MNI BRIEF: Yuan Stability Possible On U.S.-China Policy Gap

The monetary policy divergence between China and U.S central banks could help stabilise the yuan against the dollar, said Guan Tao, former PBOC official, in an article published in Shanghai Securities News on Wednesday.

Guan, former Director General of Balance of Payments at the State Administration of Foreign Exchange, said the yuan is supported by a huge trade surplus, but has deviated from economic fundamentals and a likely Fed rate hike in March could reduce capital inflows and narrow the trade gap, see: MNI: Yuan Seen Peaking Near 6.2 Against Dollar In Q2.

Guan, now global chief economist at BOC International, said yuan-denominated assets would be less attractive and the U.S dollar index may rise as the interest spread between the 10-year China government bonds and U.S treasury narrows, which is not “necessarily bad” to China.

A drop in capital inflows via securities investment would help cool yuan strength, and the PBOC has room to further cut policy rates and the reserve requirement ratio if needed, he said.