MNI: Yuan Moves Seen Limited By China Stability Drive

--Yuan Seen Range-bound 6.3-6.5 On Dollar: Policy Source

--No Strong Fundamentals Sustain Yuan Rally: Market Sources

--Policymakers Likely To Tighten Yuan's Two-Way Range

     BEIJING (MNI) - China's central bank will likely keep the yuan in a narrow

range against the U.S dollar this year to help facilitate administration

transitions, MNI understands after speaking with sources close to the central

bank and traders at state-owned banks. 

     The currency may trade between 6.3 and 6.5 against the dollar this year, a

senior source at the People's Bank of China told MNI. Others echoed the view,

predicting the currency won't repeat the high volatility seen in the last two

years, barring a sharp movement in the dollar.

     China is in the midst of its annual two-week legislative session, the

National People's Congress, essentially a rubber-stamp body that approves all

decisions by the ruling Communist Party. This year, the congress will pass laws

and approve the formation of a new government with sweeping changes. (See MNI:

Key Economic Implications in China's Proposed Govt Reform)

     Keeping the currency steady helps provide a stable monetary foundation for

the transition and the unusually wide planned structural reforms.

     --PBOC ON SIDELINE

     In recent weeks, the PBOC has largely remained on the sidelines and allowed

the market to function on its own. Some may have interpreted that as a sign that

the central bank is pushing forth the yuan 'marketization' campaign: allowing

the market a decisive role in setting the yuan's exchange rates.  

     However, that thesis couldn't be further from the truth, as recent

movements of the yuan have plotted an even narrower range. 

     In January, the yuan traded in a range of 2540 pips, the biggest trade

range ever, even bigger than the 2419 pips during August 2015 when the PBOC

surprisingly devaluated the currency by 2 percent. 

     Last month, the range narrowed to 1123 pips. So far this month, the yuan's

movement has been kept to just 522 pips.

     --POLITICAL CHANGE

     While the recovery of the dollar index from the February wobble helped

smooth volatility, a determining factor is that China has just made the perhaps

the most controversial political change in recent history: on Sunday,

legislators passed a constitutional amendment removing presidential term limits,

setting up President Xi Jinping as "Chairman For Life."

That controversial political decision necessitated the perception of a stable

economic and social environment under the iron-fist rule of the communist party.

A strong and stable currency is perhaps the most significant display of that. 

     In fact, Chinese Premier Li Keqiang said at a closed-door meeting that the

sharp rise or fall of the yuan exchange rate should be avoided and a one-way

stray to any direction hurts all involved, a delegate told MNI on the sidelines

of the parliamentary sessions.

     "There is no strong basis for a sustained appreciation" of the yuan, a

trader in a large state-owned bank told MNI. 

     After a historical 7.02% plunge in 2016, the yuan regained its ground,

recovering 6.3% in 2017 and gaining 2.84% so far this year. 

     --PBOC INTERVENTION

     The rebound in 2017 was led by PBOC's intervention, while the weakening of

the dollar helped sustain the rally, the trader noted.

     Most banks currently project a net purchase of forex, signalling

bearishness on the yuan, the trader said. Net purchase of forex totalled $900

million in January after a $6 billion of net sales in December, according to the

latest data from the State Administration of Foreign Exchange.

     "PBOC won't expand trade range or further liberalize the market now,

because that would trigger risks of insecurity," the trader said.

     Yet within a range kept by the PBOC, the yuan may still be highly volatile,

particularly if the dollar index moves steeply or the Chinese economy

experiences a downturn.

     "The yuan market is not a highly liquid market given the lack of

participants and hedge tools, so an expectation can easily skew one way reacting

to but small changes," another trader of a large bank said.

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

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