China’s yuan has weakened by 4.7 per cent against the US dollar since the start of the year, but the central bank has refrained from direct intervention.
Overseas investors held 3.4 trillion yuan (US$468 billion) of yuan-denominated bonds at the end of September, down from 3.48 trillion yuan in August, amid a weaker currency and a poor economic outlook.
Another interest rate cut could further weaken the renminbi while global inflation risks are rising and higher import costs threaten domestic price stability. By contrast, rolling out more fiscal stimulus is a viable option as there is precedent of a higher budget deficit, and investor demand for Chinese debt remains firm.
A move by the People’s Bank of China to cut the foreign exchange deposit reserve requirement ratio for banks next month is an attempt to slow down the depreciation of the yuan and reduce the incentive to hold onto the US dollar.