The US Federal Reserve has revealed that it will begin shrinking its balance sheet from October. Meanwhile, expectations are building that the central bank will announce another rate hike within this year. The two factors are supporting the US dollar, while putting pressure on China’s renminbi.
Over the last year or so, China’s monetary policy has been largely dominated by the movement of the Chinese currency. Whether China will follow the US to tighten the monetary policy will again depend on the stability of its currency.
Monetary policy usually has a far-reaching impact on the real economy, stocks and properties. In the past, Chinese policymakers gave a lot of consideration to the domestic market, such as consumer prices, but largely neglected external factors.
Nevertheless, the economy is now increasingly affected by US monetary policy as Beijing gradually opens up the domestic financial markets and allows the yuan to fluctuate within a wider trading band.
To push for renminbi internationalization, Chinese authorities have used various means to stabilize the currency in order to encourage investors to hold yuan assets.
Previously, the yuan had appreciated continuously along with Fed’s monetary easing measures in the wake of the 2008 financial crisis.
But the redback has reversed the uptrend against US dollar in recent years as Fed started to hike interest rates. As the US central bank intends to raise its key rate for the third time later this year, and kick off reduction of its asset holdings in October, these moves will weigh on the Chinese yuan.
China has already tightened its monetary policy somewhat and reduced leverage to ward off financial risks.
The Shanghai Interbank Offered Rate (SHIBOR) for one-year tenor stood at 4.4031 percent on Thursday, compared with 3.0275 percent in same period last year.
If the US dollar gains further and the renminbi comes under pressure due to Fed tightening, China may have no choice but tighten its monetary policy too.
In that case, domestic housing and equity markets are set to face some pressure.
For instance, the interest rate for first-home mortgage loans has already jumped to 1.2 times the benchmark rate, compared with 20 percent discount off the benchmark rate previously.
That has helped cool off the housing market boom. Average home price in first-tier cities registered decline in year-on-year growth rate for the 11th straight month. And new home prices in Shenzhen and Chengdu even fell 2 percent and 0.3 percent respectively in August from the year before.
This article appeared in the Hong Kong Economic Journal on Sept 22
Translation by Julie Zhu
[Chinese version 中文版]
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