Bali, Indonesia CNN Business  — 

US Treasury Secretary Steven Mnuchin is keeping a close eye on China’s currency as the trade war between the two countries escalates.

After meeting with China’s central bank governor on Thursday, Mnuchin told CNN that he has been “carefully monitoring” the yuan’s decline against the dollar.

“If someone intervenes to support their currency, that’s fine,” Mnuchin said in an interview in Bali, Indonesia. “If someone intervenes to devalue their currency, that’s not fine.”

In the past six months, the yuan has dropped more than 9% against the US dollar. And there are growing signs that the country’s currency may fall to 7 yuan to the greenback — a threshold not crossed since before the 2008 financial crisis.

Mnuchin’s Treasury Department is due to send its twice-a-year report on currencies to Congress next week. Speaking Thursday on the sidelines of an International Monetary Fund conference, he didn’t comment on whether the report would label China a currency manipulator.

The yuan’s sharp depreciation has fueled accusations from President Donald Trump that China is deliberately devaluing its currency — claims Beijing has repeatedly rejected.

The currency has been falling partly because of fears that the trade war will hurt the Chinese economy. A weaker yuan helps to offset the impact of tariffs by making Chinese goods cheaper for Americans to buy.

Beijing’s role

Chinese Foreign Ministry spokesman Lu Kang said on Tuesday that Beijing was not using its currency as a tool in the trade rift to make exports cheaper. He also dismissed such suggestions as “groundless and irresponsible.”

The Chinese government plays a significant role in setting the value of the yuan and how it trades.

Economists generally agree Beijing may have kept its currency artificially low in the past, but they are skeptical that the government has driven it down against the dollar and other major currencies this year.

China’s currency, also known as the renminbi, has declined amid an escalating trade war with the United States, a slowdown in economic growth and a broader emerging market sell-off.

‘The objective is not tariffs’

The Trump administration has slapped new tariffs on Chinese exports worth hundreds of billions of dollars. It is seeking to gain an edge by upping pressure on China as it struggles with slowing economic growth and sharp declines in the country’s stock markets.

China has retaliated with tariffs on a much smaller amount of American goods because it buys far less from the United States than it sells to it.

Mnuchin didn’t speculate on whether the president will inflict more economic pain on Beijing through additional tariffs.

“Our objective is to have a more balanced trading relationship and protect our technology and our companies,” he said. “The objective is not tariffs. The objective is to open markets.”

Trump is expected to meet with Chinese President Xi Jinping at the Group of 20 leaders summit in Buenos Aires at the end of November.

Chinese President Xi Jinping may meet with President Trump again in November.

The Trump administration has made currency issues part of its on-off trade negotiations with Beijing.

“We want to make sure that we don’t have gains on trade issues only to be offset on currency issues,” Mnuchin said.

He said he worked “very closely” with US Trade Representative Robert Lighthizer to add a currency provision in the renewed trade agreement with Mexico and Canada. It would be the “model” the administration would use in future free trade agreements, he added.

Will tensions get worse?

Trump has repeatedly accused China and the European Union of manipulating their currencies, saying it is “taking away our big competitive edge.”

He has also complained that the Federal Reserve’s rate hikes are moving too fast.

The yuan has fallen more than 9% against the dollar in the past six months.

Higher interest rates have strengthened the dollar, making it more attractive for investors to hold assets in the greenback compared with other currencies.

“The Fed is making a mistake,” Trump told reporters Wednesday. “They’re so tight. I think the Fed has gone crazy.”

Despite Trump’s criticisms, the Treasury Department has so far stopped short of labeling China a currency manipulator.

If it were to do so this month, the move wouldn’t immediately trigger any US penalties, but it would further inflame the tensions between the world’s two largest economies.