The Chinese yuan rose for a second day after Premier Li Keqiang echoed previous comments from the PBOC when he stressed that China will not weaponize its currency and will not stoop to competitive devaluation of the yuan, hours after China hit back, with a "softer punch" as Reuters put it, than the one landed by the United States in the escalating tariff war between the world’s largest economies.

Chinese Premier Li Keqiang

Speaking before a World Economic Forum event in the city of Tianjin on Wednesday, Li did not directly mention the trade conflict but he said that devaluation would do "more harm than good", and that talk of Beijing deliberately weakening its currency was "groundless."

"One-way depreciation of the yuan brings more harm than benefits for China,” he said. “China will never go down the road of relying on yuan depreciation to stimulate exports." He added that China will not do that to chase "thin profits" and "a few small bucks."

Li also said that the world’s multi-lateral trading system should be upheld, and that unilateral trade actions will not solve any problems. His remarks pushed the yuan higher, after the currency had lost about 9 percent of its value since mid-April amid the ongoing trade war.

Still, after the latest round of tariffs announced on Monday night, the next move by the two nations is clearly crucial, particularly if the US administration acts upon China’s move by introducing tariffs on the remaining $267BN of Chinese exports to the US. Additionally, as we noted yesterday, one can’t rule out the possibility of China going down the non-tariff route given the limitations on how much tariffs they can apply. As DB's Jim Reid writes, "the nuclear option would be to sell US Treasuries and on that note overnight we’ve had data released which showed that China’s holdings of US Treasuries in July fell to the lowest in six months ($1.17tn from $1.18tn in June).This was just as the trade war was ramping up so although the data is a little stale and the actual size of the reduction is small it’s still noteworthy and a data point to watch in the future."

Meanwhile, a note by Oxford Economics said that its baseline forecast for Chinese GDP in 2019 could fall well below 6%, and said prospects for near-term easing in tensions were low.

“But the likelihood of de-escalation will rise over time as the increasing economic impact in the U.S. will make the Trump team less combative, and China realises that it will be hard to integrate more into the global economy without some concessions regarding its specific economic model,” the note said.

Sure enough, the market has for now taken the latest trade war news in stride, as the latest escalation was less severe than some market participants had expected, with Asian stocks rising on Wednesday and U.S. Treasury yields near four-month highs.

Euphoria aside, China has yet to publicly accept an invitation extended last week by Steven Mnuchin to hold a fresh round of talks, which China welcomed at the time.

On Wednesday, Foreign Ministry spokesman Geng Shuang said he had no information on a possible trade delegation and questioned U.S. sincerity about wanting new talks, noting that the last round was followed immediately by the activation of new tariffs. "This has become a kind of U.S. routine," he said.

Meanwhile, the propaganda war of words is rising, with the People's Daily writing in a front-page editorial on its international edition that China remains unafraid of the "extreme measures” taken by the United States. "To deal with the trade war, what China really should do is to focus on doing its own thing well,” the newspaper, which is published by the ruling Communist Party, said.

"(China) is not worried that the U.S. trade counter measures will raise domestic commodity prices by too much but will instead use it as an opportunity to replace imports, promote localization or develop export-oriented advanced manufacturing,” it said.

Elsewhere, Reuters reported that the state-oiwned Global Times tabloid said the trade war was a chance to pursue greater global recognition of its financial markets and that it could open its A-share market more to listings by Western firms.