An editorial in one of China’s leading state media outlets says that political leaders will hold the course on current monetary policy irrespective of recent actions by the US Federal Reserve, noting that interest rate spreads between the two countries have reached a historic high.
Writing for China Economic Net, Cai Ding said that there is still no need for China’s monetary policy to change course, and the current stable, neutral monetary policy will not “dance to the tune” of the Federal Reserve.
Cai notes that many observers expect Chinese monetary policy to change tack in the wake the latest Fed rate hike, with some reports pointing to recent shifts in financial deleveraging and money market regulation as part of a broader policy response.
According to Cai, however, Chinese monetary policy will stay the current course given an essentially stable economic environment and exchange rate, stabilisation of cross-border capital flows as well as a rebound in foreign reserves across several consecutive months.
Cai points in particular to China’s response to the Fed’s June rate hike as significant of an ongoing trend in the country’s monetary policy:
“The Chinese central bank’s reaction of refraining from raising rates in tandem after the US Fed rate hike in June proves this point,” writes Cai.
“On the one hand, Fed rate hikes were factored into expectations, yet China’s capital account has not been fully opened, and the Fed rate hike did not have a marked impact upon our country.
“On the other hand the Sino-US rate spread has already reached a healthy level. The US long-term rate has recently fallen from 2.6% to approximately 2.1%, while the Chinese long-term rate has risen to approximately 3.65%, for a spread of approximately 150 basis points, putting it at a historic high.
“For this reason, there is currently no need to worry about contraction in the rate spread triggering an intensified outflow of funds, large scale declines in the exchange rate or other ‘siphon effects.'”
Cai also argues that recent dialling back of financial deleveraging and short-term money market tightening should not be interpreted as a long-term adjustment of monetary policy.
He notes that the uppermost echelons of the Chinese government have showed their determination to shore up the country’s financial system by repeatedly emphasising the importance of risk prevention for going on a year now, and as well as followed up with a coordinated regulatory firestorm in the earlier part of 2017.
According to Cai any recent adjustments to policy were a case of the central bank seeking to curb liquidity fluctuations and prevent an undue drying up of funds in the lead up to the end of the first half, in order to avoid the deleveraging process itself having an excessively adverse impact upon China’s real economy.