MNI SOURCES: China to Ensure Yuan Remains Strong For Now

     BEIJING(MNI) - The People's Bank of China is likely to avoid any yuan sharp

weakness until at least a G20 summit when President Xi Jinping may meet

President Donald Trump to discuss the two nations' trade dispute, sources

familiar with the PBOC's operations told MNI.

     While the U.S. has warned China not to use yuan depreciation as a weapon to

counter the effects of tariffs, Chinese policy makers also have their doubts

about the wisdom of letting the currency slide beyond the widely-watched level

of 7 to the dollar, the sources said.

     "The 7 level still matters to policy makers, considering the central bank

has to guard against volatility in the financial sector ... and there is a risk

that the currency would see a sharp fall after breaking the key level. If so,

then tolerating the break may be not a good option," a source said.

     The PBOC has provided two signals of its intention to support the yuan,

another source said. Firstly, a stronger-than-expected daily currency fixing,

which has remained below 6.9 this year even as the dollar index jumped over 98

in May. This means the central bank's so-called "counter-cyclical factor" is

still effective. Secondly, the central bank has steadily issued yuan-denominated

bills in the offshore market, which sends a warning to speculators tempted to

short the yuan.

     Both sources predicted that the U.S would not go ahead with threats to

impose tariffs on another USD300 billion of Chinese imports, or that it would at

least hold off from doing so for the time being, no matter the results of a

public hearing on the matter set for June 17.

     "It is important to keep the yuan stable, at least before the G20 summit,

as China will not start a currency war unless the U.S. does so first," the

second source said, expressing optimism about the trade talks. "Both sides have

sent signs indicating willingness to meet."

     In the longer run, the yuan should be bolstered by stimulus to boost the

economy, the second source said.

     "So we should not allow the key [7 to the dollar] level to be broken, as it

would bring risks, even if the U.S. imposes a higher tariff," the source said.

     The sources' comments came after People's Bank of China Governor Yi Gang

said last week that no specific level for the exchange rate was important,

triggering the biggest fall in the offshore yuan for more than three weeks.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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