Fed interest rate stance could help ‘pummelled’ yuan, China could feel ripple effects of 2024 cuts

US Federal Reserve voted to keep its benchmark overnight borrowing rate steady at between 5.25 and 5.5 per cent, but said cuts could begin to ‘come into view’
Observers said China’s yuan, exports and capital flows could benefit from the dovish monetary stance, but still pointed to domestic policy as a key driver for the economy

Banking & finance

Frank Chenin Shanghai

Published: 5:18pm, 14 Dec 2023

Why you can trust SCMP

The US Federal Reserve’s dovish monetary stance and its hint of three interest rate cuts in 2024 may bring some relief to Chinese businesses and the yuan, said analysts and academics, who urged for Beijing to focus on stronger domestic policy to sustain an economic recovery.

With inflation easing, the US Federal Reserve unanimously voted on Wednesday to keep its benchmark overnight borrowing rate steady at between 5.25 and 5.5 per cent, although chair Jerome Powell said incremental cuts could begin to “come into view.”

Li Daxiao, chief economist at the Shenzhen-based Yingda Securities, said the monetary policies of China and the US may become more aligned in 2024.

“Without the overhanging concern of a strengthening US dollar, it will help the Chinese economy and we will have a better external environment,” said Li.

“The outflow of capital could be slowed, or even reversed, and the interest spread between the two countries can be dramatically narrowed. The yuan, once pummelled, will regain much of the lost ground.”

There are some ripple effects and some relief, but what determines the Chinese economy is of course our domestic policy choices

Zhu Tian

But Zhu Tian, a professor of economics at the China Europe International Business School, said the benefits for the Chinese economy could be overblown.

“There are some ripple effects and some relief, but what determines the Chinese economy is of course our domestic policy choices,” he said.

The trajectory of the Chinese economy is usually “out of sync” with external policy changes, Zhu added.

In its statement released after the central economic work conference earlier this week, China’s top leaders vowed to stick to expansionary policies and ramp up pro-growth coordination among ministries, while admitting external complexities and uncertainties could be on the rise next year.

From outer space to seven seas, China’s 6 big economic priorities for 2024

Chen Zhiwu, chair professor of finance at the University of Hong Kong, said the pause by the US Federal Reserve, and possible cuts, could be positive for China’s exports but not its financial markets.

“The news means more US stock market and bond market upsides in the coming years, possibly luring more capital out from China,” said Chen, adding the US economy could continue to cool further but is unlikely to slip into a serious recession.

The Institute of International Finance had warned on Wednesday that Chinese stocks and bonds could see an outflow of US$65 billion in 2024, due to de-risking, deteriorating relations with the West and technology embargoes.

“Despite the US Federal Reserve’s halted rate hikes, the wide US dollar-yuan yield spread will likely persist due to the People’s Bank of China’s dovish stance,” the US-based association for the global financial services industry said in its report.

Alex Ma, an associate professor of public administration at Peking University, said any potential rate cuts would mean the US economy was cooling along with consumption.

“Americans may import even less from China, but we all know the big US market is the lifeline for many Chinese exporters,” said Ma.

US-bound shipments stood at 15 per cent of China’s total exports in the first 11 months of the year, despite the sales value falling by 13.8 per cent from a year earlier, customs data revealed.

China’s overall exports rose by 0.5 per cent, year on year, to US$291.9 billion in November, marking the first positive reading since April.