Kwah Wee Hong FX Dealer at Phillip Futures
Kwah Wee Hong FX Dealer at Phillip Futures

Spotlight on recent currency developments in China and Malaysia

As US economy continues to recover and Federal Reserve continues to unwind its asset purchase program, there has been a tussle for capital flows between recovering developed nations and developing countries in Asia. Responding to this key global development, we have seen revisions to monetary policies and political changes across Asia over the last two months. China has implemented a series of monetary easing aimed at lowering financing costs and achieving growth target of 7.5%; Malaysia has hiked rate for the first time in 3 years; India’s new government announced its first budget of structural reforms that aims to revive growth; Indonesia elected a new president who is likely to offer more market-friendly policies that are positive for Indonesian assets.

Changes to monetary policies are observed throughout Asia. This article’s focus would be on China and Malaysia, and the impact of recent developments on their domestic currencies.


While China’s sluggish growth and credit crisis dominated the first half of the year, resulting in a steady depreciation of the Chinese Yuan (CNY) against the USD, there has been a sharp reverse in market sentiment in recent weeks after a slew of positive data and policy developments. These include reforms for state-owned enterprises (SOEs), relaxation of home purchase restrictions (HPR) to boost the property sector and the issuance of CNY 1 trillion in Pledged Supplementary Lending (PSL) by the People’s Bank of China (PBOC). The results were encouraging with a stronger Purchasing Managers’ Indexes (PMI) read in July and better Q2 GDP.

The announcement of PSL has also lifted sentiment in both the bond and stock markets. PSL seeks to deliver liquidity to targeted institutions and sectors that are most in need of funds at lower interest rates, thus allowing PBOC to improve credit allocation and guiding the medium-term interest rate lower. On the other hand, SOEs reform may turn out to be the most important development for China in the longer term. Successful reforms are likely to attract private investment, improve corporate governance, raise economic efficiency and increase profitability. Overall, these policy developments coupled with stronger economy data have improved investors’ confidence in the economy, leading to more capital inflows and a stronger CNY.

MYR and CNY appreciated against the USD following recent changes to their respective monetary policies – each currency is normalised to 100Source: Bloomberg& Research

MYR and CNY appreciated against the USD following recent changes to their respective monetary policies – each currency is normalised to 100

Source: Bloomberg& Research


The central bank has hiked its Overnight Policy Rate (OPR) from 3% to 3.25% in July for the first time in 3 years. This move was highly anticipated as, highlighted in its May policy statement, that there was a need for monetary tightening to ensure that risks arising from the accumulation of financial imbalances would not undermine the growth prospects of its economy. Though Malaysia’s inflation has stabilized in recent months, it is likely to remain above its long-run average as a result of higher domestic cost factors. A rate hike was necessary to curb inflation but this development should be viewed positively against the backdrop of a growing economy with stronger exports and private sector activity, which has contributed to a stronger ringgit (MYR) recently.