27/06/23

CHINA: PBOC Has Little Incentive to Intervene as Chinese Yuan Slides Due to Wide China-US Interest Rate Spread, Analysts Say

As publsihed on: yicaiglobal.com, Monday 26 June, 2023.

The People’s Bank of China has not moved to halt the recent weakening of the Chinese yuan against the US dollar. The big spread in China-US interest rates is one of the main reasons behind the softening yuan and the central bank has little incentive to get involved, market analysts said.

Today, the offshore Chinese yuan, which reflects the expectations of international investors, was trading at 7.24 to the greenback. Last week, on June 23, it plunged more than 250 basis points against the US dollar, breaking past 7.22 for the first time since the end of November after the central bank cut the key lending rate.

The wide interest rate spread between China and the US is the main reason for the weak yuan as it limits China’s ability to cut rates, Liu Jie, head of macro strategy at Standard Chartered China, told Yicai Global.

"We haven't seen obvious signs of intervention recently, so the devaluation is brought about by the market," a trader at an international bank told Yicai Global. "Generally, the redback is under relatively high seasonal pressure in the second and third quarters.”

Most offshore hedge funds have built up short positions, and exporters are not keen to settle with foreign exchange. The central bank has little incentive to intervene in such spreads, as the Fed is unlikely to cut rates until the end of the year at the earliest. Whether the Fed will hike rates again in June is key, but either way, the rate hike cycle will end soon, Liu said.

Some easing measures may be announced at the end of July if the economic momentum continues to slow, according to mainstream institutions. However, significant fiscal policy support and changes in economic policy are not expected until after the Politburo meets next month.

“Forex market sentiment has been affected by both seasonal depreciation pressures and changes in economic fundamentals. Many institutions have revised their forecasts for China’s gross domestic product growth downward due to weak data and external demand, but they are still above the Chinese government’s target of 5 percent target. For instance, US investment bank Goldman Sachs has cut its prediction for this year to 5.4 percent from 6 percent,” the trader said.

Barclay’s forecasts for the yuan exchange rate with the greenback are 7.2 percent in the third quarter, 7 in the fourth quarter and 6.9 percent in the first quarter next year, Zhang Meng, a foreign exchange and macro strategist at the UK lender, told Yicai Global. In the future, the timing and intensity of China's easing measures may determine how the exchange rate performs.

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PBOC China Yuan