MNI SOURCES: PBOC Seeks Capital Inflow to Counter Yuan Woes

--PBOC Sees Trade Protectionism Erode Strength of Current Account 

--PBOC Courts Institutional Money to Help Boost Yuan

     BEIJING (MNI) - The People's Bank of China (PBOC) is increasing its effort

to court foreign investment into China's financial market on the growing

prospect that the country's current account and currency may be weakened by

rising trade protectionism, two sources close to the central bank told MNI.

     "A balanced international payment is important to supporting the yuan. We

can see the currency is pressured by a rallying dollar now and the pressure

could be greater if the current account surplus keeps slipping, which is not

something the PBOC is happy to see," one source said.

     The sources commented after the country's forex regulator said on Tuesday

that it will grant greater latitude to participants in the qualified foreign

institutional investor program (QFII) to move money out of the country, lifting

a remittance ceiling and a three-month lock-up period.

     China's limits on overseas remittances under the QFII scheme has dampened

the enthusiasm of foreign investors. The removal may make the QFII scheme more

attractive and further push forward the long-promised current account

liberalization. But the move also indicates the PBOC is taking action as global

trade conflicts are rising.

     "The country needs capital account surpluses to offset deficits in the

current account, particularly when we import more from the U.S. and global trade

is under greater uncertainty," one source said. If the PBOC doesn't ease

restrictions on foreign investors sending money out, investors won't have the

confidence to send in significant capital, the source added.

     --OBEY RULES

     Although the central bank has taken steps to loosen up rules governing the

current account, it is still far from a full liberalization.

     "The step will be taken cautiously considering China's financial market is

still developing, so big capital inflow and outflow may trigger sharp

volatility," another source said. "That's why the PBOC chose QFII participants,

as large institutional investors usually obey rules and are relatively easier to

manage," the source said.

     By making the change, China hopes that more foreign investors will be

willing to join the current 287 investors already qualified to put money into

China's capital market.

     "The capital account liberalization will be a long-term and gradual

process," one source said. As the yuan is depreciating against the dollar and

the economy is slowing, any moves that could result in large swings in capital

flows will be avoided, including large overseas direct investment, the source

said.

     --LOSING ADVANTAGES

     China's once-seen mighty trillion-dollar current account surplus is under

threat as its economy shifts from export-dependent to consumption-driven. The

current account surplus as a share of GDP dropped to 1.3% in 2017 from a peak of

10% in 2007.

     U.S. President Donald Trump's administration is ratcheting up its pressure

on China, threatening to impose 25% punitive tariffs on USD500 billion worth of

Chinese exports. 

     In the first quarter this year, the country recorded its first and largest

quarterly current account deficit in 17 years. Meanwhile, consecutive years of

capital account deficits have reversed. China has had capital account surpluses

in the three quarters through March 31.

--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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