Author: Xie Jun
Posted on: Global Times, March 16th, 2017
The yuan’s interest rate remained firm on Thursday, unaffected by the US Federal Reserve’s announcement to raise the benchmark interest rate by a quarter point on Wednesday.
Chinese markets edged higher and the yuan inched up on Thursday after the Fed’s interest rate hike, which experts said reflects the stability of the Chinese financial market.
The Federal Reserve on Wednesday raised the short-term interest rate by a quarter point to a range of 0.75 percent to 1 percent, supported by a strengthening job market and rising prices, it said in a statement. Federal Reserve Chair Janet Yellen said a modest increase in the rate is appropriate in light of the economy’s progress.
The unemployment rate in the US was 4.7 percent in February, down from 4.9 percent a year earlier, the US Bureau of Labor Statistics reported on March 10.
The Federal Reserve is expected to hike interest rates three times in 2017, the BBC reported on Wednesday.
As the rate hike was widely expected, the announcement pushed the Asian markets higher, especially in Hong Kong. The Hang Seng Index surged by 2.08 percent to 24,288.28 points on Thursday. The Shanghai Composite Index edged up by 0.84 percent to 3,268.94 points, while the Shenzhen Component Index rose by 0.77 percent to 10,624.42 points.
On the same day, China’s 10-year government bond rose 0.76 percent, while the five-year bond rose 0.29 percent, the cnstock.com reported.
According to Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, theoretically a US rate hike should draw capital away from the stock markets, which is bad news for the latter. However, such an outcome might have been prevented this time by the fact that US economic growth has buoyed market sentiment.
According to Zhou, US rate hikes cause capital outflows from emerging markets like Russia and Brazil, and also raise the repayment costs in those countries, many of which rely on US dollar loans.
“China will also face the risk of capital outflow if the US hikes rates multiple times in 2017,” Zhou noted.
On Thursday morning, the People’s Bank of China (PBC), the central bank, raised the reverse repo rate and the medium-term lending facility rate each by 10 basis points.
“One of the intentions behind such moves is to prevent capital outflows linked to the US rate hike,” Zhou said.
But Xi Junyang, a finance professor at the Shanghai University of Finance and Economics, said that in China, where the government has a relatively tight grip on capital management, the influence of the Federal Reserve decisions is very limited.
Despite the rate hike, the Chinese yuan’s reference rate against the US dollar stood at 6.8862 on Thursday, up 253 basis points compared with the previous trading day, the PBC said.
Xi said that the Fed’s decision was in line with market expectations.
He pointed out that investment decisions on the foreign currency market are often based on future expectations, which means that investors who had anticipated the latest US rate hike have already bought dollars. “That’s what caused the US dollar to strengthen and the yuan to weaken in 2016. But now the pressure has gone,” Xi noted.
The US Dollar Index, a measure of the value of the dollar relative to a basket of foreign currencies, dropped by a very modest 0.0099 percent to 100.53 by 3:59 pm on Thursday.
According to a report sent by the financial research center under the Bank of Communications to the Global Times on Thursday, since Wednesday’s rate hike was lower than market expectations, the US dollar might even edge down in the short term, while the yuan should remain firm as a result.
Zhou also concurred with the view that the economic rebound in China, reflected by the economic data in February, has strengthened the yuan regardless of the external conditions.