China Can Accommodate Fed’s Rate Hikes, Forex Official Says

Bloomberg

Published Apr 22, 2022 15:16

(Bloomberg) -- China is able to accommodate the impact of the Federal Reserve’s rate hikes, a senior foreign exchange official said, downplaying concerns about the yuan’s weakness and capital outflows.

Recent moves in the Chinese currency were market-based and expectations on the yuan have been “basically stable,” said Wang Chunying, spokeswoman of the State Administration of Foreign Exchange. The foreign exchange market will likely remain stable due to China’s resilient economic fundamentals, sustaining trade surplus and foreign direct investment inflows, low foreign debt risks and the increasing flexibility of the yuan, she said.

“With strengthened resilience in the foreign exchange market, China has the foundation and conditions to adapt to the Fed’s policy adjustment,” Wang said at a briefing Friday.

The comments came as the Chinese currency trading offshore is heading for its biggest weekly depreciation since August 2015, when China devalued the yuan to help combat an economic slowdown. The offshore yuan weakened 0.69% to 6.5258 per dollar as of 5:41 p.m. local time, extending losses over the past five days to 2.26%. 

Wang insisted that the yuan’s movements have been two way and that they were “stable and healthy.” Money has kept flowing into the country through trade in goods and direct investment, while Chinese companies’ overseas investment has become “more rational” and household demand for foreign exchange is weak amid travel curbs to contain Covid, she said. Market participants’ buying of the local currency when it falls will also help limit the room for further depreciation, she added.

The continued rises in U.S. yields have threatened to exacerbate outflows from China’s bond market, as the People’s Bank of China has loosened policies further to counter the economic headwinds caused by Covid lockdowns.

The yield advantage of China’s government bonds over U.S. Treasuries -- which vanished for the first time since 2010 this month -- is not the sole factor affecting overseas investors’ decisions, Wang said. 

The long-term trend of foreign inflows remains unchanged, because China still maintains an interest rate premium over the U.S. after inflation, allowing stable returns on its bonds, and diverging economic cycle means investors could buy yuan-denominated assets to diversify risks, she added. Global central banks are also seeking alternative reserve currencies and passive bond inflows will continue as China is added into global indexes, she added.

Wang said outflows from China’s bond and equity markets moderated toward the end of March and slowed further in April, without specifying.