The divergence of monetary policies between China and the United States contributes to the stability of the yuan (ex-regulator)

Chinese yuan banknotes are seen in this illustration taken February 10, 2020. REUTERS/Dado Ruvic/Illustration

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SHANGHAI, Feb 16 (Reuters) – Increasingly divergent monetary policies between China and the United States would help curb an excessive rise in the yuan by reducing foreign capital inflows, a former Chinese forex regulator said on Wednesday.

The US Federal Reserve is widely expected to step up monetary tightening to control inflation this year, while the People’s Bank of China is expected to use monetary policy tools to stabilize growth.

“As a result, the divergence in China-US monetary policies is likely to increase,” Guan Tao, chief global economist at BOC International, said in a commentary published in the Shanghai Securities News.

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Fed tightening is expected to reduce foreign capital inflows into China, reduce the country’s trade surplus and thus help stabilize the yuan, which needs to be better aligned with economic fundamentals, said Guan, who previously headed the Department of China’s state administration balance of payments. Foreign currencies (SAFE).

Guan said the divergence in Sino-U.S. policies will have several effects on China, including a narrowing of the yield gap, a reduction in purchases of Chinese securities, a strengthening of the dollar, a drop in demand for Chinese exports. and volatility in global financial markets.

Even in the worst-case scenario of Fed tightening triggering a global economic crisis, China would cushion the external impact by easing monetary policy, not tightening it, he wrote.

The yuan hit a nearly four-year high against the dollar in late January, even as the spread between Chinese and US 10-year Treasuries narrowed to around 80 basis points from a high of more than 250 basis points at the end of 2020.

Guan described a spread between 80 and 100 basis points as the “comfort zone”.

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Reporting by Samuel Shen and Andrew Galbraith; Editing by Sam Holmes

Our standards: The Thomson Reuters Trust Principles.

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