BEIJING (NYTIMES) - As the United States and China swap threats and mete out increasingly punishing tariffs, the world is watching to see whether Beijing turns to one of its most potent economic weapons. It involves the number seven.

China's currency, the yuan, has been gradually losing value since mid-April, and on Tuesday (Oct 30), it was at its weakest point in a decade.

If the currency weakens any further, it could fall below the psychologically important level of seven yuan to the dollar. The last time it took more than seven yuan to buy a dollar was in May 2008, as the world was slipping into a financial crisis.

The Trump administration doesn't like the idea of a weaker Chinese currency. That could give what it considers an unfair advantage to China's exporters. In the arsenal of trade disputes, currencies can be potent weapons.

But China has good reason to keep its currency from weakening, and it appears to have acted in recent weeks to prop it up. Currencies may be potent weapons, but they are blunt ones - and they can boomerang against those who use them.

1. WHAT HAPPENS IF THE YUAN FALLS PAST 7 TO THE DOLLAR?

There is nothing particularly threatening about the number seven itself. The yuan at 7.002 to the dollar is pretty similar to the currency at 6.998 to the dollar.

But passing that number would be significant symbolically. It would suggest China is prepared to let its currency weaken further still.

That would give China's factory owners an advantage when they sell their goods in the US. It would also undermine the tariffs the Trump administration has levied on more than US$250 billion (S$346 billion) in Chinese-made products.

2. HOW WOULD THAT HELP CHINA?

Say you own a Chinese factory making lawn ornaments, and you sell a lot of pink flamingos to an American retailer.

You price each at US$1 - they may sell for far more in the US, but shipping and storage account for most of that. When the yuan is six to the dollar, that translates to six yuan in sales.

But when the currency depreciates to seven to the dollar, that US$1 flamingo is worth seven yuan in sales to you. Or you can cut the price - say, from US$1 to 85.7 cents - and still make your original six yuan in sales.

Your American competitor, who has to buy and sell in dollars, has to grudgingly cut prices to compete.

(It's a lot more complicated in the real world. The plastic and metal for the plastic flamingo may have been imported to China and are priced in dollars. But bear with us.)

A weaker currency can also help Chinese exporters beat President Donald Trump's tariffs.

Right now, the US imposes tariffs of about 10 per cent on a wide variety of Chinese goods that arrive at an American port. If the yuan falls 10 per cent, the tariff is basically nullified.

3. WHAT'S DRIVING THE DECLINE?

Some politicians in the US and elsewhere have long said that China manipulates its currency, even though Washington officials - including in the Trump administration - have stopped short of official accusations.

But in this case, many of the forces weakening the currency are beyond Beijing's immediate control.

China's financial system is firmly controlled by the government, giving the country's leaders a great degree of control over how much the yuan is worth.

Officials set a daily benchmark rate for the yuan and allow its value to move a smidgen above or below that level in currency markets. Chinese officials say each day's trading activity helps determine the value they set for the yuan the next day, but they disclose few details about how that works.

On Tuesday, Beijing set that guidepost at 6.9574, just a hair's breadth stronger than seven. In the world of foreign exchange, a higher number means a weaker currency.

Right now, traders are sending Beijing a single message: The yuan should be worth less.

The people and companies that hold the currency have become increasingly nervous about China's slowing economic growth, slumping stock market, fragile real estate market and seemingly intractable trade war with the US.

Inflation has begun to tick upward, and rising prices tend to make holding the relevant currency less attractive.

There are other reasons. Since late July, Beijing has tried to prop up the economy by having the state-controlled banking sector increase lending, making money more available. That means even more yuan sloshing around, weakening the currency's value.

While China hasn't raised interest rates, the Federal Reserve in Washington has.

That makes it attractive for many people to sell their yuan and buy dollars. Would you rather have a one-year yuan certificate of deposit (CD) that pays 1.5 per cent interest now, or a one-year dollar CD that pays out 2.6 per cent or more?

4. IS THE DROP DELIBERATE ON BEIJING'S PART?

Not quite. If anything, Beijing is trying to keep the yuan from falling too fast.

China has a number of ways to bolster the currency's value. One option is to follow the Fed's example and raise interest rates.

That would give Chinese families and companies more incentive to keep their money in China. But that would raise the cost of borrowing in China, just as the economy is slowing.

Beijing could buy up its own currency instead. Like anything else, the yuan's value rises when it is scarcer.

Thanks to the way it has managed its currency over the years, China has amassed the world's largest foreign exchange reserves - a US$3 trillion stash of money it keeps in dollars, euros, pounds, yen and other currencies.

It has begun to tap that stash. When China's central bank released its monthly balance sheet a week ago, it showed a drop of almost US$20 billion in foreign currency just during September.

"Selling almost US$20 billion in a month won't break the bank," said Mr Brad Setser, an economist at the Council on Foreign Relations in New York. "But it does indicate the direction of current market pressure."

5. WHAT ARE THE BROADER RISKS?

Three years ago, as its economy slowed, China devalued the yuan in part to give its factories a helping hand. The financial world was shocked. Markets plunged.

As Chinese officials hurried to explain themselves, people and companies began shifting their money - money that China's economy needed - outside the country.

A year later, China had spent more than US$500 billion from its reserves in an effort to shore up the yuan. It later tightened controls on the financial system to shut off many ways people used to get money out of the country.

Should the trade war intensify, China may look to make more aggressive moves with its currency. But as history shows, there can be a price to pay.