Yuan at Record Low Fuels Speculation Monetary Easing Will Slow

  • In Business
  • 2022-09-28 01:36:34Z
  • By Bloomberg

(Bloomberg) -- China's rapidly depreciating currency has fueled speculation the central bank will slow the pace of monetary easing to avoid adding further pressure on the yuan.

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The currency's slump -- it reached a record low of 7.2162 against the dollar in offshore trading Wednesday -- means the People's Bank of China will probably delay any stimulus moves, like cutting the reserve requirement ratio for banks, according to analysts from Citic Securities Co. and Tianfeng Securities Co.

That would further complicate the government' efforts to shore up an economy battered by Covid outbreaks and a property crisis. Economists surveyed by Bloomberg expect gross domestic product growth to slow to 3.4% this year, which outside of 2020 would be the slowest pace in more than four decades.

The PBOC's policy divergence with a hawkish US Federal Reserve has fueled capital outflows and driven the yuan lower. China's central bank has ramped up its defense of the currency, setting stronger daily fixings for the yuan and making it more expensive to bet against the yuan.

Here's a look at what local analysts say are the implications of the yuan's depreciation on China's monetary policy outlook.

Tianfeng Securities Co. analysts led by Sun Binbin

  • "The central bank will have to at least pay more attention than in the past" to the balance between domestic easing measures and foreign exchange policies, they wrote in a note Tuesday.

  • That need stands even though the yuan's depreciation wouldn't restrict the PBOC's ability to loosen and that China's weak economic fundamentals are a root cause of downward pressure on its currency.

  • "It can't be ruled out that the rhythm and magnitude of the PBOC's future actions may be affected."

  • Investors may monitor the gap between the year-on-year growth rate of M2 and that of China's foreign exchange reserves for clues about the Chinese central bank's potential moves.

  • "The PBOC has to control the pace of M2 growth," they wrote. "The market has become worried about the prospects of a cut in the reserve requirement ratio in October" because the measure would have a significant impact on the expansion of broad money supply.

  • "The likelihood of another interest rate reduction within this year was already low because there is basis for total social financing to stage a slight recovery before October," and the need to balance domestic monetary easing and foreign exchange policies has only made that even less likely.

Citic Securities Co. analysts including Ming Ming

  • "Changes in the yuan's rate have contained the room for speculation on monetary easing," they wrote in a Tuesday note discussing causes for corrections in China's bond market this month. Investor confidence was also dampened by the PBOC's recent net withdrawal of one-year policy loans from the financial system, they said.

  • While a broadening liquidity gap and a high amount of maturing medium-term lending facility mean an RRR cut is still possible, "what we have to acknowledge is it may not land in October due to the current cash conditions and the yuan's exchange rate."

Shenwan Hongyuan Securities Co. analyst Meng Xiangjuan

  • "Expectations on monetary easing in the short term have cooled due to August's rate cut, a depreciating yuan and low volumes of reverse repo operations" by the central bank, she wrote in a note on Monday after market.

  • "Domestic policies are facing rising constraint as the dollar continues to strengthen and US bond yields spike, resulting in widening yield gap between China and the US and intensifying downward pressure on the yuan."

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