MNI INTERVIEW: PBOC May Step In If Yuan View 1-Way: Researcher

--Yuan May Trade in Wider Volatility Band This Year: CASS Official

--Currency Basket Should Play Lesser Role in Pricing Formula

     BEIJING (MNI) - China's central bank may intervene in the forex market to

discourage one-way bets against the yuan, Xiao Lisheng, senior research official

at the Chinese Academy of Social Sciences (CASS), a leading government think

tank, told MNI in an interview.

     The People's Bank of China (PBOC) is likely to reactivate the so-called

counter-cyclical adjustment factor in its daily fixing formula if market

sentiment on the yuan swings in one direction, said Xiao, who is the deputy

director of International Finance Research Institute of World Economics and

Politics at CASS.

     "When investors bet on one-way movement of the yuan vs. the dollar, it

would disrupt the orderly functioning of the pricing mechanism of the market,

and the role of the counter-cyclical adjustment is to correct that disorder,"

Xiao said. 

     The counter-cyclical factor largely works to guide market sentiment in a

direction satisfying the PBOC, but the usage should be more transparent and let

the market know the central bank's redline, he said.

     Xiao, an expert on China's foreign exchange policy, stressed that there has

not been a sign of one-way market expectation so far although the yuan is losing

ground to the rallying dollar.

--GREATER TOLERANCE

     USD/CNY has risen sharply so far this week, as the dollar index (USDX)

surged to a six-month high. On May 29, the yuan closed at 6.4188 against the

greenback, the lowest in more than four months. That followed after the PBOC set

the parity at 6.4021.

     In addition, CFETS Weekly RMB Index, which measures the yuan relative to a

basket of 24 currencies, fell 0.26% last week, the first drop in seven weeks.

     The market is increasingly nervous as the dollar's expected rally puts

pressure on the yuan, with some speculating the PBOC may be contemplating

intervention. Xiao disagreed.

     "The current volatility is acceptable to policymakers. An outright

intervention may lead to outside criticisms, especially as the U.S is strictly

monitoring China's forex policy," Xiao said. In addition, further depreciation

of the yuan helps exports, which benefits the economy, Xiao said.

     --INCREASED VOLATILITY

     But the yuan will trade in a wider band in future under the joint effects

of depreciation pressure from a rallying dollar and the appreciation draw from

capital inflow, the researcher said.

     The formula used by the PBOC to determine the next day's midpoint fixing

historically included three factors -- the yuan settlement rate against the U.S.

dollar at 4:30 p.m. (0830 GMT), changes in the trade-weighted basket of

currencies and the counter-cyclical factor. The first two are now used following

the central banks suspension of the CCF in January.

     To Xiao, the large weighting of the currency basket in the formula

contributes to big price swings of the yuan.

     "The yuan's exchange rate is still closely related to the change in the

dollar index because of the basket currencies factor in pricing formula.

Although the factor can reduce the yuan's volatility against the basket

currencies, it also limits the market-based movement," Xiao said.

     The effective direction of the country's forex reform is to gradually

reduce the current weighting of the currency basket from 50% to zero, Xiao

suggested. 

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

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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

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