REPEAT: MNI IVIEW: CNY 7 Level Safe Unless Talks Fail: Advisor

Repeats Story Initially Transmitted at 03:50 GMT Dec 28/22:50 EST Dec 27

--Yuan Unlikely To Break Psychological Level Unless Breakdown In US/China Talks 

--USDCNY Likely To See Sharp Swings In 2019, Trade In Band of 6.3 to 7

--Current Account Surplus To Remain Even Though To Narrow

     BEIJING (MNI) - Unless there is a worse than expected outcome from the

U.S./China trade talks come February, there is only a slim chance of the yuan

breaking above 7.0 against the U.S. dollar, although the pair will likely remain

volatile in an wide trading band, a government advisor told MNI in an interview.

     "There is still a possibility USDCNY breaks the key level of 7 in the first

quarter of next year, particularly if the dollar index rises, maybe approaching

100, as sterling and the euro weaken under the pressure of Brexit uncertainty,"

said Zhao Qingming, chief economist at the Financial Derivatives Institute of

the China Financial Futures Exchange, the only authorized futures exchange in

China.

     Depreciation could worsen as exports further soften in Q1 2019, as talk of

boosting exports via deprecation will then likely pressure policymakers, said

Zhao, a former researcher for the People's Bank of China.

     The outcome of the Sino/U.S. trade talks remains crucial to the yuan

exchange rate, the economist said. Although he is optimistic, as both sides

appear willing to reach consensus as their domestic economies slow, Zhao noted. 

     But he saw any breakdown in talks, or a failure to reach a good agreement

as a catalyst for the Chinese currency to weaken.

     "If the result is not as good as expected, the 7 level may break as early

as March," he predicts.

     --KEY LEVEL

     Zhao said USDCNY's key psychological 7.0 level should not break in the

near-term, but noted if it did, one-way sentiment can quickly gather pace in a

shallow forex market like China's.

     "There is an essential difference between 6.9999 and 7.0001 ... As soon as

the 7 level is broken, major market players would short the yuan, which means

the currency would suffer a further sharp fall," Zhao worries.

     If the yuan dropped below the key level, the capital outflow would be

significant, with China's fragile stock market likely to fall sharply in line

with the plunging currency.

     Although not directly calling for intervention to prop up the currency,

Zhao suggests that in a system with a "managed floating exchange rate", the "7

level should not be broken, at least for now".

     Zhao argues that currency depreciation would not boost exports, by

explaining that the decisive factor for exports is external demand and when the

global economy slows, even a cheap yuan cannot save exports.

     --WIDER BAND

     Although he sees the pair holding above the key 7 level in early 2019, Zhao

predicts the yuan will trade in a volatile band next year, with the overall

trading band perhaps exceeding 8%.

     "A larger band is in line with the principle of yuan exchange rate

marketization as since 2015 the yuan has seen a wider band, albeit at a gradual

pace," Zhao said.

     USDCNY range volatility was 5.1% in 2015, 8%i n 2016, 8.2% in 2017 and,

with one more trading day, 11.8% YTD in 2018, according to Wind Information.

     A USDCNY band of 6.3 to 7 can be expected next year as the dollar index

will probably lose steam from the second quarter onwards, Zhao predicts.

     --CURRENT ACCOUNT

     Looking ahead, China's current account will remain in surplus, but at a

much reduced level than before, as recent levels are unsustainable.

     "The deficit in the service sector will narrow as oversea study and tourism

have started to peak, and the domestic service sector is improving," Zhao said.

     Therefore, any depreciation pressure from the current account deficit will

be comparatively small, the economist noted.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com