MNI INTERVIEW: Capital Controls To Prevent Yuan Slide: Advisor

--Government Spending May Need To Breach 2.8% Deficit Target, Former PBOC MPC

Member Yu Says

     BEIJING (MNI) - China's authorities should accept recent yuan depreciation

as a valid market reaction to the sudden breakdown of trade talks with the U.S.,

but the currency will not fall far due to strict capital controls, a former

member of the People's Bank of China monetary policy committee China told MNI in

an interview.

     "The authorities should not curb the market move ... and a weaker yuan

benefits (China) more," said Yu Yongding, now a senior research fellow at the

Chinese Academy of Social Sciences

     For Yu, large-scale capital outflows under current regulations are

unlikely. "The trade account still remains in surplus even though it is

narrowing. As long as the capital account does not show large outflows, the yuan

exchange rate will not suffer a big fall."

     Yu, who advocates a liberal currency regime, stressed that China should not

commit to "keeping the yuan stable" during the trade talks. "We have promised

that China will not use the yuan as a tool to boost exports, that should be

sufficient ... the yuan exchange rate should be decided by market demand and

supply," he added.

     --TRADE TALKS

     China should retaliate proportionately against the recent U.S. tariff hike

and look to use precisely targeted measures, avoiding further damage to

bilateral relations, and without taking the dispute out of the domain of trade,

said Yu.

     But Beijing shouldn't make further concessions that could impact its

sovereignty, or jeopardize growth or national dignity, as, even in the

worst-case scenario of no deal, China's economy is large enough to withstand the

impact and the authorities have a range of policy options to cope.

     --BREACH DEFICIT TARGET

     According to Yu, China needs to respond to a slowing economy with an

expansionary fiscal policy coordinated with the PBOC. Public sector

infrastructure spending should underpin growth, but it would require government

borrowing, possibly to levels above the current deficit target, and for the

state to take a lead role, he said.

     "Fiscal spending, particularly that of the central government, should be

increased and should not be constrained by the 2.8% deficit ratio, so more China

government bonds should be issued as yields are still low and market demand for

them is robust," Yu said.

     Monetary policy will have limited impact on a slowing economy at a time of

low inflation and muted demand, as both firms and banks are reluctant to see

expanded credit, he noted.

--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

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

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