China ready for tighter US monetary policy after Fed says economy on track

The likely tightening of the United States’ monetary policy will have a limited impact on China as the country can maintain the stability and autonomy of its monetary policies, according to Chinese officials.

US Federal Reserve Vice-Chairman Richard Clarida said in a webcast on Wednesday that the central bank is likely to hit its inflation and employment goals by the end of 2022 and start raising interest rates again in 2023.

The Federal Reserve has kept short-term interest rates pinned near zero since March 2020.

If US economic growth stays strong, Clarida said he would also be in favor of the Fed making an announcement later this year to reduce its bond purchases. Fed Governor Christopher Waller said on Monday that the Federal Reserve could begin slowing down its bond purchases as early as October. The Fed now purchases $120 billion of treasuries and mortgage-backed securities on a monthly basis.

According to a statement issued after a meeting of the Political Bureau of the Communist Party of China Central Committee held on July 30, China will continue to adopt a prudent monetary policy, while liquidity will remain ample to support the continued recovery of small and medium-sized enterprises as well as stressed industries.

Sun Guofeng, head of the monetary policy department of the People’s Bank of China, China’s central bank, said during a meeting on July 13 that any rate adjustments by the US Fed will have a limited impact on China’s financial markets. China will stick to a normal monetary policy and ensure its autonomy to better serve the real economy, he said.

Analysts at US bank Goldman Sachs said that against the backdrop of potential normalization of monetary policy globally, particularly in the US, China’s emphasis on maintaining the “autonomy of macro policies” and discussions on supporting SMEs imply incremental easing of monetary policy is still possible in China.

“We maintain our expectation of more supportive fiscal policy especially from on-budget spending and government bond issuance, and also expect one more RRR (reserve requirement ratio) cut in the fourth quarter this year. Government bond issuance pace could be a bit more loaded toward the fourth quarter, and thus the acceleration of investment growth might be more visible by end of this year and early next year,” said Goldman Sachs analysts.

Emerging markets are more resilient and better prepared to deal with changes in US Fed policies than they were eight years ago, said Li Zhen, an analyst at Bank of China’s global financial market research center.

In mid-2013, the Fed announced a reduction in asset purchases, which led to a sharp sell-off in bonds and risk assets in emerging markets.

The “Fragile Five” — Turkey, Brazil, India, Indonesia and South Africa — which were hit hard in 2013, have seen their current accounts significantly improve by taking a more balanced ratio in their GDP. Therefore, they will be less prone to volatility in global capital flows, Li said.

Meanwhile, the foreign exchange reserves of many Asian central banks have reached record highs since 2014, signaling they are prepared for policy changes by the US Fed.

Some emerging markets have already raised their interest rates based on their own economic growth. The response in the stock, foreign exchange and bond markets in mid-February indicated that these markets have foreseen the Fed’s bond tapering plans, Li added.