MNI INTERVIEW: Yuan Likely Stable, Downward Pressure Remains

--The Yuan is Unlikely To Breach 7 To The Dollar In the Near Term

--Xi-Trump Talks Impact The Currency, Government Advisor Says

--GDP Growth May Fall to 6.2% in 2019 On Weak Investment and Exports

     BEIJING (MNI) - The yuan will probably fluctuate around its current level

in the near term, but could weaken further if the dollar index rises or if a

much-anticipated summit between the Chinese and U.S. leaders fails to make

progress towards resolving a trade dispute, a government advisor told MNI in an

interview.

     "The yuan could likely stay under the key psychological 7 level for now, as

the authorities are concerned about financial markets as the domestic equity

market has just started to recover from a big fall," said Zhang Ming, a senior

fellow at the Institute of World Economics and Politics under the Chinese

Academy of Social Sciences. Letting the currency break 7 may trigger a sell-off

of risk assets and the equity market could fall sharply, something the central

bank will want to prevent, he said.

     The People's Bank of China may use policy tools to stabilize the currency

while waiting either for the U.S. economy to cool or for Chinese growth to pick

up, which could take place in the second half of next year, he said.

     "The yuan is likely to fluctuate in a narrow band, barring significant

movement of the dollar index and the China-U.S. trade war," Zhang commented

ahead of a highly-anticipated meeting between presidents Xi Jinping and Donald

Trump at the G20 summit at the end of the month.

     However, should the Xi-Trump summit not produce progress, Chinese

policymakers may need to reassess whether the cost of preventing a sharp

depreciation is worthwhile, Zhang said. A less flexible exchange rate constrains

further monetary easing that could aid economic recovery, he said.

     --FUNDAMENTAL WEAKNESS

     The yuan's fundamental weakness is due to the divergence of Chinese and

U.S. monetary policies as well as narrowing current and capital account

surpluses, Zhang said.

     "The Sino-U.S. interest spread in the money markets has shrunk since the

second quarter as the Federal Reserve hiked rates while the PBOC pumped in

liquidity," he said, adding that the spread may become negative as soon as this

year.

     China's current account registered a deficit in the first three quarters,

while its capital account fell into the red in the third quarter, according to

data from the State Administration of Foreign Exchange.

     If the current account registers a deficit while the capital account is in

a small surplus for the whole year, a highly unusual phenomenon for China, the

medium and long-term outlook for the yuan would be of great concern, said Zhang.

     Zhang, a firm advocate of yuan liberalization, stressed that regulators

should not keep the exchange rate fixed at one level. Even if the yuan breaks 7,

large capital outflow and sharp depreciation will be avoided thanks to the

government's firm control of the capital account.

     --2019 GROWTH MAY FALL AS LOW AS 6.2%

     Concerned by continuing soft investment and export data, Zhang predicted

that GDP growth for 2019 may slow to 6.2-6.3%. It may even approach 6% in the

second or third quarter.

     "We have not seen a turning point for deteriorating exports and soft

investment," Zhang said. The impact of the trade war may show up next year,

particularly if the Trump administration goes ahead with plans to impose a 25%

tariff on Chinese goods, he said.

     The government should set a lower growth target for next year, and not

stick to this year's 6.5%, which may cause the market to expect further easing

and a retreat from policies aimed at promoting deleveraging.

     Zhang also said that the chances of a cut in interest rates are low despite

a sharp drop in credit reported by the PBOC on Tuesday.

     "The possibility and necessity of a benchmark interest rates cut is slim,"

Zhang said. Actual loan rates to the private sector are much higher than

benchmarks, so a rate cut may not help ease financing pressure but could further

pressure the yuan, he said.

     The authorities can use other tools, such as the reduction of requirement

reserve ratios or tax cuts, to resolve financing difficulties faced by the

private sector, Zhang said.

--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; +44 203 865 3829; email: jason.webb@marketnews.com

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