What does the narrowing interest rate differential between China and the US mean?

Hello everyone!

On December 10, 2025, the Federal Reserve announced a 25 basis point cut to the target range for the federal funds rate, to between 3.5% and 3.75%.

This is the Fed's third rate cut this year, with a cumulative reduction of 75 basis points.

Meanwhile, the yield on my country's 10-year government bonds is around 1.83%.

This narrows the inverted interest rate curve between China and the US, which had persisted for three years, from a high of 4% to around 2%.

This means that whether the Fed continues to cut rates will have a diminishing impact on us.

The long-standing concern about the domestic capital market being "siphoned off" by US Treasury bonds has been greatly reduced.

At the same time, the autonomy of domestic monetary policy will return.

01 This is mainly because: previously, due to the existence of the interest rate differential, the liquidity released by our rate cuts was absorbed by high-yield US Treasury bonds; the released funds did not reach the domestic real economy and capital market.

If we don't want our funds to be "siphoned off" by US Treasury bonds, the only option is to allow the currency to depreciate. However, as a major exporting country, we need to maintain a stable exchange rate.

Therefore, with a significant interest rate differential between China and the US, the effect of stimulating the economy through interest rate cuts will be greatly reduced.

This problem has plagued us for over three years since the inverted interest rate differential between China and the US began in April 2022.

Now, this concern has been greatly alleviated.

02 With this interest rate cut now implemented, the market is again focusing on questions such as "whether there will be another interest rate cut" and "when."

For China, the impact of subsequent interest rate changes by the Federal Reserve on our country is diminishing at the margin.

What we really need to focus on is: Can the Federal Reserve maintain its independence? Is the dollar's status as the world's reserve currency still secure?

The Federal Reserve's interest rate cuts are decided by vote; this time, there were 9 votes in favor and 3 against.

The number of opposing votes is the highest in recent rate cuts, indicating that internal disagreements on interest rate cuts are widening.

Powell believes that interest rates are already at the upper end of the neutral range, implying that the room for further rate cuts is narrowing.

However, given that Powell's term ends next May, the market generally believes that Hassett, the most popular successor, shares a highly consistent economic stance with Trump, making further interest rate cuts highly probable.

This is because Trump is keen to boost the US economy through interest rate cuts, laying a solid foundation for the midterm elections at the end of 2026.Trump's interest rate target is around 2%, which is clearly still some distance from the current 3.5% to 3.75%. If it does drop to 2%, the interest rate differential between China and the US will essentially disappear.

Given the significant disagreement between the Federal Reserve and Trump regarding interest rates, is the Fed's independence still necessary?

A non-independent Fed cannot support the dollar's status as the world's reserve currency, and the importance of gold will continue to rise.

Will Trump sacrifice the dollar's status as the world's reserve currency to maintain his domestic approval rating?

This is a problem of "living beyond one's means," where long-term and short-term interests cannot be balanced.

Lowering interest rates will make things better for Americans in the short term, but at the cost of sacrificing the Fed's independence and the dollar's status as the world's reserve currency.

Without policy continuity and long-term planning, it will eventually fall into a "patching-up" state.

In this light, time is in my country's favor, and stability is also in my country's favor.

03 This "domestic first" approach in the US, prioritizing economic interests over political interests, is reshaping the international order.

One potential impact is that it has given a boost to the long-slow progress of RMB internationalization.

my country explicitly proposed "promoting RMB internationalization" in its draft 15th Five-Year Plan.

Since the beginning of this year, the US dollar index has fallen by 8.68%;

The US dollar and Japanese yen have seen significant declines among major global asset classes;

They have not only underperformed metal commodities like gold, silver, and copper, but also lagged behind major stock markets;

Meanwhile, currencies such as the euro, RMB, and British pound are experiencing moderate appreciation;

The RMB exchange rate is almost breaking the 7 mark, and the central bank has even begun to intentionally prevent the RMB from appreciating too rapidly;

Moreover, the central bank has increased its gold reserves for 13 consecutive months, reaching over 2,100 tons, raising its share of total reserve assets from 5.94% to 8.34%.

Adding to this, Cambodia recently stored some of its gold reserves in China…

These are all manifestations of the accelerated internationalization of the RMB.

A feasible path is for the RMB to be anchored to manufactured goods, while simultaneously using increased gold reserves as a credit backing to enhance the RMB's attractiveness.