MNI INTERVIEW2: Capital Inflows To Boost Yuan: Fmr PBOC Econ

--Demand for RMB-Bonds May Rise After Index Inclusion: Ma Jun

--Expanding Demand for RMB-Bonds Draws Inflow, Supports Yuan

     BEIJING (MNI) - China's currency may receive a boost after more

renminbi-denominated bonds are included in three major global indexes in the

near future, Ma Jun, former chief economist of the People's Bank of China, told

MNI in an exclusive interview.

     That may be a timely welcome for the market, as concerns grow that the

country's shrinking current account surplus may weaken the value of its

currency, said Ma, who is now director of the Center for Finance and Development

at Tsinghua University, one of the country's leading think tanks.

     China has the world's largest trade surplus, but is under increasing

pressure from the U.S. and other nations to boost purchases and reduce its

export dominance.

     Next April, 384 more RMB-bonds are expected to be added into the Bloomberg

Barclays Global Aggregate Index, representing 5.49% of a $53.73 trillion index.

That compares with only 0.6% currently. The indexed bonds issued in the Chinese

currency will be the fourth-largest bloc by value after the dollar, euro and yen

in the index.

     In addition, up to $700 billion could flow into China as some Chinese bonds

are set to join two other global indexes in the near future: CITI's World

Government Bond Index and JPMorgan's Government Bond Index, Ma predicted.

     Becoming part of the global bond indexes recognizes the value and risk

controls of Chinese bond, boosting investors' confidence. Many investments are

automatically allocated according to the makeup of the indexes. 

     "It will effectively boost the yuan and offset impact of the narrowing

current account surplus," said Ma.

     Ma, who was with the central bank's research bureau in 2014-2017, was

credited for helping conceptualize and advocate the yuan internationalization

program.

--CAPITAL INFLOW

     For years, China's once-huge current account surplus effectively supported

the yuan against other major currencies. That dominance has declined in the last

two years as its economy transformed from export-dependent to

consumption-driven. The current account surplus as a share of the Gross Domestic

Product dropped to 1.4% in 2017 from a peak of 10% in 2008. In the first quarter

this year, the country recorded its first quarterly current account deficit in

17 years. At $28.2 billion, it was also the largest ever.

     The shrinkage is expected to continue now that China has made a commitment

to "significantly and meaningfully" increase goods imports from the U.S,

according to the joint statement of the two governments released last weekend.

This has fuelled market concerns that the yuan may be pressured by depreciation

and capital outflow.

     However, Ma said two other factors will balance international payments

besides capital inflow, even given a rising dollar index and the Federal

Reserve's rate hikes. 

     "The yuan has become a safe haven currency to a certain extent considering

its stronger economic fundamentals relative to many other emerging markets. In

addition, the increasing flexibility of the yuan exchange rate will help

stabilize its current account balance," Ma said.

     Ma also called for a further opening up of the domestic bond market and a

simplifying of the approval procedure for foreign investors, who account for 1%

of Chinese bond market, which is much lower than international average, Ma said.

     Given that overseas investors focus on investing in Chinese government

bonds, China needs to address the CGB liquidity issue, Ma said. China should

meet that demand by issuing more CGBs, diversify its maturities and further

develop the derivatives market, he 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; tel: +44 203-586-2225; email: les.commons@marketnews.com

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