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Little effect on China’s markets from Fed rate hike

2018-12-21

Source: Global Times    Published: 2018-12-20


The mainland financial markets have responded calmly to the US Federal Reserve's overnight decision to raise its benchmark interest rates.


Fluctuations in the range of the yuan's exchange rate against the US dollar were limited.


On Thursday, the yuan's reference rate against the greenback weakened by 67 basis points, according to data from the People's Bank of China (PBC), China's central bank.


The mainland stock markets also fluctuated by only a small amount as of closing time on Thursday, with the Shanghai bourse edging down by 0.52 percent and the Shenzhen bourse rising by 0.1 percent.


This shows that the connectivity between the US' and China's financial markets is decreasing as the monetary policies taken by the two countries head in different directions, experts told the Global Times on Thursday.


The Fed announced on Wednesday that it would raise the benchmark interest rate for the dollar by a quarter-point to a range of 2.25 to 2.5 percent, marking the fourth rate hike in 2018, and the ninth increase since the Fed began raising rates from near-zero three years ago.


On December 15, 2016, the yuan's reference rate against the US dollar weakened by 261 basis points after the US announced an interest rate hike the previous day, also by a quarter-point.


The Fed's statement also suggests that it may decide on two rate hikes in 2019 instead of three, according to overseas media reports.


"This is sending a signal that the markets are worried about whether the US can carry its current trend of rapid economic development into the next year," Zhao Xijun, co-director of the Finance and Securities Research Institute at the Renmin University of China, told the Global Times on Thursday.


Different directions


According to Zhao, the US' and China's financial markets are becoming increasingly independent from each other as the two countries are heading in different policy directions.


"The US is taking measures to tighten monetary policy, while the Chinese government is easing its monetary policy to a certain extent," Zhao said.


On Wednesday, the PBC announced it would offer a Targeted Medium-term Lending Facility, a monetary tool aimed at facilitating financial institutions' loans to small private enterprises.


"Next year, I believe the two countries will continue their current policy orientation, with the US further tightening and China further enhancing policy flexibility," Zhao noted.


According to experts, the capital interaction between Chinese and US financial markets is now mostly psychological, with some Chinese investors still making decisions in response to changes in the US.


But even these moves are becoming less abrupt.


"For example, the yuan would still have some depreciation pressure because of the Fed interest rate hike," Zhou Yu, director of the international finance research center at the Shanghai Academy of Social Sciences, told the Global Times on Thursday.


"But as the market had long ago anticipated the Fed's intention, the depreciation pressure on the yuan is gradually released during a relatively long period, and the yuan won't fluctuate strongly when the interest rate hike actually takes place," Zhou said.


Cheng Shi, chief economist at ICBC International, also told the Global Times that the rising US interest rate won't be a significant blow to the yuan's stability, because long-term investment in emerging markets by international capital is expected to increase in 2019 as overseas investors focus on performance of the real economy.


This means that the pressure of capital outflows from emerging markets, including China, will ease in general, Cheng said.


Zhao Xijun is a senior fellow at the Chongyang Institute for Financial Studies at Renmin University of China.

Key Words: China's market   finance   Fed rate   Zhao Xijun  

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