A
man wearing a mask walks past the headquarters of the People’s Bank of
China, the central bank, in Beijing, China, as the country is hit by an
outbreak of the new coronavirus, February 3, 2020.
Jason Lee | Reuters
BEIJING – The
U.S. Federal Reserve’s emergency interest rate cut gives
China’s central bank much more leeway to lower its own rates, and boost the internationalization of the yuan, analysts said.
In
response to concerns about the new
coronavirus’ economic impact, the
Fed surprised markets during the New York trading session on Tuesday
with a
half percentage-point rate cut.
It came two weeks before a scheduled meeting. The last time the Fed
took similar emergency action was during the financial crisis in 2008.
The Fed’s loosening of monetary policy will likely accelerate similar moves by the
People’s Bank of China, said Zhao Bowen, research director at
Beijing-based Blue Stone Asset Management.
“The
bottom line is opened more,” he said, according to a CNBC translation
of his Mandarin-language remarks. But he noted increased fiscal spending
is what China will really need to support economic growth. According to
his calculations, GDP
growth in the second and third
quarter must reach at least 7.5% in order for the country to achieve its
implied goal of roughly 5.5% for 2020.
While the timing and exact scale of expected PBOC rate cuts vary, analysts pointed out the Fed’s move will keep the
Chinese yuan from weakening too much, alleviating concerns about capital outflows, and even boost inflows in the near future.
That
would go a long way toward helping the Chinese government along with
its years-long efforts to boost use of the yuan in global financial
markets. Also known as the
renminbi, the Chinese yuan accounted for
1.65% of global
payments by value in January, versus 40% for the U.S.
dollar, according to Swift, the financial messaging service for banks.
Boost to yuan-denominated assets
The
U.S. dollar index
extended recent losses to touch its lowest level since early January,
while the yuan reversed a recent weakening trend to strengthen by well
over half a percent to near 6.93 per dollar.
″
(For the yuan),
yesterday was a turning point,” Xu Hongcai, deputy director of the
Economics Policy Commission
at the China Association of Policy Science,
said in a phone interview, according to a CNBC translation of his
Mandarin-language remarks.
“So this shows confidence in China,” he said, adding that capital is flowing into the country.
International
investors will likely also be more attracted to the relatively higher
yields of Chinese yuan-denominated assets if current trends in financial
markets and monetary policy persist.
Yuan-denominated
assets were never really considered
safe haven, Zhao said. But with
expectations that the Fed will cut rates again at its meeting later this
month, Treasury yields are likely to fall further, he said, noting
investors may begin to question the scale of their U.S.
asset holdings.
U.S. Treasury yields fell after the Fed rate cut, with the benchmark
10-year
yield hitting a record low of 0.906%. The Chinese equivalent traded
near 2.71% on Tuesday. The roughly 180 basis point spread, or
gap
between yields, makes the yuan-denominated bonds a more attractive
investment.
Given the Fed’s rate cut, which some criticize as too
hasty, the internationalization of the yuan is being “pushed forward,”
Zhao said.
As for stocks, the Shanghai Composite gained 0.6% on
Wednesday, versus the S&P 500′s volatile 2.8% drop overnight. While
the mainland Chinese A-
shares market has been likened to a casino for
years, the Shanghai Composite has kept its fluctuations close to the
3,000 level for much of the last several months.
Cao Yanghui,
deputy director of the Nanhua Futures Research Institute, said the
coronavirus’ spread in China has entered a more stable period than
overseas.
“Relative to overseas markets, domestic assets have
begun to have some properties of safe-haven assets,” Cao said, according
to a CNBC translation of his Chinese-language statement. “If U.S.
stocks continue to decline, A-shares will not necessarily follow, and
may even begin an independent upward trend.”
Calls for more coordination
Shortly before the Fed made its emergency move, financial leaders from the G-7 major economies released a vague statement on
working together
to fight the
coronavirus. The central bank of Australia had already cut
rates, while the European Central Bank and other major central banks
are
widely expected to follow suit in the coming weeks.
“Because
of this situation, the whole world needs to strengthen monetary policy
coordination,”
Zong Liang, chief researcher at the Bank of China said in
a phone interview, according to CNBC’s translation of his
Mandarin-language remarks.
That includes exchange rates, he said.
Zong added that large-scale rate cuts are not needed at this time, and
China would hope to direct global rates toward a stable level, with
space for additional monetary policy action.
Further
cuts would take interest rates that are already at unprecedented lows or
negative territory even lower. China has kept rates at a relatively
higher level, while facing
unique challenges in getting the local economy to truly reflect the benefits of lower rates.
For now, the situation at home is still key for each country, especially
for China.
“I
don’t think they have the bandwidth to think about more than
stability,” said James Early, CEO of investment research firm Stansberry
China.
“I think the (PBOC) sees (the Fed cut) as a negative
because it signals meaningful concern from the world’s largest economy,”
he said. “They couldn’t even wait two weeks. The information that was
communicated was fear and the PBOC has to digest this.”
The Chinese central bank did not immediately respond to CNBC’s request for comment.
On
Tuesday, China’s central bank held a meeting with other major financial
regulators and institutions in the country to discuss recently
announced support measures, and lowering financing costs amid the virus’
impact to the economy. It was
unclear according to the official
announcement if the meeting ended before the Fed announced its rate cut
late that night Beijing time.
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