At a time when the rest of the global economy is looking to reduce record monetary stimulus, there is one key economic power that stands at odds: China. Yesterday, amidst a much-awaited economic data release, the People’s Bank of China chose to cut interest rates by 10 basis points. In the immediate aftermath of the pandemic, back in early 2020. the PBoC’s monetary response was much awaited. As the US was exporting its ultra-accommodative policy across the globe, China was hesitant to provide too much stimulus to its all but frozen over economy. This means that yesterday’s interest rate cut was the first since April 2020.
The exact adjustment the PBoC has made was to lower the rate it charges to domestic banks for one-year loans. This limited injection of liquidity is designed to ease monetary conditions whilst the risks of Omicron manifest in the nation and data points to a slowdown in Q4 economic growth. The targeted and controlled monetary adjustment is designed to provide support to economic growth over the short run to sustain momentum into 2023. The divergence in policy has largely stemmed from the fact that the nation continues to suffer risks to its economic growth but has not so far experienced the type of pervasive inflation that many Western economies have faced.
The impact in CNY was limited with the Yuan largely unchanged on a trade weighted basis versus Friday’s close with the exception of yesterday’s trading session coinciding with a US bank holiday. The limited reaction of course is partly due to the active management of the CNY by the PBoC. Interest rates play a less significant role in the face of strict capital controls and active currency management. What market signals can still be read from the widening interest rate differential is further obscured by the fact that Chinese growth data released yesterday did not show as severe a contraction in the growth rate towards the end of last year as feared.
Despite the limited reaction in the Yuan, there was some fallout in more openly traded currencies. Due to China’s share within the composition of global commodity demand, commodity prices and thus commodity currency valuations rose. The Aussie and Kiwi Dollars in particular rose due to their economic exposure to both commodities and China in particular.
Discussion and Analysis by Charles Porter