US rate hikes’ ef­fect pre­dicted to be lim­ited

China Daily (Hong Kong) - - FRONT PAGE - By LI XIANG lix­i­ang@chi­nadaily.com.cn

The first of what may be a se­ries of in­ter­est rate hikes by the US Fed­eral Re­serve is ex­pected to have lim­ited ef­fects on China’s economy if the coun­try con­tin­ues to main­tain steady growth and keeps cap­i­tal out­flows and prop­erty bub­bles un­der con­trol, econ­o­mists said on Thursday.

The Fed raised its tar­get for short-term in­ter­est rates by 0.25 per­cent­age points on Wednesday, which was only the sec­ond in­crease in a decade. It also in­di­cated it will likely em­bark on a steeper path of in­ter­est rate hikes over the next year, with three or more rate hikes pos­si­ble. Ear­lier, they had in­di­cated rates might go up only once or twice in 2017.

Lian Ping, chief econ­o­mist at the Bank of Com­mu­ni­ca­tions, said that the first and fore­most task for China is to main­tain steady growth of 6.5 to 7 per­cent next year. “Sta­ble growth will boost in­vestors’ con­fi­dence, which could slow down the cap­i­tal out­flows and at­tract more in­bound in­vest­ment,” Lian said.

China should also im­prove

the man­age­ment of cross-bor­der cap­i­tal flows by tight­en­ing the curbs on spec­u­la­tive over­seas in­vest­ments while re­lax­ing con­trols on in­bound cap­i­tal from in­ter­na­tional mar­kets.

On Thursday, the bench­mark Shang­hai Com­pos­ite In­dex de­clined slightly by 0.73 per­cent, as the US rate hike had been widely fac­tored into cur­rent stock prices.

But econ­o­mists warned that any un­ex­pected ac­cel­er­a­tion in the pace of US rate hikes could gen­er­ate stronger growth head­winds for China and cre­ate more pres­sure on the Chi­nese cur­rency, in­duc­ing more cap­i­tal out­flows.

More un­cer­tain­ties also linger around whether eco­nomic poli­cies of the ad­min­is­tra­tion of pres­i­dent-elect Don­ald Trump could cause rates to rise at an even faster pace next year.

“The Fed can­not be seen to be be­hind the curve. If US in­fla­tion heats up, then the prob­a­bil­ity for the Fed to move faster than ex­pected can­not be ruled out,” said Hong Hao, the chief strate­gist at Bocom In­ter­na­tional.

Hong said that China’s mon- etary au­thor­i­ties should raise in­ter­est rates in tan­dem with the US rates to ease the pres­sure for yuan de­pre­ci­a­tion and more cap­i­tal out­flows.

Econ­o­mists have sug­gested China should step up ef­forts to con­tain as­set price bub­bles like those in the prop­erty sec­tor, against the back­drop of a stronger US dol­lar.

The fear is that a weaker yuan and cool­ing prop­erty mar­ket would prompt in­vestors to ro­tate their funds out of real es­tate, desta­bi­liz­ing the over­all Chi­nese economy and accelerating cap­i­tal out­flows.

“China should strictly con­tain fur­ther ex­pan­sion of bub­bles in as­set prices, which are at his­toric highs, and push for­ward eco­nomic re­forms to raise growth ef­fi­ciency,” said Jiang Chao, an an­a­lyst at Haitong Se­cu­ri­ties.

But econ­o­mists are di­vided on whether China should tighten its mon­e­tary pol­icy, given that growth head­winds still ex­ist, with ag­gre­gate de­mand and pri­vate in­vest­ment re­main­ing at lack­lus­ter lev­els.

Con­sumer and pro­ducer prices in Novem­ber in­creased faster than ex­pected, spark­ing ex­pec­ta­tions that the Peo­ple’s Bank of China will tighten mon­e­tary con­di­tions.

Zhao Yang, chief China econ­o­mist at No­mura Se­cu­ri­ties, said that Chi­nese pol­i­cy­mak­ers will con­tinue to keep mon­e­tary pol­icy ac­com­moda­tive next year, although the re­cent in­fla­tion data did pro­duce some pres­sure for the PBOC to tighten its pol­icy.

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