China’s yuan trimmed declines while sovereign bonds held an advance, as the nation is said to be mulling more stimulus measures after a surprise rate cut. Stocks saw modest gains.
The offshore yuan pared losses of as much as 0.3% and moved away from the keenly watched 7.2-per-dollar level. The yield on 10-year government bonds fell four basis points to 2.63%, a nine-month low. China stocks traded in Hong Kong extended an advance.
China is considering a broad package of stimulus measures as pressure builds on the world’s second-largest economy, according to people familiar with the matter. The stimulus proposals include further rate cuts and at least a dozen measures designed to support areas such as real estate and domestic demand, the people said, asking not to be named because the matter is private.
Earlier on Tuesday, the People’s Bank of China reduced the interest rate on its seven-day liquidity tool, the first time since August. Analysts said the central bank may also cut the rate on the medium-term lending facility on Thursday.
Here’s what China watchers are saying:
Galvin Chia, a currency strategist at NatWest Markets based in Singapore.
- A source article is not the game changer, “but it’s 50% there in showing that the Chinese authorities are now willing to essentially heed what markets have been calling for for 1.5 months now and roll out more stimulus.”
- If China does deliver the stimulus, the offshore yuan can advance beyond 7; Based on relative equities and interest rates, the currency should rightly be in the 6.8 - 6.90 region.
- Markets have been positioned very bearishly, with a lot of risk premium in the currency.
Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets in Singapore
- The problem with the economy increasingly is lack of demand, and interest rate cuts and more credit supply are not going to solve that underlying problem.
- China needs more aggressive fiscal stimulus, rather than interest rate cuts or easier mortgage policies.
- Currency depreciation is another form of monetary stimulus, and the path to a weaker trade-weighted yuan is justified fundamentally.
- The yuan will likely weaken to 7.2, with upside risks to the dollar-yuan rate predominating until the markets get more decisive stimulus measures from Beijing.
Ju Wang, BNP Paribas head of greater China FX & rates strategy in Hong Kong
- The move confirms the thinking that rates have yet to bottom out, as both producer price inflation and exports are on a downward trend
- Will monitor if there are other policy stimulus coming along with monetary easing soon. Markets expect the rate on the medium-term lending facility and the loan prime rate are likely to be moved too on June 15 and June 20, respectively
- There’s expectations onshore that China may announce measures to support the property sector
- Yuan can weaken further in reaction, but increasingly versus both the dollar and basket. The RMB CFETS basket at 97 is still too high, and a further drop is needed to reduce the deflation pressure locally
Steven Leung, executive director at UOB Kay Hian Hong Kong Ltd.
- “A rate cut is not enough to lift the market, especially when investors have other choices to put their money like in Japan, where the momentum there is so strong,” referring to the equity market
- Market needs to see more policy support, both monetary and fiscal, before turning around the bearish sentiment on China’s economic outlook
Kiyong Seong, Societe Generale lead Asia macro strategist in Hong Kong
- It has been clear that Chinese policy authorities want to have lower interest rates, even at the expense of a weaker currency
- Rate cuts in MLF, LPR will surely follow and China may also reduce the reserve-requirement ratio soon
- As the PBOC rate cut cycle is not over yet, Chinese rate will remain low. The catalyst for a bottoming out in Chinese yields should be from expansionary fiscal policy, but it’s uncertain when that materializes
- Ten-year China yields will fall to 2.6% by year end, while the two-year rate will drop to 1.9%
Khoon Goh, head of Asia research at Australia & New Zealand Banking Group
- With China’s monetary policy going in the opposite direction of the Fed, this will put further pressure on the yuan
- Given the lack of any official comment on the currency or signal from the fixings, today’s rate cut gives the greenlight to push the yuan weaker, with the 7.20 level likely to be tested
--With assistance from Chester Yung.
