This week, yield differentials between China and the U.S. have reached their widest point in 22 years, contributing to the yuan's decline to its lowest level in over a year, despite a recent interest rate cut by the Federal Reserve.

The yuan is currently trading at a one-year low, reflecting significant depreciation amid contrasting economic conditions.

The stark yield differences between 10-year bonds from China and the U.S. underscore the divergent economic landscapes of the two nations.

In response to economic challenges, the Politburo announced that China will adopt an 'appropriately loose' monetary policy in 2025, marking its first easing in 14 years.

The People's Bank of China (PBOC) has expressed caution regarding interest rate risks due to rapid declines in Chinese yields, indicating a careful approach to monetary policy.

Current economic pressures, including falling yields and a weakening yuan, are limiting the PBOC's options for immediate monetary easing.

Analysts from Nomura anticipate that the PBOC will implement a 15-basis-point cut to the 7-day reverse repo rate and both loan prime rates (LPRs) in the first half of 2025, along with a 50-basis-point reserve requirement ratio (RRR) cut by the end of 2024.

On December 20, 2024, the PBOC decided to keep its benchmark interest rates unchanged, maintaining a range between 3.10% and 3.60%.

Market expectations indicated that the PBOC would maintain its benchmark lending rates during this announcement.

This trend of maintaining interest rates is mirrored by the European Central Bank, which also lowered its rates recently, suggesting a broader easing of monetary policy among major economies.

Similarly, the Bank of England opted to maintain interest rates during its last meeting of the year on December 19, 2024.

In contrast, the Federal Reserve cut its benchmark rates by 25 basis points on December 18, marking its third consecutive rate reduction this year.