China is facing a sharpening dilemma between a perceived need to keep interest rates low to help the economy manage its debt burden and a downward pressure on the Chinese yuan, said Fitch Ratings on Monday.
The authorities have cut interest rates steadily since November 2014 in a bid to help the economy manage its debt burden at a time of slowing growth. However, lower rates are helping drive capital outflows, weakening the yuan, it said.
The yuan has depreciated by just under 6 percent versus the U.S. dollar since the authorities began to allow the unit to weaken in mid-August 2015. The decision on Dec. 11 by the People's Bank of China to measure the yuan against a broader basket of currencies and not just the U.S. dollar could also contribute to further weakness of the yuan against the U.S. dollar, according to Fitch.
Fitch does not expect the authorities to resolve the dilemma with a large trade-weighted yuan depreciation, as this would risk creating additional uncertainty and further undermining policy credibility.
