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--Yuan Unlikely To Break Above 7 Vs Dollar This Year
     BEIJING (MNI) - The People's Bank of China is unlikely to follow the lead
of the U.S. Federal Reserve and make a rate cut, concentrating instead on
market-orientated reform of its interest rate regime, and on maintaining the
stability of the yuan as the dollar strengthens, government advisors and former
officials told MNI Thursday.
     "It is too early for us to follow the Fed's move and reform is at this time
more important than stimulus," said Guan Tao, a former Director General of
Balance of Payments at the State Administration of Foreign Exchange, adding that
markets should watch carefully how the central bank attempts to integrate market
interest rates with its benchmark lending rate. Guan also expected volatility
ahead for the yuan, as difficult trade talks with the U.S. drag on.
     Given that the PBOC's policy bias is already towards loosening, there is
little need for China to cut its benchmark lending rate, according to Zhang
Ming, a senior fellow at the Institute of World Economic and Politics under the
Chinese Academy of Social Sciences, noting that the Fed had taken a hawkish
stance over further easing.
     Reserve requirement ratio cuts and lower market policy rates are, however,
still options, Zhang added.
     --THE YUAN
     Dollar-yuan touched 6.9150 Thursday, the highest level in over a month, as
the dollar index jumped to 98.9. But this was unlikely to be a trigger for
runaway yuan weakness, MNI was told.
     The yuan is under pressure as global monetary policy divergence boosts the
dollar, Guan said. While markets will soon adjust and pressure on the Chinese
currency will ease, he recommended that the authorities should plan for
different scenarios, including a worst case in which an economic slowdown, a
strong dollar and escalated trade tension occur simultaneously, pressuring the
yuan into an excessive depreciation.
     Zhang Ping, deputy director at the National Institute of Finance and
Development, a state-level think tank, saw a worsening trade balance in H2
pushing the yuan towards 7 by year end.
     --TRADE TALKS
     In the longer term, China's currency should find support from the gradual
resolution of the economy's structural challenges, said Zong Liang, chief
researcher at Bank of China, although for the meantime the progress or otherwise
of trade talks will continue to hang over the performance of the exchange rate.
     "The level around 6.85 to 6.90 now is appropriate for Chinese exporters ...
a big depreciation to above 7 is still a lower probability," Zong said,
predicting that the Fed would begin an easing cycle sooner or later, helping the
yuan.
     The latest Sino-U.S. negotiations finished Wednesday without any
substantive result. One former Ministry of Commerce official, who requested
anonymity, told MNI that it was a symbolic meeting to flag the consensus reached
by presidents Xi Jinping and Donald Trump at the Osaka G20, with no indications
that either side had given ground on outstanding issues.
     The official also noted that this week's policy statement from China's
Politburo offered little indication of any significant policy concessions,
particularly with regards to the reform of state-owned companies.
--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$]

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