SHANGHAI, July 22 (Reuters) - China surprised markets by
lowering a string of major short and long-term interest rates on
Monday, in an effort to boost growth in the world's
second-largest economy.
Analysts said the move showed the yuan, which has
been undermined all year by its low yields versus U.S. rates, is
less of a priority than growth.
WHY IT'S IMPORTANT
A weakening yuan has been considered a constraint on the
People's Bank of China's (PBOC) monetary easing efforts, and
investors had widely expected the PBOC would wait till the
Federal Reserve started rate cuts to avoid widening the yield
gap and additional depreciation pressure.
Analysts said some initial declines in the yuan on Monday
were a knee-jerk reaction, and further weakness will be
carefully managed.
The rate cuts were part of the pro-growth policy following
the weaker-than-expected second-quarter economic data last week
and echoed the call from the plenum to achieve this year's
"around 5%" growth target.
BY THE NUMBERS
China lowered seven-day reverse repo rate,
the one-year loan prime rate (LPR), the
five-year LPR and cost of standing lending
facility by 10 basis points each.
The yuan has lost 2.4% against the dollar
year-to-date, and last traded at 7.2734.
Yields on 10-year U.S. Treasuries were about 200
bps higher than the benchmark 10-year Chinese government bonds
.
CONTEXT
The yuan has faced headwinds such as widening yield
differentials with other major economies, worries about weak
growth and rising trade tensions since late last year.
China's onshore yuan is only allowed to move in a narrow
range of 2% around a daily midpoint fixing guided by the PBOC,
and markets take the guidance as an official signal of FX
stance.
The PBOC also carefully manages offshore yuan cash
conditions, as it has gradually increased the size of the bills
it sold in Hong Kong since August 2023.
KEY QUOTES
Volkmar Baur, FX strategist at Commerzbank: "The measures
should be aimed at achieving the government's growth target of
5% this year...the market will be able to discount more negative
scenarios of a more pronounced growth slowdown, which should
help the yuan."
Becky Liu, head of China macro strategy at Standard
Chartered: "FX containment will become a smaller constraint – We
see China having little incentive to letting the yuan
appreciate, regardless of the direction of the dollar index."
"Their effort to defend the currency mainly aims to prevent
disorderly depreciation, rather than trying to engineer an
appreciation."
CHART
Analysts expect the yuan to finish the year at 7.29 per
dollar, about 0.23% weaker than the current level, according to
seven forecasts compiled by Reuters.
INVESTMENT Q3-2024 END-2024 Q1-2025 Q2-2025
HOUSES
RBC CAPITAL 7.31 7.33 7.35 7.32
MARKETS
SOCIETE 7.4 7.45 7.3 7.2
GENERALE
DBS 7.21
COMMERZBANK 7.3 7.25 7.25 7.2
SEB 7.1
GOLDMAN SACHS 7.35 (3-month 7.4 7.4
horizon)
ING 7.26
(Reporting by Shanghai Newsroom; Editing by Vidya Ranganathan
and Varun H K)
