Surprise, surprise! The Chinese central bank decided to drop a bombshell on the forex market right before the weekend by announcing several rate cuts. That’s the sixth time they’ve cut interest rates since November last year!
What in the world is going on in China?!
Unless you’ve been living under a rock, you’re probably aware that the Chinese economy has been in the middle of a slowdown for the past few months. Inflation has tanked, GDP growth is at its weakest pace since 2009, import and export activity have tumbled, and its stock market has dropped it like it’s hot. This is a pretty huge deal since the Chinese economy is the second largest one in the world so what happens in China doesn’t stay in China.
What are Chinese authorities doing about all this?
The People’s Bank of China (PBOC) lowered its benchmark interest rate from 4.60% to 4.35% in order to boost liquidity through cheaper borrowing costs. Aside from that, the central bank also decided to cut the deposit rate from 1.75% to 1.50% and reduce the reserve requirement ratio (RRR) by 0.50% to spur lending activity.
Prior to this, the PBOC already announced RRR reductions in four instances since November last year in hopes that lowering the amount of cash that banks are required to keep in the central bank’s vaults would mean that they’d have more moolah to lend to consumers and businesses.
The Chinese government has also acted to devalue the yuan in order to stimulate demand for exports and keep domestic price levels supported. After all, a weaker local currency enables China to hit two birds with one stone, as it makes the country’s products relatively cheaper in the international market while making imported goods more expensive.
So will these easing efforts be good for China and the global economy?
Supposedly. The Chinese economy has been in dire need of stimulus for the past few months so it’s no surprise that Asian equities reacted positively to the latest batch of PBOC rate cuts. Besides, most central banks have been blaming the Chinese slowdown for bringing a huge source of uncertainty for their own economies so these easing moves could provide a bit of relief.
However, the fact that Chinese authorities have been announcing one rate cut after another in the past few months suggests that these monetary policy tools might already be losing their effectiveness. Chinese government officials are still set to convene later this week to come up with policies and reforms for the country’s five-year plan under President Xi Jinping.
How can this affect forex market trends?
For now, it looks like the PBOC rate cuts were enough to revive risk appetite, as higher-yielding assets advanced after the announcement. Commodity currencies were also in good spirits since additional liquidity could lift prices of oil and precious metals. In particular, the Australian dollar has been able to regain ground against its forex peers, as more stimulus in China could shore up demand for Australia’s iron ore exports.
Moving forward, forex market watchers are likely to keep close tabs on whether these easing efforts will be able to steer the Chinese economy towards recovery or not. Signs of progress could allow central bank officials to breathe easy and possibly be less downbeat with their outlook. Do you think risk-taking can carry on?