Stronger Chinese Yuan bodes relief for China’s central bank
ALBAWABA – The People’s Bank of China (PBOC) pinned the benchmark lending rate as is on Monday as the Chinese Yuan rallied to a three-month high, after having traded near the weaker end of the 2 percent band-range set by the central bank for almost a whole month.
The PBOC also raised its daily reference rate for the Chinese Yuan to the strongest level since August, at 7.1612 per dollar, nearly 0.2 percent stronger than the previous day’s level, as the US dollar slipped against all of its Group-of-10 peers.
Bloomberg’s dollar index was down 0.21 percent, at 103.6980 by midday Monday, Amman time.
Meanwhile, the onshore yuan strengthened to about 7.1774 against a soft greenback on Monday and the offshore yuan advanced 0.5 percent to 7.1815 per US dollar. Moreover, the Bloomberg Asia Dollar Index also climbed for a fifth day in a row, setting for the longest run since December 2022.
The Chinese Yuan was one of the worst-performing currencies in Asia against the US dollar - Shutterstock
A stronger Chinese Yuan gives China the much-needed relief it seeks after the nation’s central bank spent the past few months effectively pegging its currency to the dollar, Bloomberg reported.
China’s currency has been among the worst performers in Asia this year, prompting the PBOC to go all the way to punish yuan bears, according to Bloomberg.
This rally allows the central bank to loosen its grip on the Chinese Yuan, having kept such a tight range on the reference rate — its favorite tool for guiding the currency.
Prospects of world’s second-largest economy as Chinese Yuan rallies
In the meantime, pessimism toward the nation’s assets has begun to recede, Bloomberg reported. Especially with the leaders of China and the United States (US) actively engaged in efforts to soothe US-China ties.
Traders and investors are expecting rate cuts in 2024, which would further help the advancement of the Chinese Yuan, as Eurozone and US inflation begins to slow.
Recent data showed the recovery in the world's second-largest economy remains patchy with industrial output and retail sales surprisingly higher. Even as deflation builds and the debt-laden property market struggling to bounce back.
A stronger Chinese Yuan helps the case of growing factory output and retail sales, as per the data released last week - Shutterstock
Multiple stimuli packages were introduced by the authorities, yet it is not clear whether they have actually started to kick in. Especially with no major big-bang stimuli measures in the pipeline so far.
While the economy still needs more policy stimulus, according to Reuters, an escalation of monetary easing would add unwanted downside pressure on the Chinese currency.
In other words, lowering the benchmark interest rate will weaken the Chinese Yuan.
This is why the PBOC did not lower interest rates this month, and why the central bank needs to tread carefully moving forward.
PBOC pins interest rate to fortify Chinese Yuan
The one-year loan prime rate (LPR) was kept at 3.45 percent and the five-year LPR was unchanged at 4.20 percent, as reported by Reuters.
The Chinese Yuan is up to a 3-month high against the US dollar - Shutterstock
Notably, most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.
The central bank also pinned its medium-term interbank liquidity rate last week, with the one-year LPR loosely pegged off to the medium-term lending facility (MLF), as per Reuters. Market participants typically see changes in the MLF rate as a precursor to adjustments in the LPR.
Overall, the PBOC injected 1.45 trillion Chinese Yuan ($207.28 billion) worth of one-year MLF loans into the banking system last week but kept the rates on those loans unchanged. This liquidity boost resulted in a net 600 billion yuan ($85.86 billion) of cash injections into the banking system, the biggest monthly increase since December 2016.
