MNI INTERVIEW: Economy To Support Yuan In 2020, Ex-FX Official

     BEIJING(MNI) - Economic fundamentals will tend to support the Chinese

currency in 2020, although it could face volatility if trade talks with the U.S.

run into trouble again, a former senior official at China's foreign exchange

regulator told MNI.

     While a likely economic growth target of about 6%, a growing trade surplus

and the prospect of U.S. dollar weakness should all favour the yuan, Guan Tao,

former Director General of Balance of Payment at the State Administration of

Foreign Exchange (SAFE) said in an interview that the greenback could benefit

from safe-haven flows in the face of geopolitical uncertainty, or if China's

talks with the U.S. hit turbulence.

     Supervisors should try to minimise abnormally brusque movements in the

currency, but also maintain a neutral stance without attempting to defend

particular levels, Guan said.

     Authorities are likely to continue to move towards significant further

liberalisation of the exchange rate regime, he added, noting that progress on

this front came in August 2019, when officials did not try to resist market

sentiment when it pushed the yuan past 7 to the dollar.

     "Overseas investors did not panic after the yuan passed the key level. On

the contrary, purchases of yuan-denominated financial assets have been

increasing," he said.

     China's regulator can still improve the formation mechanism of its daily

yuan fixing price and should expand or even remove the daily volatility band,

Guan said. Authorities should also encourage further growth in the foreign

exchange market, by allowing more products to be offered, and relaxing

restrictions on trading.

     --YUAN FRAMEWORK SHOULD BE FLEXIBLE

     An inflexible exchange rate regime presents a potentially dangerous policy

mix with China's gradual opening-up of its financial markets, said the former

official, adding that the yuan framework needs to be much more flexible before

access to these markets can be further liberalised to any significant degree.

     This should be coordinated with reform of monetary policy, including

clarification of benchmark policy rates and improvement of the People Bank of

China's liquidity adjustment mechanism.

     Guan was optimistic about prospects for China's economy this year, although

the danger persists of disputes over the implementation of a likely phase-one

deal with Washington, which could hit the yuan. The next phase of talks is also

likely to be even more challenging, he said.

     "The China issue will surely become a focus during the U.S presidential

election this year, [and] it is possible that the bilateral trade relationship

could be sacrificed." Guan said. "We have to be aware that the trade conflict

will persist, and could produce complications."

     But the improved external environment, together with previous policy moves

to support growth and continuing reform means Chinese output should be able to

expand by about 6% even without additional stimulus. Officials might anyway be

prepared to tolerate slightly lower growth, so long as employment remains

strong, and would prefer to focus on unwinding the excessive leverage

accumulated since the global financial crisis in 2008, he noted.

     China's foreign sales should grow, buoyed by a campaign by exporters to

diversify markets away from the U.S. and as the global economy strengthens. But

imports may show less strength, with investment and consumption soft.

     The country's capital account will remain in deficit as its current account

surplus expands further, he said, as the PBOC's likely abstention from foreign

exchange market intervention encourages Chinese institutions and households to

increase holdings of overseas assets. Capital outflow could intensify if the

trade dispute with the U.S. worsens or if global easing triggers financial

turbulence.

     A deficit in the capital account would not in itself be a bad thing, Guan

said, adding that China's previous "twin surplus" in its current and capital

accounts was an economic imbalance.

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

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