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When is a trade war not just a trade war? When it’s about so much more.

After another week of rising tensions between the U.S. and China, it’s fair to wonder just how far things will go. The answer that emerged in a conversation with hedge-fund manager and prominent China bear Kyle Bass of Hayman Capital Management: very far.

The recent market volatility began with President Donald Trump announcing 10% tariffs on the remaining $300 billion in unpenalized Chinese goods. China, for its part, responded by letting its currency, which is heavily managed, weaken against the U.S. dollar—the yuan closed the week trading at 7.06 to the greenback, the weakest since March 2008. That prompted the Trump administration to label China a “currency manipulator.”

“The brilliance of us labeling them a currency manipulator is that China has intervened since 2015 to prop [the yuan] up,” Bass says, after China’s decision caused the yuan to drop 1.7% this past Monday.

By allowing its currency to weaken, China has opened a new front in the trade war, as a cheaper yuan helps offset the tariffs on Chinese goods. In fact, China would probably like to see the yuan weaken by about 5% a year over the next eight years, Bass says.

“The goal of the Chinese is to weaken the currency in an orderly fashion,” he says. “If it breaks, that’s very bad.”

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A currency war, once started, has a way of broadening. And in this case, the U.S. has an advantage, Bass says. That’s because the world still uses dollars to conduct its businesses. That means the U.S. could, if it wanted to, decide to cut off China from the U.S. payment systems. Or the U.S. could decide to cut off one Chinese bank for, say, doing business with Iran, and send shock waves through China. “For all those people that say China will beat us, we have all the cards,” Bass says.

But the standoff between the two countries appears to be moving beyond trade and currencies. The rift between pro-democracy activists in the Hong Kong Special Administrative Region of the People’s Republic of China and the mainland has also raised tensions between the U.S. and China.

China published information about a U.S. diplomat’s family after she met with leaders of the democracy movement, prompting a U.S. official to refer to China as a “thuggish regime.” How far China will go to tighten its grip over the city remains to be seen, but Hong Kong must remain autonomous or lose its most-favored-nation trading status. That could cause major problems, Bass says, particularly for the Hong Kong dollar.

Anyone who has followed Bass knows that he has been expecting big problems in China, and that hasn’t changed. He points to China’s debt load, its need for dollar funding, and the troubles in Hong Kong as possible problems that could ultimately cause an economic crisis. “Both China and Hong Kong been building a very large pile of firewood,” he says. “Any spark could set it off.”

His critics will point to the fact that many of his proclamations haven’t come true. How does he feel about them? “I think all those people should put all their money in Chinese banks, earn what they can earn, and show me in 10 years how it will work out,” Bass says.

Write to Ben Levisohn at Ben.Levisohn@barrons.com