PBoC likely to keep yuan stable at a reasonable level in run-up to G-20 Osaka Summit, says Scotiabank

The People’s Bank of China (PBoC) is expected to keep the yuan stable at a reasonable and balance level in the run-up to the G-20 Osaka Summit, with measures such as keeping USD/CNY fixing below 6.90, according to the latest research report from Scotiabank.

China’s weak factory activity for May has intensified concerns over the nation’s economic recovery that is losing momentum amid simmering US-China trade tensions. China’s official manufacturing PMI dropped to 49.4 in May from 50.1 a month ago, below the 50 threshold that separates expansion from contraction on a monthly basis.

Hong Kong-based newspaper SCMP reported last Friday that Chinese President Xi Jinping and his counterpart Donald Trump will meet at the G-20 Osaka Summit set for 28-29 June, citing former PBoC Governor Dai Xianglong.

Dai said "leaders of China and the US will meet late next month in Japan and I believe there will be positive news [from the meeting]," but added that Beijing was not optimistic about achieving a breakthrough in the US-China trade negotiations, the report added.

According to a Reuters report, US Vice President Mike Pence spoke in Ottawa earlier on Thursday that he was hopeful a Trump-Xi meeting would take place during the G20, but added that China must agree to reforms.

In addition, White House senior adviser Kellyanne Conway said last Friday that US President Donald Trump may ask Treasury Secretary Steven Mnuchin to meet with Chinese officials when attending the G-20 finance ministers’ summit in Fukuoka on June 7-9.

On Sunday, China released a government policy white paper on trade issues with the US. The paper reiterated three preconditions for a trade deal, including 1) the US must remove "all additional tariffs" imposed on Chinese exports; 2) China’s purchases of American goods to help reduce the US trade deficit "should be realistic" and; 3) the text of a final agreement should be "balanced."

Earlier, Bloomberg reported that Beijing has readied a plan to restrict exports of rare earths to the US if necessary and the measures would likely focus on heavy rare earths that are a sub-group of the materials where the US is particularly reliant on China.

After the Summit, latest comments from former PBoC Governor Zhou Xiaochuan signals USD/CNY could rally through the 7 psychological level if needed.

"In our view, the chance of a one-off devaluation sending the dollar/yuan above 7 cannot be ruled out if the US-China trade negotiations break down amid escalating fears over the tech cold war," Scotiabank further commented in the report.