Key Assumptions

Although the likelihood of the U.S. implementing a YCC policy is currently high, there have been no clear official signals. This article analyzes the potential impacts solely from a macroeconomic perspective. Should the Federal Reserve formally introduce YCC in the future, a more precise analysis will require consideration of the specific timing of its implementation—which could occur after a change in the Fed’s leadership or during a liquidity crisis in the U.S. Treasury market.

I. The Certainty of Long-Term Dollar Depreciation

If the U.S. implements a YCC policy, dollar depreciation is an inevitable outcome. The analysis focuses on two key dimensions:

  1. Depreciation Structure: The dollar’s depreciation against Asian currencies will be significantly greater than against developed-market currencies such as the euro, yen, and pound. While the U.S., Europe, and Japan currently face similar bubble issues—with bubbles present in currencies, government bonds, stock markets, and real estate—the dollar’s bubble is more severe. Consequently, the overall decline in the U.S. Dollar Index will be smaller than the decline against Asian currencies.
  2. Depreciation Cycle: YCC policy will result in the U.S. permanently losing its ability to raise interest rates. The traditional U.S. economic model has been “debt-fueled production,” where asset markets such as stocks and real estate are propped up through interest rate cuts and balance sheet expansion; YCC policy, however, will push the economy toward a “debt-fueling-debt” model, in which U.S. Treasuries themselves become the problem, and the primary goal of money printing becomes protecting the Treasury market rather than rescuing assets.

This model is extremely sensitive to rising interest rates; once rates rise, the Treasury market will face the risk of collapse. Similar to debtors whose income is insufficient to cover debt, the U.S. will inevitably choose to roll over short-term debt at low interest rates rather than seek long-term financing at high rates—a state the U.S. is already in. Once trapped in the YCC cycle of “debt-financing-debt,” the U.S. will be unable to raise interest rates for a long time, capable only of brief rate hikes and unable to sustain high interest rate levels.

II. Impact on China and Associated Risks

Expectations for Improved Liquidity

Amid the long-term depreciation trend of the U.S. dollar, China’s liquidity environment will see significant improvement. The dollar is unlikely to continue a one-sided decline; it is more probable that after a sharp drop during a specific period (such as 2026), it will consolidate at low levels for an extended period. Similar to the historical trajectory of the Canadian dollar against the renminbi, the USD/CNY exchange rate may stabilize within the 6.0 range for the long term.

Mitigating Potential Risks

One potential risk exists: if, following the U.S. implementation of YCC, a large number of Chinese enterprises follow Evergrande’s example by borrowing massive amounts of U.S. dollar debt, a sudden U.S. rate hike—similar to Paul Volcker’s policy of raising rates to over 5%—could pose a threat to China’s financial security. However, the actual impact of this risk would be far less significant than it is currently, because under a YCC policy, even if the U.S. raises rates in the short term, it cannot sustain such hikes for long—much like a drug addict losing the ability to engage in high-intensity exercise—and both the scope and duration of rate hikes would be severely limited.

Key Points for Further Monitoring

We must continue to monitor official signals from the Federal Reserve. Once the YCC policy is formally introduced, we will conduct a more in-depth analysis of its implications and develop response strategies by considering the specific implementation details, the timing of the launch, and the global economic environment.