US Fed interest rate cut will prompt RMB appreciation
Chinese academic Zang Shijun says that the recent rate cut by the US Federal Reserve could lead to a chain reaction, in particular the strengthening of the renminbi.
The US Federal Reserve (Fed) has lowered the target range for the federal funds rate by 50 basis points to between 4.75% and 5.00%. This is the first rate cut by the Fed in four and a half years, marking the beginning of the interest rate cut cycle for the US dollar.
According to the Fed’s forecast, the US federal funds rate is expected to reach 4.4% by the end of the year, within the target range of 4.25% to 4.5%, and then decrease to 3.4% by 2025 and 2.9% by 2026.
Favourable environment for China
Following rate cuts in Canada and the EU, the Fed has finally followed suit. Historically, when the “US dollar tide” enters the rate-cutting phase, the released dollar liquidity often floods out globally, acquiring high-quality assets at low prices in other economies, especially emerging markets.
This process is usually accompanied by political turmoil and regional security tensions. Currently, the conflict in the Middle East is expanding and the fighting in Ukraine is intensifying, which all has to do with the US. As for the East Asian region that some are concerned about, with the common efforts of China and most ASEAN countries, there will not be armed conflict. Therefore, many countries will remain highly vigilant to cope with various economic and financial impacts as the dollar rate cut begins.
In terms of exchange rates, the US interest rate cut will inevitably reduce the attractiveness of dollar assets. The dollar will start to depreciate, while many other currencies such as the renminbi (RMB) and yen will continue to appreciate. This will trigger a chain reaction, causing funds to flow out of the US in search of higher-yielding opportunities, leading to a revaluation of currencies and a reversal of exchange rates.
The Fed’s rate cut will attract more foreign capital into the Chinese market, particularly stocks and bonds, and the inflow of funds will have a positive impact on China’s asset prices.
In particular, since the Fed started raising interest rates in March 2022, the RMB has been under depreciation pressure, falling to around 7.3 RMB per dollar. With the opening of the dollar rate cut channel, the dollar-RMB exchange rate quickly approached 7 RMB per dollar, and is expected to continue to rise in the next few years, possibly even reaching 6.3 RMB and 5 RMB per dollar.
Interest rate cuts usually lead to lower borrowing costs and economic growth; however, this is not the case for the US.
The dollar’s global positioning means that rate cuts will directly impact global asset prices, especially in emerging markets and for non-dollar assets such as precious metals. The Fed’s rate cut will attract more foreign capital into the Chinese market, particularly stocks and bonds, and the inflow of funds will have a positive impact on China’s asset prices.
The pressure from the inverted China-US interest rate spread will also ease with the Fed’s interest rate cut. This would give the People’s Bank of China more operational flexibility.
Over 1.4 billion Chinese people cannot all buy land and build homes like the US, but China’s construction technology is highly developed, and its planning and design are improving by the day...
Light for Chinese real estate and stock market
China has already cut interest rates twice this year. China’s central bank also said on 29 September that it would tell commercial banks to lower mortgage rates for existing home loans before 31 October, setting them at least 30 basis points below the loan prime rate, the central bank’s benchmark rate for mortgages.
The US interest rate cut signals a global liquidity easing cycle, creating a favourable environment for China to introduce more market-friendly monetary policies.
After years of downturn, China’s real estate market may seek a new path of high-quality development driven by domestic and foreign funds, especially amid the loose monetary environment caused by the global wave of rate cuts.
Over 1.4 billion Chinese people cannot all buy land and build homes like the US, but China’s construction technology is highly developed, and its planning and design are improving by the day; its high-speed transport network is widespread and high-quality property development is worth looking forward to. This will lead to the continued growth of China’s economy, improved employment trends, and a higher standard of living.
On 24 September, the People’s Bank of China (PBOC) and National Financial Regulatory Administration launched several new policies on property and finance. One, cutting the interest rate on existing mortgages by 0.5 percentage points to almost the rate for new mortgages. Two, lowering the minimum down payment ratio on second homes to 15%. Three, extending two housing finance policy documents by two years, covering deferred repayment of real estate companies’ existing loans and operating loans for commercial properties.
Four, improving housing refinancing; the PBOC is making 300 billion RMB (US$42.7 billion) available to local government-owned enterprises to help them buy unsold inventory from property developers and convert them into subsidised housing, an important move for the property market to get rid of reserve stock.
To give further incentive to banks and purchasing bodies, the funding support ratio for the re-lending programme for the housing stock buy-back scheme will go up from 60% to 100%. These concrete measures by the PBOC will stimulate the property market.
This is the first time the PBOC has shown such a clear stance with solid funds pumped in to support the stock market, so how could China’s rock-bottom stock market not rise?
As for stimulating the stock market, the PBOC governor said for the first time, the PBOC is establishing a structural monetary policy tool to support the capital market. One measure will allow agencies much greater access to funds and stock holdings, where the funds can only be used to invest in the stock market.
The initial scale of this swap facility is 500 billion RMB, with the possibility of additional funding of another one or two tranches of 500 billion RMB; the PBOC is open to it. This is the first time the PBOC has shown such a clear stance with solid funds pumped in to support the stock market, so how could China’s rock-bottom stock market not rise?
China’s continued openness
If China’s long-struggling stock market and real estate market can fire up again and get out of trouble, the Chinese consumer market will reach new heights, and manufacturing upgrades and technological innovation will continue to drive China’s real economy towards high-quality development. These factors are crucial for the RMB’s continued appreciation.
Aside from the key external factor of the US dollar, China’s opening-up measures and monetary policies provide intrinsic momentum for the RMB’s appreciation. As of the end of July, foreign investors held a record 4.5 trillion RMB worth of Chinese bonds. The RMB accounts for 6% of global trade financing, ranking second.
China continues to strengthen communication and cooperation with international financial organisations and major economic bodies, actively participating in global financial governance and enhancing its openness through expanded international cooperation.
As of the end of August, China’s foreign exchange reserves reached US$3.3 trillion, maintaining its position as the world’s largest foreign exchange reserve holder for 19 consecutive years. China’s stable economic growth and long-term prospects support the stability of its foreign exchange reserves.
Will the real estate bubble burst? Will the RMB’s appreciation affect exports? How will local debt risks be addressed?
If the Fed’s interest rate cut is a trigger for the RMB’s appreciation, then the expectation of significant RMB appreciation is based on a comprehensive assessment of China’s real economy.
Depreciation of dollar and appreciation of RMB
Of course, there have always been concerns about China’s economy as challenges remain. Will the real estate bubble burst? Will the RMB’s appreciation affect exports? How will local debt risks be addressed? Various policies and solutions are being implemented to tackle these issues, so there is no need to be overly pessimistic.
In contrast, the US federal government’s debt burden is heavy, the US stock market is high and “de-dollarisation” is gaining ground — US bonds, stocks and currency are all in a precarious situation. An old Chinese saying goes: “There are always more ideas than there are problems.” Hopefully, the US will also find various ways to resolve its issues.
The US government has repeatedly faced shutdowns, only to avoid them by printing more money. However, from an objective economic and financial perspective, the combination of measures introduced by the PBOC on 24 September to revitalise the capital market will undoubtedly reverse the trend, driving the real estate and stock markets to continue growing and expanding, and boosting consumption to new heights. As a result, China’s economy will enter a period of stable growth.
The Fed’s interest rate cut has finally landed, and the PBOC has unveiled its combination of policies. As a result, the global economy has entered a relaxed cycle, and the funding chain and industrial chain will undergo significant changes. It is clear that economic and financial trends indicate the inevitable depreciation of the dollar and appreciation of the RMB.
On 25 September, the exchange rate for 1 US dollar against the RMB briefly fell below 7. The next target is 6.3. If the US becomes deeply entrenched in the Russia-Ukraine conflict and Middle East conflicts, and continues to fuel tensions in East Asia, relying solely on its military machine will not sustain its hegemony. In the worst-case scenario, if a divided US descends into internal chaos, it is worth pondering what the value of the dollar will be.
