**China’s Economic Stimulus Boosts Yuan to 16-Month High**
In a surprise move, the Chinese government unveiled a series of stimulus measures on Tuesday to revitalize its slowing economy. The announcement sent the yuan soaring to its strongest level in over 16 months, with the offshore yuan briefly touching 6.9946 per dollar. The onshore yuan also strengthened, trading at 7.0319 against the greenback.
The rapid appreciation of the yuan may lead to deflationary pressure on China’s exports, according to Ben Emons, founder of Fed Watch Advisors. However, BNP Paribas believes the movement in USD/RMB will be capped by expectations of further fiscal support, corporate hedging needs, and improved risk appetite.
China’s unique exchange rate system, which allows the yuan to trade within a limited range of 2% above or below the midpoint rate, sets it apart from other major currencies like the US dollar and Japanese yen. The offshore yuan, traded in Hong Kong, London, Singapore, and New York, is more susceptible to market supply and demand.
Zerlina Zeng, head of Asia Credit Strategy at CreditSights, predicts the possibility of the offshore yuan trading below 7.0 over the next three months, driven by policymakers’ pro-growth stance and the Federal Reserve’s easing policies.
The People’s Bank of China Governor Pan Gongsheng announced a 50-basis-point cut in the reserve requirement ratio and a 0.2-percentage-point reduction in the 7-day repo rate. This move is expected to boost consumer confidence, which has been hindered by a “crisis” in property overhang on banks’ balance sheets.
Chinese bonds rallied following the announcement, with 10-year and 30-year yields hitting record lows. The increased demand for Chinese bonds tends to strengthen the yuan. Yields on 10-year bonds rose 5 basis points to 2.074%, while those on 30-year bonds edged up to 2.182%.
The news also sent Chinese equities soaring, with the Hang Seng Index in Hong Kong recording its best day in seven months and the CSI 300 in mainland China experiencing its largest one-day gain in over four years.
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