Why China is unlikely to start a currency war amid escalating trade tension

Beijing will not use a sharply devalued yuan as a weapon to gain an upper hand in its trade war with the US, as it will do more bad than good to China’s economy and hurt its image as an upholder of free trade, according to analysts.

In the past month China’s yuan has swung from being one of the stronger global currencies to an underperformer, suffering a 3.3 per cent depreciation against the US dollar, reflecting its worst single-month decline since Beijing established its foreign exchange market in 1994.

Chinese officials have been careful to stress there is no official policy to devalue its currency as part of a salvo in the ongoing trade battle with the US, arguing instead that market forces have been the major driver in the yuan’s softening.

Guo Shuqing, party secretary of the central bank, said in a recent statement that the yuan’s drop is likely only temporary as China’s economic fundamental point to a stronger currency in the longer term.

“There is no possibility of significant depreciation,” Guo said in an interview on Thursday with the state-run media group Financial News, a publication affiliated with the People’s Bank of China. He added that the yuan would likely tend to be stronger in the future.

“In recent years, some international punters have tried to earn big profits by shorting the yuan. The facts proved they had made serious misjudgment over the situation,” he said.