China won't use the yuan to 'aggressively' attack the US, even as trade tensions between the world's 2 largest economies rise, Morgan Stanley says

An employee counts money at the last workday of a week at a bank in Taiyuan, Shanxi province, June 28, 2013.REUTERS/Jon Woo
  • Morgan Stanley does not think China will use its Yuan "aggressively" against the US even as trade tensions mount between both countries.
  • Morgan Stanley chief Asia economist Chetan Ahyda said: "China doesn't want its currency to be that volatile."
  • China devalued its currency in 2018 prompting the US to label it as a "currency manipulator."
  • On Wednesday, China threatened tit-for-tat sanctions for the US signing of the Hong Kong Autonomy Act, which in turn followed China's imposition of a new security law in Hong Kong.

As trade tensions between US and China have flared up again, Morgan Stanley is confident that China's currency will not be used as a tool to attack the US.

Speaking to CNBC Wednesday, Morgan Stanley chief Asia economist Chetan Ahya said: "I think there's another trend that's emerging ... China doesn't want its currency to be that volatile, or be seen to be a currency which is not seen to be stable enough to be a long time venue for being a reserve currency."

The current exchange rate between the yuan and the US dollar is about seven yuan per US dollar. Advertisement

China will not "aggressively" use Yuan to attack the US

Ahya said: "China will, we think, not be using its currency aggressively, even if there were to be new rounds of trade tensions emerging.

"We think they will be more focused on, in the context of geopolitical developments, trying to keep it more stable so that it can be seen as a stored value currency where people are enticed to get into Chinese assets."

Tensions flared up again between two of the world's largest economies most recently over the new draconian security law that China imposed on Hong Kong last month.
Advertisement

China said the rule was needed on security grounds, but critics of the law say it violates Hong Kong's "One Country, Two Systems" policy, that has been in place since 1997.

In response to the law, Trump signed the Hong Kong Autonomy Act on Wednesday, which removes all special treatment that was previously in place for Hong Kong. China then vowed to impose tit-for-tit sanctions on the US.

China has long threatened to use yuan as leverage against the US

China has long threatened to devalue its yuan in its trade war with the US.Advertisement

Read More: BANK OF AMERICA: Buy these 14 stocks that are likely winners in the pandemic — and may benefit from the biggest trends that will define the future

In 2018 the country devalued its currency to the lowest point in more than a decade, prompting the US to label China as a "currency manipulator." The yuan had fallen below the seven against the dollar at that time.

While the US said it would drop its currency manipulator title ahead of signing the Phase 1 China-US Trade Agreement this January, tensions between both nations have flared up on who is responsible for the coronavirus outbreak and most recently the autonomy of Hong Kong. Advertisement

The US has also reportedly explored removing the US-Hong Kong dollar currency peg, which has been place in 1983.

Read More: Paul Andreola has a long track record of finding tiny stocks that deliver 10-times returns. He lays out the 4 criteria he looks for when seeking the next explosive pick.

But while tensions between both countries are visibly rising, Morgan Stanley thinks China's assertion to use the Yuan is an empty threat. Advertisement

Ahya's comments echo similar statements made by Goldman Sachs last week, which predicted in a note that the yuan may even appreciate against the US dollar to 6.70, following good Chinese economic performance.

Zach Pandl, Goldman Sach's co-head of global foreign exchange, rates and emerging market strategy, told CNBC last week: "The only thing holding us back really from enthusiasm around the currency is tensions with the United States ahead of the November election."

{{}}