Liu Xuezhi

strong the first time, but the influence gradually dwindles,” he told the Global Times on Thursday.

PBC reaction

The People’s Bank of China (PBC), the country’s central bank, reacted to the US interest rate hike by raising the interest rates for its Medium-term Lending Facility (MLF) and reverse repos by 5 basis points on Thursday.

The PBC also conducted reverse repos worth 50 billion yuan ($7.57 billion) on Thursday, while injecting 288 billion yuan into the market via the MLF, according to a PBC statement published on its official website.

In a seperate statement published by the PBC on Thursday, the central bank noted that the upward adjustment of the interest rates reflected supply and demand and said it was a “normal market reaction” to the US hike.

The PBC’s increase of reverse repo and MLF rates was quite mild and seems more like a “symbolic gesture,” according to Liu.

“China is maintaining a monetary policy that is neutral and stable in order to prevent financial risks, so the government wouldn’t want to raise interest rates too much, as that would send a signal to the market that it might tighten monetary policy,” Liu noted.

The PBC also raised the repo rates in March this year following a US interest rate hike, but it didn’t adjust the rates in June after the US Federal Reserve’s second interest rate hike this year.

According to Liu, around mid-year the domestic economy showed signs of robustness, but now market expectations for the economic situation have started to weaken again.

“This time, the PBC wouldn’t want to neglect the possible negative impact of the US interest rate hike on the domestic economy, but neither does it want to overreact,” he noted.

A report sent by China Merchants Bank to the Global Times on Thursday also noted that the PBC’s mild rate hike can “protect the market at a time of liquidity stress approaching the end of the year.”

Liu also noted that in the future, the PBC might be inclined to adjust rates for operational tools like reverse repos, which are more flexible and timely, rather than changing benchmark interest rates.

The Hong Kong Monetary Authority on Thursday raised the base lending rate by 25 basis points to 1.75 percent.

‘Duplicate effects’

The US Federal Reserve is expected to raise interest rates three more times in 2018 and twice in 2019, the Financial Times reported on Thursday.

Zhou said that these potential interest rate hikes, plus the US government’s tax cut, will generate “duplicate effects” that would add pressure for capital outflows from China to the US, causing the yuan to weaken.

“But in the final analysis, whether the US interest rate hike affects the yuan depends on whether China’s economy is strong enough,” he noted.

Liu Xuezhi also predicted that the US interest rate hike might cause some foreign countries to tighten their monetary policy.

Senior analyst at Bank of Communications