REPEAT: MNI INTVW: PBOC Eases FX Rules to Push Reform:Fmr Offl

Repeats Story Initially Transmitted at 08:15 GMT Jun 8/04:15 EST Jun 8

--PBOC Sees No Need for Currency Intervention

--Markets More Confident of Yuan's Stability

--Second part of Interview with former SAFE official (First Ran 7 June)

     BEIJING (MNI) - The People's Bank of China (PBOC) has largely refrained

from intervening in the foreign exchange market this year, allowing greater

volatility of the yuan and relaxing controls on capital outflow, a former forex

regulator told MNI.

     "The central bank didn't step in even though the yuan has been on a

rollercoaster this year," Guan Tao, former Director General of Balance of

Payments at the State Administration of Foreign Exchange (SAFE) said in an

interview with MNI.

     Policymakers are satisfied that the currency has both risen and fallen

against the dollar with no strong sign of moving in a single direction, he said.

     However, the central bank still needs to be watchful of key positions of

the yuan-dollar path to prevent a rapid build-up of any one-way market

expectations, Guan said in the second-part of an interview on the yuan's

stability (the first published Thursday). 

     Although the yuan has depreciated amid a surging dollar index since April

17, there is no sign of a growing speculation against the yuan, Guan said. 

     --CONFIDENCE IN YUAN

     Chinese banks bought net CNY92.4 billion from clients in April, the most

since June 2014, compared with net sales of CNY16.5 billion in March, according

to SAFE. That showed some market players had the confidence to settle dollar

assets for the yuan, rather than holding them on fear of yuan depreciation. 

     "The market has functioned well in supporting the exchange-rate formation

mechanism," Guan said. The PBOC should continue to proactively work to guide

against one-way expectations forming, Guan said.

     A growing confidence that yuan can sustain stability was reflected in

official comments. "Two-way flow of cross-border capital is more stable, and the

pattern of foreign exchange rates set by supply and demand on their own is

further consolidated," Wang Chunying, a SAFE spokeswoman, said April 19, hinting

at fewer government interventions. 

     Relaxing controls is an importance step to forward the market-oriented

exchange-rate reform, Guan said. SAFE has announced a series of measures this

year, including widening the quotas of Qualified Domestic Limited Partner (QDLP)

and Qualified Domestic Investment Enterprise (QDIE), two outbound investment

schemes in Shanghai and Shenzhen.

     --OPEN FLOOD CHANNEL

     "Relaxing capital outflow controls is like keeping a flood control channel

open," Guan said. Allowing some purchases of overseas assets prevents a panic

capital outflow in the case of sudden yuan depreciation, he said.

     Currently, as China carries on its campaign of preventing financial risks,

the yuan moves in both directions and market expectations are more balanced,

which provides a good opportunity for further yuan exchange rate reform, the

policy advisor said.

     Yet further liberalizing the yuan carries some risks, Guan said. "The

economy is vulnerable to downturn pressure" as China restructures for a more

sustainable path, so a free-float yuan could face depreciation, which may

trigger selling of the yuan and affect borrowers' ability to repay foreign debt,

Guan said.

     China conducts a managed-float exchange rate policy in which exchange rate

works as the anchor of its monetary policy, but when it goes to a free-float

structure, the PBOC needs a new anchor to communicate with the market, Guan

said.

     --BUFFER VOLATILITY

     China should also boost domestic demand to reduce reliance on external

markets and buffer the impact of exchange rate volatility, Guan said.

     China may possibly launch forex futures, as boosting forex derivative

products is important to managing forex risk exposure given increased volatility

of the yuan, Guan said. 

     "We could also expect the integration of benchmark and monetary rates this

year and further reduction of RRRs in the future," Guan added. "Achieving these

goals can allow exchange rate reform to progress more naturally."

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com