MNI EXCLUSIVE: Any China Yuan Pledge Likely To Be Vague

     BEIJING (MNI) - A possible memorandum of understanding after this week's

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

stabilizing the yuan exchange rate, rather than specific pledges, policy

advisors to the Chinese government told MNI Wednesday.

     "Any promise would be unlikely to be very specific. It's more likely to

resemble a framework as the problems won't have specific solutions in such a

short period," Guan Tao, former Director General of Balance of Payments at the

State Administration of Foreign Exchange, told MNI in an interview.

     "A discussion of yuan exchange rate stability should not only impose

responsibilities on China, but also require cooperation from the U.S., such as

by reducing trade frictions, slowing the pace of Fed interest rate hikes, and

maintaining a basically stable U.S. dollar," Guan said. The manner in which yuan

stability is defined - either against the dollar or a basket of currencies -

could also lead to different outcomes, he added.

     The U.S. has asked China in the talks for a commitment to keep the yuan

stable, Bloomberg News has reported. But China will interpret stability to mean

reducing the scope for exchange rate fluctuation rather than preventing

depreciation, Zhang Chenghui, former director of the Finance Research Institute

at the Development Research Centre of the State Council, told MNI.

     "For us, it means that fluctuations should not be large, while the U.S.

means that it hopes the yuan will not depreciate. But there has to be some

fluctuation based on demand and supply in the market," Zhang said.

     --MARKET FORCES

     Their comments came as China's Ministry of Foreign Affairs said Wednesday

that China doesn't engage in currency depreciation, and would not use the yuan

exchange rate as a tool in trade disputes. The MFA said the U.S. should obey

market rules and refrain from politicising the exchange rate.

     Observers say a promise from China to maintain a stable yuan would be at

odds with efforts to let market forces play a bigger role in setting the level

of the currency.

     "China has been stressing it doesn't manipulate the yuan, while the

exchange rate should be decided by the market," Jin Canrong, deputy director of

the National Association of International Studies and an advisor to several

government departments, said in an interview.

     Other trade advisors told MNI they doubted China would make specific

promises in the MOU, although they noted that Beijing is not currently pursuing

a weaker currency to boost exports.

     "We would prefer for the yuan to neither appreciate nor depreciate to any

great extent, because China's economy includes elements other than exports,"

said Mei Xinyu, a researcher at the Chinese Academy of International Trade and

Economic Cooperation under the Ministry of Commerce. While a weaker currency

benefits exports at a time of trade tensions, the government would also be

concerned by the potential damage it would inflict on many companies' balance

sheets, he said.

     But Liu Hong, a director of the Ministry of Commerce's China Association of

International Trade, said China could agree to a statement that yuan

fluctuations would be governed by markets.

     "Committing the government to guaranteeing an FX exchange rate is not in

line with our move towards more market-driven FX management," Liu told MNI. "We

won't accept a demand to increase government intervention."

     Yu Miaojie, a veteran trade expert who advises the Ministry of Commerce,

the Ministry of Finance and the State Council's Counsellors' Office, said a

stronger yuan would be in line with Chinese government objectives to upgrade

export categories and boost imports.

     "When we are discussing stabilizing foreign trade, we are talking more

about expanding imports and enhancing the quality of trade," Yu told MNI. "China

is emphasising increased added-value rather than depreciating the yuan to boost

exports."

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

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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