MNI: PBOC Advisor Says Yuan Could Break 7 To USD By Year-End

--PBOC Sources See Greater Chance Yuan Could Break Below 7.0 Near Term

     BEIJING (MNI) - Chinese officials and government advisors have begun to

indicate the authorities might allow the yuan to break the key 7.0 level against

the U.S. dollar as early as the end of this year, MNI understands.

     "USDCNY will not break 7 in the short term, but it is hard to say as of the

end of this year," Sheng Songcheng, a senior advisor to the People's Bank of

China, told MNI in an interview this week, without giving any further

explanation.

     In August, Sheng had told MNI that 7 was an important psychological level,

and that it would be better for the currency not to depreciate beyond that

point, in order to avoid the risk of capital outflows and perhaps worsening

trade disputes.

     --UNCERTAINTY

     The level of the yuan is a key pressure point in relations between China

and the U.S., which declined to label China a currency manipulator Oct. 17, but

has also warned Beijing against competitive devaluations. U.S. Treasury

Secretary Steven Mnuchin has said he wants the exchange rate included in talks

to resolve the two countries' trade dispute.

     For the moment, the PBOC seems keen to hold 7 during the rest of 2018.

     "The last thing the PBOC would like to see is the uncertainty that could be

triggered by breaking this level, so the 7 level is still a concern at least

this year," a second source close to the PBOC told MNI.

     Government advisors spoke to sooth market concern earlier this year, as

USDCNH rose to an intraday high of 6.9586 on August 15. Despite retreating from

these levels, both onshore and offshore rates have again tested the August

maximums, with USDCNY hitting 6.9425 on Oct. 18.

     --SLIM CHANCE OF SHARP DEPRECIATION

     Lian Ping, chief economist at Bank of Communications (BOCOM), a large

state-owned bank, told MNI on Wednesday there was no practical reason to stress

any particular level, as the reasonable and balanced level for the yuan exchange

rate is changing.

     However, he said there was only a very slim chance that the yuan could

suffer a sharp depreciation, given benign economic fundamentals, prudent macro

control, ample policy tools and adequate forex reserves.

     Liu Shijin, a member of the PBOC's monetary policy committee, said in an

article published by state media on Oct 8 that the market should not be nervous

over recent yuan exchange rate volatility.

     "We think the key is the (market-oriented) mechanism, not a specific point.

As long as the mechanism is right, the point will come back," Liu said.

     The overall position for forex purchases on the PBOC balance sheet fell

CNY119.4 billion in September, the biggest fall since January 2017, indicating

the central bank intervened at a fairly intensive pace as the currency weakened.

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

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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