Chinese Yuan Weakens As PBOC Introduces New Benchmark

The Chinese yuan is weakening on Tuesday after the central bank introduced a new lending benchmark as part of the nation’s market-oriented reforms and attempts to weather the economic trade winds. Beijing joins a long list of other major markets that have recently imposed lower interest rates to boost lending and spur growth.

On Monday, the People’s Bank of China (PBOC) reduced its lending reference rate – the loan prime rate (LPR) – by 10 basis points from the official benchmark of 4.35% to 4.25%. The LPR is the average of the rates that 18 designated financial institutions charge their clients.
The measure could help central banks decrease lending rates in a timely and regular way through open-market operations. It is considered a tool to help make PBOC’s easing of monetary conditions swifter and to counter moves by the Federal Reserve. It is also a new method for the central government to manage the negative effects of the trade dispute with the US.
Although the PBOC joins the growing chorus of central banks introducing monetary easing efforts, analysts contend that the decision is not a big deal. Ostensibly, the rate cut is part a of long-term reform strategy and its short-term effects will have a ceiling, though it is meant to push banks to slash lending rates.
However, speaking to reporters, PBOC Vice Governor Liu Guoqiang stated that policymakers do not want to see additional drops in mortgage rates, promising that the central bank will ensure stability.
Guoqiang also noted to the press that there could be further declines in the reserve requirement ratios (RRRs) and interest rates. When that might take place is unknown as the PBOC official said benchmark rates are staying the same for an unspecified length of time.
All is quiet on the data front as China is not anticipating official economic data until next week when industrial profits and manufacturing and non-manufacturing purchasing managers’ index (PMI) are released.
The USD/CNY currency pair rose 0.14% to 7.0609, from an opening of 7.0508, at 14:56 GMT on Tuesday. The EUR/CNY edged up 0.2% to 7.8288, from an opening of 7.8126.

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