If U.S. President Donald Trump proceeds with plans to label China a currency manipulator, the confrontation would likely escalate beyond trade, David Roche, global strategist at Independent Strategy, told CNBC on Monday.
"Although there are actually no economic grounds, according to the U.S. Treasury's own criteria, for judging a country to be a currency manipulator, I believe on the grounds of politics, Trump will force this through his Republican support and that'll be the start of a confrontation with China, which I think is actually the point at which the proverbial soft stuff hits the fan," Roche told CNBC's "Squawk Box" on Monday.
During his campaign, Trump vowed to label the country a currency manipulator for the purposes of a competitive trade advantage on his first day in office and threatened to impose a tariff of as much as 45 percent on China's exports to the U.S.
On Thursday, U.S. Treasury Secretary Steven Mnuchin told CNBC that the administration would stick to the existing process to judge whether China was a currency manipulator. By those standards, China doesn't match the definition.
In fact, China's policymakers have appeared to be supporting in recent months, not trying to push it lower.
But in an interview with Reuters on Thursday, shortly after Mnuchin's comments, Trump called China the "grand champions" of currency manipulation, saying he hasn't "held back" on the manipulator label despite not following through with his campaign vow.
But Roche didn't expect slapping the manipulator label on China would be the end of the confrontation.
"If Trump goes ahead with this, the cost to the U.S. will be substantial," Roche said. "The ability of China to inflict pain on the U.S. is very substantial."
While acknowledging that analysts' consensus appeared to be that China's response would be "measured and pointed," Roche said he disagreed.
"Once the confrontation starts, it'll run and it'll involve not just trade -- you know putting tariffs on American widgets and America putting tariffs on Chinese widgets," he said. "It'll involve Chinese holdings of Treasurys -- which are still a trillion [dollars], down 30 percent, but still a trillion. It'll involve things that can happen to American executives and organizations in China, such as nice tax audits."
Roche pointed to the 19th Communist Party congress this fall as one reason China would likely take a hard line on any U.S. pressure on trade.
Chinese President Xi Jinping will be aiming to consolidate his power by appointing allies at the congress and possibly even signal he will stay on for an unprecedented third term.
"Xi has to show great strength, because Xi is still struggling to put his people in power in the standing committee in November. The last thing he can be seen to be now is a wimp," Roche said.
—Evelyn Cheng contributed to this article.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1