Impact of Fed’s Rate Hike on Cross-Border Capital Flow in China Eases Off, Says SAFE

Yicai

2017-04-20

(Yicai Global) April 20 -- The impact of the rate hike by the Federal Reserve is easing off on cross-border capital movements in China, said Wang Chunying, spokeswoman for the State Administration of Foreign Exchange (SAFE). The regulator will continue to monitor and assess the effects of the rate hike and the Fed’s decision to unwind its balance sheet.

The different effects of the three rate hikes by the Fed attest to the fact that China’s ability in handling and adapting to fluctuations in the federal funds rate has improved considerably, Wang commented. “We are confident in our ability to handle and adapt to the situation,” she said.

The Fed has raised the reserve rate three times since the exit of the quantitative easing policy in the US. The first rate hike occurred in December 2015, and the dollar index rose around 7 percent at the peak, Wang reminded when answering questions at a press conference today, noting that the rate hike, coupled with some other factors, led to a USD183.9 billion drop in China’s foreign reserves in the fourth quarter that year.

Before the second increase in Fed’s rates last December, the dollar index surged around 9 percent driven by strong rate hike expectations and the US presidential election, and China’s foreign exchange reserves decreased by USD155.9 billion in the fourth quarter.

The dollar index climbed 2.7 percent on the eve of the third rate hike last month, and the Chinese foreign reserves only dipped by USD1.4 billion – a fall of USD12.3 billion in January was followed by USD6.9 billion and USD4 billion gains in the following two months.

The risk reversal index in the options market serves as a measure of expectations in the yuan’s exchange rates fluctuations. Recently, the index fell sharply on both Chinese and foreign markets compared with the figures recorded at the end of 2015 and last year, indicating that expectations of the yuan’s exchange rates have stabilized, she added.

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