MNI INTERVIEW: Yuan Stable In Long Run: Says Ex-SAFE Official

     BEIJING (MNI) - The yuan should remain stable in the long run as China has

ample fiscal and monetary space to counter any worsening of its trade dispute

with the U.S. and economic headwinds, Guan Tao, a former senior official at the

country's foreign exchange administration, told MNI, although he warned

short-term pressure on the currency could prompt market fears of capital

controls.

     Possible policy responses include the reduction of companies' tax and

administrative burdens, and measures to stimulate domestic consumption and

investment, Guan, a former Director General of Balance of Payments at the State

Administration of Foreign Exchange, said in an interview.

     "Policies such as these, which stabilise the economy, will boost the

currency," he noted.

     Support for the yuan should also come from the increasing probability of

Federal Reserve rate cuts, which would in turn allow the PBOC more room to

fine-tune its own monetary policy, Guan said.

     But an intensifying trade dispute could still pressure the exchange rate,

he said, adding that in a worst-case scenario, the currency, currently trading

at just over 6.9 to the dollar, could slide towards 7. If the yuan does come

under sustained pressure, and regulators try to hold it at levels stronger than

the 7, investors could begin to worry about a possible tightening of capital

controls, he said.

     "The authorities should take such side effects into consideration, since

the country is increasingly reliant on foreign investment as its current account

surplus shrinks," Guan said, adding that plans to open up China's financial

sector should be carried out with caution.

     Net outflows of foreign funds via the stock connect schemes hit a record

high at CNY53.7 billion in May, according to financial data provider Wind.

     --DANGER OF VOLATILITY

     Should the authorities stand aside and allow the yuan to break 7, the

People's Bank of China would have to brace for a possible short-term spike in

volatility, the veteran yuan watcher added.

     A possible catalyst for selling pressure on the yuan could come on June 17,

when it is possible the U.S. could announce fresh tariffs on about USD300

billion in Chinese imports. The outcome of the G20 summit in Japan at the end of

the month may also disturb the market if Donald Trump and Xi Jinping fail to

meet or trade tensions persist.

     --ECONOMIC FUNDAMENTALS

     One option for the central bank to support the economy would be to expand

the range of collateral accepted against its liquidity tools, such as

medium-term lending facilities, as falling reserves pressure the money supply,

Guan said, noting that the PBOC had recently begun to accept commercial banks'

perpetual bonds.

     But he cautioned that there were limits to the effectiveness of monetary

policy in a country already suffering from an investment glut, as companies will

find it hard to put borrowed funds to profitable use.

     On Friday, People's Bank of China Governor Yi Gang said China has

"tremendous" room to adjust monetary policy if the trade war with the U.S.

deepens". Talking about the yuan, Yi said no "numerical number" is more

important than another.

     --LASTING CONFLICTS

     Disputes with the U.S. could be drawn out over a long time, even if a

temporary truce is agreed in the short term, Guan said, pointing to the 30-year

period during which the U.S. tussled with Japan over trade.

     While China's exports, particularly to the U.S., will come under pressure

this year, Guan did not expect the country's overall trade surplus, including

both goods and service trade, to fall.

     "As the U.S. restricts high-tech exports and the entry of Chinese students,

the relevant surplus will increase, and Chinese tourism to the U.S. may also

decline," Guan said.

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

[TOPICS: M$A$$$,M$Q$$$,MC$$$$,MI$$$$,MT$$$$,MX$$$$,MGQ$$$]