U.S. Fed Interest Cuts Can Be Beneficial For China’s Renminbi

Yuan and US dollar
A U.S. dollar banknote featuring American founding father Benjamin Franklin and a China's yuan banknote featuring late Chinese chairman Mao Zedong are seen among U.S. and Chinese flags in this illustration picture taken May 20, 2019. (Photo: REUTERS/Jason Lee/Illustration)

Markets are expecting the U.S. Federal Reserve to push through with its planned interest rate cuts this year and analysts believe that if this happens, the Chinese renminbi could get a good boost.

According to China Daily, Researcher at the Bank of China's Institute of International Finance, Wang Youxin, predicted that the Chinese currency will gradually stabilize due to relevant policies as well as the strong possibility of U.S. interest rate cuts.

The Fed has hinted over the last few weeks that it may slash interest rates as a means of cushioning the U.S. economy from the effects of global trade disputes. "This would give the renminbi a comparative advantage, and China is expected to stick to prudent monetary policy," Wang pointed out.

It's not just the potential Fed cuts that could help stabilize China's currency. International payments are expected to reach a more balanced state, propelling the renminbi to a level that should allow it to redeem losses against the American dollar over the past few months.

The trade war has ignited fears among economists regarding how the renminbi will perform throughout the year. Losses were incurred during the first half of this year but many financial experts are upbeat about a rebound for the currency by the second half.

Even the International Monetary Fund (IMF) is positive about the renminbi bouncing back in the coming months. "China's current account is now broadly in line with fundamentals," economist at the IMF, Gita Gopinath, noted.

Gita went on to explain that while the country's current account surplus saw a decline in H1, the government's most to push for a more flexible exchange rate plus the overall appreciation figures of the renminbi over the last 10 years could bolster better performance for the rest of the year.

The foreign exchange agency revealed this week that China's net foreign exchange sales from commercial institutions and banks during the first six months of 2019 stood at $33.2 billion. The numbers indicate a more stable ground for the Chinese currency's value, experts said.

Meanwhile, the Chinese masses are looking forward to the new banknotes and coins that the government is set to release on August 30. The announcement was made earlier this month.

The People's Bank of China said at that time that the new notes will feature technology that prevents counterfeiting, making it harder for counterfeiters to produce fake notes and Chinese currency that is not approved by the central bank.

Despite the eagerness of some to use the new releases, other Chinese netizens seemed to be less excited about the news. This is because of the rise in digital payment methods that allow for non-cash transactions in various purchases or bill payments.

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