US rate hikes' effect predicted to be limited

A $100 banknote is placed next to 100 yuan banknotes in this October 16, 2010 file picture illustration taken in Beijing. [Photo/Agencies]

The first of what may be a series of interest rate hikes by the US Federal Reserve is expected to have limited effects on China's economy if the country continues to maintain steady growth and keeps capital outflows and property bubbles under control, economists said on Thursday.

The Fed raised its target for short-term interest rates by 0.25 percentage points on Wednesday, which was only the second increase in a decade. It also indicated it will likely embark on a steeper path of interest rate hikes over the next year, with three or more rate hikes possible. Earlier, they had indicated rates might go up only once or twice in 2017.

Lian Ping, chief economist at the Bank of Communications, said that the first and foremost task for China is to maintain steady growth of 6.5 to 7 percent next year. "Stable growth will boost investors' confidence, which could slow down the capital outflows and attract more inbound investment," Lian said.

China should also improve the management of cross-border capital flows by tightening the curbs on speculative overseas investments while relaxing controls on inbound capital from international markets.

On Thursday, the benchmark Shanghai Composite Index declined slightly by 0.73 percent, as the US rate hike had been widely factored into current stock prices.

But economists warned that any unexpected acceleration in the pace of US rate hikes could generate stronger growth headwinds for China and create more pressure on the Chinese currency, inducing more capital outflows.

More uncertainties also linger around whether economic policies of the administration of president-elect Donald Trump could cause rates to rise at an even faster pace next year.

"The Fed cannot be seen to be behind the curve. If US inflation heats up, then the probability for the Fed to move faster than expected cannot be ruled out," said Hong Hao, the chief strategist at Bocom International.

Hong said that China's monetary authorities should raise interest rates in tandem with the US rates to ease the pressure for yuan depreciation and more capital outflows.

Economists have suggested China should step up efforts to contain asset price bubbles like those in the property sector, against the backdrop of a stronger US dollar.

The fear is that a weaker yuan and cooling property market would prompt investors to rotate their funds out of real estate, destabilizing the overall Chinese economy and accelerating capital outflows.

"China should strictly contain further expansion of bubbles in asset prices, which are at historic highs, and push forward economic reforms to raise growth efficiency," said Jiang Chao, an analyst at Haitong Securities.

But economists are divided on whether China should tighten its monetary policy, given that growth headwinds still exist, with aggregate demand and private investment remaining at lackluster levels.

Consumer and producer prices in November increased faster than expected, sparking expectations that the People's Bank of China will tighten monetary conditions.

Zhao Yang, chief China economist at Nomura Securities, said that Chinese policymakers will continue to keep monetary policy accommodative next year, although the recent inflation data did produce some pressure for the PBOC to tighten its policy.