China remains calm in face of U.S. rate hike

With a growing capacity to better manage potential shocks to its economy, a calm and watchful China is expected to astutely handle the impact of the latest U.S. interest rate hike.

Showing confidence in the gradual recovery of the U.S. economy, the Federal Reserve on Wednesday raised its key interest rate by a quarter point to a range of 1 percent to 1.25 percent, and unveiled plans to start trimming its 4.5-trillion-U.S.-dollar balance sheet.

The Fed’s slow-paced rate hikes since December 2015 are helping the market digest spillovers in advance.

For China, Fed rate hikes and paring bond holdings are expected to bring pressure on its exchange rate, trade and psychological expectations, notably risks of currency devaluation and capital outflow.

However, the situation is under its control.

China is becoming increasingly capable in economic management, with a central bank increasingly experienced and tactful in monetary policy, on top of the application of other instruments.

A stable and neutral monetary policy, which is able to be fine-tuned in line with economic conditions, along with fruitful reforms in its economic structure, are among the important factors for China to maintain steady growth.

The latest International Monetary Fund estimates put China’s economic growth at 6.7 percent this year and an annual average 6.4 percent in the next three years. Such growth will help China maintain its lead among the major economies and remain a significant contributor to global economic growth.

The European Central Bank announced on Tuesday that it had exchanged part of its U.S. dollar reserves for renminbi, the latest sign of strong overseas confidence in the Chinese currency.

Data released on Wednesday by China’s National Bureau of Statistics (NBS) showed steady growth in the country in the first five months led by supply-side structural reform and an innovation-driven strategy.

Innovation is playing an increasingly important role in China’s economic expansion, pointing to an unignorable potential of its economic strength.

Strong and steady economic growth will help the Chinese currency renminbi maintain its strength despite the many uncertainties ahead in the global political and economic landscape that may sustain fluctuations in the U.S. dollar exchange rate.

These uncertainties are about additional Fed rate hikes this year, Fed actions to reduce bond holdings, Washington’s new tax and infrastructure construction policies, the German elections, the Brexit process, terrorist threats, and geopolitical black swans, among others.

In addition, cautious precautions against Fed rate hikes by central banks of major economies may signal a trend in their policies towards an exit from monetary stimulus.

The trend can be supported by a global economic recovery and favorable inflation situation in countries.

That will mean a narrowed gap in interest rates between the U.S. dollar and other major currencies, something which will contain the U.S. dollar’s appreciation and ease the pressure on the Chinese currency. Thus, China has every reason to face the latest U.S. rate hike with composure.