MNI INTERVIEW: PBOC Would Like Weaker Yuan Vs Basket: Adviser

--China Cenbank Wants Overall Weaker Yuan as Trade War Looms: Zhang

--However, PBOC May Step In If USDCNY Rallies Above 6.7 Against Dollar

--The Yuan Likely To Trade In A Range from 6.5-6.7 in H2

     BEIJING (MNI) - The People's Bank of China would like to see yuan

depreciation in order to stabilize the exchange rate against a basket of

currencies and buffer against a Sino-U.S. trade conflict hitting exports, Zhang

Ming, senior fellow at the Institute of World Economics and Politics under the

Chinese Academy of Social Sciences, told MNI in an exclusive interview.

     "The depreciation of yuan against the U.S dollar since April may have

resulted from a deliberate adjustment by the central bank, considering a

stronger yuan against emerging market currencies has impacted our exports, which

already had a gloomy outlook due to the trade spat," Zhang said.

     Zhang's comments came after the USDCNY rose about 400 pips this morning

from yesterday's closing price, breaking through the 6.6 level and recording the

highest level since Dec 20, 2017. Meanwhile, USDCNH rallied about 200 pips, also

above the 6.6 level.

     The yuan has been depreciating against the greenback since the middle of

April under pressure from the strong dollar. In the period Apr 18 to June 27,

USDCNY rose 4.45%, taking the lead from PBOC fixings.

     --STEPPING IN

     The yuan has seen a plunge over the eight consecutive trading days. From

June 15 to 27, USDCNY sharply rose 5.08%, outpacing the PBOC's fixing which rose

4.46%. On Wednesday, the pair witnessed the biggest fall in fixing since Jan 9,

2017, recording 6.5569.

     "The last thing the PBOC would like to see is one-way market expectation

... which could cause further depreciation of the yuan and even fuel capital

outflow," Zhang said, "The PBOC may step in if the yuan continues a sharp and

rapid depreciation against the dollar, particularly when the domestic financial

market is suffering big volatility now."

     To Zhang, if the USDCNY rises to 6.7, it would worry the PBOC, who may

suspend the previous operation of devaluing the yuan or take actions to dampen

volatility.

     "It is not impossible for the PBOC to use forex reserves or reintroduce the

counter-cyclical factor into its fixing formation mechanism to support the

yuan," Zhang noted.

     Therefore, Zhang does not think the yuan will see a further sharp fall this

year, with an expectation that the currency will remain in a narrow 6.5 to 6.7

range against the green back in the second half of this year.

     -- DEPRECIATION PRESSURE

     Over the longer run, the yuan will continue suffering from deprecation

pressures due to the economic fundamentals.

     "The depreciation pressure still exists, because China's economy is slowing

while the American economy is booming. The Federal Reserve is hiking rates while

PBOC is marginally loosening its policy," Zhang noted.

     For Zhang, it was the strict and effective capital controls that helped

avoid a plunge for the yuan in 2016. 

     Also, Zhang notes, the narrowing current account surplus is concerning

policymakers. For years, China counted on its trillion-dollar current account

surpluses to support the yuan. 

     That dominance has declined over the last two years, as China's economy

transformed from export-dependent to consumption-driven. The current account

surplus as a share of GDP dropped to 1.3% in 2017 from a peak of 10% in 2007. In

the first quarter of this year, the current account recorded a first deficit in

15 years.

     "It is a very concerning problem. We will see quarterly deficits again in

the next two years as the global trade prospects are pessimistic. In this

scenario, if the capital outflow worsens, the forex reserves and exchange rate

will be pressured, which is not what the central bank would like to see," Zhang

said.

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

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

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