HONG KONG, Sept 19 (Askume Breakingviews) – President Xi Jinping is very grateful to Jerome Powell after the Federal Reserve chairman lowered the benchmark interest rate by 50 basis points on Wednesday. The central bank said this was mainly due to “increased confidence” that U.S. inflation was returning to its target range. But the move also eased depreciation pressure on the yuan and gave the People’s Bank of China more room to boost the economy.
The People’s Bank of China, which has a legal mandate to maintain currency stability to boost economic growth, has been trying to control the yuan’s depreciation since the United States began raising interest rates in March 2022. However, the yuan actually began to rise as expectations grew that the Fed would soon ease policyThe yuan has gained about 2.5% against the dollar since July.
At the same time, it is becoming increasingly likely that economic growth will fall short of Beijing’s 2024 target of “around 5%.” The latest data confirms this: despite the peak of summer tourism, China’s retail sales grew only 2.1% in August, down from 2.7% a month earlier. The real estate market continues to slow, with real estate investment falling 10.2% in the first eight months of this year compared with the same period in 2023. These weaknessesThis prompted investment banks to lower their forecasts for China’s full-year GDP growth.
The Fed’s unexpected rate cut means China’s central bank can now focus on helping Xi Jinping achieve his GDP growth target by lowering China’s own borrowing costs. That could start on Friday, when the central bank plans to set key lending rates. The People’s Bank of China is expected to lower existing mortgage rates. That could help further deflate the bond bubble that has pushed yields to historic lows and regulators have been grappling with for months.
A key official at the People’s Bank of China said earlier this month that banks have room to cut their deposit reserve ratios to free up more liquidity. The central bank may also expand lending programs to help local governments convert unsold properties into affordable housing.
Top U.S. and Chinese economic officials will meet again in Beijing on Thursday to discuss issues ranging from industrial capacity to cooperation on financial stability. The timing couldn’t be better, as the Fed makes its rate decision just hours before its meeting.
Referral Information
Askume reported that Chinese bond yields fell in early trade on September 19 after the Federal Reserve cut interest rates by 50 basis points. This raised expectations that Beijing would take new rescue measures to help the struggling economy. China’s benchmark 10-year government bond yield fell 1.6 basis points to 2.02%.
The People’s Bank of China will make the next decision on the preferential loan interest rate on September 20. The last time China lowered its LPR was in July.
