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Economy

China has more wiggle room for policy maneuver as Fed signals slower rate hikes(2)

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2016-03-18 08:36Xinhua Editor: Gu Liping

"I think the Fed probably will wait a while before raising interest rates again, that helps create a stable global environment (for China)," David Dollar, a senior fellow with the Brookings Institution and a former official of the World Bank and the U.S. Treasury Department, told Xinhua.

The Fed's less aggressive path of rate increases could provide some relief to emerging markets who are already struggling with currency depreciation and capital outflows. It could also open a window of opportunity for emerging markets to boost economic growth.

The longer the Fed waits before raising interest rates, the further emerging markets can go with loosening monetary policy. That will buy time for emerging markets to put fiscal policy and structural reforms in place to help stabilize slowing growth.

China has announced more accommodative fiscal and monetary policies, supply-side structural reform and other pro-growth measures to prevent the economy from falling too quickly this year, according to a government work report delivered at China's annual parliamentary sessions this month.

"I hope that's effective to keep China's growth going pretty well," Dollar said. "I really think China needs to clearly show the growth rate is stabilizing."

Dollar said "markets will be convinced that China is not in need of large (currency) devaluation," if incoming data in the next few months show evidence of stabilized economic growth.

Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, also said the Fed's "very gradual" pace of rate hikes would probably benefit the Chinese economy in some ways, especially for exchange rate policy.

"If the U.S. interest rates have been rising rapidly, the dollar would have risen more rapidly, that would make it even more difficult for the Chinese government to maintain the relationship between the renminbi (RMB) and the dollar," he argued.

"Now the dollar is not going to be that strong ... it makes Chinese exchange rate management policy much much easier," he said.

The dollar index weakened to an almost five-month low on Wednesday as investors re-evaluated the Fed's rate hike plan and their dollar positions.

"The Chinese central bank can continue liberalizing the capital account ... the risk that they're forced to introduce capital controls is much smaller," Kirkegaard told Xinhua, noting that the pressure for capital outflows from China has eased.

China's foreign exchange reserves dropped by 28.57 billion U.S. dollars to 3.2 trillion dollars in February, the smallest decline since June, according to the People's Bank of China (PBOC), the central bank.

"If that pattern continues, I think the government will succeed in stabilizing the exchange rate," said Dollar, adding that it "makes a lot of sense" for China to manage the RMB exchange rate with reference to a basket of currencies as the three big currencies in the world -- U.S. dollar, Euro, Japanese yen -- are going in different directions.

"Right now the currency seems pretty stable with reference to the basket," said Dollar. "I think the sentiment in the market has become calmer, right now there's not a big net outflow from China."

  

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