China and the Fed’s Date with December

Building expectations that the Federal Reserve will raise the target range of the Fed funds rate at their December 15-16 meeting have elevated concerns about the potential impact of a hike on the Chinese economy, emerging markets, and commodity prices. A Fed interest rate adjustment would primarily pressure the Chinese economy through a rising dollar, both requiring additional intervention into foreign exchange markets to support the yuan and calling into greater question the political sustainability of that currency support, potentially
creating additional capital outflows.

Yet Chinese companies and banks also face more direct exposure from rising short-term US interest rates, through rising costs of refinancing short-term USD-denominated borrowing and a tightening credit environment for such refinancing. This exposure has resulted not only from borrowing from foreign banks, but also in the use of Chinese commercial banks as proxy agents for the PBOC’s intervention into the foreign exchange markets offshore.

Posted August 1, 2017
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