China is turning to a stealth weapon in its trade war with Trump

• President Donald Trump threatened to label China a currency manipulator throughout his campaign.
• Treasury officials have declined to do so three times under the Trump administration.
• The Chinese yuan on Wednesday slid to its lowest level against the dollar this year.

The Trump administration has threatened to slap tariffs on nearly all Chinese imports to the US, a move Beijing isn't able to match in duties of its own. Meanwhile the yuan, has weakened to fresh lows, raising questions about whether China could counter trade threats with currency manipulation.

The yuan hit its lowest level of the year on Wednesday at 6.6105 versus the dollar. It has plummeted 6% versus the dollar since March, when the Trump administration announced plans to penalize China for what officials found to be unfair trade practices. A weaker currency typically boosts exports.

The slide comes days after the People's Bank of China cut its reserve requirement ratio, or the amount of money commercial banks have to store, for some institutions by 50 basis points. The move is expected to release $108 billion in liquidity.

This is the third time China's central bank has lowered reserve ratios this year. And as trade tensions rise, analysts expect additional reserve cuts in the future.

"We expect the currency to remain under pressure as rising expectations of further accommodation in monetary policy will likely weigh on China's real interest rate differential with the US," said analysts at Fitch's BMI.

But in April, the Trump administration declined for a third time to declare China a currency manipulator, something the president had repeatedly vowed to do on the campaign trail.

The Treasury Department releases semiannual reports on the foreign exchange policies of major trading partners where they monitor for currency manipulation. The latest report said China runs a trade and current account surplus with the US. But officials said Beijing had not been directly intervening in its currency market.

Officials did, however, keep the country on a "monitoring list." Countries on the Treasury's monitoring list can be subject to sanctions if they meet the following criteria:

1. Have a significant trade surplus with the US
2. Have a "material" current account surplus with the US
3. Be engaged in "persistent, one-sided" intervention in the foreign exchange market

The next Treasury report is expected to come out in October.

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