Macroscope | China must end its monetary policy easing cycle and raise interest rates to stabilise the yuan

Beijing needs to allow fiscal stimulus to carry the burden of economic regeneration to stay on its 5.5 per cent growth track

Rather than reckless expansion, China needs an intensive investment spending campaign to boost domestic growth and ease market fears

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Construction workers are seen at the Gaolan Harbour Interchange, part of the Hezhou-Gaolan Port Highway project in Guangdong province, on May 5. With growth flagging and the yuan weakening against the US dollar, pressure is growing on Chinese policymakers to enact an intensive investment spending campaign. Photo: Xinhua

Published: 6:45am, 10 May 2022

Is this the end of the road for China’s easing cycle? The US Federal Reserve has thrown down the gauntlet against rising inflation risks with a commitment to tougher half-a-percentage-point interest rate increases for the foreseeable future.

This will make it doubly difficult for Beijing to cut domestic interest rates again without endangering exchange rate stability for the renminbi and running the risk of another row with Washington over concerns about China being a currency manipulator. The renminbi is in sharp decline against a resurgent US dollar, and there is also the problem of domestic inflation risks increasing.

With global interest rates pushing higher, Beijing needs to switch the emphasis of monetary policy away from easing to a tightening bias fairly soon. It must allow fiscal stimulus to carry the burden of economic regeneration to help the government stay on track for its goal of 5.5 per cent growth in 2022.

In the past few weeks, the renminbi has lost about 5 per cent of its face value against the US dollar. Global investors are weighing the relative risks of China easing interest rates again while the Fed has stepped up its tightening campaign by signalling its intention to move more aggressively against inflation.

After last week’s half a point increase, the benchmark Fed funds rate has moved to 1 per cent. The general perception is that it could be heading towards 3 per cent or higher in this tightening cycle.

The People’s Bank of China (PBOC) last cut its benchmark one-year loan prime rate by 0.1 per cent, to 3.7 per cent, in January. It has kept the cost of borrowing on a downward track by recently lowering the reserve requirement ratio for banks by 0.25 percentage points.

.css-1m2rp1p{color:#34b8b5;}Macroscope | China must end its monetary policy easing cycle and raise interest rates to stabilise the yuan

Macroscope | China must end its monetary policy easing cycle and raise interest rates to stabilise the yuan