US-China monetary policy divergence set to ‘become greater’, will aid yuan stability

US Federal Reserve is expected to accelerate monetary tightening to tame inflation, while the People’s Bank of China needs to use its policy tools to stabilise growth

Guan Tao, a former Chinese foreign exchange regulator, believes US Federal Reserve tightening will reduce foreign capital inflows into China

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The yuan hit a near four-year high against the US dollar in late January, even as the spread between Chinese and US 10-year treasuries shrank to roughly 80 basis points, from a high of more than 250 basis points in late 2020. Photo: AP

Published: 12:55pm, 16 Feb 2022

Increasingly divergent monetary policies between China and the United States would help rein in an excessive rise in the yuan by reducing foreign money inflows, a former Chinese foreign exchange regulator said on Wednesday.

The US Federal Reserve is widely expected to accelerate monetary tightening to tame inflation this year, while the People’s Bank of China needs to use monetary policy tools to stabilise growth.

“Therefore Sino-US monetary policy divergence will likely become greater,” Guan Tao, global chief economist at BOC International said in a commentary published in the Shanghai Securities News.

US Federal Reserve tightening is expected to reduce foreign capital inflows into China, shrinking the country’s trade surplus and thus helping stabilise the yuan, which needs to be better aligned with economic fundamentals, said Guan, who previously headed the balance of payments department at the State Administration of Foreign Exchange.

Guan said China-US policy divergence will have several effects on China, including a shrinking yield spread, reduced purchases of Chinese securities, a strengthening US dollar, less demand for Chinese exports and global financial market volatility.

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