MNI China Money Week: To Defend Or Not To Defend The Yuan?

--U.S. Pressure Gives PBOC No Easy Options

By Stuart Allsopp

     SINGAPORE (MNI) - USDCNH is trading at fresh multi-year highs as the key

7.0 level comes into sharp focus, and speculation surrounding the PBOC's

willingness to defend this level is rising. 

     If the PBOC doesn't step in to intervene, it risks further aggravating

relations with the U.S. and we could see speculators target the yuan, testing

the PBOC's resolve to maintain stability in the currency.

     We have seen a number of headlines this week about the PBOC's yuan policy.

Yesterday we noted that PBOC advisor Sheng Songcheng told MNI the bank will look

to keep the yuan's exchange rate stable and it is unlikely to break below 7 in

the short-term, adding that stability, not reform was the more important

near-term aim for the central bank (see 'MNI: Yuan Stability PBOC's Short-Term

Priority: Advisor Sheng', 03:49 EDT / Oct 25).

     This was followed shortly after by comments by MOFCOM at a press conference

which stressed the country will not carry out a competitive devaluation of the

yuan in response to the trade war with the U.S. or other "external

disturbances." 

     These sentiments were echoed today in comments by Pan Gongsheng, deputy

governor of the PBOC, which noted at a forum in Beijing that the PBOC will

continue to use macro-control policies to stabilize market expectations for the

yuan exchange rate. Pan did not respond directly to a question as to whether the

PBOC would take further measures to stop the yuan trading above 7 against the

U.S. dollar.

     --HAMSTRUNG BY THE U.S.

     Policymakers seem to see the yuan's weakness as posing little threat to

economic stability and are more concerned with the potential adverse reaction by

the US from any further weakness. Our guess is that the PBOC would prefer a

gradually weaker currency to support its traditional export sectors amid slowing

growth, but is increasingly hamstrung by the U.S.

     A strong bounce in global risk appetite is needed to stabilize Chinese

stocks and help to support the yuan, and given how oversold and undervalued

markets have become, the bounce potential is there. However, with U.S. equities

continuing to weaken, the risk is that the 7.0 level gives way, triggering a

fresh round of global risk aversion and further complicating US-China trade

relations.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

[TOPICS: M$A$$$,M$Q$$$]