MNI INTERVIEW: Yuan Should Rally, Despite Economic Headwinds

     BEIJING(MNI) - The yuan will tend to appreciate during 2019 as credit

stimulus stabilises China's economy, despite continuing headwinds, at a time

when the Federal Reserve is on pause and as trade talks with the U.S. head to a

potentially positive conclusion, a government advisor told MNI.

     "I am not pessimistic about the yuan. The economy will be stable, if not

rebounding strongly, which should support the currency, particularly as China's

economic performance will be more resilient than that of the U.S.," said Zhang

Bin, a senior fellow of China Finance 40 Forum, a prominent think tank, adding

that the trend will be clearer after a deal expected by the end of June in

China-U.S. trade talks.

     Zhang, also director of the Global Macroeconomy Research Division at the

Chinese Academy of Social Sciences' Institute of World Economics and Politics,

said capital outflow and downward pressures on the yuan had eased significantly

thanks to a more dovish Fed and the advance of the trade talks.

     But Zhang noted continuing headwinds for China's economy, including slowing

exports, weak manufacturing investment, a drag on property investment from poor

sales and a shortage of funding channels for infrastructure. Monetary policy

should maintain its easing stance to support lending, he said, and any

tightening of liquidity could cause "devastating damage."

     "China's economy has had more of a tendency to run cold than hot since

2012, so monetary policy should be cautious," Zhang suggested, although, even

though the central bank should maintain ample liquidity and keep policy rates

low, the role of monetary policy in China's changing economy is becoming more

limited.

     "It is prudent to revive the market's capacity to generate credit, but it

requires a long time to take effect," Zhang said, "The priority now is to

prevent the economy from dying of thirst."

     Robust first quarter gross domestic product data was largely due to the

recovery of lending after the central bank began providing additional liquidity

and incentivising corporate loans at the end of 2018, Zhang said. Local

government funding vehicles played a big role in the increased flow of credit,

he said.

     "The biggest contributor to the broad credit recovery was governments, as

they front-loaded debt issuance," Zhang said.

     Fresh first quarter broad credit totaled CNY9.5 trillion, CNY3.1 trillion

more than in the same period last year, with local debt issuance of CNY1.9

trillion up CNY1.2 trillion from the first three months of 2018.

     "Experience tells us that the rebound of broad credit produces an impact

after two to three quarters," Zhang said.

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

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