MNI EXCLUSIVE: After Sharp Drop, PBOC Heads Favour Stable Yuan

     BEIJING (MNI) - China's central bank may not sit still and tolerate the

yuan's further plunge, as it views the current depreciation an overshoot, a

source close to the PBOC told MNI Tuesday.

     "The yuan's depreciation has overshot," the PBOC source told MNI. "Although

a weak yuan benefits China against the backdrop of Sino-US trade spat, it

doesn't mean the central bank would stand by and tolerate a plunge." 

     Earlier Tuesday, Yi Gang, governor of the People's Bank of China, said:

"There are certain pro-cyclicalitities in the market." 

     In a short question-and-answer interview with a state newspaper, reposted

on the central bank's website in the afternoon, Yi said policymakers are

"closely watching the volatility in the forex market, which was also due to "a

strong U.S dollar and external uncertainties." 

     USDCNY surged as much as 700 pips to 6.7204 after the morning opening, the

first time it had broken above the 6.7 level since August 2017. On the offshore

market, USDCNH rose above 6.73 at the same time.

     --PRO-CYCLICALITIES

     The market is sensitive to Yi's use of the phrase "pro-cyclicalities," --

used to refer to factors that may amplify the currency's fluctuation in one

direction -- as it hinted the PBOC may reintroduce the "counter-cyclical factor"

into its daily fixing formation mechanism, in which it attempts to exert more

interventions over market forces.

     "We have seen some state banks selling the dollar in the market when the

yuan broke 6.6 level against the greenback. The 6.6 and 6.7 level is still

within the PBOC's tolerance; it would be very dangerous into the 6.8 territory,

which is a level the PBOC would not like to see," the source said.

     Speaking in Hong Kong Tuesday, Pan Gongsheng, the vice-governor of the

PBOC, said China has confidence to keep the yuan stable in a reasonable range

and "China's forex reserves are adequate and we have plenty of experience and

policy tools".

     This was the first time PBOC officials openly expressed a stance against

the yuan's current round of depreciation. After that, both USDCNY and USDCNH

fell back below 6.7.

     --TOO EARLY TO SAY

     However, it is too early to say that the PBOC would intervene in a big way,

particularly given the gloomy outlook for exports. 

     China will continue implementing "prudent and neutral monetary policies"

and ensure the yuan's exchange rate "basically stable at a reasonable and

balanced level," the source said.

     Earlier, PBOC head Yi said China would maintain a managed-float exchange

rate regime, which is based on market demand and supply with reference to a

basket of set currencies.

USDCNY closed the Beijing session at 6.6672, the highest since September, 28,

2017, rising 182 pips from yesterday's afternoon closing but a touch below the

night closing.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: sherry.qin@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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

[TOPICS: MAQDS$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$]