HONG KONG ¨C Last month, the U.S. Federal Reserve initiated its first monetary-easing cycle in more than four years. With a 50-basis-point cut, the Fed brought the federal funds rate down from its 20-year high of 5.3% to a range of 4.75-5%. This is good news for China, which now has much more room to maneuver in its quest to reflate its economy.
Prior to last month¡¯s rate cut, monetary policy in the United States and China were on sharply diverging paths. The Fed had raised its benchmark interest rate 10 times since mid-2022, while the People¡¯s Bank of China lowered its key policy rate ¡ª the seven-day reverse repo rate ¡ª from 2.1% to 1.7%.
The PBOC would have eased monetary policy further, were it not for the interest-rate gap with the U.S., which was causing the yuan to depreciate against the U.S. dollar and depressing Chinese asset prices. That, together with a broader deflationary trend, rising geopolitical tensions and declining population growth, fueled capital outflows, which totaled a whopping $787.8 billion over the last three years.
With your current subscription plan you can comment on stories. However, before writing your first comment, please create a display name in the Profile section of your subscriber account page.