MNI INTERVIEW: Yuan Stability To Boost Global Use: Wei Benhua

     BEIJING (MNI) - The yuan will likely remain strong and stable, underpinned

by an increasing capital account surplus and the strength of the world's second

largest economy, helping boost the globalization of the currency, Wei Benhua,

former deputy director of State Administration of Foreign Exchange, told MNI in

an interview.

     "A stable and strong currency is a precondition for yuan

internationalization in the medium and long term," said Wei, now a senior fellow

with the International Monetary Institute (IMI) of Renmin University of China,

     "We are confident that the yuan will keep appreciating over the long run

and be more stable than the most of its counterparts, helping it grow as a

global reserve currency," he continued, referencing the People's Bank of China

comments on yuan stability and reform of the exchange rate formation mechanism.

     Wei sees the potential surplus of the capital account supporting a stable

yuan, offsetting a narrowing current account surplus, more so as China

introduces incentives for foreign investors, including the Shanghai-London

Connect and schemes connecting Hong Kong and the mainland markets.

     The RMB Internationalization Index (RII), which gauges the yuan's role in

international payments, financial transactions and reserves, jumped to 2.95

through the end of 2018, up from 1.90 in Q3, 2017. Research from IMI predicts

the index will touch 3.20 in Q2, 2019.

     Wei said the robust One Belt, One Road Initiative and the ongoing

opening-up of the economy helped the Index higher.

     --LONG GAME

     According to Wei, yuan globalization will be a drawn-out process in gaining

international status in trade, finance, investment and currency reserves,

particularly given China's added challenges of reform at home and external

uncertainties. Continuing trade issues with the U.S. will impact China's economy

to some extent, despite domestic policy initiatives, he believes.

     He outlined the role of OBOR in boosting the yuan's global acceptance,

certainly as more European countries become involved. However, he warned that

China should be wary of interventions by a "certain advanced country" looking to

disturb the process.

     The RII index showed a noticeable decline in 2016 and 2017 after regulators

tightened their grip to slow short-selling of the yuan after a sudden

devaluation in 2015.

     Wei conceded the "herd behaviour" seen after 2015's exchange rate reform

triggered policy moves to stabilize sentiment, including introducing the

counter-cyclical factor into the fixing formula.

     Effects of fresh opening-up moves, particularly in the financial services

sector, would be a big boost for yuan internationalization, showing up as early

as the second half of this year, Wei said.

     --CAPITAL ACCOUNT

     Wei shrugged off concerns that a shrinking current account, even a dip into

deficit, will pressure the yuan, as increasing capital inflows will largely

offset the impact.

     "In the long run, the excess reliance on a trade surplus is also a

structural imbalance and a new international payment structure will help yuan

globalization," Wei argued. "The capital account is expected to show a surplus

as more channels are available for overseas investors to get in."

     Wei said overseas capital inflows into China's stock and bond markets saw a

jump in recent years after major international indexes, such as MSCI and

Bloomberg Barclays Global Aggregate Index, included China, predicting the move

would bring in about CNY4 trillion. Increased holding of yuan-dominated assets

would further push internationalization, Wei added.

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

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