MNI China Money Week: Yuan Rangebound Despite Look Higher

By Anthony Barton

     LONDON (MNI) - Dollar-yuan continues to trade in the recent CNH6.70-6.80

range, at least on a closing basis, despite a brief break below the lower bound

on Thursday, following media reports suggesting that the U.S. and China were

drafting six Memorandums-of-Understanding on key structural trade issues ahead

of the ministerial level trade talks in Washington planned for later Friday.

This week saw the yuan draw support from reports pointing to the U.S. pressing

for a stable yuan in the latest round of trade talks, although policy advisors

told MNI that "a possible memorandum of understanding after this week's

China-U.S. trade talks will probably contain only vague wording about

stabilising the yuan exchange rate."

Looking ahead, the scope for further notable yuan gains against greenback may be

somewhat limited, even if there is a positive outcome to trade talks, with 6.60

to the greenback a likely upside barrier as the currency faces economic

headwinds in the year ahead, at least in the view of one Chinese government

advisor and leading economists who spoke with MNI on Thursday.

     --MONEY SUPPLY

Focus has also fallen on the record round of new yuan loans and a larger than

expected rise in M2 money supply during January, which has added further fuel to

January's reserve ratio requirement (RRR) cuts, even though seasonal factors

seem to be in play.

The release itself seemingly triggered some worry within the country's ruling

party, as Premier Li stressed that China will not change its prudent monetary

policy, as it is determined not to flood the economy with excess liquidity and

credit to spur growth, while pointing to financial arbitrage as a driver behind

the jump in credit levels.

Li went on to tell the State Council that the two RRR cuts in January were in

line with market expectations, adding that China has plenty of room for further

cuts. He also stressed that liquidity has been withdrawn properly during the

cuts.

The People's Bank of China (PBOC) launched a quick retort via its newspaper, the

Financial News, noting that some of the bill financing had been used by private

companies to facilitate rates 'arbitrage,' but the move will prove temporary as

there was little arb opportunity with structured deposit interest rates

returning to a reasonable level

This was followed up by the PBOC's stating in its latest quarterly Monetary

Policy Report that it will keep its prudent monetary policy stance, strengthen

counter-cyclical adjustment, maintain ample liquidity and stabilise market

interest rates. The bank omitted the phrasing surrounding "neutral" monetary

policy, that it had previously employed.

     --CENTRAL BANK OPTIONS

The removal of the word "neutral" will add to discussions surrounding the

potential for monetary easing by the central bank. Many analysts suggest that

such a move, if it were to come, would be via the rates applied to the Bank's

open market operations (OMOs), although some have pointed to the potential for

tweaks in the medium-term lending facility and targeted medium-term lending

facility (MLF/TMLFs) rates, while some still look for a benchmark rate cut in

the coming quarters, which the PBOC reportedly still views as a measure of last

resort.

Finally, it is worth highlighting that the PBOC conducted the inaugural round of

central bank bill swaps this week, and has pledged to promote use of the

facility and perpetual bonds, which will in turn boost bank capitalisation.

Ultimately, the health of Chinese assets and the yuan will be tied to the

outcome of the Sino-U.S. trade talks, with U.S. President Trump set to meet with

Chinese Vice Premier Liu He later Friday. The deadline for a deal to avert

further tariffs is March 1, although recent comments from the U.S. side have

suggested that this could be pushed back if enough progress is made in talks.

--MNI London Bureau; +44 203 865 380; email: anthony.barton@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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