MNI: Fed Cut To Help PBOC Ease, Yuan Strengthen

MNI (BEIJING ) - The Federal Reserve’s 50 basis point cut to its benchmark rate will give the People’s Bank of China greater opportunity to cut the reserve requirement ratio as early as this month with easing to its key policy rate to follow, as the yuan strengthens toward 7.0 against the U.S. dollar, policy advisors and economists told MNI. 

The PBOC could cut RRR by 25-50bp as soon as this month and reduce the key policy rate by 10-15bp over the reminder of 2024, guiding down the Loan Prime Rate to help lower the cost of social financing, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance. (See MNI: PBOC Seen Cutting Repo Rate Soon, Boosting Bond Trades)

The yield spread between China and the U.S is expected to remain stable following the Fed’s cut, while global capital is expected to flow into emerging markets, which would alleviate pressure on capital outflow and shore up the yuan, he noted. 

The historic low of corporate-loan and household mortgage rates would constrain any significant or sharp decline in key policy rates, he continued. 

CREDIT APPETITE

China’s economy needs more supportive measures, but priority must be given to boost business and household confidence to increase investment and consumption, noted Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University of China, adding a rate cut or liquidity injection would prove less effective when credit demand remains weak.  (See MNI: PBOC Seen Cutting Repo Rate Soon, Boosting Bond Trades)

Zhao noted the Fed’s decisive move would give the PBOC’s monetary policy greater freedom, but policymakers should focus on effective implementation of existing policies rather than additional stimulus. 

Whether the U.S. can achieve a soft landing will take time to ascertain, he added, pointing to Fed Chair Jerome Powell’s concerns on unemployment. The spillover of slower U.S economic performance on global markets and China’s exports remains uncertain, he argued. 

YUAN STRENGTH

The yuan will experience the most significant impact from the Fed’s easing, said Zhu Zhenxin, chief economist at Asymptote Investment Institute, predicting the currency could continue to appreciate toward 7.0 this year and move below that level over the medium term. 

The Fed’s reduction was preemptive as economic data showed only marginal weakness rather than a recession, making the underlying economic risks less severe, he added. 

However, a stronger yuan could make China’s goods more expensive and less competitive in the U.S., impacting trade and dragging down the Chinese economy, he said. 

But external factors represent less critical challenges compared to weak domestic demand, especially in the real-estate sector, Zhu noted, predicting the central bank will cut rates to existing mortgage soon.