MNI EXCLUSIVE: CNY Seen Weaker Than 7 For Most H2: Advisors

--China Advisors See Yuan Weaker After Recent Strength

--Global Uncertainty, Capital Inflows, To Feed Volatility

     BEIJING(MNI) - Chinese policy advisors and forex experts expect the yuan to

remain on the weaker side of 7 to the dollar for most of the rest of the year,

despite recent strength during an equity market surge, though they anticipate

volatile two-way trading as global uncertainties weigh against capital inflows

and China's economic recovery, they told MNI.

     The People's Bank of China is becoming more tolerant of forex fluctuations

as the economy moves towards liberalisation, said Tang Min, a counsellor at the

State Council, noting also that the cost of controlling the exchange rate is

increasing. But the PBOC could step in both in the case of excessive capital

inflows or of too steep a yuan sell-off if tensions flare between China and the

U.S., he said.

     Both the onshore and offshore yuan strengthened below 7 on Thursday after

the central bank set its USD/CNY daily fixing at 7.0085, the strongest since

March 18. On Friday, the yuan pulled back above 7, even though the fixing was

set at 6.9943, the first with a six-handle since March 12.

     The currency has been buoyed in recent sessions by inflows chasing a rising

stock market, with the Shanghai Composite Index gaining for an eighth straight

day by Thursday before Friday's sharp reversal, and turnover exceeding CNY1

trillion in both the Shanghai and Shenzhen stock exchanges for seven days in a

row.

     --INFLOWS A POSITIVE FOR NOW

     For the moment, the inflow into stocks is a positive, boosting investors'

spirits and assisting recovery, said Tang. But the authorities would act to

deflate any possible bubble, and could decide to approve more IPOs to sop up

liquidity.

     A sharp yuan appreciation driven by rapid capital inflows could hamper

economic recovery, said Guan Tao, former director general of Balance of Payments

at the State Administration of Foreign Exchange. Inflows could also blow

destabilising bubbles in China's stock markets, he warned.

     Guan, now chief global economist of BOC International (China) Co Ltd.,

expects the yuan to trade within a wide range, buffeted by swings in global risk

appetite at a time of both ultra-low interest rates and accelerating Chinese

growth, which could hit 6% in the next two quarters as the economy rebounds from

the pandemic lockdown at the beginning of the year.

     So-called "northbound capital" flowing via stock connect programmes from

offshore into onshore markets has shot up to CNY50 billion so far this month,

from a net CNY52.68 billion in June, according to financial data provider Wind.

The CSI 300 Index of the largest Chinese stocks has risen 14% this month alone,

the biggest monthly gain since April, 2015, a year which later saw investors

lose USD1.6 trillion in a matter of days when euphoria turned to panic.

     --DIFFERENT SCENARIOS

     Zhang Ming, a senior fellow at the Institute of World Economic and Politics

under the Chinese Academy of Social Sciences, saw two possible, very different

scenarios for the yuan this year. If economic fundamentals take the lead, it

could strengthen to as much as 6.7-6.8 as interest spreads widen. But if trade

conflicts escalate, it could drop to 7.2-7.3 as investors seek the dollar as a

safe haven.

     The yuan is still in a weakening trend, despite its recent gains, said Tan

Yaling, head of the China Forex Investment Research Institute, predicting that

it would trade above 7 for most of the rest of the year, and could weaken beyond

7.2 in the third quarter. It could end 2020 at around 7.01 to 7.02, lower than

2019's closing price of 6.9662, Tan said, noting that authorities will be wary

of hurting exporters with yuan strength. Offshore-onshore arbitrage, and the

possibility of a Covid second wave in the late autumn could also sap the

currency, she said.

     The small and medium-sized exporters who account for over 50% of China's

foreign sales need the yuan at 7.02-7.08 to break even, according to Tan's

research. The 7 level has been a key reference for the PBOC's fixing since

industry began to resume production in February, she said.

     In late May, MNI cited sources familiar with Chinese foreign exchange

operations saying the PBOC sees 7.2 as a key level in the short term.

     The expectation of a wide trading band, of at least 5%, was echoed by Zhao

Qingming, an international finance specialist, who predicted a range of 6.6 to

7.2 for the rest of the year.

     Export performance will be decisive role for the exchange rate, Zhao said,

with policy makers likely to let the currency ease when foreign sales are

sluggish.

     USD/CNY traded at 7.0070 at 4:45 pm in Beijing on Friday, up 147 pips on

the day, and retreating from the strongest close since March 12 on Wednesday.

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

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