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
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.
“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.
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.
Even in a worst-case scenario in which US Federal Reserve tightening triggers a global economic crisis, China would cushion the external impact by easing monetary policy, not tightening it, he wrote.
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.
Guan described a spread of between 80 and 100 basis points as the “comfort zone”.