MNI EXCLUSIVE: PBOC Seen On Hold, Focussed On Yuan Stability

--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

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