For the first time ever, China’s central bank is offering lenders short-term cash at a lower cost than its US counterpart.
The Federal Reserve’s interest-rate hike Wednesday has sent the US benchmark rate to 2.5%, which is higher than the 2.1% rate for the People’s Bank of China’s seven-day reverse repurchases.
That’s because China has remained an outlier among major central banks as it maintains an accommodative stance to boost its economy battered by Covid outbreaks and turmoil in the property sector. The monetary policies of the world’s two largest economies have been diverging since the Fed kicked off rate hikes this year but analysts don’t expect outflows from China to worsen going forward.
“I don’t think the policy rate inversion will increase China’s capital outflow pressure” which was bigger in the first half of this year as the gap between the two nations’ 10-year treasury bonds has narrowed, according to Zhang Zhiwei chief economist at Pinpoint Asset Management Ltd.
Yields on Treasury 10-year bonds surpassed that on similar Chinese debt, widening the gap between the two by as much as 66 basis points last month. That gap has narrowed to less than a basis point as US yields eased on concerns that aggressive Fed hikes may lead to a recession.
The wider yield gap had led to $30 billion of outflows from China’s sovereign bonds. The yuan has also fallen from the top of Asia’s currency performance ranking in 2021 to the fifth position this year with a loss of nearly 6% against the dollar. However, the currency is getting support from the nation’s trade surplus, which jumped to a record high last month.
