China’s yuan: will economic recovery lift currency out of the jungle after Fed effect fades?
- Yuan is one of the worst performing currencies in Asia this year, dropping below the key level of 7 against the US dollar for the fourth time since 2019
- Wang Chunying, deputy head of the State Administration of Foreign Exchange, says spillover affects of tightening US monetary policy will weaken
China still has the tools to stabilise market expectations for the yuan’s exchange rate, while external conditions will also marginally improve as the United States is expected to conclude its run of interest rate increases, the foreign exchange regulator said on Friday.
Wang Chunying, deputy head of the State Administration of Foreign Exchange (SAFE), said the spillover effects of tightening US monetary policy will weaken, offering support to the Chinese currency.
“It is possible that the [US Federal Reserve] will continue to raise interest rates, but it is also nearing the end of the rate hike,” Wang said.
She said China’s economic fundamentals, which will continue to recover and improve, are still the decisive factor for the yuan’s rate.
In the context of slowing global economic growth, China’s economy will play a stronger role in supporting the foreign exchange market
“In the context of slowing global economic growth, China’s economy will play a stronger role in supporting the foreign exchange market,” Wang added.
On Thursday, the People’s Bank of China and SAFE stepped up support for the yuan by increasing a key parameter in terms of its macroprudential management – a multiplier that decides the upper limit of outstanding cross-border financing available to an institution – from 1.25 to 1.5. The offshore yuan jumped by over 0.8 per cent after the move.
“The upwards revision of the parameter can expand the room for overseas financing, increase the sources of cross-border financing, expand capital inflows, help improve the liquidity – especially the liquidity of foreign currencies – in the domestic market,” Wang added.
She added that the move has been welcomed by the market, as it can help manage foreign exchange expectations.
Wang said despite the widening interest rate gap with the US, China’s cross-border capital flows have been relatively stable, and in the first quarter, foreign capital turned from net outflow into net inflow.
Without taking the redemption at maturity into account, the net purchase of China’s domestic bonds by foreign investors was nearly US$79 billion in the first half of the year, reversing the trend of net sales last year, she said.
Looking ahead, international investors will continue to increase their holdings of yuan-denominated assets
“Looking ahead, international investors will continue to increase their holdings of yuan-denominated assets,” she said, adding that China’s monetary policy is independent so it can offer a diversified option to bonds from developed and emerging markets.
Wang added that the yuan’s rate has the condition to remain basically stable at a reasonable and balanced level, and China has accumulated enough experiences and tools when dealing with external shocks in the past years.
“We will adhere to comprehensive policies, focus on stabilising expectations, and take different measures according to actual conditions to provide a stable environment and expectations for the market,” she said.
