Fed cut could spark China interest rate reform, rather than easing from the central bank
- With US Federal Reserve expected to make first rate cut in a decade, all eyes are on response from Beijing
- Analysts suggest that the People’s Bank of China is more likely to usher in market-oriented reform than like-for-like cut
Beijing could use Wednesday’s expected US Federal Reserve interest rate cut to usher in long-awaited market-oriented interest rate reform.
The Fed’s first cut in a decade will mark the reversal of its rate increase cycle that began in 2015. This could make it easier for the People’s Bank of China (PBOC) to instigate its reform plan, analysts said.
Lower US interest rates tend to weaken the dollar exchange rate and so ease depreciation pressure on the yuan.
The Fed’s cut would increase the gap between US and China interest rates, so that Chinese securities would have a higher return compared to equivalent US bonds. This alone would give investors less incentive to move money out of China for US markets. However, a rise in the US stock market in response to the Fed rate cut could still create an incentive for Chinese investors to move their money overseas.