Can China’s pummelled yuan find strength with US Fed pausing interest hikes?

Even with China getting a bit of a respite from the US Federal Reserve’s decision to pause its interest-rate hikes that have affected global markets, analysts say this “breathing room” does not remove the urgency that Chinese regulators face in curbing cross-market contagions while trying to stabilise the yuan exchange rate.

The rate increases added pressure on the yuan that has persisted, recently sending its exchange rate against the US dollar to a 16-year low, as the country is also grappling with multiple financial challenges, including foreign investors pulling capital from China’s onshore stock exchanges amid slumping equity prices.

“The pressure on China’s yuan will be slightly down for a short period [following the Fed’s decision],” said Ming Ming, chief economist at Citic Securities.

He described Fed chairman Jerome Powell’s speech as more “neutral”, despite the US official saying they remain willing to raise rates again after assessing job and inflation data between now and their next meeting in December.

The US dollar index – a gauge of the currency’s performance against a basket of other major currencies – was able to be pulled back from an 11-month high of 107, Ming said. The index goes up when the dollar gains “strength”, relative to other currencies.

Beijing has been prioritising the yuan’s stability while managing financial risks, especially in cross-market contagions, and that remained unchanged at its five-yearly financial work conference that ended on Tuesday.

Both China’s central bank and the forex regulator, the State Administration of Foreign Exchange (SAFE), vowed to prevent one-way bets on the yuan’s exchange rate and its volatility, while promoting the market-oriented reform of an exchange-rate-formation mechanism, according to a joint online statement that both respectively published on Thursday.

How far will China go after yuan slides to 16-year low against the US dollar?

“[China’s] foreign-exchange market has the foundations and capacity for stable progress, and the balance of payments will continue to remain balanced overall,” SAFE deputy head Wang Chunying said in a separate statement a day earlier.

However, Ming at Citic noted that because the possibility of future rate increases exists, the impact will continue to test China’s stock, bond and foreign-exchange markets.

“Yet, domestic economic development is still the core deciding factor for the currency’s value in the long run,” Ming said. “Policies on stabilising investment, boosting consumption and exports are still the most effective ways to stabilise the currency.”

China’s central bank could still adopt policies such as adjusting the foreign-exchange-reserve ratio or the foreign-risk-reserve ratio to maintain a healthy and stable policy on the currency when necessary, he added.

There was an outflow of US$75 billion worth of capital from China in September – the largest net outflow since 2016, Goldman Sachs said in a report earlier this month, using its measure of cross-border currency flows. That came after a US$42 billion flight in August as the capital and current accounts suffered deficits.

Yet, a report published by China International Capital said the latest Fed decision could give “breathing room” in terms of property-value depreciations and capital flows.

“For the market, a stronger US economy and the pause in interest-rate hikes will be beneficial to improving risk appetite and could give breathing room to property and capital that were depreciated earlier on,” said the report published on Thursday.