China’s yuan, central bank performing well under stress, but US Fed rates adding to pressures

Prolonged high interest rates in the United States could introduce uncertainty to the monetary policy outlook of emerging economies, the world’s “bank for central banks” said, pointing to rising pressures on Asian currencies and capital outflows.

“In general, central banks around the world have so far done a very good job containing inflation. But the job is not finished yet,” said Zhang Tao, chief representative of the BIS office for Asia and the Pacific.

“If interest rates stay higher and [the US dollar] remains stronger, whether the system can continue to face the pressures remains to be seen,” he said.

Zhang said that since the Asian financial crisis of 1997, central banks have adopted either flexible or inflexible inflation targeting regimes, supported by flexible foreign exchange rates.

As such, the fundamentals of emerging economies are better than they were during that trying period, he said.

“One of the lessons from the past is that policy measures need safety margins and to work effectively within the boundaries of stability,” Zhang said. “For example, the impact of the prolonged period of lower interest rates before Covid-19 has brought to light limitations and side effects. When pressure is felt, there’s a question as to whether policies remain as effective as they were supposed to be.”

The yuan is facing its highest level of capital outflow in eight years, according to research released last week by French investment bank Natixis. The bank estimated China’s trailing 12-month net capital outflows stood at US$139 billion as of May 2024, the worst year for the figure since the period from 2016 to 2017.

The BIS report estimated that the combination of falling prices in China and a depreciating currency caused the