REPEAT: 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