China after the Fed hike

THE US Federal (Fed) increased its short-term interest rates by a quarter per centage points on Wednesday, whereby the new range will be one to 1.25 per cent compared with the current rate of 0.91 per cent.

This is the third rate hike in six months.

We see the economy as giving off mixed growth signals, with gross domestic product expansion at around 1.3 per cent in the first quarter but unemployment stayed low at 4.3 per cent in May.

According Fed chairwoman Janet Yellen, the economy will continue to expand.

On the other end of the spectrum, the Hong Kong Monetary Authority raised its interest rates by 25 basis points ( bps) to 1.5 per cent after the rate hike in US, as the Hong Kong dollar is pegged to the US dollar.

Market expect that Hong Kong’s base rate is likely to move higher given the Fed stuck to its forecast for one more increase in US rates this year.

So, what is China reaction after Hong Kong follows the foot- step of US of rising interest rate? On Thursday after US increased its interest rate, the People Bank of China ( PBOC) left its interest rates for open market operations unchanged.

PBOC did not explain its rationale for this move, but the yuan currency is on a steadier footing and domestic liquidity conditions are much tighter than they were in mid-March.

Besides that, there are traders believed that China also refrained from raising rates on Thursday because it did not want to establish a pattern of following the Fed.

China’s benchmark lending rate has not changed in almost two years, but PBOC surprised markets in March by raising short and medium-term interbank rates hours after the last Fed hike.

This time however, the Chinese government is likely to strive to keep economic conditions stable.

They want a very stable renminbi ideally against dollar and trade-weighted basis.

The yuan is now up 2.3 per cent so far in 2017, with nearly half of that seen in recent weeks, after tumbling 6.5 per cent last year.

We believe that the Chinese government had done a lot of preparation ahead of the US rate hike that was widely anticipated, and there have been a lot of preemptive moves by the central bank and regulators to kind of more balance exchange rate expectations in recent months.

We expect the mainland’s economy will be more stabilised and has a more positive outlook.