China warns of ‘spill effects’ from US interest rate hikes

Foreign investors have sold off Chinese stocks and bonds – Photo: SOUTH CHINA MORNING POST

According to the newspaper South China Morning Post On April 27, investors were gradually withdrawing from China due to the complicated developments of the COVID-19 pandemic, the conflict in Ukraine and the forecast that the US Federal Reserve (FED) would raise interest rates.

Capital flows out of China

In March, money outflows from China through the Stock Connect program reached 45 billion yuan ($6.9 billion). Stock Connect is a program that allows foreign investors to trade shares listed on the stock exchanges of mainland China.

According to South China Morning Post, Foreign investors also cut their Chinese bond holdings by 112.5 billion yuan in March, after selling about 80.3 billion yuan a month earlier.

Besides selling government bonds, foreign investors also dumped Chinese stocks. China’s stock market was immediately rattled, forcing the government to voice its commitment to support the market and the economy.

Some experts warn that any developments in the current Fed interest rate cycle could significantly affect the Chinese economy.

The market expects the Fed to raise interest rates from now until the end of the year to control inflation. US interest rates are forecast to rise above 2% from the current 0.25-0.5%.

China’s interest rates will also lose competitiveness with the US. Combined with the dismal economic trend caused by the conflict in Ukraine and the tough “Zero COVID” strategy, the yuan is under great pressure.

In the past week, the yuan’s exchange rate has fallen by nearly 2% against the USD in the domestic market. On April 25, the exchange rate between these two currencies exceeded 6.6 yuan to 1 USD in overseas markets, before the intervention of the People’s Bank of China (PBOC).

The International Monetary Fund (IMF) has lowered its 2022 growth forecast for China from 4.8% to 4.4%, well below Beijing’s annual target of “about 5.5%”. .

Efforts to stabilize the market

To limit the impact, the PBOC has slowed the yuan’s slide by cutting the required level of foreign exchange reserves by banks. The PBOC hopes it can release about 10 billion USD into the market, helping to lift the yuan’s price against the USD.

Last week, deputy director Wang Chunying of China’s Foreign Exchange Administration (SAFE) asserted that the country can adapt to changes in US monetary policy.

According to Ms. Wang, China is able to make up for the loss of capital thanks to foreign direct investment in the country, China’s net overseas assets and trade surplus totaling $2 trillion. In addition, the country has a record foreign exchange deposit of 700 billion USD.

Chinese government data shows that China’s debt-to-GDP ratio is currently 15.5%, down from 16.3% in 2020 and 17% in 2014.

The country’s debt structure has also been optimized. Short-term debt increased 9.9% year-on-year to $144.6 billion at the end of 2021, accounting for 52.7% of total debt.