SHANGHAI (Reuters) – China surprised markets by cutting a series of major short- and long-term interest rates on Monday in a bid to boost growth in the world’s second-largest economy.
Analysts said the move shows that the yuan, which has been undermined all year by low interest rates relative to U.S. rates, is less of a priority than growth.
WHY IT’S IMPORTANT
A weakening yuan is seen as a drag on the People’s Bank of China’s (PBOC) monetary easing efforts, and investors had widely expected the PBOC to wait for the Federal Reserve to begin rate cuts to avoid a widening interest rate spread and additional depreciation pressure. prevent.
Analysts said some of the yuan’s initial declines on Monday were a knee-jerk reaction, and further weakness will be carefully managed.
The rate cuts were part of pro-growth policies following weaker-than-expected second-quarter economic data last week and reflected the plenum’s call to meet this year’s growth target of “around 5%”.
BY THE NUMBERS
China cut the seven-day reverse repo rate, the one-year loan prime rate (LPR), the five-year LPR and the cost of the standing credit facility by 10 basis points each.
The yuan has lost 2.4% against the dollar this year and last traded at 7.2734.
The yield on 10-year US government bonds was about 200 basis points higher than that of 10-year Chinese government bonds.
CONTEXT
The yuan has faced headwinds since late last year, including widening interest rate differentials with other major economies, concerns about weak growth and rising trade tensions.
The Chinese rate is allowed to move only within a narrow range of 2% around a daily midpoint fix based on the PBOC, and markets view these guidelines as an official signal of the currency rate.
The PBOC is also carefully managing cash conditions as it has gradually increased the size of notes it has sold in Hong Kong since August 2023.
KEY QUOTES
Volkmar Baur, FX strategist at Commerzbank (ETR:): “The measures should be aimed at achieving the government’s growth target of 5% this year. The market will be able to ignore more negative scenarios of a more pronounced growth slowdown. the yuan should help.”
Becky Liu, head of China macro strategy at Standard Chartered (OTC): “FX control will become less of a constraint – we see China having little incentive to allow the yuan to rise regardless of the direction of the .”
“Their efforts to defend the currency are primarily aimed at preventing disorderly depreciation, rather than trying to induce an appreciation.”
GRAPHIC
Analysts expect the yuan to end the year at 7.29 per dollar, about 0.23% weaker than current levels, according to seven Reuters forecasts.
INVESTMENTS Q3-2024 END-2024 Q1-2025 Q2-2025
HOUSES
RBC CAPITAL 7.31 7.33 7.35 7.32
MARKETS
SOCIETY 7.4 7.45 7.3 7.2
GENERAL
DBS 7.21
COMMERCIAL BANK 7.3 7.25 7.25 7.2
SEB 7.1
GOLDMAN SACHS 7.35 (3 months 7.4 7.4
horizon)
ING 7.26
