This would help to rein in a sharp rise in the Yuan through reducing foreign money flows.
A former Chinese forex regulator stated Wednesday that the United States and China are increasingly divergent in their monetary policies. This would help to rein in a sharp rise in the Yuan through reducing foreign money flows.
Widely, the U.S. Federal Reserve will accelerate monetary tightening in order to control inflation this year. The People’s Bank of China must use monetary policy tools for stabilizing growth.
Guan Tao, the global chief economist of BOC International, stated that “Sino-U.S. Monetary Policy Divergence will likely increase,” in a commentary published by Shanghai Securities News.
Fed tightening will reduce foreign capital flows into China, shrinking China’s trade surplus, and helping stabilize the yuan. Guan was previously the head of the balance of payments division of the State Administration of Foreign Exchange.
Guan stated that China-U.S. policy divergence would have many effects on China. These include a shrinking yield spread and reduced purchases of Chinese securities. A strengthening dollar will also help. There will also be less demand for Chinese exports.
He wrote that even in the worst case scenario, where Fed tightening causes a global economic crises, China would mitigate its external impact by easing its monetary policy, and not tightening.
In late January, the yuan surpassed a four-year high against a dollar, while the spread between U.S. and Chinese 10-year Treasurys shrank to approximately 80 basis points from more than 250 basis points in the late 2020.
Guan described a spread between 80 and 100 basis point as the “comfort zone.”
