China’s Central Bank Takes Cautious Approach Amidst Yuan Pressure
As the yuan continues to face downward pressure following Donald Trump’s presidential election victory, China’s central bank, the People’s Bank of China (PBOC), has opted to maintain its medium-term lending facility rate at 2.0%. This decision comes amidst a backdrop of ample market liquidity, which has been bolstered by the PBOC’s injection of 500 billion yuan into the banking system in October.
Stabilizing the Yuan: A Delicate Balancing Act
The PBOC’s move is seen as a cautious approach, aimed at stabilizing the yuan without compromising the country’s economic growth. According to Bruce Pang, chief economist and head of Research at JLL, keeping the MLF rate intact allows for “greater policy maneuverability” in the face of changing global circumstances.
Commercial Banks Feel the Squeeze
Commercial banks in China are facing tight net-interest-margins, which have dropped to 1.53% as of September. This is significantly below the 1.8% threshold deemed necessary for “reasonable profitability” by regulators.
Interest Rate Projections
Wang Tao, chief China economist at UBS Investment Bank, predicts that the MLF will remain at 2.0% this year, before decreasing to 1.2% by the end of 2025 and 1.0% in 2026. Others, like Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, expect the PBOC to hold off on further rate cuts until the new U.S. administration takes office in January.
Yuan Under Pressure
The offshore yuan has lost approximately 2% since the U.S. presidential election, and 3.3% against the dollar since September 24. The PBOC is walking a fine line, seeking to stabilize the yuan without compromising China’s export-driven economy.
Gradual Depreciation Preferred
Gary Ng, senior economist at Natixis, notes that while China may want a weaker yuan to support exports, it will prefer a gradual depreciation rather than a sudden shock. The central bank is likely to “walk one step at a time to assess the policy results.”
Further Stimulus Measures Expected
A further cut on the reserve requirement ratio for commercial lenders is more likely in the coming months, which could aim to “balance the dual objectives of revitalizing the economy and stabilizing the exchange rate.”
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