MNI EXCLUSIVE: China Advisors See Limited Impact From FX Deal

     BEIJING (MNI) - A currency deal reportedly reached between the U.S. and

China is unlikely to have much impact on the value of the yuan, a former senior

official from China's State Administration of Foreign Exchange, told MNI, noting

that the two countries had already made commitments to ensure market-based

exchange rates and to avoid competitive devaluations.

     If the deal, which according to media reports has been included in a

partial trade accord reached last week, merely implements the existing

consensus, "it would barely impact the market," said Guan Tao, former director

of international payments at SAFE.

     He pointed to comments in March by PBOC governor Yi Gang regarding a joint

commitment with the U.S. to not only avoid using exchange rates for commercial

gain but also to maintain close communication on foreign exchange markets and to

disclose data in accordance with International Monetary Fund transparency

standards.

     --NO PROMISES

     Yu Yongding, a former member of the PBOC's Monetary Policy Committee, told

MNI that China should not go further than increasing the transparency of market

intervention as per the IMF requirements. No country should promise that its

currency could not depreciate, he said.

     Only if the deal contains stipulations referring to the mechanism the PBOC

uses to announce its daily yuan fixing price will it have much practical effect,

said Xiao Lisheng, deputy director of the International Finance Department of

the Institute of World Economics and Politics, a think tank based at the Chinese

Academy of Social Sciences. In its fixing calculation, the PBOC takes into

account a so-called "counter-cyclical factor" designed to smooth out market

excesses. Classing this process as prohibited market intervention would prompt

further exchange market liberalisation, Xiao said, adding that China may not be

ready for such a step.

     While a deal might be broadly supportive for the currency, reassuring

investors that Beijing would not be tempted to devalue in future, an accord

would not stipulate particular levels or bands for the yuan, according to Xiao,

as this would only give clear targets to speculators.

     --LIBERALISATION

     His sentiments were echoed by Wei Benhua, former deputy director of State

Administration of Foreign Exchange, who told MNI that should China opt for more

exchange rate liberalisation, it will enact it at its own pace.

     "Even if we decide to push forward, we will choose the best timing," he

said.

     The PBOC's daily fixing has barely moved from 7.07 to the dollar since

Sept. 17. The PBOC is likely to continue to hold the price stable in the

short-term, said Xiao, noting that the PBOC limited itself to supporting the

yuan by selling foreign reserves. A trade deal including a reference to currency

would boost market sentiment, but even then a significantly stronger fixing

would be unlikely, given China's soft export performance has imposed pressure on

the yuan, he said.

     Tan Yaling, head of the China Forex Investment Research Institute, said the

yuan's trend would remain one of depreciation in the short term, with no chance

of any strengthening below 7.

     "Offshore shorting of the yuan looks still to be increasing, with capital

outflow to Singapore from Hong Kong in Q3 recorded at USD4 billion," Tan said,

"And the trade talks will not necessarily go smoothly and the Q3 economic

indicators so far have not been positive."

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

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