MNI EXCLUSIVE: Yuan Strength Likely Short-Lived-China Advisors

     BEIJING(MNI) - The yuan's recent strengthening against the U.S. dollar

should not continue for long, a Chinese policy advisor and a former forex

official told MNI, with the advisor adding that the People's Bank of China would

prefer to keep the exchange rate within the range of 6.9-7.1 to the greenback.

     The central bank will want to avoid any significant yuan rally, said Zhang

Ping, deputy head of the National Institution for Finance and Development under

the Chinese Academy of Social Sciences. The central bank would prefer to cap the

currency's advance to 6.9, he said, speaking after both the onshore CNY and the

onshore CNH rates hit near six-week highs on Wednesday following the Federal

Reserve's emergency 50-basis-points rate cut to contain the impact of

coronavirus on the economy and markets.

     China's economic fundamentals should not support much further currency

strengthening, Zhang said, particularly as it has been the country hardest hit

by the virus. Likely PBOC rate cuts, and a possible current account deficit in

coming months as the now global epidemic saps trade, should also tend to weaken

the currency, at least in the first half of the year, he said.

     The gap in yield between benchmark 10-year Chinese government bonds and

10-year U.S. Treasury debt jumped to 182bps earlier this week, the widest since

2015, as the Fed eased, driving demand for Chinese currency.

     --TWO-WAY TRADE

     Guan Tao, former Director General of Balance of Payments at the State

Administration of Foreign Exchange, said the yuan would be a two-way trade as

the impacts of the virus outbreak ease. The currency strengthened through 7 to

the dollar at the end of February as containment efforts drastically slowed the

spread of the disease in the country, he said.

     While the PBOC has to remain alert to any acceleration of the cross-border

capital movement, it should focus mainly on the domestic economy and prices,

Guan said, urging continued liberalisation of foreign exchange markets. The

central bank's tolerance of FX movements was highlighted last August, when the

yuan broke through the 7 level investors had regarded as key.

     Well-known Chinese forex expert Zhao Qingming, though, saw continued

support for the yuan. The dollar index, DXY, peaked at 99.9 earlier this year,

he said, adding that he expected Chinese output to rebound from the second

quarter. Trade and political relations with the U.S. could however prompt

volatility, he said.

     USDCNY closed at 6.9425 Thursday at 16pm Beijing time, up 0.14% from

Tuesday when the onshore yuan rose 0.7% versus the greenback to the strongest

since Jan. 22, the day before China locked down Wuhan to stop the virus from

spreading. The PBOC today set the CNY fixing at 6.9403 per dollar, 0.16% firmer

than the previous fix of 6.9514.

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

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