The People’s Bank of China will not follow the Fed in raising rates, deciding instead to keep borrowing costs steady. This move suggests policymakers in Beijing have continued trust in the yuan as China opens up its capital markets.
By breaking with tradition and not following the Fed’s action, China faces downward pressure on the value of its currency. However, according to Citic Securities Co., the exchange rate is no longer the primary concern for China’s central bank it terms of monetary policy.
“It appears that the PBOC holds strong confidence on yuan stability and even a symbolic hike in reverse repo yield is not needed,” said Ken Cheung, Senior Currency Strategist at banking group Mizuho. He added that foreign capital inflows will buoy up the yuan amid further liberalisation.
The yuan has had a strong start to the year with a 1.8% gain against the dollar and has enjoyed tailwinds from MSCI’s inclusion of A-shares in some of its indices and a growing appetite from foreign investors for Chinese sovereign bonds. It is the now the second-strongest Asian currency behind the Japanese yen, according to Bloomberg.