China better placed to prevent, defuse risks of external shocks ahead of Fed rate cut, forex regulator says

  • The US Federal Reserve is widely expected to start hiking interest rates as early as March.
  • During the previous round of US Federal Reserve tightening in 2018, China’s currency depreciated sharply.

China must prevent and defuse the risk of external shocks this year while strengthening macroprudential management and guiding market expectations, the country’s foreign exchange regulator said on Friday.

The comments come as the US Federal Reserve is widely expected to start hiking interest rates as early as March, while its Chinese counterpart has stepped up monetary easing to prop up a slowing economy, raising concerns about possible capital outflows due to the policy divergence.

During the previous round of US Federal Reserve tightening in 2018, China’s currency depreciated sharply.

China is better able to cope with external changes, and “this round of tightening by the Federal Reserve may have less spillover effect than the previous round,” Wang Chunying, spokeswoman of the State Administration of Foreign Exchange, told a news conference on Friday.

On Wednesday, Chinese government bond yields fell across the curve after an official’s comments heightened expectations that the country’s benchmark lending rate would be cut as early as this week to shore up the cooling economy.

On Thursday, China cut its benchmark lending rate for the second consecutive month, while also lowering a mortgage reference rate for the first time in nearly two years.

“In the face of this round of Fed tightening expectations, both cross-border loans or capital flows related to trade financing are relatively stable,” Wang said.

Robust export growth, ample foreign exchange liquidity and the attractiveness of Chinese assets should all help China better tackle changes in the external environment, the regulator added.

The yuan was the best performing emerging market currency in 2021, appreciating 2.7 per cent against a rising US dollar. Its gains have extended into 2022, with a 0.2 per cent advance so far this year.

China’s current account surplus to gross domestic product ratio for 2021 was tentatively estimated to be within 2 per cent, Wang added.

Meanwhile, China will on Friday cut the interest rates on a key monetary policy tool by which financial institutions can obtain temporary liquidity from the central bank, three sources with direct knowledge of the matter said.

The 10-basis-point cut in the rates on People’s Bank of China’s (PBOC) standing lending facility (SLF) loans follows a series of reductions in China’s key interest rates, as Beijing eases monetary policies to stabilise a slowing economy.

China’s economy grew 4 per cent in the fourth quarter – the slowest rate in one-and-half years – as growth loses momentum on a property market downturn and weak consumption. Analysts expect more easing measures in the coming months.

The borrowing cost on overnight, seven-day and one-month SLF loans will be lowered by 10 basis points, to 2.95 per cent, 3.10 per cent and 3.45 per cent, respectively, according to the sources.

The PBOC did not immediately respond to a request from Reuters for comment.

SLF was created by the PBOC in 2013 to meet temporary liquidity needs from financial institutions, and its interest rates are determined by monetary policy directions and other money market rates in China.

Chinese banks can borrow SLF loans from the PBOC using qualified bonds and other credit assets as collateral.

Author: Reuters, SCMP

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