Headline: China’s Renminbi Weakens as Central Bank Cuts Interest Rates
Date: August 21, 2023
In an effort to revive its economy, China’s central bank has announced another interest rate cut, leading to a further weakening of the Chinese renminbi. The one-year loan prime rate (LPR) has reached an all-time low, signaling the country’s gloomy economic outlook.
On August 21, 2023, the People’s Bank of China authorized the China Foreign Exchange Trading Center to announce that the central parity rate of the RMB exchange rate in the interbank foreign exchange market was 7.1987 yuan per U.S. dollar. This represents a decrease of 19 basis points compared to the previous trading day.
According to reports, the exchange rate of the onshore and offshore renminbi against the U.S. dollar has fallen below 7.30. The opening price of 7.3075 remained relatively unchanged from the previous trading day’s closing price. Expert analysis suggests that the depreciation of the renminbi is directly linked to the increasingly gloomy economic outlook in China.
A recent report from British investment bank Barclays revealed that Chinese state-owned banks intervened with approximately $2 billion in the foreign exchange market to stabilize the renminbi at 7.3 yuan to 1 US dollar. These banks primarily provided dollar liquidity in domestic and overseas markets, rather than relying on the central bank’s reserves.
Barclays also stated that it is challenging to estimate the scale of intervention since this activity is not recorded in the daily transactions of state-owned banks. Instead, it is calculated through the foreign exchange asset data of the People’s Bank of China and the foreign exchange settlement data of banks.
To further stimulate China’s economy, the People’s Bank of China announced another interest rate cut on August 21. The one-year prime loan rate (LPR) was lowered by 10 basis points to 3.45%. However, the five-year LPR remained unchanged at 4.2%. The decision surprised many traders and analysts who anticipated further cuts in the benchmark rate due to rising default risks in China’s property sector.
Maintaining the five-year LPR is seen as a signal that the People’s Bank of China is reluctant to reduce interest rates at the expense of interest rate differentials. Both rates are now at historic lows after being lowered twice in June.
China’s latest move contrasts with the efforts of other major Western economies to curb inflation and rising global interest rates. The purpose of the Chinese authorities’ decision is to indirectly support economic activity amid slowing growth and encourage commercial banks to increase lending at more favorable rates.
However, the financial troubles in China’s real estate sector pose a significant obstacle to economic growth. Household loans in China recently reached their lowest level since 2009, making it more challenging for the Communist Party to revive the economy in the aftermath of the coronavirus epidemic.
Major real estate developers, such as Country Garden, are facing bankruptcy threats with unfinished projects, which could have serious consequences for the domestic financial system.
As China continues to grapple with its economic challenges, the international community will closely monitor the impact of these measures on the global economy.
Editor: Lin Li