China tightens monetary policies on US rate hike alarm

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The US Federal Reserve’s latest rate hike alert is already having an impact on China. The People's Bank of China (PBOC) raised interest rates for its medium-term Lending Facility and reverse repos on Thursday, and China’s Reminbi also appreciated.

Fed just announced that it would raise short term interest rates for the third time this year. It also increased the target range for federal funds rate by 25 basis points and predicted more increases to follow in 2018.

PBOC immediately followed by raising its seven-day reverse repurchase rate to 2.5 percent and the 28-day reverse repo to 2.8 percent. The PBOC's one-year Medium-term Lending Facility rate was also lifted to 3.25 percent.

Federal Reserve Board Chair Janet Yellen leaves after speaking during a briefing at the US Federal Reserve, December 13, 2017 in Washington, DC. The Fed on Wednesday raised the benchmark interest rate for the third and final time this year. /VCG Photo

Experts say that China's tightening monetary policies are in line with the current expansion rate of the global economy.

“The Chinese economy may benefit from the global GDP expansion. Our exports are being supported by the advanced economic solid growth. On the other side, the Chinese inflation will also be affected by global commodity price going up,” said Li Liuyang, Chief Analyst at China Merchants Bank.

China has already tightened its monetary policies several times this year. The Shanghai Interbank Offered Rate for all categories has been rising in the past few months.

Meanwhile, the value of the Renminbi increased upon the US dollar’s slipping. The People's Bank of China set the Renminbi midpoint fixing against the dollar at 6.6033 yuan today, 218 basis points stronger than yesterday.

VCG Photo

But experts believe that Renminbi's rise won't last long and will ease again next year.

“If we cut money supply, maybe our currency will appreciate. But at the same time, the US will do the same thing. The key point is the strength and the size they cut. Maybe they will do more and bigger than us. Maybe the US dollar will appreciate,” said Deng Zhijian, Investment Strategist with Development Bank of Singapore (DBS) China.

The rising global economy has led several central banks to tighten their monetary policies. In addition to China and the US, the Bank of Korea also raised its interest rate last month, and experts believe more central banks will go down that path in 2018.

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