China’s yuan: central bank sees resolve for stable currency, stimulus tested as Fed holds firm on rates
- The People’s Bank of China has expressed an interest in more rounds of monetary easing, but pressures on the yuan could stall those actions
- With no clear date set for Federal Reserve cuts, depreciation of the yuan against the US dollar remains the major priority for China’s central bank
Although China’s central bank has hinted at plans for more monetary easing, uncertainty over the exact timing of US interest rate cuts and renewed depreciation pressures on the yuan are likely to delay any moves in that vein, analysts said.
Stress has piled on the yuan as the US Federal Reserve holds interest rates steady following a two-day policy meeting that ended on March 20.
The yuan has plunged an average of 0.53 per cent against the US dollar since March 20, despite strong fixing rates being set by the People’s Bank of China (PBOC) for the national currency.
Louise Loo, China economist at Oxford Economics, said that the PBOC is still in a relatively “accommodative” mode when it comes to yuan exchange rate management.
“The currency weakness is also, to a large degree, driven by dollar strength and still-weak domestic fundamentals, and a weak currency can provide a helpful economic boost – so we think they could still tolerate further weakening,” Loo said.
Most analysts expect interest rate differentials between China and the US to remain significant until the Federal Reserve begins its first rate cut this year.