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The formal designation came a day after China allowed its currency to breach a psychologically important level, with the yuan falling to 7 against the dollar on Monday — the first time since 2008 that's happened.
"But if the U.S. does escalate further on the tariff front, or try other sanctions, then as we saw overnight, there will once again be intensification of pressure coming back from the Chinese."
"They have plenty of options to consider as the recent move in the bilateral exchange rate demonstrates," Roach said.
The world's two largest economies are locked in a prolonged trade war that has dragged on for more than a year. Both countries have slapped additional tariffs on each other's goods worth billions of dollars, and the escalating tensions have spooked markets and hurt global economic growth outlook.
The U.S. Treasury Department announced Monday that Secretary Steven Mnuchin will engage with the International Monetary Fund (IMF) to eliminate what the U.S. has called an "unfair competitive advantage" created by China.
Roach said that politics have gotten "in the way of objective analysis in the Trump administration. "
"My guess is the IMF will be much more analytical and objective in assessing this characterization than the politicized U.S. Treasury has been," he said.
Roach, however, said that will not work unless there is a "grand coalition of other countries that would join with the U.S. in attempting to push the (Chinese currency) back up."
With the bulk of the Chinese yuan move concentrated against the dollar on a trade-weighted basis, there's "no pressure elsewhere in the world that would lead to the creation of this coalition of the willing to gang up on China to force a different level of currency," he said.
— CNBC's Patti Domm contributed to this report.