FORMER China central bankers warned Saturday of currency-war risks with the US after an abrupt escalation of trade tensions between the world’s two biggest economies last week.

The US’ labeling 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, Chen Yuan, former deputy governor of the People’s Bank of China (PBoC), 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 seven to the dollar last 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 US.

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, Chen said 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 believes, in a geopolitical point of view, it’s being contained by China with China’s holding of its sovereign bonds,” Chen said. “That means the US is not completely without weakness.”

China should work to increase the use of the yuan in global trade such as the purchase of commodities, he said.

One of the PBoC officials at the meeting signaled that tensions with the US could increase. Zhu Jun, director of the PBoC’s international department, said “more ensuing measures are likely coming.” She didn’t elaborate.

The US’s 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 Saturday.

While markets haven’t reacted too strongly to the weakening yuan last week, it is possible that “the yuan could weaken further on unexpected shocks in the future,” 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,” Yu said. “It won’t benefit the PBoC’s credibility and won’t benefit forex reform.” — Bloomberg

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