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December 16, 2016

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Decision time for China’s policymakers

THE US Federal Reserve’s rate hike decision sparked mixed opinions over monetary tightening in China amid rising concerns over declining foreign reserves and a liquidity crunch in the interbank market.

Fed officials on Wednesday approved the first US interest rate increase in a year. The 0.25 percentage point hike was widely expected, but the market was surprised at the Fed’s hint of a more aggressive pace of future increases — three next year instead of the expected two.

The yuan fell to its weakest in more than eight years against a stronger US dollar after the Fed hike, while China’s five-year and 10-year treasuries fell by their daily limits as yields of US debt moved higher.

Traders at Chinese state-owned banks sold off US dollars in the onshore foreign exchange market yesterday morning, Shanghai Daily learnt.

“If the US hikes its interest rate at a relatively fast tempo, yields on US treasuries will rise above equivalent bonds in China, causing more capital outflows,” said Zhao Yang, chief China economist at Nomura.

“Policymakers will have to decide whether China does or doesn’t tighten its own money supply to curb that trend,” he added. “But if the government does, there would be pressure on domestic asset prices and economic growth.”

Market insiders argue that higher interest rates in the US could make it harder for China to manage its rising debt, as the world’s second largest economy “depends on borrowing to ensure that economic growth is steady.”

But anticipated rising inflation next year will curb the possibility of a heavy tightening, said Hong Hao, managing director of Bank of Communications International.


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