Macro

China's PBOC Holds Rates Amid Yuan Pressure, Fed's Stance

Fed's delay in rate cuts pressures global currencies, constraining China's monetary easing amid yuan stability efforts.

By Athena Xu

4/17, 01:49 EDT
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Key Takeaway

  • China's economic growth requires more stimulus, but Fed's rate policies limit PBOC's ability to cut interest rates due to yuan pressure.
  • PBOC prioritizes yuan stability over rate cuts, employing alternative monetary tools like lowering banks' required reserves.
  • Analysts push back expectations for PBOC rate cuts to Q3, highlighting the challenge of balancing growth with currency stability.

Fed's Influence on Global Rates

The Federal Reserve's monetary policy stance, particularly its delay in rate cuts amidst resurgent US inflation, is exerting significant pressure on global interest rates, including those in China. The US-China yield gap has widened to a record, putting the yuan under pressure. Despite China's economic slowdown and deflationary pressures, the People's Bank of China (PBOC) finds itself constrained from lowering interest rates due to the need to maintain the yuan's stability. This situation underscores the global reach of the Fed's policy decisions, affecting economies worldwide, even those shielded by capital controls like China.

Yuan Stability Over Rate Cuts

The PBOC's priority has shifted towards defending the yuan's exchange rate over stimulating the economy through rate cuts. This strategic pivot is in response to the widening yield differential with the US and aims to prevent further depreciation of the yuan. High-level directives from top Communist Party leaders and President Xi Jinping have emphasized the importance of a "basically stable" and "powerful currency" for China's financial power aspirations. Consequently, the PBOC has employed an artificially strong reference exchange rate and explored alternative monetary tools such as lowering banks' required reserves and launching relending programs to support technology innovation without directly impacting the yuan's value.

Global Currency Dynamics and Interventions

The strength of the US dollar, buoyed by the Fed's stance, has led to a challenging environment for Asian currencies, prompting interventions by central banks across the region. The Japanese yen, Indonesian rupiah, and Korean won, among others, have experienced depreciation, forcing monetary authorities to take action to support their currencies. This dynamic is part of a broader trend of global currency volatility, with the MSCI Emerging Markets Index reflecting investor concerns over China's economic slowdown and delayed monetary easing worldwide. The offshore yuan liquidity tightening in Hong Kong, possibly orchestrated by Chinese authorities, further illustrates the complex interplay of global and regional financial forces.

Street Views

  • Arthur Budaghyan, BCA Research Inc. (Neutral on China's economy):

    "The government is currently placing a greater priority on exchange-rate stability... the PBOC will ease monetary policy much less than is required for the economy to recover."

  • Morgan Stanley Economists (Neutral on Asian central banks):

    "Across Asia, central banks will have to postpone monetary easing till later this year – if they can manage to do it at all."

  • Adam Wolfe, Absolute Strategy Research (Neutral on PBOC's strategy):

    "The PBOC is probably hoping that the market will bail it out, like it did at the end of 2023 when the dollar weakened and allowed China’s central bank to stop intervening."

  • Chang Shu and David Qu, Bloomberg Economics (Neutral on PBOC rate cuts):

    "Strong US March CPI data have spurred expectations of a further delay in a Fed rate cut ... The PBOC may want to avoid being the first major central bank to cut rates this year — which could accentuate the downward pressures on the yuan."