Impact of China’s economic policies on US Dollar and global liquidity
USD has always been considered the most reliable, safe, and stable currency of all time, and its role in global trade has made it the backbone of the global financial system. Besides, it has been the most widely used currency in foreign exchange transactions, international debt securities, cross-border loans, trade invoicing, and SWIFT payments.
However, the currency struggled last week when the USD index lost over 1 percent. It fluctuated a little below 103.00 in spite of NFP rising by 275,000 in February. China’s economic policies, such as currency pegging, export strategy, and trade dynamics, have global implications, significantly affecting USD and global liquidity.
China’s Economic Policies
Consumer inflation in China has touched 0.7%, the highest in a year, showing a considerable increment in consumer prices with a significant drop in producer prices. January witnessed a 0.8% decline, the highest in fourteen years.
Where Western Central Banks are continuously increasing the interest rates, Asian banks are keeping calm. For instance, the People’s Bank of China has cut down Key Policy Rates thrice since 2021, and the existing situation foresees more reduction.
China’s central bank has been boosting liquidity to help stabilize the financial market. This ramped up the market with PBOC’s fund injection. On March 11, 2024, the PBOC conducted 10 billion Yuan of seven-day reverse repos at an interest rate of 1.8%. By boosting liquidity, China looks forward to increasing the economy by 5% in 2024.
China’s reverse repos will have a potential impact on global liquidity in terms of affecting investor confidence, market dynamics, and funding costs. Since China has been a key player in regulating the world economy, its liquidity directly impacts foreign exchange and, thus, global financial stability.
Impact on the US Dollar and Global Liquidity
China’s inflation will boost investor confidence, enabling more capital flow into the Chinese market and strengthening the Yuan and, thus, the Chinese economy. However, the US Dollar may exert depreciation pressure on Yuan and strengthen itself. On the other hand, the US dollar may witness a decline in value when the PBOC has less intervention in currency markets.
China’s liquidity injections will increase global demand for oil and commodities, making the world rely on these resources. Besides, Increased liquidity may indirectly impact US CPI inflation. Investors seeking higher returns may move capital to China, affecting the demand for dollars. Overall, the real trade-weighted value of the US dollar may decrease.
Concluding Remarks
China’s economic policies wield a substantial influence on global finance. As the world’s second-largest economy, China’s actions ripple across borders, affecting currencies, liquidity, and stability. Despite the US dollar’s historical reliability, recent Chinese financial moves have raised concerns.
China’s contrasting monetary moves, including easing liquidity and boosting economic growth, play a pivotal role. As China’s liquidity decisions resonate globally, investor confidence, market dynamics, and funding costs all hang in the balance. The US dollar feels turbulence because of China’s actions. In international finance, China’s economic policies will remain a critical force, significantly impacting global currencies and liquidity.
