MNI INTERVIEW: China Needs FX Capital Control: Ex-PBOC Advisor

--PBOC Shouldn't Guarantee USDCNY 7.0 Level, Look To Smooth Sharp Volatility 

--Currency Depreciation In Emerging Markets Could Impact China

--China's Large Holding of U.S Treasuries Concerning In Trade Spat

     BEIJING (MNI) - China should not relax cross-border capital controls at

present as domestic and external disturbances would pressure the yuan exchange

rate, particularly when a potential financial crisis in emerging markets could

weigh on the currency, a former senior People's Bank of China advisor told MNI.

     "China needs to prepare for a messy global economic situation as the 'herd

effect' of the market could impact us in a negative way, which is what we have

learned during the Asia financial crisis," Yu Yongding, formerly a PBOC Monetary

Policy Committee member told MNI on the sidelines of the Yichun Forum, held by

China Finance 40 Forum, a prominent Chinese think tank.

     Yu, now a senior researcher with the Chinese Academy of Social Sciences,

spoke after the Turkish lira plunged 16% last Friday against the greenback,

which weighed heavily on European financial markets, sending the euro lower.

     --DISTURBING FACTORS

     The PBOC could smooth the yuan's sharp volatility through its forex

reserves, but should not try to reverse the trend based on economic

fundamentals, Yu suggested, noting the yuan would continue to face depreciation

pressure and maybe even a new round of capital outflow.

     "China should insist on quota management of large-scale channels for

capital outflow, including Bond Connect, Shanghai-Hong Kong Stock Connect, and

block possible loopholes for capital flights ... Do not make efforts at the last

moment," Yu told the Forum.

     Several "disturbing factors" worried the prominent economist, such as

increasing peer-to-peer defaults, a property bubble, the economic slowdown in

H2, negative impacts to market sentiment from the trade war and the divergence

of China and U.S monetary policy.

     However, the yuan is unlikely to see depreciation pressures like Turkey, as

China's foreign debt is still small. What is more, there has been no panic in

China forex trade, even as USDCNY saw a sharp rise.

     "Although the yuan indeed is under depreciation pressure, the scale will

not be very big, even if the PBOC stays sidelined," Yu said.

     --7.0 LEVEL

     The PBOC should inform the market that it would not guarantee the 7 level

of the yuan against the dollar, but would avoid a sharp and rapid fluctuation of

the exchange rate, Yu said.

     "It is irrational for the market to stick to a specific level and the PBOC

should correct the sentiment by improving communication," Yu noted.

     According to Yu, the PBOC should maintain the policy of no regular forex

market intervention adopted in early 2017 and pave the way to the eventual

establishment of a free floating yuan exchange rate regime, which is the first

step to capital account liberalization and then the yuan internationalization.

     --FOREX RESERVES

     Yu was concerned about the large holding of U.S treasuries in China's

foreign exchange stockpiles because of President Trump's unpredictability.

     "It would put China over the barrel. If the U.S takes action in these

terms, it would be a huge blow to us," Yu said. "China would not dump U.S.

treasuries. But it may have to reduce its holding in a gradual fashion."

     The economist suggested China should keep a "neutral" stance on its trade

policy by noting that the period of "twin surpluses" (current account surplus

and capital account surplus), which resulted in persistent accumulation of

foreign exchange reserves, has gone.

--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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