**MNI:PBOC Reserves Coun-Cyclical. Factor To Warn Speculators

--PBOC Email: Neither Denies Nor Confirms Report

--PBOC May Retain Factor To Deter Short-Sellers

     **BEIJING (MNI) - China's central bank may be signaling that the suspension

of the so-called counter-cyclical factor in managing its yuan exchange may be

temporary, therefore it shouldn't be seen as a permanent abandonment of this

potent instrument, according to traders who spoke to MNI.  

     The market is still abuzz on Wednesday on media reports yesterday that PBOC

had for some time stopped using this counter-cyclical component in setting

yuan's value against the U.S. dollar. In an email responding to MNI's enquiries,

PBOC said that banks participating in setting the yuan can act independently

according to economic conditions and herd behavior. Without giving details and

context, the central bank's cryptic statement suggests it neither refutes nor

confirms the media reports.

     "The counter-cyclical factor is like a nuclear weapon deterrent: PBOC

hasn't used it for a while nor does it need to now," a Shanghai-based trader

told MNI. "But as long as the central bank keeps the market guessing, it's

serving the purpose of preventing one-way bets against the currency," he said.

     Some traders who spoke to MNI acknowledged that the component hasn't been

applied for some time. A shanghai-based forex trader said that since the end of

last year, his model has made better predictions if discounting the

counter-cyclical factor. Another forex trader from a major bank made a similar

observation.

     --NOT FOR EXPORTS

     "The counter-cyclical factor was to stop the one-way bet for the yuan to

depreciate, but that expectation has now faded," the Shanghai-based trader said.

In that regard it is similar to the PBOC move last September cutting reserves on

forex forward purchasing: both were intended to normalize forex policies, the

trader said.

     It may be tempting to assume PBOC may have acted to weaken the yuan to help

China's exports and economy. However, yuan's impact on exports is better gauged

by how it trades against a basket of currencies. The latest CFETS yuan index was

94.9 on last Friday, while highest since Nov. 10, 2017, it is not unusually high

enough to choke exports. 

     "It is possible that the PBOC doesn't want the yuan to appreciate too

quickly, but I don't think that's the main intent here," said the Shanghai-based

trader.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

[TOPICS: M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MN$FX$]