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US Federal Reserve
Opinion
Neal Kimberley
Neal Kimberley

Macroscope | How US-China monetary policy split could drive dollar gains against the yuan

  • While the US central bank is waking up to the need to respond to rising inflation, China looks set to stick with supportive monetary policy
  • If this divergence continues, it could erode the yield differential that currently favours the renminbi over the US dollar

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US Federal Reserve chairman Jerome Powell (left) and Treasury Secretary Janet Yellen listen during a House Financial Committee hearing in Washington on December 1. Stocks slid, short-term interest rates rose and measures of equity volatility surged after Powell warned Congress that rising inflation could justify ending asset purchases sooner than planned. Photo: Bloomberg
Neal Kimberley
Monetary policy divergence could push the US dollar-Chinese yuan exchange rate higher in the first quarter of 2022. With the Federal Reserve now waking up to the need to address a rise in inflation, US monetary policy looks set to tighten even as the People’s Bank of China seems likely to retain an accommodative stance. Such circumstances could translate into gains for the dollar versus the renminbi.
In the case of China, supportive PBOC monetary policy settings remain an essential tool in Beijing’s armoury. China continues to adhere to a zero-Covid strategy which will have a negative impact on economic activity in general and domestic consumption in particular.
The arrival of the easily transmissible Omicron variant of Covid-19 on the global scene will only reinforce the view of Beijing policymakers that their own response to the pandemic continues to be in China’s best interests.
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Additionally, China has adopted its “three red lines” to take some heat out of increasingly unaffordable property prices and address problems of excessive leverage among property sector companies. This has exposed corporate fragility that requires carefully tailored monetary policy responses to support the wider Chinese economy during a period of adjustment.

No one should realistically expect Beijing to reverse course on the property sector issue. When President Xi Jinping said in 2017 that China faced “the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life” and that addressing this should become a key focus of government policy, he meant it.

The “three red lines” policy is one consequence of that 2017 shift in official thinking. Just because implementing the policy is causing major economic ripples does not mean Beijing will abandon its plan.

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