China better placed to handle US rate hikes, says official

Chinese officials and analysts said that China is better placed to handle the changes in US interest rate hikes with strength in the industrial chain, financial opening-up, ample foreign reserves, and the attractiveness of Chinese assets. The Chinese economy is not where it was during the US' previous cycle of rate hikes, with a fundamentally strong yuan and a shift in policy focus insulating the economy from a massive fallout in the Federal Reserve's monetary normalization, according to observers. The US Federal Reserve was widely expected to hike interest rates early in March, while China stepped up monetary easing as the country moves to stimulate economic growth. There are concerns about possible capital outflows due to the policy divergence. In the latest move, China's central bank has announced a reduction in interest rates on its lending facility loans on Friday, another key monetary policy tool after it lowered its benchmark lending rate five-year Loan Prime Rate LPR on Thursday, the first time in 20 months. The move came just four days after the central bank lowered the Medium-term Lending Facility MLF by 10 basis points. In the last round of the Federal Reserve's monetary policy adjustment, China is better able to deal with external changes, said Wang Chunying, a State Administration of Foreign Exchange SAFE spokesperson, said that this round of tightening may have a less spillover effect than the previous round. During the previous US Federal Reserve tightening, China's currency depreciated sharply. A Beijing-based veteran industry observer told the Global Times on Friday that the economy is largely done with its deleveraging efforts, with local government debt and property lending well under control. In 2015, at the beginning of the US rate hike cycle, China's equity market was squeezed out in the wake of a crackdown on runaway margin loans. Deleveraging had topped the policy agenda until the end of the US rate hike cycle in 2018, according to the observer. Such efforts have paid off. The country's macro leverage ratio was at 272.5 percent at the end of 2021, down 7.7 percentage points from the year before, central bank data shows. The observer said that deleveraging has apparently given way to pro-growth policies, making it possible for the country to deviate from a US-led rate hike path. With the gradual opening-up of the country's financial market, yuan-denominated assets are becoming more attractive, paving the way for a more stable hold for China against external shocks, Wang said. Foreign investors have increased the ante in the country's equity market over the past few years. Since China opened its capital market in 2017 in 2017, foreign holdings of Chinese bonds and stocks have exceeded $700 billion, with an average annual growth of 34 percent, according to official data. The proportion of foreign capital in China's stock and bond market remains at 3 to 5 percent, which is relatively low compared to developed and emerging economies such as Japan, South Korea and Brazil. The country's strong industrial chain resilience - a linchpin of the Pandemic damaged global supply chains - boosted exports and prompted multinationals to reconsider their relocation plans that were previously cost-oriented, as well as fared exceptionally well against the US dollar last year. The Chinese yuan has reached fourth for the first time since August 2015, reaching fourth as one of the most popular currencies for cross-border payments. According to a Bloomberg report, the euro held its second place ranking for a seventh month, and the pound was third. Activity in the yuan rose to its second highest level ever, according to the report, which was cited by the Society for Worldwide Interbank Financial Telecommunications. The yuan held the top spot since June, despite the Chinese currency making some inroads in the rankings, and accounted for about 2.7 percent of the market versus the dollar at 41 percent. The monetary easing in China, as opposed to an estimated rate hike cycle in the US, would lead to fluctuations in the exchange rate, according to Wei Fengchun, chief economist at Shenzhen-based Truvalue Asset Management, told the Global Times that the currency swing depends on the extent of China's monetary easing compared to US rate hikes and, more importantly, on China's economic survival.