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Chinese yuan could come under more pressure after surprise rate cut

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Banknotes of Renminbi arranged for photography on July 3 2018 in Hong Kong.

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China’s central bank unexpectedly cut loan rates on Monday — a move that will likely put more downward pressure on the Chinese currency, one analyst said.

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“What has happened this morning won’t help the [Chinese yuan’s] case. And should contribute to further downward pressure on CNY,” Gareth Berry, Macquarie Group’s foreign exchange strategist, told CNBC on Monday, adding that it could push up the range toward 6.55 yuan per dollar.

The Chinese yuan is currently trading at about 6.34 to the dollar on Monday.

In an attempt to boost the economy, the Chinese central bank said it will cut the interest rate on 700 billion yuan ($110 billion) worth of one-year medium-term lending facility (MLF) loans to 2.85% — 10 basis points lower, according to Reuters.

This was the first time People’s Bank of China cut the MLF rate since April 2020.

While the rate cut was in line with market expectation, it also shows Chinese policymakers are concerned about economic growth, said Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a note.

“Economic growth is clearly under pressure, recent omicron outbreaks in China exacerbated the downside risk. The lower inflation opened policy room. We think China is at the early stage of a rate cut cycle,” he said.

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The central bank also cut the seven-day reverse repurchase rate, another lending measure. The PBOC also injected another 200 billion yuan of medium-term cash into the financial system.

Zhang predicted there will be more cuts in the reserve requirement ratio and interest rate in the first half of the year. The reserve requirement is the amount of money banks must hold as reserves with the central bank.

“The omicron outbreak has become the top risk in China,” he said.

“We think risk to Q1 GDP growth has shifted to the downside. The rate cut itself is a small step in the right direction,” he added, referring to Monday’s policy loan rate cut — “but the economic outlook largely depends on how effectively the outbreaks can be contained.”

On Monday, China reported that its economy grew by 8.1% year-on-year in 2021, according to official data from the National Bureau of Statistics. GDP in the fourth quarter rose 4% from a year ago, faster than analysts expected.

… policymakers now are much more concerned about growth and we should see concerted action going forward.

Johanna Chua

Citi Global Markets Asia

China’s zero-Covid policy, aimed at limiting the virus outbreak, prompted renewed travel restrictions within the country including the lockdown of Xi’an city in late December. 

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The larger than expected 10 basis points MLF rate cut rate seems to suggest China is concerned about its economic slowdown, Johanna Chua, head of Asia economics and strategy at Citi Global Markets Asia, told CNBC’s “Street Signs Asia” on Monday.

“Which really suggests, I think, policymakers now are much more concerned about growth and we should see concerted action going forward.”

She said the country is not likely to abandon its zero-Covid policy anytime soon.

— CNBC’s Evelyn Cheng contributed to the story

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