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     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
[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MN$FX$]

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