Any raise in interest rates by the U.S. Federal Reserve will have a moderate and manageable impact on China's economy, said Bloomberg economists Friday. "If the Fed increases interest rates twice this year, the impact on the U.S. dollar would be marginal.
You will see some modest appreciation, but not anything too substantial," said Michael McDonough, Chief Economist of Bloomberg LP. At the start of the year, the Fed indicated four interest rate hikes in 2016. But it has kept the federal funds rate unchanged since an increase in December last year, the first in nearly a decade.
The Fed reduced the expectations of rate hikes to two in March, which McDonough said is much more realistic and possible. "When you look at the situation now, the probability of one hike certainly looks a lot more higher than three and increasingly better than two," said the economist, adding that one hike will have no substantial impact on the U.S. dollar and consequently no substantial impact on China.
Bloomberg Chief Asia Economist Tom Orlik said four rate hikes would be bad for China, but two would be good. A Fed rate raise will lead to a stronger U.S. dollar and a weaker yuan, which would be positive for China's export competitiveness, according to him. A Fed rate raise would also save China's central bank from the necessity of a rate cut, Orlik said.
In his view, yuan weakness and capital outflow would be moderate. "All of that would be manageable," he said. During the Eighth Round of the China-U.S. Strategic and Economic Dialogue last week, the U.S. side agreed to consider the spillover effect on the international financial market during monetary policy normalization.
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