MNI EXCLUSIVE:Yuan Gains Capped If Talks Succeed:China Advisor

--Yuan Seen Facing Economic Headwinds In Year Ahead

     BEIJING (MNI) - Further yuan gains against the U.S. dollar should prove

limited even if there is a positive outcome to trade talks, with 6.6 to the

greenback a likely upside barrier as the currency faces economic headwinds in

the year ahead, a Chinese government advisor and leading economists told MNI

Thursday.

     "If the outcome of the (U.S./China) trade talks beats expectations by March

1, CNYUSD would rise further in short term, but the 6.6-level would be a

ceiling," said Zhang Ming, a senior fellow at the Institute of World Economic

and Politics under the Chinese Academy of Social Sciences and an advisor to the

government.

     The yuan has traded higher in recent days, partly as a result of a

weakening dollar index, although also helped by upbeat sentiment regarding the

ongoing talks. On Thursday, the yuan further rallied, briefly breaking through

6.70, before reversing course and closing the Beijing session at 6.7101, the

highest since January 31.

     "Positive market sentiment will not last long ... as China's economy is

still slowing, with the trade surplus expected to shrink at a faster pace in

2019, as imports from the U.S have started to increase and overall exports are

weaker due to a soft global economy," Zhang added.

     Zhang predicted the yuan would see volatile trade this year, with a

mid-range of 6.7-6.8 against the greenback.

     Noting recent reports that the U.S. hopes for a stable yuan as an outcome

from the trade talks, Zhang said this would be of mutual benefit, as Beijing

wants neither a sharp depreciation of the currency which might prompt capital

outflows, nor an appreciation that would further pressure exporters and weigh on

overall growth.

     --SENTIMENT DRIVEN

     Tan Yaling, chief economist at the China Forex Investment Research

Institute, also attributed the yuan's recent gains to upbeat market sentiment

fuelled by Chinese compromises in the talks, a weakening dollar and a

retracement of 2018's depreciation.

     "Short-covering in the offshore market is leading the sharp rise this time,

which indicates market speculation is playing the main role," Tan said, noting

6.7 remains a crucial level.

     Tan said a weak yuan is more in line with the economic situation,

considering the cycle and structural adjustment pressures, and stressed

fundamentals should be a main driver in setting exchange rates.

     "According to our research, the current exchange rate level has weighed on

profits at Chinese exporters, as the exchange rate at which the private

exporters could make profits is about 6.8, and for SOEs 7.2," Tan said,

referring to state-owned enterprises.

     --RETEST THE LOWS

     Tan predicted the pair could yet retest the 7 handle in 2019, as there was

a strong chance the dollar could strengthen again as the euro weakens in the

first half of the year.

     Zhao Qingming, chief economist at Chain Financial Future Exchange, said

yuan stability needed to be better understood, arguing it remained stable

against a wider basket of currencies even as it fluctuated against the dollar.

     "It is impossible and unrealistic to maintain the yuan in a small stable

range against the dollar, and it is also against our target of market-oriented

exchange rate reform," Zhao said.

--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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