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Free AccessREPEAT: MNI INTERVIEW: PBOC Should Tolerate Recent Yuan Moves
Repeats Story Initially Transmitted at 03:30 GMT Jul 5/23:30 EST Jul 4
--Counter-cyclical Factor Should Not Be Reintroduced Now
--Yuan Likely To Remain Weak Against Dollar in H2
--China Won't Use Yuan As A Tool In Trade Spat With U.S.
BEIJING (MNI) - The People's Bank of China should not be hijacked by
short-term market moves and should not intervene in the forex market, as
economic fundamentals are still supportive and capital outflow pressures are not
large, Zhang Bin, director of the Global Macro economy Research Division of the
Chinese Academy of Social Sciences, the leading think tank of the Chinese
government, told MNI in an interview.
"The yuan's recent plunge is mainly due to market sentiment, so the PBOC
should remain tolerant and not intervene by consuming forex reserves," said
Zhang, a firm advocate of yuan liberalization, noting that intervention over the
past two years did not have a positive impact on the real economy.
Although there have been no clear signals that the central bank has stepped
in directly, the unusual clarifications from two senior PBOC officials Tuesday
to boost the plunging yuan has managed to reverse the recent depreciation trend.
Both USDCNY and USDCNH reacted quickly to comments Tuesday from governor Yi
Gang and vice-governor Pang Gongsheng, who both stressed China would keep the
yuan stable in a "reasonable range".
"It is a crucial time for the PBOC to boost confidence that the yuan is a
market-oriented currency by not intervening. It is also a condition for the
yuan's internationalization," Zhang noted.
--CONTROLLED DEPRECIATION
In his statement Tuesday, Yi said "There are certain pro-cyclical moves in
the market," after stressing policymakers are "closely watching the volatility
in the forex market". This had markets guessing the PBOC is preparing to
reintroduce the counter-cyclical factor into its daily fixing formula.
However, Zhang thinks the reintroduction is not a good option.
"The central bank is best not restarting the factor without thought,
because as long as the factor is in place, the pricing mechanism of the forex
market would be disturbed," Zhang said.
For Zhang, a gradual and controlled depreciation, like that seen in 2016 is
very harmful, will stimulate market speculation and trigger increased capital
outflow.
"The central bank should set a wide band for the yuan exchange rate
fluctuation, in which market forces take charge, but if the yuan breaks outside
of the range, the PBOC should react immediately and decisively to kill any
further move," Zhang suggested.
--NOT SPAT TOOL
Zhang believes the yuan will remain weak against the U.S dollar in the
second half of this year, considering economic differentials between China and
the U.S., plus the continued impact on sentiment from the trade dispute between
the two global powers.
But China will not use the yuan as a tool in the trade spat, Zhang
stressed, explaining the devaluation of the yuan would sharpen conflicts between
the two countries, offend other trade partners and worsen both the depreciation
sentiment and capital outflows.
Zhang is also confident over the yuan's performance next year, mainly as
the economy is expected to recover around year end.
"The differentiation between China and the U.S will continue for several
quarters, which will further pressure the yuan and capital outflows," Zhang
said.
"But the momentum will reverse at end of next year as China's economy turns
robust, and some economic indicators have already shown positive signs so far,
including the property market," he added.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.