MNI POLICY: Wider Yuan Floating Band Helps Deal Econ Headwinds

     BEIJING (MNI) - China should allow a wider floating band of the yuan to

hedge against stronger economic difficulties and provide more space for monetary

policy, said Zhang Bin, a senior fellow at the China Finance Forum 40, a

prominent think tank.

     Here are the main points of Zhang in a quarterly note to policymakers.

Zhang is also the director of the Global Macroeconomy Research Division at the

Institute of World Economics and Politics under the Chinese Academy of Social

Sciences. 

     --The introduction of a wider floating range won't trigger sharp

deprecation given China has a medium-to-high growth, low inflation, trade

surplus, stable financial system and less foreign debt. An appropriate

market-oriented depreciation of the currency could help overcome economic

headwinds by boosting exports and the industrial sector. 

     --Intervening in the forex market to boost the yuan may raise the

expectation of its gradual decline, thereby intensifying capital outflow,

although the current exchange rate mechanism seems to have managed to balance

the demand of keeping the currency at a reasonable level and accommodating the

market's orientation. The regulator should remove currency basket factor from

the daily fixing formula and not introduce the countercyclical factor unless the

volatility of the yuan sharply deviates from economic fundamentals.

     --Fiscal spending should be accelerated as government spending takes up

almost half of the general social credit. For social services projects not

covered by special bonds, the governments should help raise debt. The central

government should take over the implicit debt raised by local government

financing vehicles for social services projects, given the risks of defaults

could spread to the entire financial system.

     --More proactive fiscal policy is key in the second half given soft

external demand, poor general credit demand from the property sector and local

governments' hesitation for borrowing concerning on higher leverage ratio. The

PBOC should reserve cutting interest rates given bigger headwinds ahead.

     --The impact from the trade war is controllable and can be managed through

adjusting policies, so the two sides may not rush to reach a deal.

--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