Chinese Yuan Rebounds As PBoC Unveils Additional Stimulus Measures

The Chinese yuan is rebounding at the end of the trading week, buoyed by the central bank’s recent stimulus measures to stimulate the world’s second-largest economy as the country tries to return to normal. The yuan had breached the crucial 7 mark against the US dollar this week, but the currency might recover amid encouraging economic progress.

On Friday, the People’s Bank of China (PBoC) announced a $79 billion stimulus push to help the nation’s private sector recover from the Covid-19’s economic fallout. The PBoC will slash the reserve requirement ratio (RRR) by a range of 0.5% and 1%, freeing up as much as $78.8 billion in funds that financial institutions can lend to businesses. Officials are signaling that they want these banks to lend to smaller businesses that are having a hard time accessing traditional bank lending.
The PBoC is also projected to slash its benchmark deposit rate and medium-term lending rate by as much as 25 basis points in the coming months.
It is unclear how much borrowing and spending will be needed to rev up the economy.
This would be in addition to the massive $570 billion stimulus plan that many analysts have been warning about in recent days. The funds are projected to be allocated to companies with weak cash flows and public infrastructure endeavors. Experts note that Beijing will not accept a gross domestic product (GDP) growth rate of less than 5%, so it may go beyond the estimated figure if necessary. The latest forecasts suggest year-on-year growth in the first quarter could plunge to 4%.
The PBoC’s actions follow other central banks’ initiatives, including the Reserve Bank of Australia’s $8.8 billion injection into financial markets and the Federal Reserve’s $1.5 trillion rescue plan.
Qian Wan, an economist for Bloomberg, wrote:

China’s fiscal health is under significant pressure as the coronavirus outbreak reduces government revenue by disrupting economic activity, while expenditure is rising to stimulate demand. The strain is more evident for local governments that have limited income while taking on an out-sized spending responsibility.

On the data front, new motor vehicle sales cratered 79% in February, down from the 18.7% contraction in January. Year-to-date foreign direct investment (FDI) tumbled 8.6%. Earlier this week, the February inflation rate came in at 5.2%, the producer price index (PPI) clocked in at -0.4%, and outstanding loan growth climbed 12.1%.
The USD/CNY currency pair fell 0.3% to 7.0082, from an opening of 7.0296, at 16:50 GMT on Friday. The EUR/CNY declined 1.53% to 7.7521, from an opening of 7.8728.

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