MNI INTERVIEW: PBOC Widened Yuan Band, May Defend Key Level

     BEIJING (MNI) - The People's Bank of China is tolerating a wider band for

yuan volatility, but may still defend a key psychological level, an official

researcher told MNI.

     "A new yuan exchange rate formation mechanism is emerging, comprising

market forces, a stable currency basket rate and a wide volatility band," said

Zhang Bin, a senior fellow of the China Finance 40 Forum, speaking on the

sidelines of its quarterly Macro Policy Report briefing. He dubbed the new

system "the FBB regime", according to the initials of "floating", "basket" and

"band".

     The yuan's 10% fluctuation from July 2017 to July 2018, in a band from 6.27

to 6.90, was unprecedented in a decade, Zhang said, noting that the

reintroduction by the central bank of its so-called counter-cyclical factor

(CCF) in daily currency fixings from Aug. 24 should set a floor for yuan

depreciation for now.

     "From our observations, the central bank could tolerate market volatility

within a band from 6.2 to 6.9 against the dollar," said Zhang, also the director

of the Global Macro Economy Research Division of the Chinese Academy of Social

Sciences, the government's leading think tank.

     "Economic differentials between China and the U.S. could trigger declines

in capital inflows and even a net capital outflow in the short term," Zhang

said, "And the continued impact on sentiment from the trade dispute between the

two powers will also weigh on the yuan."

     While the currency will continue to come under pressure unless the dollar

index sees a sharp fall, the PBOC is likely to defend a "psychological" level,

Zhang said. While he did not specify any particular rate, investors have

identified 7 to the dollar as key for markets.

     The FBB regime, with its wide band for yuan volatility, should avoid

one-way market sentiment and reduce pressure on the PBOC to intervene by selling

foreign reserves, he said. The PBOC should use the CCF sparingly, but apply it

when necessary in order to immediately reverse any steep yuan sell-off, he said.

     His remarks came after a senior PBOC advisor told MNI last month that while

the yuan was unlikely to break below 7 in the short term, it could depreciate

beyond that point at some time in the future as many factors affecting it remain

uncertain.

     The PBOC set the yuan central parity rate weaker at 6.9163 on Thursday,

compared with Wednesday's 6.9065.

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

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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