Will China economy stand U.S. rate lift-off?

Will China economy stand U.S. rate lift-off?

16 September 2015, 12:53
Anton Voropaev
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With market participants worldwide anticipating the first Federal Reserve rate increase in nine years, the second largest economy that’s looked the shakiest lately may actually be one of the countries best positioned to face the approaching liftoff.

Even with the slowest growth in a quarter century triggering a stock-market collapse, China’s $3.56 trillion in foreign currency reserves eclipse every other economy, and officials showed last month they’re willing to put them to use at a record pace to defend the renminbi.

According to Bloomberg Intelligence, China is one of the strongest economies in the Asia-Pacific region to withstand higher U.S. rates.

What will help China buffer the economy from external shocks is high foreign reserves, low external debt and low foreign-held public debt.

Fed officials gather this week to make the difficult decision in years after keeping the benchmark rate near zero since December 2008. At 2 pm Thursday, the decision will be announced.

U.S. officials are calculating whether unemployment falling to a seven-year low justifies raising rates even as inflation remains below their 2 percent objective.

The biggest reason to postpone raising rates may be China, as signals of a downturn in the biggest contributor to global growth pushed shares, commodities and EM currencies to an abyss in August.

48% of economists polled by Bloomberg saw a September increase, compared to 77% in early August. Some 17% saw a rate rise in October and 24% forecast December.

About 46% of economists polled last week by The Wall Street Journal predict the Fed would raise rates at its Sept. 16-17 meeting. In early August, 82% of economists believed the Fed would act in September.

The People’s Bank of China says it’s prepared to whatever the Fed will do. Let us have a look.

Renminbi

In a statement from August 12, the Chinese central bank said any negative impact on the yuan has already been factored to the PBOC’s outlook and it won’t cause a sharp depreciation. The statement came on the second day after its abrupt devaluation of the local currency.

According to analysts polled by Bloomberg, the yuan will end the year at 6.5 to the U.S. dollar, compared with 6.37 close in onshore trading Tuesday.

Debt

Chinese firms now less rely on the dollar funding. The evidence of this are five central bank interest rates cuts since November 2014 and rules to loose yuan bond issuance onshore.

That helps to buoy Chinese companies, the region’s biggest dollar debt issuers. Domestic corporate bond sales surged 77 percent in 2015 from the same period last year, Bloomberg says.

Equity market

China’s domestic stock market remains largely closed to foreign investors and fluctuates mainly on domestic drivers. That can be painful for Beijing in times of speculative frenzy, but it also can make the nation’s stock market more robust in relation to Fed policy than others.

Exposure to crisis

Past Fed tightening cycles have triggered crises in developing nations, such as the 1997 Asian financial crisis or Mexico’s peso crisis in 2004. China cannot be called fragile, since its low levels of foreign ownership of securities and government debt mean it is less likely to be damaged by investors pulling out of the country as they seek higher yields elsewhere.
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