Why China’s yuan may stay weak in 2024, regardless of any US Fed interest rate cuts
- Chinese economist flags two key risks that could pressure the yuan: weaker-than-expected fiscal expansion and a further contraction in the property market
- The yuan has lost roughly 6 per cent against the US dollar this year, and it could remain suppressed through next year
China’s yuan could stay weak against the US dollar next year, according to analysts, even though expectations are high for an interest-rate cut from the US Federal Reserve that could help the world’s second-largest economy ease its capital-outflow pressure.
The large interest-rate differential between China and the US has exacerbated capital outflow from yuan-denominated assets since the US Federal Reserve began raising its benchmark rate in March last year.
Zhang Ming, deputy director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences (CASS), said he believes that the US central bank may not start to cut rates in the second quarter of next year, as has been anticipated by markets, citing a possible rebound in energy prices and a tight labour market in the US that might prompt the Federal Reserve to stay put longer.
Zhang said two key risks that could pressure the yuan are weaker-than-expected fiscal expansion and further contraction in the property market. A prolonged slump in the housing market could have a significant impact on consumption and trigger financial risks among the country’s small to medium-sized banks, Zhang added.
“Under a pessimistic situation, I think that, by the end of next year, the exchange rate of the yuan against the US dollar may still remain around 7.3 to 7.5,” Zhang said at a seminar arranged by Renmin University on Friday.