The People’s Bank of China ( PBoC ) is in a crucial position as it looks to reduce the yuan’s appreciation while avoiding crimping Chinese bank profits as it follows the US with significant monetary easing.
On Wednesday, the US Federal Reserve eased its key lending rate by 0.5 percentage points to 4. 75 % to 5 %, marking the first easing in the country since 2019. The Fed Chair Jerome Powell said that higher borrowing costs, put in place to combat inflation, if n’t end up hurting the US market, so the split was greater than the customary 0.25 percent point decline.
Powell claimed that price cuts can be anticipated in the upcoming month and that the lessening will move faster if the economy is weak and slower if it is sturdy.
As the buck weakened, the on-shore yen increased by 233 basis points to close the regional trading program at 7.066 per money on Thursday, the strongest close since May 26, 2023. Due to this, the renminbi had increased by 2.8 % over the previous two months as forex traders anticipated the US Fed’s interest rate may be cut in September.  ,
Currency markets expected that the PBoC may cut its loan prime rate ( LPR ) by 20 basis points on Friday, the Securities Times, a state-owned newspaper and a unit of the People’s Daily, reported on Thursday.  , The magazine said business aspirations for a reduction in existing loan rates, as well as the start of financial stimulation, are also growing.
Another Chinese media, including iFeng.com, likewise said the PBoC will definitely cut costs on Friday. Stock investors have profited from the opportunity to benefit from the markets, even though authorities have not confirmed all these information.  ,
The Shanghai Composite Index gained 0.69 % to 2, 736 while Hong Kong’s Hang Seng Index surged 2 % to 18, 013 on Thursday.  ,
Some experts claimed that the US price cut has made it easier for Asian nations to lower their borrowing rates to improve their economies and that it has also reduced the relationship yield gap between China and the US.
In April 2022, the US Treasury Bond generates have surpassed China’s, leading to a cash flow from China to the US. The supply space peaked at 237 base items, or 2.37 percentage points, in April this year. There is still a deliver space of 168 foundation points between the country’s two largest economy.  ,
The US-China offer gap has decreased by about 1.6 %, according to Zhao Ran, an associate professor at the Capital University of Economics and Business, as US interest rates are declining. With reduced prices, China’s currency will continue to rise over the long run, according to Zhao.  ,
Nevertheless, some economists are worried that the beginning of the US rate-cutting period, which could mean a weaker dollar and stronger yuan, did hurt China’s imports.  ,
” China’s plan is to keep a steady exchange rate for yen. Even if there is a require for yuan respect, a high volatility of the currency’s exchange rate may remain avoided”, Wu Dan, a scientist at the Bank of China Research Institute, told the China Youth Daily, which is a paper published by the Communist Youth League.  ,  ,
She said, from a long-term view, chinese gratitude is good for China as the country can get more capital, import more goods and appreciate more room to use financial tools to improve its economy.  ,
She added that because they avoided purchasing the yen during the strong dollar time, Taiwanese manufacturers may have accumulated about US$ 500 billion in dollar-denominated property since 2022. She claimed that as the yuan increases, these businesses may now be given more incentives to sell their dollar assets to Chinese ones.  ,  ,
After the US Fed rate cut, Chinese companies may dump about$ 1 trillion of dollar-denominated assets, according to Stephen Jen, CEO of Eurizon SLJ Capital, and send some of it back to China. This could lead to a 5- to 10 % yuan appreciation.  ,
Exports at risk ,
In the first eight months of this year, China’s exports rose 6.9 % to 16.45 trillion yuan ($ 2.33 trillion ) from the same period of last year while imports grew 4.7 % to 12.13 trillion yuan. The trade surplus expanded by 13.6 % to 4.32 trillion yuan.  ,
China’s trade with ASEAN countries increased 10 % year on year, and was up 1.1 % with the European Union and 4.4 % with the US over the same period. The increase was primarily attributable to increased shipment numbers of mechanical tools and electronic goods, which made up 59 % of China’s total exports.  ,
Chinese consumers benefit from seeing how much Yuan appreciation lowers their costs of purchasing imported goods. But it will at the same time hurt Chinese exporters”, an Inner-Mongolia-based columnist said in an article published on September 13.  ,
He claimed that the yuan’s appreciation has encouraged Chinese exporters to buy renminbi assets, but that the trend will also cause the Chinese currency to rise. He claimed that a downward spiral might lead to a” stampede,” which would indicate a sharp and unexpected increase in the renminbi, which would lower the volume of orders placed by Chinese manufacturers.  ,
The PBoC wants to slow the yuan appreciation in order to maintain export growth, but the scope for rate reductions is constrained because Chinese banks ‘ net interest margins ( NIMs) have fallen below the industry’s warning line of 1.8 %, which is in line with industry expectations.  ,
Chinese listed banks ‘ average NIM was 1.69 % last year, down 1.94 % in 2022 or 2.23 % from the pre-pandemic level in 2019. In accordance with an EY report, declining NIMs resulted in net interest income levels never before seen since 2017.
After the PBoC cut one-year and five-year LPRs by 10 basis points to 3.35 % and 3.85 %, respectively, in July 2024, the average NIM of major Chinese banks is expected to decline to 1.51 % for the whole year of this year, based on a Visible Alpha consensus.  ,
Zhou Lan, head of the PBoC’s monetary policy department, stated in a media briefing on September 5 that while there are some restrictions on cutting interest rates, Chinese banks can still reduce their reserve requirement ratios ( RRRs ) to help boost the economy.
He said the average RRR, the percentage of a banks ‘ total deposits that must be held in reserve, is around 7 % at present, compared with 15 % in 2018.
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