SCMP: China’s yuan dilemma: Beijing ‘faces a choice’ between cutting rates and a weakening currency

[Hamartia Antidote]

https://www.scmp.com/economy/china-economy/article/3191813/chinas-yuan-dilemma-beijing-faces-choice-between-cutting

• Depreciation pressure on the yuan may constrain China’s ability to expand monetary policy in the second half of the year, say experts
• Combination of slowing growth in China and a strong dollar due to aggressive US tightening predicted to weigh on the yuan outlook

The People’s Bank of China (PBOC) is walking a tightrope between monetary easing to shore up economic growth and keeping depreciation of the yuan “under control”, amid growing policy divergence with the United States and possible complaints from Washington about China’s weakening currency.

The US Federal Reserve’s aggressive rate hikes to rein in inflation this year have driven the US dollar stronger against many currencies. So far, it is up 9.5 per cent on the yuan, 13.7 per cent against the euro and 24.9 per cent on the yen.
As China’s economic growth sputters, Beijing has reason to expand fiscal and monetary policies in the second half of the year. But the PBOC may be concerned about cutting interest rates too low, given the widening yield differential between China and the US, analysts said.

“The US is raising rates, if China’s monetary policy continues to ease, naturally there will be more depreciation pressure on the yuan, there may form some constraints to monetary policy. But so far, I don’t think the constraint is too significant,” said Xu Gao, chief economist of Bank of China International in a blog post published by CF40 Forum last week.

Liang Zhonghua, macro analyst at Haitong Securities, said the PBOC is likely to maintain its easing stance, while keeping depreciation of the yuan “under control” by deploying tools such as the foreign exchange reserve requirement ratio and capital control measures.


“But in the medium to long term, China is still facing the choice between interest rates and the foreign exchange rate,” Liang said in a note on Wednesday. “As such, if the depreciation pressure is growing, the easing of monetary policy will see some constraint.”

On Monday, the PBOC said it would cut the foreign exchange reserve requirement ratio to 6 per cent from 8 per cent, effective September 15, in an attempt to slow the slide of the yuan

The central bank has also sent signals it wants to see a stronger yuan against the US dollar by setting the currency’s daily midpoint rate firmer of late.

“The PBOC is unlikely to offset the strong US$ tone completely but it is expected to smooth out excessive volatility,” said Charles Lay, foreign exchange and emerging market analyst at Commerzbank in a note on Wednesday.

“The combination of growth concerns in China and a strong dollar due to the aggressive tightening of US monetary policy continue to weigh on the yuan outlook.”

Mark Sobel, US chairman of the Official Monetary and Financial Institutions Forum, said China has been trying to resist depreciation of the yuan before it dips below the key threshold of 7 per US dollar.

Beijing’s management of the yuan could fuel long-standing suspicion in the US and elsewhere in the world that it is using the currency to gain competitive advantage, he said.

“While authorities often suggest they have their eyes focused on the yuan’s trade-weighted index, it seems they also keep a close eye on the dollar as well,” said Sobel, a former US Treasury official, in a blog post on Monday.

“This means that when the dollar is rising, the yuan falls against the dollar, but less so than others – often China’s competitors.

“While voices have been so far muted about the yuan weakening, a renewed cycle of complaints about Chinese currency practices – even if wide of the mark – is within the realm of possibility.”

Meanwhile, China’s foreign-exchange reserves fell significantly in August as prices of global financial assets plunged amid the strengthening dollar.

The country’s foreign exchange holdings stood at US$3.055 trillion at the end of August, down US$49.18 billion from a month earlier, according to data released by the State Administration of Foreign Exchange on Wednesday.

 

[Nan Yang]

Quote
Despite its drop versus the dollar, the yuan remained steady against a basket of peers -- a sign that the depreciation was mostly triggered by a surge in the greenback rather than bearish bets toward China assets. The currency was around the same level seen three months ago against an index of 24 other exchange rates, according to data compiled by Bloomberg.

Source:

China Sets Yuan Fix at Strongest Bias on Record as Losses Mount

China sent its most powerful signal yet on its discomfort with the yuan’s weakness by setting its reference rate for the currency with the strongest bias on record.

www.bloomberg.com

 

[S10]

I think China needs to shift its reliance on real estate development (land sales, building binge) and move to a public housing model (property taxes, affordable rentals).

I've said for years that following the HK model will eventually lead to disaster.

 

[MH.Yang]

Facing choice?

Please, we are the world's largest surplus country and the world's largest export trade country. We are afraid of currency appreciation, not devaluation.

Is this still a choice? Interest rate reduction + RRR reduction + M2!

Pressing the exchange rate to 8.0, taking advantage of the energy crisis, killed the remaining manufacturing industries in western countries. We will raise inflation to more than 5%, use CPI to increase PPI, and let the CPI of western countries rise to a higher point.

 

[letsrock]

I think China needs to shift its reliance on real estate development (land sales, building binge) and move to a public housing model (property taxes, affordable rentals).

I've said for years that following the HK model will eventually lead to disaster.

Aren't rentals already affordable compared to costs of owning ?

The present acts of chinese govt are correct. Make sure house prices are stable as incomes keep increasing.

This will keep more money in pockets of chinese who will spend leading to consumption led growth - which is what eventually creates mass prosperity as people understand (lots of people owning lots of stuff - whether useful or not).

 

[Song Hong]

Richard Nixon's Treasury Secretary John Connally put it in 1971: “The dollar is our currency, but it's your problem.”

Right now FED raising interest cycle is making lots of monies flowing back to USA. But this is also very toxic and not a single MSM reporting it. The high mortgage interest rate is causing BIG problem in subprime loans. Trillions of derivatives and financial feces is base on subprime. If it blows up it will take down lots of bank and insurance company.

Today is no Vockler time where FED can raise rate and tame inflation.

We see who goes down first.

 

[casual]

The article presents a false choice. China has many more choices then cutting rates or weakening currency. Also, this focus on currency and rates is retarded. The much more important number is inflation number and GDP.