REPEAT:MNI EXCLUSIVE:PBOC To Allow Yuan To Appreciate In Truce

     BEIJING (MNI) - The People's Bank of China will allow market forces to take

the yuan higher as it looks to mollify the U.S. during crucial trade talks, but

the rally will be unsustainable, current and former advisors to the PBOC and

government told MNI.

     The yuan could appreciate to as much as 6.6 to the dollar by the end of

this year as a 90-day U.S.-China negotiation period begins following a deal

forged at a weekend dinner between presidents Xi Jinping and Donald Trump, one

source currently close to the PBOC said, adding that the central bank will be

happy to take advantage of improved market sentiment to boost the currency.

     Separately, a former member of the PBOC's monetary policy committee told

MNI that markets should not expect the central bank to step in to slow the pace

of appreciation in order to protect exporters as it has in the past. Investors

should use hedging rather than rely on the PBOC to maintain currency stability,

Yu Yongding said.

     But the current period of sharp appreciation will not last long, and

China's softening economy and financial risks associated with rapid accumulation

of debt will undermine the yuan in the longer run, said Yuan Gangming, former

senior fellow at the Chinese Academy of Social Sciences (CASS), which advises

the government. He added that it suits the PBOC to allow the yuan to appreciate

for now, so that when depreciation resumes, it does so from a higher level.

     --TRADE TRUCE

     "Current appreciation is exactly what we desire, otherwise it would be more

expensive for us to defend 7 to the dollar," Yuan told MNI, referring to a level

regarded by investors as having key psychological importance.

     Before the Xi-Trump meeting, Chinese advisors had indicated that the PBOC

might allow the yuan to depreciate beyond 7 by as soon as the end of this year.

The truce in China-U.S. relations has seen a change in tone.

     A weaker yuan, while a fillip to exporters, also brings risks to the

Chinese economy, and could rattle already fragile financial markets, Yuan, now

an economics professor at Tsinghua University, said.

     In addition, China's policy of pursuing the internationalisation of the

yuan requires a stable, and perhaps slightly stronger exchange rate, he said.

     But former PBOC MPC member Yu said China should not try to force the pace

of internationalisation, a process which will depend on external demand for the

currency.

     "Success will come when conditions are right," Yu said.

     The yuan opened at 6.8768 against the dollar on Thursday, weakening from

the previous close of 6.8662, after jumping by 1.2% in the first three days of

this week following the trade truce.

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

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