China and Hong Kong after the Fed hike
US Federal Reserves raised interest rates on Wednesday by a quarter of percentage point to a range of 1.25 to 1.5 per cent. It was the third rate hike in 2017 and Fed forecasts three additional rate increases in year 2018 and 2019. So, what are China and Hong Kong reactions after the US rate hike?
On Thursday, the central bank of China has responded to the US rate hike by nudging up a key policy rate on lending to commercial banks overnight but left the benchmark rate for borrowing by companies and the public unchanged.
The People’s Bank of China ( PBoC) raised the one-year Medium-term Lending Facility ( MLF) by 25 basis points to 3.25 per cent. The central bank had not adjusted these rates in June after the Fed’s last interest rate hike.
On the other side, the Hong Kong Monetary Authority ( HKMA) raised the base lending rate on Thursday by 25 basis points to 1.75 per cent, matching the widely anticipated move by the US Federal Reserve overnight. The HKMA follows US monetary policy decisions as the Hong Kong dollar is pegged to the US dollar.
Both China and Hong Kong stocks fell on Thursday, after the respective country’s central bank nudged up their money market rate following the widely expected US rate hike. The Shanghai Composite Index fell 0.3 per cent on Thursday, while the Yuan traded onshore strengthened 0.2 per cent to 6.6069 to the US dollar. The Hang Seng Index fell 0.2 per cent to 29,166.38, after rising 1.5 per cent on Wednesday.
Economists conclude two things that the Fed policy is still one of the important parameters to influence the PBoC’s decision making, and also China shows no sign of fatigue in financial deleveraging.
According to a data released by the National Bureau of Statistics on Thursday, China’s industrial output was up 6.1 per cent in November year- on-year which met market expectations, whereas China’s fixed- asset investment growth slowed to 7.2 per cent in the January to November period.
We see China’s economy has defied market expectations with an economic growth of 6.9 per cent in the first nine month of the year, supported by a construction boom and robust exports. Even though market data released recently showed positive sentiments, we anticipate that China will keep their policy tighter next year from what they have done after the US rate hike.