Fed's Rate Hike Hits Liquidity, Puts the Pincers on China's Monetary Policy
Yicai Global
/SOURCE : Yicai
Fed's Rate Hike Hits Liquidity, Puts the Pincers on China's Monetary Policy

(Yicai Global) Dec. 16 -- Economic analysts Yicai Global interviewed said that, after the US Federal Reserve Bank jacked interest rates, Chinese central bank's monetary policy stands poised on the horns of a dilemma.

"To a large extent, China's monetary policy has been snookered," Song Yu, chief China economist with Goldman Sachs Gao Hua Securities Co., told Yicai Global. If the central bank chooses to raise interest rates now, this will exert pressure on its steady growth target. If it opts to cut interest rates, this will lead to inflationary pressures and, because the commercial bank deposit and lending rates have had their upper and lower limits cancelled, for the central bank to adjust the benchmark interest rate holds little significance, Song said.

Song believes the central bank may be more inclined to lay aside the interest rate tool, and via open market operations change inter-bank market interest rates, or take the window guide route to meet liquidity needs.

Currently, the main pressure the Chinese central bank's monetary policy confronts comes from the Fed's rate hike and China's domestic deleverage requirements. The forecast for the Fed's rate hike in 2017 is much higher than market expectations, which means that US interest rates and the dollar have entered a stronger uptrend channel, said Ming Ming, fixed-income chief analyst with CITIC Securities Co. [ SHA:600030].

In Ming's view, spurred by the Fed's rate hike, China's central bank may soon move to a more market-based floating exchange rate to achieve the independence of its monetary policy, or it may have to passively and substantially tighten monetary policy, or even passively raise interest rates to slow the pressure for yuan devaluation, in a bid to avoid mutual-reinforcement between exchange rate depreciation and capital outflows.

Ming also believes that, if the US interest rate is raised three times next year, China's domestic monetary policy is likely to be passively tightened.

However, Zhang Jun, chief economist at Morgan Stanley Huaxin Securities Co. told Yicai Global that, next year when emerging markets are still in a low inflation environment, especially in China, overcapacity and other issues may recur in the second quarter, so an interest rate rise is unlikely. Given that economic challenges will remain high next year, and that inflationary increases are liable to be short-term, China's monetary policy should preserve its current prudent stance.

If the Fed continues to raise interest rates next year, China's central bank is more likely to lower its benchmark interest rate, but monetary policy will remain circumspect overall in the next two years, Zhang observed.

China does not yet have the necessary conditions to raise interest rates, and its monetary policy will remain cautious next year, but flexibility may be enhanced to cope with external shocks, said Lian Ping, chief economist with Bank of Communications Co. [SHA:601328]

Lian believes that whether the real estate bubble will expand and commodity prices will continue to soar are major concerns in raising interest rates next year. However, the most important consideration is whether economic growth will remain stable.

Lian noted that if the dollar continues up and exceeds expectations, the Fed may slow down its pace of interest rate hikes because the too-strong dollar is not conducive to revitalizing US manufacturing.

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