China on the horns of a Fed rate cut dilemma

The People’s Bank of China (PBoC) faces a crucial policy dilemma as it weighs following the US with significant monetary easing to tamp down an appreciation of the yuan while seeking to avoid crimping Chinese bank profits.

The US Federal Reserve lowered its key lending rate by 0.5 percentage points to 4.75% to 5% on Wednesday, marking the first easing in the US since 2019. The cut was bigger than the usual reduction of 0.25 percentage points as Fed Chair Jerome Powell said high borrowing costs, put in place to fight inflation, should not end up hurting the US economy.

Powell said more rate cuts can be expected in the coming months and that the pace of the easing will accelerate if the economy is weak and slow if it’s strong.

As the dollar weakened, the on-shore renminbi increased by 233 basis points to end the domestic trading session at 7.066 per dollar on Thursday, the strongest close since May 26, 2023. Prior to this, the renminbi has already gained 2.8% over the past two months as currency traders anticipated that the US Fed would lower interest rates in September.

Currency markets expected that the PBoC may cut its loan prime rate (LPR) by 20 basis points on Friday, the Securities Times, a state-owned newspaper and a unit of the People’s Daily, reported on Thursday. The newspaper said market expectations for a reduction in existing mortgage rates, as well as the launch of economic stimuli, are also growing.

Other Chinese media, including iFeng.com, also said the PBoC will probably cut rates on Friday. Although officials have not confirmed all these reports, stock traders have taken advantage of the opportunity to profit from the markets.

The Shanghai Composite Index gained 0.69% to 2,736 while Hong Kong’s Hang