How China’s yuan stands to gain with US Federal Reserve’s monetary tightening ‘coming to an end’
- US Federal Reserve has been gradually raising interest rates for the past year to combat inflation, prompting Beijing to repeatedly warn of global financial risks
- China’s currency reached its strongest point in more than a month on Thursday as the Fed’s rate-hike cycle looks to be winding down
Hints by the US Federal Reserve that it may ease up after a year’s worth of interest rate increases could help reassure Beijing that support for the yuan is on the way amid rising concerns about a global financial crisis, according to analysts.
“We believe that whether the Fed raises interest rates by 25 basis points or does not raise interest rates, it will not change the reality that the Fed’s tightening monetary policy cycle is coming to an end,” said analysts at Founder Securities on Wednesday, referring to the series of US rate increases over the past year.
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The US move set the Fed’s benchmark overnight interest rate in the range of 4.75-5 per cent, pushing borrowing costs to their highest point since 2007, as inflation remains elevated.
“Even if the Fed will not enter the interest-rate-cut cycle immediately, the stability of monetary policy will be conducive to the improvement of market risk appetite and the transfer of funds to risky assets,” Founder Securities’ analysts added. “The yield of US bonds will fall, the US dollar index will continue to fall, the yuan’s exchange rate against the US dollar will appreciate relatively.”
On Thursday afternoon, the onshore yuan rate reached its strongest point in more than a month, at 6.8169 against the US dollar, following the US central bank’s rate move. A shrinking yuan-to-dollar rate signifies a strengthening yuan, with fewer yuan required to buy one dollar.
The yuan has been under pressure since the US Federal Reserve began lifting borrowing rates last March – a decision that has resulted in record capital outflows from China.
The world’s second-largest economy logged a record net portfolio outflow of US$80 billion in 2022, according to a report in February by the Institute of International Finance, a US-based trade group for the global financial services industry.
The outflows were predominantly in bonds, suggesting that the rate increases by the US Federal Reserve were the main trigger, the report said.
China frees up US$72.6 billion for banks with cut to reserve requirement ratio
A year’s worth of rapid interest rate hikes in the US has made Beijing increasingly wary about the knock-on effects, particularly the triggering of more risk events in emerging markets.
Louise Loo, lead economist at Oxford Economics, said China’s banking sector is relatively insulated from developed countries, partly because of capital controls but also due to the availability of liquid assets in the state-dominated commercial banking system.
“But aggregate banking sector data potentially masks tighter liquidity constraints at smaller banks – explaining why the PBOC may have opted for a reserve requirement ratio cut more recently that would have effectively eased the funding costs for this segment of the banking system,” Loo said on Thursday.
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The enlarged super-regulator will take over the role of the existing banking and insurance watchdog, as well as some functions of the PBOC.
Provincial governments, including in Hebei, have also stepped up their liquidity support for regional small to medium-sized banks.
Hebei authorities said the province had allocated a government bond quota of 1.5 billion yuan to help “resolve” risks at these banks, in its budget report released in January.
