China’s central bank trimmed rates on seven-day reverse repurchase agreements on Monday, the first time this move was made since 2015. The decision sent the yuan modestly higher and sparked speculation that China is on a path towards additional financial stimulus and towards a trade deal with the United States, Reuters analysts commented.
Reports from CNBC this weekend further explained China’s current economic strategy, citing the country’s “silent” effort to diversify its reserves and reduce its dependence on the U.S. dollar, a currency which has long been tightly bound to the yuan.
According to CNBC, Beijing is slowly cutting back its holdings of U.S. Treasuries. China was the largest holder of these assets until June, when Japan became the largest holder of U.S. Treasuries. China has reduced its U.S. Treasury holdings by $88 billion in the past 14 months and is expected to reduce its holdings further as Beijing seeks to diversify its assets and limit its dependence on the United States. To this end, Beijing has invested heavily in gold, and held 1,957.5 tons of the precious metal in October, a record high. Analysts expect China to continue shedding its U.S. holdings in favor of other currencies including the British pound and the Japanese yen. Such a strategy would help China build deeper trade relationships with other countries and to gradually ease its dependence on the U.S.
Other Considerations for China
The Chinese economy has other problems besides its strong tie to the dollar. The country’s consumer inflation settled near an eight-year peak in October as the country struggled with a steep slowdown in economic growth. The country’s inflation surge stemmed primarily from the rise in pork prices, The South China Morning Post reported, which jumped over 100 percent in October compared to October 2018, and disrupted the food component in the country’s CPI basket.
Pork is a staple of the Chinese diet, and the industry has been devastated by the outbreak of African swine flu which has limited the amount of pork available. China is also the world’s largest hog producer, and the country’s limited ability to raise hogs is having a direct impact on the Chinese economy.
In addition to distressing CPI numbers, China’s GDP growth in Q3 2019 was the slowest the country has seen since Q1 1992.
Despite China’s larger problems, its benchmark stock indexes were both higher on Monday and the yuan was treading water. The Shanghai Composite was up 0.62 percent as of 3:23 p.m. HK/SIN, and the Shenzhen Composite was up 0.71 percent. The gains in China came as Asian markets were mixed. Japan’s Nikkei 225 gained 0.49 percent and Hong Kong’s Hang Seng Index surged 1.13 percent, but Australia’s ASX 200 and South Korea’s Kospi both headed lower.