China says won't weaken currency to boost exports, as U.S. tariffs mount

By Kevin Yao

TIANJIN, China (Reuters) - China will not stoop to competitive devaluation of its currency, Premier Li Keqiang stressed, hours after China hit back, with a softer punch than the one landed by the United States, in an escalating tariff war between the world's largest economies.

Addressing a World Economic Forum event in the port city of Tianjin on Wednesday, Li did not directly mention the trade conflict but said talk of Beijing deliberately weakening its currency was "groundless."

"One-way depreciation of the yuan brings more harm than benefits for China," he said. "China will never go down the road of relying on yuan depreciation to stimulate exports."

China will not do that to chase "thin profits" and "a few small bucks".

Li went on to say that the world's multi-lateral trading system should be upheld, and that unilateral trade actions will not solve any problems.

His remarks gave a lift to the yuan, which has lost about 9 percent of its value since mid-April amid the ongoing trade war.

On Tuesday, Beijing added $60 billion of U.S. products to its import tariff list in retaliation for U.S. President Donald Trump's planned levies on $200 billion of Chinese goods.

But Beijing is running out of room to respond to any further U.S. tariffs on a dollar-for-dollar basis, raising concerns it may resort to other measures to weather what could be a protracted trade battle.

China has yet to publicly accept an invitation extended last week by U.S. Treasury Secretary Steven Mnuchin to hold a fresh round of talks, which China welcomed at the time.

On Wednesday, Foreign Ministry spokesman Geng Shuang said he had no information on a possible trade delegation and questioned U.S. sincerity about wanting new talks, noting that the last round was followed immediately by the activation of new tariffs.

"This has become a kind of U.S. routine," he said.

The United States wants to pressure China to make sweeping changes to its trade, technology transfer and high-tech industrial subsidy policies.

Trump had warned that retaliation by China would trigger tariffs on another $267 billion of Chinese goods, on top of duties on $250 billion in imports that are already in place or threatened. China, which bought only $130 billion in American goods last year, has imposed or threatened tariffs on $110 billion in U.S. products.

"China are out of bullets. The fight is done and dusted. Now it's just a question of how the Chinese can save face and say 'alright we're going to change, going to open up wider access not only to the U.S. but to the EU and Japan'," said Christopher Peel, chief investment officer at Tavistock Wealth in London.

"Their economy is export-led, they can't afford for it to go out of control," he told Reuters.

ECONOMIC HIT

The new U.S. tariffs will begin on Sept. 24 at 10 percent and will increase to 25 percent by the end of 2018, with Bank of America Merrill Lynch forecasting a 0.5 percentage point decline in Chinese gross domestic product (GDP) growth for 2019 to 6.1 percent.

Oxford Economics said in a note that China's economic growth in 2019 could fall well below 6 percent, and said prospects for near-term easing in tensions were low.

But, it added "the likelihood of de-escalation will rise over time as the increasing economic impact in the U.S. will make the Trump team less combative, and China realises that it will be hard to integrate more into the global economy without some concessions regarding its specific economic model."

Investors were relieved that the latest escalation was less severe than some market participants had expected, with Asian stocks rising on Wednesday and U.S. Treasury yields near four-month highs.

FIGHTING TALK

China remains unafraid of the "extreme measures" taken by the United States, the People's Daily newspaper said in a front-page article in its overseas edition on Wednesday.

"To deal with the trade war, what China really should do is to focus on doing its own thing well," said the newspaper, which is published by the ruling Communist Party.

"(China) is not worried that the U.S. trade counter measures will raise domestic commodity prices by too much but will instead use it as an opportunity to replace imports, promote localisation or develop export-oriented advanced manufacturing," it said.

The Global Times tabloid, which is affiliated to the People's Daily, said the trade war was a chance to pursue greater global recognition of its financial markets and that it could open its A-share market more to listings by Western firms.

Confidence among Asian companies has slumped to the weakest in almost three years as businesses fear collateral damage from the worsening trade war and China's slowing economy, the latest Thomson Reuters/INSEAD survey showed.

Chinese firms were the most pessimistic since the poll began in 2009.

(Additional reporting by Brenda Goh in SHANGHAI, Ben Blanchard in BEIJING and Helen Reid in LONDON; Writing by Tony Munroe; Editing by Simon Cameron-Moore and Kim Coghill)