MNI EXCLUSIVE: Yuan May Rally Modestly On Positive G20 Outcome

     BEIJING(MNI) - The yuan should receive a short-term boost from a positive

meeting between the Chinese and U.S. leaders this weekend, pulling away from 7

to the dollar, but no sharp appreciation is likely, given a weak economy which

might require further cuts in banks' reserve requirement ratios and even

interest rates, government advisors told MNI.

     "The yuan is likely to rise against the U.S. dollar if the G20 brings

consensus between the two leaders, which makes the chances that USDCNY will

break 7 this year quite slim, but there is no significant support from economic

fundamentals for a big jump, particularly as the trade surplus is still

narrowing," said Zhang Yongjun, deputy economist at the China Center for

International Economic Exchange, a think tank under National Development and

Reform Commission, "A sharp appreciation would also pressure our exports, which

we would not like to see," he continued.

     The USDCNY closing price hit as low as 6.8505 after it was reported that Xi

Jinping and Donald Trump made a phone call on June 18, with the dollar weakening

by 1.1% against the yuan in two days. Although the pair rose a bit this week, as

the yuan weakened, it remains far from the highest close of 6.9190 at the end of

May, when U.S.-China negotiations came to a standstill.

     Another advisor, who asked to remain anonymous, predicted that USDCNY would

trade above 6.5 during the rest of the year, compared with a low of 6.2764 in

April last year, "We saw a robust economy at the beginning of last year, but now

we do not have that support," he said.

     Both of the advisors agreed there is still a room for policy easing, but

that further moves should be taken after previous stimulus measures take full

effect.

     --MONETARY EASING

     "Further easing is still needed and possible in the second half, and

current M2 growth at 8.5% is a bit low," Zhang said, "but easing moves including

RRR cuts and liquidity injection via monetary tools only take effect with a lag,

so we still need time to see. "

     The other advisor agreed, saying that monetary policy moves usually need

six-to-nine months to feed through to the economy.

     Both advisors said the People's Bank of China should cut its benchmark

lending rate, but were divided as to the likelihood of such a move in the short

term. While the unnamed advisor said that lower rates were necessary to boost

the economy, so long as property market speculation can be kept under control,

Zhang was concerned that narrower credit spreads would eat into lenders' profits

and noted that inflation had already jumped to nearly 3%.

     Zhang said authorities were likely to further reduce banks' reserve

requirement ratios in the second half, adding that the central bank needed to

open channels to expand the monetary base at a time when the country's trade

surplus has been trending lower.

     The authorities could also consider increase quotas for issuance of special

purpose local government bonds (SGB) or use last year's unused quota to boost

infrastructure, as fiscal revenue has been sapped by tax cuts, Zhang suggested.

Special bonds, which are meant to be repaid by returns on the projects they

fund, are not included in national government deficit calculations.

     According to the Ministry of Finance, as of the end of May, new SGB

issuance totalled CNY859.8 billion, 40% of the quota for the whole year. In

2018, the unused SGB quota was CNY1.13 trillion

     The infrastructure investment saw 4% growth in May according to the latest

data of National Statistics Bureau, below the annual 5-6% which the anonymous

advisor said was needed for the year as a whole for China's economy to see

reasonable growth. Weak local government funding capacity and the stock of

existing infrastructure projects will likely remain a drag on the sector, the

advisor said, predicting that GDP could grow by 6.2-6.3% this year if the trade

dispute is resolved. If not, more stimulus is likely to be on the way, the

advisor said.

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

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