MNI INTERVIEW: Natgas,Iron Ore Contracts To Boost Yuan-Advisor

--China Should Develop Natural Gas, Iron Ore Contracts

--Zhang Ming Says Yuan Could Rank 3rd As Reserve Currency By 2030

     BEIJING(MNI) - China, the biggest importer of natural gas and iron ore,

should develop yuan-denominated contracts for the commodities as it reinforces a

strategy to boost the currency's use in trade invoicing which could propel it

into third place behind the dollar and the euro in the global forex pecking

order within a decade, a government advisor told MNI.

     While tension with the U.S. may dent the currency's attractiveness during

2020, the effect would be only short term due to China's growing economic weight

and as it builds on moves to boost its presence in commodities pricing begun

with the launch of crude oil futures in March 2018, Zhang Ming, senior fellow at

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

Sciences, said in an interview.

     In addition to promoting the yuan in the countries of its Belt and Road

initiative, China could also further open its domestic markets and create more

financial products to provide investors with a deeper pool of assets,

complementing this year's planned large-scale issuance of Treasury bonds and

local government special-purpose debt.

     Over the next few months, the currency may face a bumpy ride if trade

conflict with the U.S. intensifies, but China's relative resilience in the face

of the Covid-19 pandemic will tend to increase the attractiveness of its

currency longer-term, Zhang said. A flare-up with Washington, which could

include targetting of the Chinese financial sector later in the U.S. election

campaign, could push the yuan to as low as 7.4 from the current 7.08, he said,

noting that the experience of the last 10 years has shown that progress towards

internationalisation has tracked the performance of the exchange rate.

     --GDP GROWTH

     But a strong counterbalance will come from China's economic performance.

GDP should grow by 2-3% in 2020, even as other major economies contract, Zhang

said, adding that growth could pick up to 2% in Q2, then to 6% and 7% in

subsequent quarters.

     The opposing forces of economic fundamentals and Sino-U.S. conflict

complicate exchange rate forecasts, but Zhang said the yuan could appreciate to

as much as 6.7 later in 2020 if fundamentals prevail.

     The yuan internationalisation strategy has evolved since earlier efforts to

promote the use of the currency stalled from 2016 to 2017, following the

unexpected devaluation by the People's Bank of China in August 2015. The

interest rate differential with the U.S. narrowed and capital controls had to be

tightened to curb outflows.

     At the time, according to Zhang, official strategy to promote the yuan

relied too heavily on settlement, offshore hubs and bilateral PBOC currency

swaps. This generated interest rate and foreign exchange arbitrage, rather than

any real need for a currency whose interest rates and exchange rate regimes

remained rigid, he said, adding that such demand was also volatile and

price-dependent.

     Gauges including measures of cross-border trade settlement and offshore

yuan deposits in Hong Kong show a slow resumption in the yuan's international

expansion since the end of 2017, said Zhang, noting that, as of the end of 2018,

yuan-denominated crude oil trade volume surpassed that of Dubai, taking 6% of

the total global market.

     --INVOICING CURRENCY

     Invoicing is more important than settlement for an international currency,

said the advisor, calling for yuan-denominated iron ore and gas futures to be

followed by others for commodities such soy and maize. This would enhance

Chinese pricing power and reduce exchange rate risk for local buyers, he said,

as well as helping the yuan eclipse the pound sterling and the yen as reserve

currencies by 2030.

     Offering more financial products in domestic markets would also both lure

overseas investors and attract offshore yuan accumulated from oil and gas

futures, boosting capital inflows.

     In addition, project financing and direct investment by Chinese companies

could cultivate demand for yuan for invoicing and as a reserve currency in the

countries along the Belt and Road, particularly in Southeast Asia. The yuan has

already surpassed the yen in some of that region's currency baskets, Zhang

noted.

     Lack of exchange rate flexibility remains a big obstacle to

internationalisation, Zhang warned, calling on the central bank to accelerate

liberalisation. Otherwise overseas investors may be less willing to hold yuan

assets for fear of tightened capital controls or forex market intervention by

the PBOC.

     Zhang saw little impact on the yuan from any U.S. retaliation against

Chinese plans to impose its security law on Hong Hong, the most important yuan

hub.

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

[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MC$$$$,MT$$$$,MX$$$$,MGQ$$$]