The anticipated interest rate cut in the U.S. did not happen, but China has cut rates instead.
There are two main factors for this interest rate cut by the central bank:
First, under the significant premise of the decoupling between China and the U.S., China has a long-term current account surplus, but its U.S. dollar foreign exchange reserves have not increased year after year. China is consciously controlling the level of U.S. dollar foreign exchange reserves and is no longer seeking to increase them.
Second, after the status of U.S. Treasury bonds as a safe asset was challenged, the interest rate differential between China and the U.S. is no longer the most significant factor driving capital outflows. The main reason why U.S. Treasury bonds have been abandoned by price insensitive buyers (central banks of various countries) is precisely due to Trump's tariff policies.
Many people always mention the exchange rate without understanding the underlying logic. With the decrease in direct trade volume between China and the U.S. and China no longer pursuing an increase in U.S. dollar foreign exchange reserves, what strategic significance does the RMB to USD exchange rate hold?
In other words, the offshore RMB exchange rate is not a constraint on the central bank's monetary policy. Maintaining a reasonable range of two-way flexible fluctuations is sufficient. The central bank does not have that much interest and energy to maintain the offshore RMB to USD exchange rate.
There was a very interesting saying before: If the Federal Reserve does not cut rates, I will not cut rates; as soon as the Federal Reserve cuts, I will follow suit, replicating last year's September 24.
In fact, the logic of cutting rates today is not wrong either, because a rate cut will inevitably impact the RMB exchange rate. Our initial rate cut will certainly lead to pressure on the RMB.
As a result, when the trade war broke out in April, it was the U.S. itself that caused the dollar to collapse, plunging from 110 to 99, and thus there were no worries about cutting rates anymore.
So does this interest rate cut mean that the Federal Reserve will also follow suit?
