MNI 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

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