Yuan stable after U.S. rate rise

Updated 2017-06-16 08:49:40 Global Times

Fed move won't affect domestic markets: experts

The Chinese yuan remained firm on Thursday after the U.S. Federal Reserve announced a rise in interest rates late on Wednesday. Experts noted that this rate hike, and future ones that may come, are unlikely to have a big influence on the domestic financial markets.

"The yuan depreciation pressure seen in the past few years has ended," Xi Junyang, a finance professor at the Shanghai University of Finance and Economics, told the Global Times on Thursday.

The yuan's central parity rate against the dollar edged up by 87 basis points to 6.7852 on Thursday.

The offshore and onshore yuan edged down 0.07 percent and 0.11 percent, respectively, by 4:21 p.m. on Thursday.

The stock markets experienced relatively little fluctuation on the day, with the Shanghai market gaining by 0.06 percent, while the Shenzhen market rose 0.69 percent.

According to a report from Reuters on Wednesday, the U.S. Federal Reserve raised its benchmark lending rate by a quarter percentage point to a target range of 1 percent to 1.25 percent.

It's the second U.S. interest rate increase in three months and the fourth since 2008, when rates were pushed to near zero in response to the financial crash.

No rate rise in China

The Chinese government didn't make any moves on interest rates in open market operations on Thursday to counter the rise in U.S. rates.

The rate for seven-day reverse repos remained at 2.45 percent, the 14-day tenor at 2.60 percent and the 28-day tenor at 2.75 percent, according to the People's Bank of China (PBOC), China's central bank.

In the past, the PBOC usually raised short-term interest rates after a rise in U.S. interest rates, which was read as a gesture to keep pace with monetary policies in the U.S.

"The yuan used to be sensitive to U.S. rate changes, as a rise would cause the yuan to edge down. That's why the PBOC had to raise short-term rates to prevent capital outflows. But now that the yuan has entered a stable phase immune to external influences, the PBOC no longer needs to take such actions," Xi explained.

The yuan has strengthened against the dollar by about 2.3 percent so far in 2017, after tumbling 6.5 percent last year.

"The downward pressure on the yuan since the second half of 2015 may have ended, but there will be two-way fluctuations between the U.S. dollar and the yuan in future," Xi said.

He added that the government's tighter management of cross-border capital flows also helped the yuan to stay firmer.

The PBOC also injected 90 billion yuan (.25 billion) into the financial system by means of reverse repos on Thursday.

Li Xuanjing, an associate research fellow at the Institute for International Monetary Affairs at Renmin University of China, said that exchange rate fluctuation is a normal situation that reflects economies' need for currencies.

"It's hard to say if the yuan has entered a stable period, because it depends on factors such as economic openness and financing needs in the international markets," he told the Global Times on Thursday.

But he noted that the new round of infrastructure construction such as projects under the Belt and Road initiative will trigger new financing needs for the yuan in the global markets. "In this sense, the yuan's exchange rate is headed for a more stable and healthy state," he said.

Little influence

According to Xi, although there will be future U.S. interest rate hikes, they will have a negligible impact on the domestic economy including the foreign currency reserves and the real estate sector.

"The markets anticipated long ago that the U.S. government would raise rates. Any influence from this has already manifested itself in the global financial markets," he noted.

Xi also said that the room for future U.S. dollar interest rate hikes was limited, meaning that the dollar is approaching the end of its appreciation cycle.

Li argued that it's hard to anticipate the influence of the U.S. interest rate hikes on domestic foreign currency reserves, because the Chinese government is maintaining a tighter grip on foreign currency reserves and cross-border capital flows.

The U.S. Federal Reserve said that another interest rate rise would be completed before the end of this year, as it expressed confidence about U.S. economic prospects.

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