An opinion piece published by one of the state-owned Xinhua News Agency’s economics imprints points to the possibility that the People’s Bank of China could follow rate hikes undertaken by the US Federal Reserve.
The opinion piece entitled “The Impact of Appreciation in the US Dollar is Limited Yet Caution is Necessary – Central Bank Could Follow US Fed Rate Hikes” (美元升值影响有限但需警惕 央行或会跟随美联储加息) by Wang Jingwen (王静文) points out that the US Dollar Index has bounced back since the mid-April, rising by 3.7% as of 7 May.
According to Wang the revival in the fortunes of the greenback follows more than three months of desultory performance, and has come as a surprise to market observers who expected the US dollar to remain in a downward corridor throughout 2018.
Wang points to rising yields for US bonds on the back of heightened inflation expectations as one reason for the strong performance of the greenback, with the yield on 10-year debt at around 2.95%.
Another reason is a decline in global risk appetites alongside the strong performance of the US economy, with the unemployment rate for April falling to a near two-decade year low of 3.9%.
Wang also points to the influence of actions by the US Federal Reserve, with expectations of 3 – 4 more rate hikes in 2018, just as the central banks of other major economies such as the UK and the Eurozone hold off on monetary tightening due to their own precarious health.
According to Wang the Chinese central bank may pursue rate hikes of its own that follow those of the US Federal Reserve should it feel it necessary to shore up the health of the renminbi.
“For China, because in recent years the flexibility of the renminbi with respect to the US dollar has markedly increased, and capital account controls have not yet been fully removed, the economy continues to retain an excellent growth momentum,” Wang writes.
“Depreciation of the renminbi and capital outflow risk is reasonably under control, but we must still remain alert with respect to changes in two areas.
“The first is the need to pay attention to the impact of external turmoil upon exports…last year exports were the main support for the economy surpassing expectations, but following an easing in global growth rates as well as the escalation of Sino-US trade frictions, this year exports are extremely likely to become a drag factor.
“In the first quarter the contribution value of exports to GDP has already turned negative, and this is also a key reason that a meeting of the politburo towards the end of April again made mention of the need to ‘expand internal demand.’
“Another factor that requires attention is the potential impact on funds…following the rise in the yields on US Treasuries and the narrowing of the interest spread between China and the US, the renminbi faces definite depreciation pressure, and the central bank could in future choose to follow US Fed rate hikes.”