Forex regulator: China braces for imminent US Fed cut

A Bank of China staff member works behind counters at a branch in north China’s Shanxi province, March 13, 2020. /CFP

A Bank of China staff member works behind counters at a branch in north China’s Shanxi province, March 13, 2020. /CFP

China is better prepared to weather the latest round of Fed cuts than last time, thanks to growing exports and strong economic fundamentals, China’s forex regulator said on Friday.

From a microeconomic perspective, unlike the previous round of Fed hikes, Chinese companies face limited pressure to deleverage their external debt this time around, Wang Chunying, deputy director and portfolio manager, told reporters. word of the State Administration of Foreign Exchange (SAFE).

They haven’t borrowed so much cheap money in the past two years, compared to the last round of monetary easing in advanced economies, Wang said, adding that a stable yuan (RMB) anchors a size reasonable borrowing.

Monetary tightening by the US Fed in 2013 caused the yuan to depreciate as investors exited emerging markets.

Compared to a 21% annual increase in cross-border lending and trade finance between 2009 and 2013 (while the Fed and European Central Bank maintained ultra-loose monetary policies), Chinese corporate borrowing only increased than 8% every year in two years since the second quarter of 2020. Over the past two years, both central banks have responded to COVID-19 with near-zero interest rates, added to this unprecedented fiscal stimulus governments.

The Fed surprised the market in the summer of 2013 when Ben Bernanke, then central bank chairman, announced that he would begin scaling back asset purchases at a later date. The ensuing bond sell-offs pushed yields on 10-year US Treasuries from 2% to 3% in May into December – what is often referred to as the “tantrum”. Emerging markets have experienced capital flight.

No crisis crisis will be felt in China, based on what Wang explained as new developments that have put the country’s economic fundamentals in good shape to fend off Fed interest rate hikes. and liquidation of balance sheets.

These new developments include strong earnings for exporting companies under trade items, the growing appeal of the Chinese yuan as an investment asset, and a more market-oriented currency with stabilized expectations.

Strong export growth and an increasingly attractive currency

Chinese companies have amassed $160 billion in two years since the 2020 pandemic. “And that’s not leveraged capital inflows,” Wang said, but income earned through trade. These savings from the industrial upgrades of the country will help the forex market to adapt to the middle of the adversaries.

China’s exports grew by more than 20% in 2021 after recovering from the pandemic and becoming the first country to record positive trade growth in 2020.

Foreign investors have increasingly added RMB assets to their portfolios. From 2018 to 2021, the cumulative net increase in foreign holdings of Chinese stocks and shares exceeded 700 billion U.S. dollars, with an average annual growth rate of 34 percent, Wang added.

And the potential for investing in renminbi-denominated assets is huge, Wang said. The 3-5% level of foreign investment in the domestic securities market is low compared to high income earners such as Japan, South Korea and also emerging economies such as Brazil.

“Big diversification from a low-yield world,” Wang said, pointing out that the Chinese yuan is now supported by an economy that is opening up its financial sector more, unlike nearly a decade ago.

The noticeable impact of the RMB is not only for investors, but also its contribution to a more resilient foreign exchange market in China. The country’s central bank has adopted since July 2005 a managed floating exchange rate regime, which is based on market supply and demand and on a basket of currencies. The accompanying heightened volatility in the yuan over the years — the result of a better view of how supply and demand will evolve — will help anchor market expectations in the forex market, Wang said.

The yuan showed greater volatility in daily movements during the 2018-2021 period, Wang said, compared to that seen between 2014-2015.

In addition to the domestic developments above, the Fed’s communication with the market has learned lessons from the taper tantrum. Clearer communication from the Fed so far with close monitoring of the labor market and price levels, according to Wang, has already released some of the ripple effects of the end of the situation with historic liquidity flooding the market. and inflated asset prices.

That said, SAFE wants to ensure the security of the Chinese foreign exchange market and be responsive with its integrated management framework of “macro-prudence and micro-regulation”.

Read more: US Fed policy change won’t disrupt China’s FX market trend: regulator

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