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Free AccessMNI INTERVIEW: US Tension May Boost Yuan Vol-Ex-SAFE Official
--US-China Tensions May Make Yuan More Volatile
--Former SAFE Official Guan Tao Sees Current Account Surplus
BEIJING(MNI) - Trade conflict with the U.S. is likely to increase yuan
exchange rate volatility, but the People's Bank of China will remain on guard
against any build-up in expectations of one-way price moves or of appreciation
damaging to export competitiveness, a former senior official from the State
Administration of Foreign Exchange told MNI, calling for China to diversify
foreign reserves away from dollar assets.
Recent yuan weakness against the U.S currency comes as the dollar index has
moved around the 100 mark in recent weeks, with investors securing greenbacks
amid concern over the Covid-19 pandemic and trade tensions, said Guan Tao, a
former director general of balance of payments at the SAFE.
An expansion in dollar liquidity due to Federal Reserve monetary policy
will eventually tend to push the U.S. currency below 100, he said, noting that
capital inflows into China could grow as the PBOC eases less aggressively than
its major counterparts and China's economy recovers relatively quickly from the
virus, said Guan, now chief global economist of BOC International (China) Co
Ltd.
China's current account, which dipped into deficit in the first quarter,
should return to surplus for the year, in line with structural trends, he said.
--YUAN FLEXIBILITY
But the prospect of further flare-ups with the U.S. could temper bets on
yuan appreciation, or send them into reverse, said Guan, noting that last year's
move through what had been the key level of 7 to the dollar had shown traders
that the authorities were able to tolerate a broader range of fluctuation.
Chinese banks purchased about a net CNY143.2 billion foreign exchange on behalf
of their clients in the first quarter, indicating that not everyone expects a
weaker yuan, he said.
While China's currency has retreated in the face of broad dollar strength,
its value versus a basket of 24 major trading partner currencies rose to 93.79
by Friday from 91.39 at the end of last year, after hitting a high of 95.73 in
March, according to the CFETS index. This advance came as China reached a Phase
1 trade deal with the U.S., which included commitments to a flexible yuan
exchange rate formation mechanism and to avoid competitive devaluation, said
Guan, adding that authorities should be cautious in further opening up the
capital account, in order to avoid excessive flows of hot money.
In February, though, the U.S. opened a possible front for future conflict
when its Commerce Department finalised a rule which would impose anti-subsidy
duties on products from countries whose currencies it considers to be
undervalued. This could be used against China, said Guan, adding that the
definition of currency undervaluation and how it differs from currency
manipulation was unclear.
U.S. threats to seize Chinese assets are another concern, Guan said, adding
that China should improve the management of its foreign reserves by using its
sovereign wealth fund or even take advantage of low prices to increase strategic
reserves of commodities and fuel.
The country's improved international liquidity, enhanced by moves towards
yuan internationalisation and a more market-oriented exchange rate formation
mechanism, have reduced reliance on forex reserves, Guan said, adding that these
could fall below the USD3 trillion level previously considered to be a minimum
for Chinese authorities.
A move by the U.S. to scrap a plan for its federal employee retirement fund
to buy more than $4 billion in Chinese assets may hasten moves in Beijing to
rethink its reserves strategy, Guan said. Dollar assets accounted for 58% of
China's over USD3.8 trillion in reserves at the end of 2014, according to the
most recent data available from SAFE.
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MN$FX$]
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.