MNI INTERVIEW: China Yuan Could Fall If Talks Fail: Advisor

     BEIJING (MNI) - China's yuan could face fresh depreciation pressures if

there is a deterioration in the trade talks between Beijing and Washington, with

a chance the 7 level could again be tested against the U.S. dollar as the

Chinese authorities' stabilization tendencies lessen, a government advisor told

MNI in an interview.

     After months of relative stability in the currency market, volatility in

the pair will pick up if uncertainties build, said Zhang Ming, a senior fellow

at the Institute of World Economic and Politics under the Chinese Academy of

Social Sciences.

     Zhang also warned that financial markets should not underestimate the "40%

possibility" of talks breaking down, triggering market turbulence and sending

the yuan lower against the dollar, although he remains cautiously optimistic

about this week's trade talks. With vice premier Liu He leading a delegation to

the US, suggesting that China is prepared for changes, he sees a 60% possibility

for a positive outcome.

     As trade talks have faltered this week, China's benchmark stock indices

have fallen sharply, triggering an outflow of funds and reversing an inflow of

international investor funds in recent months, Zhang said, noting the inflow was

one of the key factors to support the yuan's stability in the previous months.

     His view is backed up with data, as Wind, a China financial data provider,

said four days of net capital outflow this week totalled CNY11.8 billion via

Shanghai-Hong Kong and Shenzhen-Hong Kong Connect.

     An indicator to see if the yuan trades in a "proper range" is its exchange

rate against a wider basket of currencies, considering it impacts the trade.

     The CFETS Weekly RMB Index, a measure reflecting the yuan against China's

24 major trading partners, has, until Monday, seen the yuan above 95 for 10

consecutive weeks.

     "The index above 95 indicates (China's) effective exchange rate is

appreciating, which will weight on exports," he said.

     Yuan stability in March was due in part to unexpectedly strong economic

fundamentals, but supporting factors, including from the good performance of

exports, is losing steam, said Zhang.

     "The latest trade data for April has shown that exports are still soft

after the effects of the Chinese New Year faded, which will pressure the yuan,"

he said.

     China is expected to unveil more stimulus measures if the external

environment deteriorates, centred largely on fiscal efforts, Zhang said,

     The measures could include the issuance of more government debt, but the

central bank should be careful not to turn to an easing stance as inflation is

rising and asset prices are under pressure.

     Zhang also points to other factors that could weigh on the yuan, including

a narrowing of the yield spread between China and US 10-year government bonds as

the US economy outperforms, while geopolitical tensions such as Iran and Taiwan

could underpin the dollar's safe haven status, further pressuring the yuan.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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