US Treasury secretary Janet Yellen addresses the media ahead of the G20 summit in New Delhi, India, on Friday
US Treasury secretary Janet Yellen said ahead of the G20 summit in India on Friday that countries in east Asia would be more affected by China’s economic slowdown © Francis Mascarenhas/Reuters

US Treasury secretary Janet Yellen said China had the “policy space” to tackle its economic slowdown as Beijing extended efforts to pull the renminbi back from 16-year lows against the dollar.

China’s faltering economy is fuelling concerns for the global economy ahead of a G20 summit due to start on Saturday in India. Speaking in New Delhi, Yellen said she did not expect the slowdown in China to have a “very significant direct impact on the United States” but said countries in east Asia were more likely to be affected.

“We see China’s growth as slowing over time,” Yellen told reporters. “That said, China has quite a bit of policy space to address these challenges, so we’re monitoring the situation.”

China has so far refrained from large-scale fiscal stimulus or a bailout for the country’s struggling property sector, though it has cut benchmark lending rates as part of efforts to restore confidence.

The lack of concerted effort by Beijing has added to downward pressure on the renminbi, which is down more than 6 per cent against the dollar this year. The exchange rate touched levels last seen in 2007 on Thursday, after data showed a fourth straight month of decline in Chinese exports.

Following the currency’s slide, the central bank set the trading band for the renminbi against the dollar at an unexpectedly high level on Friday. Foreign exchange strategists and economists said it reflected senior officials’ growing discomfort with renminbi weakness.

While policymakers welcome the boost to exports afforded by a softer currency, they remain wary of capital outflows that could be stoked by runaway depreciation against a strengthening dollar.

Despite the move by the People’s Bank of China, the renminbi fell as much as 0.2 per cent against the dollar on Friday to Rmb7.3469.

Line chart of Renminbi per dollar showing China’s currency pushes against trading band floor

Yellen did not offer any specific prescriptions for Chinese officials but said Washington was monitoring the “challenges” facing Beijing, including “less of a pick-up” in consumer spending after Covid-19 restrictions were lifted at the start of this year, as well as longer-term problems such as debt in the property sector and demographic decline.

Monetary easing to boost China’s economy has pushed down interest rates on Chinese government bonds relative to those on US Treasuries and has already prompted more than $20bn in foreign outflows from the country’s onshore debt market this year. That has added downward pressure to the exchange rate.

“This is a very dynamic dance,” said Hui Shan, chief China economist at Goldman Sachs. Since sluggish economic growth meant there was no option to raise interest rates to match those in the US, the central bank was primarily aiming to manage the currency’s fall, she said. “Most investors still expect [the renminbi] will continue to depreciate.”

Column chart of Difference between trading band’s daily midpoint fix and market expectations (Rmb/$) showing PBoC uses daily ‘fix’ to push back against dollar strength

Recent efforts by the PBoC to prop up the renminbi have focused on its daily fixing of the currency trading band’s midpoint, around which the renminbi can be traded 2 per cent in either direction against the dollar. On Friday, the PBoC set the fix at Rmb7.215 a dollar, about Rmb0.11 stronger than a consensus forecast from analysts surveyed by Bloomberg.

“You can see why the renminbi is plumbing new lows because the dollar is strong across the board and the PBoC’s options [to support the renminbi] remain limited,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore.

“The central bank will continue to try and use the fix to prevent a more debilitating slide in the exchange rate, which would worsen sentiment towards China and lead to more capital outflows and further falls,” he added. “They don’t want to get into that vicious circle.”

Foreign exchange strategists said unless Beijing launched major fiscal stimulus or the broader rally for the dollar began to fade, there was little chance of a turnaround for China’s currency.

“Now that we’re through those low levels from last year there seems to be more to go, and the key is that the perception outside of China is that Chinese investors are looking for the exits,” said Sean Callow, senior currency strategist at Westpac.

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