With US interest rates at a 22-year high, how will Beijing’s new central bank chief counter the toll on China?
- US Federal Reserve lifted interest rates to the highest level in 22 years on Wednesday, posing a challenge to China’s newly appointed central bank governor, Pan Gongsheng
- Over the past few weeks, China’s central bank has delivered stronger than expected daily yuan fixings to stem currency weakness, and has also eased some restrictions
Ongoing interest rate increases by the US Federal Reserve underpin the first major challenge for China’s newly appointed central bank governor tasked with defusing financial risks, curbing capital flight and getting the nation’s sputtering economic recovery back on track.
The US Federal Reserve lifted its interest rates to a range of 5.25 to 5.5 per cent on Wednesday, marking the 11th increase since early 2022 and the highest level in 22 years as the central bank attempts to cool the economy and ease price inflation.
The US rate increases have added pressure on the yuan, another consideration that Beijing has to take into account, as there are rising risks in various parts of the economy, including bleak export prospects, growing deflation risks, a lack of business confidence, mounting local government debts, a beleaguered property market and heightened US-led de-risking pressure.
Mr Pan has a reputation for regulation and compliance which may mean that shifts towards a more expansionary monetary policy could come in measured steps
The Politburo, the prime decision-making body of the Communist Party, ordered the basic stability of yuan exchange rate to be maintained, countercyclical policy adjustments to be enhanced and monetary support for innovation and market entities.
Pingan Securities said on Tuesday that it was the first time that the leadership had mentioned the exchange rate since the yuan started to depreciate against the US dollar last year. The yuan has fallen by 3.3 per cent against the US dollar since the start of this year.
Over the past few weeks, China’s central bank has delivered stronger than expected daily yuan fixings to stem currency weakness, and has also eased restrictions on foreign borrowing to encourage capital inflows.
Having set a growth target of “around 5 per cent” earlier this year, China’s economy grew by 5.5 per cent, year on year, in the first half of 2023, but banks have lowered their full-year estimates to 5 per cent.
Analysts now expect the PBOC to lend support to easing measures in the property market, although the central bank is likely to stick with a targeted approach.
Anticipation that the US Federal Reserve could be ending its rate increase cycle means that there is more room for policymakers to ease monetary policy without adding depreciation pressure on the yuan.
Pan will need to respond to the current issues, which are different from what Yi had to deal with
“I think Pan is very experienced within the system … he is a good candidate to balance these policy objectives, financial stability, exchange rate stability and stable growth of economy,” said Xia Le, chief economist for Asia at BBVA.
“Pan will need to respond to the current issues, which are different from what Yi had to deal with.”
Pan, who was already vice-governor of the PBOC and has been the head of the State Administration of Foreign Exchange since 2016, had said before this week’s appointment that China would not follow the US in making large changes to its interest rates.
He also said China would not join the race of zero interest rates or conduct quantitative easing.
As the Fed’s interest rate hike cycle draws to a close, it will be difficult for the dollar to continue to strengthen, and the spillover impact is expected to weaken
“The reason behind China’s relatively stable financial cycle is China’s long-term adherence to a prudent monetary policy,” he told a forum in Shanghai last month.
Pan said that there had been volatility in the yuan since April, but overall China’s foreign exchange market and cross-border capital flows had remained relatively stable.
“Looking ahead, China’s economy has generally maintained a steady upward trend, while some in the markets predict that the US economy may face a mild recession,” he added.
“At the same time, as the Fed’s interest rate hike cycle draws to a close, it will be difficult for the dollar to continue to strengthen, and the spillover impact is expected to weaken.”
