Source: Global Times    Published: 2019-8-11

Escalating financial friction between China and the US as a side effect of the trade war is becoming a hot topic among Chinese economists, with some of them cautioning that the trade row might worsen into a finance war between the two countries.

Chen Yuan, chairman of the standing council of the China Finance 40 Forum (CF40), said on Saturday that China should take steps to reduce the economy's reliance on the US dollar to guard against potential financial attacks by the US.

To achieve that goal, the government can take steps such as increasing the use of other reserve currencies and enhancing the yuan's use in the bulk commodity market, Chen said.

The government has already moved to multiply the allocation of its foreign exchange reserve assets. Central bank data showed that China's gold reserves reached 62.26 million ounces by the end of July, the eighth month that the central bank has increased its gold reserves.

Signs have emerged that finance could become a flashpoint in the trade war. The US government recently labeled China a "currency manipulator" after the yuan's exchange rate fell against the greenback in response to US President Donald Trump's threats to impose fresh tariff increases on Chinese goods.

The yuan on August 5 broke the key psychological level of 7 per US dollar for the first time since 2008.

Chen said that the "currency manipulator" label can be deemed as a move by the US intending to upgrade the "trade war" to a "finance war".

"The US wants to disrupt China's financial markets and damage China's economic order by labeling China a currency manipulator, so as to create disorder and attack its opponent during its wrestling with China in the trade negotiations," Chen said at the forum.

Zhou Rong, a senior research fellow at the Chongyang Institute for Financial Studies at the Renmin University of China, said that so far the China-US friction is mostly concentrated on trade, and it has not largely spilled over to the finance sector yet.

"But we should prepare for the possibility of a 'finance war' or 'technology war' in the future," Zhou Rong told the Global Times on Sunday, saying that the US might take measures such as further restricting Chinese companies' financing in the US.

Chen Yuan also warned that the US might threaten the safety of China's foreign exchange reserves, which are heavily denominated in US dollars.

But Zhou Yu, director of international finance under the Shanghai Academy of Social Sciences, said that chances of the US using extreme financial sanction measures such as an asset freeze are small.

"The US still has strong business connections with China as so many US companies are exploring the Chinese market. Besides, the US' reputation in the global community would be greatly damaged if it takes overly extreme measures against the Chinese financial market as the effects would spread to other markets as well," Zhou Yu said.

Chen Yuan also suggested that China increase the resilience of the yuan as well as enhance the yuan's international pricing abilities.

Huang Yiping, chairman of the academic committee of the CF40, said at the forum that China should not "dance to the tune of Donald Trump", but should pay more attention to its own missions in reform and opening-up.

Zhou Rong is a senior fellow at the Chongyang Institute for Financial Studies at the Renmin University of China.