BEIJING: China’s central bank is a step ahead of its US counterpart in reining in its Covid-19 emergency stimulus, relieving potential market pressure from the Federal Reserve’s looming shift in policy.
The People’s Bank of China has already started curbing credit growth to tackle debt risks, although it’s doing so gradually to avoid stalling the economy’s still uncertain recovery. Consumer inflation also remains tame despite the recent surge in factory prices, report agencies.
It’s a different backdrop to the US, where record fiscal stimulus is driving up growth projections and prices are rising faster than expected. The Fed is now debating when it can begin scaling back its bond-buying programme and possibly start raising interest rates.
Unlike in the US’s previous tightening cycle, when interest rates in China also moved higher in part to ease capital outflow fears, this time around capital has been gushing into China. And even though the yuan may weaken as the Fed tapers – which brings some welcomed relief to exporters and the PBoC – the impact will likely be muted.
“China is taking its own policy path due to a very different growth and inflation story there versus the US,” said Dariusz Kowalczyk, head of research for Asia, excluding Japan, at Credit Agricole CIB in Hong Kong. “The Fed’s policy shift is putting upward pressure on global foreign-exchange market volatility, and the PBoC would welcome the dollar-yuan exchange rate being impacted by it as well.”
Beijing had repeatedly signalled that the yuan’s advances against the dollar have been too fast as it rose to the highest level since 2018 in May. While the onshore yuan has fallen 1 per cent since the Fed’s surprise hawkish turn, it’s still up 1.1 per cent this year as Asia’s second-best performing currency.
China’s higher-yielding markets remain attractive to global investors, which may help keep the yuan stronger against its peers. Though US rates have jumped in the wake of the Fed’s signal, Chinese 10-year sovereign bonds still yield around 1.6 percentage points more than Treasuries of the same tenor. The inclusion of some government debt into FTSE Russell’s flagship global debt index will also help support inflows.
The PBoC began signalling a shift away from stimulus in the latter part of last year, when the rest of the world was still struggling to recover from deep recessions. Officials have repeatedly raised concerns about rising debt and asset bubbles, pledging to stabilise debt ratios while avoiding any “sharp turn” in policy.
“Even in the early phase of the Fed’s actual tapering, the PBoC will probably still stick to its own policy pace as it’s started normalisation already,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc in Hong Kong.