What are the possible economic and business consequences if China’s renminbi deteriorates to 7 per US dollar?

A miserable month for China’s yuan is pressuring officials to decide how much they care about defending 7 a dollar.

The currency is down about 2.5 per cent in May, headed for its worst drop since July and the biggest loss in Asia. It touched a five-month low of 6.9217 per dollar a week ago. With the G-20 summit in Japan next month, some strategists see an increasing chance that a trade war escalation could drive the yuan past 7 for the first time in more than a decade.

They don’t agree on the consequences. While Citigroup says a break of the key level may trigger a sell-off in stocks, competitive devaluation and even financial instability, Bank of America Merrill Lynch argues a weaker yuan is justified by slower growth, and that massive outflows aren’t likely.

What’s clearer is that risk of intervention is higher when 7 is in sight – the authorities dumped dollars and mopped up offshore liquidity repeatedly in recent years, and have come out with verbal support for the currency this week. This is the third time the yuan is close to testing that mark in the aftermath of a shock devaluation in 2015.

“What’s different this time is the intensification of trade tensions,” said Claudio Piron, co-head of Asian currency and rates strategy at BofAML. “When we look at all the tools that China has at its disposal, an adjustment in the yuan is the easiest one to use. The trick is to achieve it without scaring the rest of Asia.”

He added that the yuan may slide to 7.13 if China and the US slap more tariffs on each other’s goods. The odds of a tumble beyond 7 within a year have doubled over the past month to 38 per cent following the recent weakening, according to data compiled by Bloomberg based on option prices. The yuan rose 0.07 per cent to 6.9083 a dollar as of 2:06pm in Shanghai.