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Opinion
How Should China Cope with U.S. Interest Rate Rise?
By Tan Haojun | NO. 23 June 9, 2016

 

Workers assemble trucks in a factory of AVIC Changzheng Automobile Manufacturing Co. Ltd. in Xingtai, north China's Hebei Province, on May 11 (XINHUA) 

A May 25 Bloomberg report said that Chinese officials plan to ask their American counterparts during the upcoming eighth round of the China-U.S. Strategic and Economic Dialogue about the chance of a Federal Reserve (Fed) interest rate increase in June.

Chinese central bank officials said later that day that the report was not correct.

However, there are still signs that the Fed is likely to raise interest rates this month.

Since the U.S. economy began to recover and the Fed raised interest rates at the end of last year, the world economy has been obsessed with the possibility of the Fed raising interest rates further. The market has been deeply affected before and after each such interest rate increase.

Though the Fed's future moves have been postponed time and again, nations around the world, emerging economies in particular, are affected by the potential for change, which to some degree may outweigh the impact of interest rate rises themselves.

As one of the emerging economies, China cannot be immune to U.S. interest rate policy. Moreover, due to mounting downward pressures on its economic growth in the last two years, the nation's capacity to deal with interest rate rises is more or less eroding, and China's economy is consequently now more sensitive to the Fed's interest rate moves, since it's beginning to show some signs of bottoming out and stabilizing.

As the world's largest economy, the United States is experiencing economic recovery, with higher employment and the strengthening of potential consumer demand. Interest rate rises, therefore, are inevitable.

While other economies rarely escape the influence of U.S. monetary policy, what's more important is whether other nations can foresee the rises, figure out effective measures in advance and reduce the impact to a minimum.

In fact, no matter whether the United States launches quantitative easing or raises interest rates, countries like Britain, and Germany especially, can better handle the effects because they have stable economic growth, employment and markets. Such stability is based on their sound development of the real economy, which is underpinned by a robust manufacturing sector. Such countries, therefore, can withstand financial crises.

By contrast, affected by overheated development of the real estate and financial sectors during the past few years, China's real economy has encountered problems, and its capacity to resist risks has been undermined. Thus, the country is moderately concerned about possible interest rate rises.

Based on its past behavior, the United States is not likely to take into consideration the economic predicament of other nations. Just as the Fed launched quantitative easing measures before, when the time is ripe, it will surely raise interest rates again.

So, what we need to do is to work out a coping strategy. What really matters is how we adjust our thoughts, what actions we take, and whether government at all levels can focus on the development of the real economy.

To put it bluntly, if we fail to shift the focus to the real economy and continue pursuing short-term profit by pouring money into the real estate sector, we may soon suffer pains brought about by the Fed's interest rate increase.

Worth mentioning is the launch in recent years of a series of measures to stabilize economic growth, many of which focus on the real economy, such as the targeted reserve requirement ratio reduction, tax cuts for small and micro-sized enterprises, and the change from business tax to value-added tax. Some of these policies, however, have been distorted, intercepted or diluted during their implementation, especially when it comes to the injection of capital.

From 2008 to the present, broad money supply—a measure of how much money is currently in the economy—has increased by 80 trillion yuan ($12 trillion), yet enterprises in real economic sectors still struggle with financing. Worth reflecting upon is the fact that huge amounts of money have flooded into real estate companies, local government financing platforms and state-owned enterprises.

If the pro-growth measures had not been distorted in practice, and the newly increased funding had actually flowed into real economic sectors such as manufacturing and small and micro-sized enterprises, the situation would be much better than it is presently. Then we wouldn't need to worry about the potential risks and impact resulting from the Fed's interest rate increases.

In conclusion, to prepare sufficiently for the possible interest rate rise in June, China should intensify the focus of its policies and ensure their full implementation. Failing this, China's economy would continue to be vulnerable to external changes.

This is an edited excerpt of an article originally published in National Business Daily

Copyedited by Chris Surtees

Comments to yushujun@bjreview.com

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