Is China Ready for Fed Liftoff? Reserves Buffer Suggests It Is

  • $3.56 trillion reserves can help buffer from external shocks
  • China's `domestic economy is the key,' says Mizuho's Shen

What Would a Fed Rate Hike Mean for China?

With investors worldwide awaiting the first Federal Reserve rate rise in nine years, the major economy that’s looked the shakiest lately may actually be one of the countries best positioned to weather the looming liftoff: China.

Even with the slowest growth in a quarter century spawning a stock-market debacle, China’s $3.56 trillion in foreign-exchange reserves dwarf every other economy, and policy makers showed last month they’re willing to put them to use at a record pace to defend the yuan.

“The Fed’s rate hike itself doesn’t have a great impact on China’s economy,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “For China, the domestic economy is the key.”

Among the Asia-Pacific region’s largest economies, China is in one of the strongest positions to weather higher U.S. rates, according to a Bloomberg Intelligence analysis. High foreign reserves, low external debt and low foreign-held public debt all help buffer the economy from external shocks, according to Bloomberg economist Fielding Chen in Hong Kong.

Fed officials convene this week to make their toughest decision in years after holding the benchmark rate near zero since December 2008. They announce their decision at 2 p.m. Thursday in Washington (that’s 2 a.m. Friday in Beijing), and Chair Janet Yellen will hold a press conference.

U.S. policy makers are weighing whether unemployment falling to a seven-year low warrants raising rates even as inflation remains below their 2 percent objective. China may be the biggest reason to hold off: signs of a deepening slowdown in its economy, the biggest contributor to global growth, sent shares, commodities and emerging-market currencies plunging last month.

Economists have pushed back Fed rate rise forecasts, a Bloomberg survey conducted Aug. 27-31 showed. Forty-eight percent saw a September increase, compared to 77 percent in early August. Some 17 percent saw a rate rise in October and 24 percent forecast December.

Whenever the Fed makes the move, the People’s Bank of China says it’s ready.

Here’s a look at the main areas of China’s vast economy and increasingly open financial markets that may be affected by a Fed policy change:

  • YUAN: Any negative impact on the yuan has already been factored to the PBOC’s outlook and it won’t cause a sharp depreciation of the currency, the PBOC said in a statement on Aug. 12, the second day after its abrupt devaluation of the yuan. The yuan will end the year at 6.5 to the U.S. dollar, according to the median estimate of analysts surveyed by Bloomberg, compared with 6.37 close in onshore trading Tuesday.
  • DEBT: Five PBOC interest rate cuts since November and rules to relax yuan bond issuance onshore mean Chinese companies are becoming less reliant on dollar funding. That helps to cushion Chinese companies, the region’s biggest dollar debt issuers, from a potential Fed rate increase. Domestic corporate bond sales jumped 77 percent in 2015 from the same period last year, data compiled by Bloomberg show.
  • STOCKS: China’s domestic stock market remains largely closed to foreign investors and swings mainly on domestic drivers. While that can be a headache for policy makers in times of speculative frenzy, it may make the nation’s stock market more immune to Fed policy than others.
  • CRISIS VULNERABILITY: Past Fed tightening cycles have spurred crises in developing nations, such as the 1997 Asian financial crisis or Mexico’s peso crisis in 2004. China isn’t vulnerable in the same way because its low levels of foreign ownership of securities and government debt mean it is less likely to be hurt by investors pulling out of the country as they seek higher yields elsewhere.

— With assistance by Xiaoqing Pi, Lianting Tu, Catarina Saraiva, and Xin Zhou

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE