An escalating trade war between the world's two largest economies could persuade an increasing number of global investors to favor China's yuan over the U.S. dollar, the former People's Bank of China (PBOC) Governor Zhou Xiaochuan told CNBC Tuesday.
Trading in the partly managed yuan — also called the renminbi — has been volatile over recent months, amid threats of additional U.S. tariffs against China.
This comes after President Donald Trump said late last week that he was "ready to go" on tariffs targeting another $267 billion on Chinese goods "if he wants." That would follow planned charges on $200 billion of Chinese goods in several industries, including technology.
Beijing has vowed to retaliate if Washington takes any new steps on trade.
"If the U.S. uses too much financial sanctions against the other country, it drives (investors) to consider the other currency," the former People's Bank of China (PBOC) Governor Zhou Xiaochuan told CNBC's Geoff Cutmore on Tuesday.
"It is quite like the beginning of the global financial crisis, when the U.S. dollar had a little bit of a problem because it gave room for the other currencies to play a certain role," he added.
Dollar remains 'default currency'
Speaking on the sidelines of the Eastern Economic Forum (EEF) in Valdivostock in Russia, Xiaochuan told CNBC that the U.S.-Sino trade war could provide an "opportunity for faster growing of our renminbi use."
The yuan's value against the dollar factors into the ongoing trade dispute because its decline has lessened the impact of American tariffs on Chinese products.
China's currency has lost more than 9 percent of its value against the greenback since April — when the Asian economy imposed its first set of retaliatory trade duties against U.S. imports.
In general, a weaker currency can help a country's export performance by making its products cheaper to those in other countries and thus more competitive in global markets.
Massimiliano Castelli, head of strategy for global sovereign markets at UBS, said in a report published Tuesday that while there had been a "significant increase" in the number of market participants prepared to invest in the yuan this year, "the U.S. dollar remains the default currency to invest new reserves."
The Swiss bank's annual global survey of central banks and sovereign wealth funds found investors still faced a number of challenges when considering whether to invest in China's yuan, including clarity over Beijing's financial regulations, access to its onshore investments and the safekeeping of securities.
— CNBC's Kelly Olsen contributed to this report.