US Big Cut Followed by China's Large-Scale Stimulus
Concerns Over Export Impact if Yuan Rally Continues
Worries About Hitting 5% Growth Target This Year
As China announced a large-scale stimulus package, the offshore yuan reached its highest value against the dollar in 16 months.
According to Investing.com on the 25th, the offshore dollar-yuan exchange rate dropped to 6.9951 yuan per dollar during the morning session before rising back above the 7 yuan level. This is the first time since May last year that the offshore dollar-yuan exchange rate fell below 7 yuan.
This indicates a strengthening of the offshore yuan against the dollar. There are two main reasons for this. First, the People's Bank of China implemented strong liquidity supply measures the day before, including lowering the reserve requirement ratio (RRR), the 1-year loan prime rate (LPR), and mortgage rates.
Additionally, the U.S. Federal Reserve's big cut on the 18th?the first in four years?lowered the U.S. benchmark interest rate to 4.75-5.0%, which also contributed to the offshore yuan's strength. The interest rate gap between the U.S. rate and China's effective benchmark, the 1-year LPR (3.35% annually), narrowed significantly. Furthermore, the U.S. Conference Board (CB) announced that the September consumer confidence index dropped to 98.7, the lowest in three months, which also played a part in the offshore yuan's appreciation against the dollar.
Some analysts predict that the offshore yuan may continue to strengthen for a while as Chinese exporters sell their dollar-denominated assets amid the dollar's weakness.
Chinese authorities are closely monitoring the rise in the offshore yuan's value. A rapid increase in the domestic currency's value over a short period can negatively impact exports. This could hinder the Chinese government's goal of achieving around 5% growth this year.
Accordingly, Bloomberg reported that if the yuan rally continues, the People's Bank of China may take measures such as lowering the foreign exchange risk reserve requirement for currency futures trading from the current 20% to 0%. The foreign exchange risk reserve is an amount that Chinese banks must deposit interest-free with the People's Bank of China for one year when conducting forward exchange transactions. This system was introduced in 2015 to defend the yuan's value.
However, Ken Cheung, Chief Asia FX Strategist at Mizuho Bank, analyzed that concerns about weak domestic demand in China remain, so the yuan rally may not sustain.
Meanwhile, following China's large-scale liquidity supply measures, both mainland China and Hong Kong stock markets are showing significant gains today. The CSI 300 index, composed of the top 300 stocks by market capitalization on the Shanghai and Shenzhen exchanges, was up 2.13% as of 2 p.m. local time. At the same time, the Hong Kong Hang Seng Index and the H-Share Index were trading up 2.01% and 2.32%, respectively.
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