The U.S. Federal Reserve is poised to raise benchmark interest rates as soon as this week, which may bring wide-ranging impacts to China’s own economy and monetary policy.
The Chinese economy serving as backdrop has shown signs of slight improvement in recent weeks. October trade data was positive, according to state statistics, with both imports and exports increasing in dollar terms compared to a year ago.
Exports were flat (at 0.1 percent) but up considering recent strengthening of the dollar. Imports surged—up 6.7 percent—on higher inflows of commodities such as oil, copper, and coal.
Deflationary pressures also eased somewhat. China’s producer’s price index (PPI)—a measure of price of factory inputs—rose in November as prices of coal, steel, and crude oil all jumped. Consumer inflation also picked up more than forecast, and should continue to rise given the increase in PPI.
An expected series of U.S. rate hikes—December’s 25 basis points should only be the beginning—will continue to boost the dollar and exacerbate existing capital outflows which Beijing is trying hard to restrict. And with continued positive inflation figures domestically, People’s Bank of China (PBoC) could be pressured to tighten its own rates policy in the near future.
No End to Capital Outflows
A stronger dollar makes U.S. investments more attractive to the Chinese, considering recent depreciation of the yuan.
This could prompt Chinese investors and companies to continue searching for loopholes around capital controls put in place by Beijing to limit cash outflows. China has already spent a big portion of its foreign exchange reserves to manage a depreciating yuan. Any continued strengthening of the dollar will put even more burden on Beijing to burn through its remaining reserves.
PBoC’s reported foreign exchange reserves dropped $69 billion in November, a decline of 2 percent from October and the biggest monthly slide since January. China’s foreign reserves have largely been declining since August 2015 as the PBoC has sold dollars, and as the dollar’s relative strength versus basket of other currencies increased.
Along with selling the dollar, Beijing is aggressively cracking down on cash leaving the country from companies and individuals. Consumers already face a $50,000 annual conversion limit. For companies, authorities recently barred foreign acquisitions of $10 billion or more, and instituted a new program where each transfer of greater than $5 million must be reviewed and approved by regulators.
