MNI INSIGHT: China Policymakers Comfortable With RMB Level

--Stable Currency Serves China's Interests In Trade Tensions

--Yuan Exchange Rate Would Fluctuate in A Wider Band s

     BEIJING (MNI) - China's yuan is modestly overvalued and despite a moderate

depreciation against a rallying U.S dollar, it has still performed better than

other G10 currencies against the greenback in recent weeks. However, Chinese

officials and government advisors think the yuan's current performance is within

the "comfort zone" of policymakers both politically and in meeting market

expectations, MNI understands.

     The yuan's depreciation has been smaller than most other non-dollar

currencies since the dollar's rebound started in mid-April. In the past month

(April 17 to May 17), CNYUSD fell 1.37%, while the dollar index bounced 4.37%. 

     The yuan's fall is the smallest among all the G10 currencies: EURUSD

dropped 4.73%, JPYUSD 3.41%, GBPUSD 5.74% -- and in emerging markets, the latest

forex crisis in Argentina has seen the peso slump 16.85%.

     The trend is clearly reflected in the CFETS Weekly RMB Index, which

measures the yuan relative to a basket of 24 currencies. It is up 0.64% so far

from the week of April 13 to 97.59, the highest since April, 2016.

     "The current situation is comfortable, because the yuan's depreciation

against the dollar is slower than major currencies including sterling, euro and

Japanese yen. We need a stable and even a slightly strong currency to encounter

uncertainty (in Sino-US trade negotiation)," people familiar with PBOC's

operations said.

     --COUNTER-CYCLICAL FACTOR

     The current performance of the yuan is similar to that in May 2017, but in

the opposite direction. The yuan showed a clear cyclical trend, triggering heavy

selling of the yuan last May, so the central bank introduced the so-called

"counter-cyclical factor" to support the yuan.

     Now the yuan seems set on the opposite track, with a much shallower pace of

depreciation than the market expected, and is now perhaps "overvalued", so there

is a need for PBOC to step in, market sources told MNI.

     However, policymakers think in a different way, as a stable currency serves

Beijing's interests better at a time of trade tension.

     Against the background of Sino-US conflict, Beijing would like the currency

to keep a low profile and gain modestly, giving freedom to the market so as to

smooth tension during Sino-US negotiations. However, Beijing would not stand

still if exports pressure surges, so the option of two-way yuan volatility

against the greenback is comfortable to policymakers, MNI understands. 

     "There is no sign of a need to restart the counter-cyclical factor. Market

expectation has diverged and supply and demand in the forex market are

comparatively balanced, so the PBOC now has no reason to step in," a government

advisor told MNI.

     --CAPITAL INFLOW

     The comparatively strong performance of the yuan has been helped by strong

yuan purchase from banks' clients, resulting from rising capital inflows. Under

the tight domestic financing environment, Chinese firms are increasing overseas

borrowing and foreign institutions continue to add holdings of yuan assets.

     Outstanding overseas debt raised by Chinese companies touched USD934.4

billion as of the end of 2017 from USD730.9 billion to the end 2016. Meanwhile,

according to China Central Depository and Clearing and Shanghai Clearing House,

the CGB holdings of foreign institutions in April grew by CNY68.7 billion, the

14th consecutive month of increase and the largest monthly growth on record.

     As a result, China banks bought a net CNY92.4 billion in forex from clients

in April, the highest since June 2014, compared with net sales of CNY16.5

billion in March, according to the latest statistics from State Administration

of Foreign Exchange.

     The yuan is expected to fluctuate in a wider band as capital inflow

continues to increase and current account surplus further shrinks.

     "The yuan exchange rate will be more flexible and volatize in a wider range

as the international payment would remain balanced and current account sees a

two-way volatility in the future," an official at SAFE told MNI.

--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

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