world's two biggest economies this week.

The US's labelling of China as a currency manipulator "signifies the trade war is evolving into a financial war and a currency war," and policy makers must prepare for long-term conflicts, Mr Chen Yuan, former deputy governor of the People's Bank of China, said at a China Finance 40 meeting in Yichun, Heilongjiang.

Former PBOC Governor Zhou Xiaochuan said at the gathering that conflicts with the US could expand from the trade front into other areas, including politics, military and technology. He called for efforts to improve the yuan's global role to deal with the challenges of a dollar-denominated financial system.

The PBOC allowed the yuan to weaken below 7 to the dollar this week, prompting the US to accuse China of currency manipulation.

President Donald Trump said talks with China planned for next month could be called off. Domestically, the conflicts added a new dimension to China's balancing act: how to support the economy while avoiding an exchange rate that widens its rift with the U.S.

The US currency-manipulation charge is part of its trade-war strategy, and it'll impact China "more deeply and extensively" than the trade differences, Mr Chen said on Saturday. While China should try to avoid further expanding the disputes, policy makers must be prepared for long-lasting conflict with the US over the currency.

The US move is an "appalling" act to gain an advantage during trade negotiations and is doomed to fail, the Communist Party's flagship newspaper People's Daily said in a commentary on Saturday.

While markets haven't reacted too strongly to the weakening yuan, it is possible that "the yuan could weaken further on unexpected shocks in the future," Mr Yu Yongding, a researcher at the Chinese Academy of Social Sciences, said in Yichun.

With policy makers seemingly determined to make the yuan more flexible, the PBOC "should be patient and not adjust policies in haste because of short-term market volatility," Mr Yu said. "It won't benefit the PBOC's credibility and won't benefit forex reform."

In Washington, the International Monetary Fund said it saw little evidence that China's central bank had deliberately reduced the value of the nation's currency - a position at odds with the Trump administration's decision this week to accuse Beijing of manipulating the yuan.

The IMF says in its yearly review of China's economy that the yuan has been "broadly stable" against other currencies, suggesting that there's been little intervention by the People's Bank of China. A weaker yuan would give Chinese exporters a competitive price advantage over foreign rivals.

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