The U.S. Federal Reserve should hike interest rates as early as March. Meanwhile, its Chinese counterpart has trekked up monetary easing to support a slowing economy. Hence it is raising worries about possible capital outflows because of the policy divergence.
The Deterioration of China’s Currency
During the prior round of Fed tightening in 2018, China’s currency declined sharply.
China is better able to manage external changes. According to Wang Chunying, spokesperson of the State Administration of Foreign Exchange (SAFE), this round of compressing by the Federal Reserve might have a more negligible spillover effect than the prior round.
An official’s comments heightened expectations that the country’s benchmark lending rate will be trimmed as early as this week to shore up the cooling economy. Hence, on Wednesday, Chinese government bond yields dropped across the curve.
Wang said that in the face of this round of Fed tightening expectations, both cross-border loans or capital flows associated with trading financing are relatively stable.
The regulator added that solid export growth, ample FX liquidity, and the attractiveness of Chinese assets should support China in tackling changes in the external environment.
The yuan was the best performing emerging market currency in 2021, enjoying 2.7% versus a rising dollar. Its gains have grown into 2022, with a 0.2% advance year-to-date.
China’s existing account surplus to GDP ratio for 2021 was within 2%, Wang added.
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