Neal Kimberley

Macroscope | As China’s central bank brings out the big guns, the tide is turning in favour of the yuan

Just as the pound plunged on the weak UK mini-budget, the yuan narrative is changing as Chinese authorities signal firm support for the economy and the yuan

It’s a matter of time before China ends its zero-Covid policy. Once traders sense yuan weakness is running its course, there could be an avalanche of dollar selling

Reading Time:3 minutes

Why you can trust SCMP

A man walks past the large screen showing stock and currency exchange data in Shanghai on September 29. The yuan hit a record low against the US dollar on September 28, the weakest since the global crisis in 2008. The central bank is taking steps to rein in yuan weakness. Photo: EPA-EFE

Neal Kimberley

Published: 4:45pm, 4 Oct 2022

The Chinese yuan has fallen against the US dollar this year and the move derives in large part from the strength of the US currency. But this doesn’t mean that further weakening is inevitable.

Indeed, the tide may be turning in the yuan’s favour as the narrative shifts.

This year has seen the dollar broadly strengthening, and this is largely traceable to the US Federal Reserve tightening monetary policy at a faster pace than other major central banks, in its attempts to tackle elevated US consumer price inflation.

Nor is the Fed likely to stop raising its interest rates just yet, unless – and this is not an immaterial risk – the pace at which it has been tightening monetary policy results in financial instability at home or, where this might adversely affect wider US interests, abroad.

As it is, with the US consumer price index still “unacceptably high”, Cleveland Fed chief Loretta Mester argued last week that “when there is uncertainty, it can be better for policymakers to act more aggressively because aggressive and pre-emptive action can prevent the worst-case outcomes from actually coming about”.

US Federal Reserve Board chairman Jerome Powell speaks at a news conference in Washington on September 21. The Fed said more rate increases are coming as it battles soaring prices. Photo: AFP

Elsewhere, like the United States, Britain too has been tightening monetary policy but the Bank of England, often referred to by traders as the Old Lady, has been raising its rates in smaller increments than the Fed.