Global bank says imminent US rate increase will have little impact on Chinese mainland economy unless it is steep

Global wealth management and research giant Bank of America Merrill Lynch has ruled out further capital outflow from the Chinese mainland arising from a widely expected US interest-rate hike this month.

It affirms that a rate increase would have minimal impact on the economy unless the rate normalization process turns out to be faster than expected.

Helen Qiao, chief Greater China economist at the bank, contended that despite recent volatility in the foreign-exchange market, the renminbi will stabilize as the US Federal Open Market Committee is scheduled to meet in mid-December to decide whether or not to kick off the rate normalization cycle this year.

"We believe the upcoming US rate hike has been largely priced in as the renminbi has been weakening since the SDR (special drawing right) decision. The currency should be able to stabilize in two weeks," Qiao said on Wednesday.

"The market is more concerned about the pace of the US rate normalization cycle next year," she said.

Bank of America Merrill Lynch expects the US Federal Reserve (Fed) to lift interest rates four times till the end of 2016, with the first round kicked off at this year's last Fed meeting due to be held on next Tuesday and Wednesday.

The People's Bank of China trimmed the renminbi daily fixing rate on Wednesday by 0.1 percent to 6.4140 against the US dollar - the weakest level since August 2011. The onshore spot rate dropped 0.17 percent to close at 6.4280 in Shanghai - a four-year low.

The redback has lost 0.5 percent onshore since the International Monetary Fund decided to include the currency in the SDR basket on Nov 30. The mainland currency was traded at 6.5063 offshore as of 17:26 Beijing time on Wednesday.

While believing that any US rate hike will not trigger further capital outflow from the mainland, Qiao said the shrinking interest rate differential across the Pacific could exert greater pressure on those domestic companies with US dollar liabilities. "These borrowers have been paying back ahead of schedule and squeezed domestic liquidity."

"It's tempting for the central government to further devalue the yuan in the wake of weak external and domestic demand, but merely nominal depreciation is not helpful to boosting growth in China," Qiao said.

"The government has been focusing on longer-term structural reforms, such as the supply-side reform," she said, adding that the next thing to watch in China is the 13th Five-Year Plan (2016-20), due next March, especially further details on innovation-driven type of growth, SOE (State-owned enterprise) reform, as well as financial market and fiscal reforms.

emmadai@chinadailyhk.com

(HK Edition 12/10/2015 page9)