China can offset the effects of Fed rate hikes – Opinion


MY DAILY XUEJING/CHINA

Given that the international monetary system is dollar-dominated, the US Federal Reserve’s rate hike should have a ripple effect on other economies and limit their monetary policy space to varying degrees. Yet the impact of the Fed’s rate hike is waning on China, due to the latter’s autonomous monetary policy.

Still, the People’s Bank of China must stabilize the macroeconomy through a balanced monetary policy, especially since the expansion of monetary credit and the reduction of the cost of capital are its two important intermediate goals.

According to data from the Bank for International Settlements, at the end of April, about 3.3 percentage points of the key interest rate differential between China and the United States was in a relatively high range. But the Fed’s decision to raise the interest rate by 50 basis points from June will reduce the gap in key interest rates between the two countries. This will make it difficult for China to promote economic growth by cutting interest rates.

Yet China could still stimulate the economy by taking measures such as reducing the reserve requirement ratio.

In terms of cross-border bond investment, the yield gap between China and the United States has rapidly narrowed, even leading to a reversal. The yield on 10-year US Treasury bonds was just 1.52% at the end of last year. But on February 10 of this year, the yield on 10-year US Treasury bonds rose above 2%, peaking at 3.12% on May 6 and then dropping to 2.84% on May 12.

On the other hand, the yield of Chinese 10-year Treasury bills has been quite stable, essentially staying in the 2.5-3.2% range since 2020. On May 12, for example, the yield of Chinese Treasury bills Chinese at 10 years was 2.81%. percent, which means that the interest rate differential between the United States and China has “reversed”.

In terms of long-term capital flows, China was the top major economy in terms of growth as it opened up its economy more despite the COVID-19 pandemic. China also remains a top destination for outbound direct investment, attracting $144.37 billion in 2020 and $173.48 billion in 2021. And Commerce Ministry data shows that in the first quarter 2022, China’s actual use of foreign capital was 379.87 billion yuan ($55.9 billion), up 25.6% year on year.

From the perspective of short-term capital flows, statistics from China Central Depository & Clearing Co. show that the value of bonds held by foreign institutional investors at the end of March 2022 was about 3.57 trillion USD. yuan, down 110 billion yuan year on year.

From the end of 2021 to the end of March 2022, foreign institutions reduced their holdings of government bonds by 21.56 billion yuan and their political bank bonds by 79.59 billion yuan. The proportion of bonds held by foreign institutions on the interbank bond market fell from 4.41% at the end of 2021 to 4.16% at the end of March.

Given that the interest rate differential between the United States and China has significantly narrowed, if not “reversed,” it is natural for foreign institutions to reduce their holdings of Chinese bonds somewhat.

Regarding capital outflows from the stock market, according to data from WIND Information Co, at the end of 2021, foreign capital held about 2.96 trillion yuan, or 3.95% of the outstanding market value of stocks. A, and as of May 12, foreign capital held 2.31 trillion yuan, or 3.71% of the outstanding market value of A shares. a short-term increase in capital outflows to some extent.

Regarding the yuan exchange rate, the US dollar index strengthened due to the Fed’s interest rate hikes and the relatively accommodative monetary policy of the US dollar index economies. . From January 1 to May 12, the US dollar index rose about 9.2% and the yuan depreciated about 6.8%, although the depreciation of the yuan against the dollar was less than that of the euro, the yen and the pound.

If the Fed raises rates again, the interest rate differential between the United States and China will narrow further, increasing the risk of short-term capital outflows. However, in the medium to long term, China’s economic fundamentals remain positive. It is therefore necessary to implement macro-prudential management during the Fed’s interest rate hike window, to avoid excessive short-term fluctuations in the financial market and to prevent fears of a rapid depreciation of the yuan.

Moreover, since the pandemic has exerted downward pressure on the economy and reduced market expectations, it is necessary to contain it as soon as possible and resume normal economic activity, stabilize growth and increase employment. And stable labor and capital markets, and a secure exchange rate combined with steady growth will, to a large extent, offset the ripple effects of Fed interest rate hikes and avert financial risks. caused by excessive fluctuations in asset prices.

The author is a researcher at the National Academy of Development and Strategy, Renmin University of China. Opinions do not necessarily represent those of China Daily.

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