The U.S. dollar experienced a sharp decline, reaching a 17-month low against the Chinese yuan, following the Federal Reserve’s decision to cut interest rates. This move contrasts with the People’s Bank of China (PBoC) opting to hold its rates steady overnight, widening the gap in monetary policy between the world’s two largest economies.
The PBoC maintained its one-year loan prime rate (LPR), a key benchmark for most corporate and household loans, at 3.35%. Similarly, the five-year LPR, which serves as a reference for property mortgages, remained unchanged at 3.85%. These decisions come against the backdrop of China’s robust economic performance, with the country’s GDP expanding by 5% year-over-year in the first half of 2024. This growth was achieved despite a complex global environment, with inflation remaining subdued, rising only 0.1% year-on-year as measured by the consumer price index (CPI). The central bank acknowledged the stability of the economy but also highlighted ongoing domestic challenges, including “insufficient effective demand” and the “transition to new growth drivers.” The PBoC’s accommodative monetary stance aims to provide essential financial support for a sustainable economic recovery. However, the bank highlighted that external conditions remain “complex, grim, and uncertain,” necessitating a cautious approach to navigating potential economic headwinds.
In response to the differing monetary policies, Chinese domestic stocks, as measured by the Shanghai Composite Total Return Index, closed flat for the day, reflecting market uncertainty. However, offshore Chinese stocks performed better, with Hong Kong-listed entities, tracked by the iShares MSCI Hong Kong Index Fund (EWH), registering gains of over 1%. In the U.S. premarket trading session, major Chinese stocks listed on American exchanges also witnessed gains: XPeng Inc. (XPEV) rose by 3.3%, Li Auto Inc. (LI) increased by 1.5%, Alibaba Group Holdings Ltd. (BABA) advanced by 1.3%, and Tencent Music Entertainment Group (TME) climbed by 0.8%.
Meanwhile, in Eastern Asia, the Bank of Japan (BoJ) also maintained its interest rates at 0.25%, aligning with market expectations. Japan’s economy showed signs of a moderate recovery, although the BoJ statement acknowledged weakness in certain sectors. On the inflation front, Japan’s core CPI (excluding fresh food) has risen by 2.5-3.0% year-on-year, driven by wage increases and modest price hikes in services. Following this announcement, the Japanese yen, tracked by the Invesco CurrencyShares Japanese Yen Trust (FXY), weakened by over 1% against the U.S. dollar. However, Japanese equities rallied, with the Nikkei 225 index, represented by the iShares MSCI Japan Index Fund (EWJ), surging by 1.5% after a 3% gain in the previous session.
