Chinese analysts fear capital flight and Yuan depreciation

Beijing - The U.S. Federal Reserve's decision to raise interest rates by a quarter of a point caused Chinese analysts to fear a flight of capital and a further depreciation of the Yuan. Economists quoted by the China Daily newspaper said that this is forecast to be the principal effect of Janet Yellen's long-awaited announcement to raise interest rates on Wednesday. The Yuan continued to fall for the tenth consecutive day on Thursday. The Chinese Central Bank set the central parity rate against the dollar at 6.4757, a four-and-a-half-year low. "Higher interest rates by the U.S. central bank will cause further capital outflow and weaken the yuan," wrote Sung Won Sohn, a professor of economics at California State University Channel Islands in Camarillo, California. This trend could only be reversed by the Central Bank of China if it raised interest rates too, the opposite of what it has been doing up to now. Over the last 13 months, the People's Bank of China (PBOC) has cut interest rates six times. Mr Sung Won Sohn continued: "In order to stem the capital outflow and defend the currency, the PBOC would have to raise the interest rate, which is contrary to its objectives. In order to provide stimulus to the economy, the government would have to lower the interest rate and allow the yuan to depreciate." Tailan Chi, professor at the University of Kansas Business School in Lawrence said: "The People's Bank of China can then let the yuan fall against the dollar and thus make it more costly for Chinese investors to move their money to dollar-denominated assets to benefit from the higher interest rates." It is still too soon to evaluate the impact of the Fed's move from the Chinese authorities' official reaction, although there is no doubt that it will affect the world's second-largest economy. The Chinese Ministry of Commerce commented on the interest rate hike on Thursday, explaining that "further analyses" would be necessary to quantify the effects on Chinese trade. A few hours before Janet Yellen made the announcement, the People's Bank of China gave a reassuring signal on the Fed's decision, which many analysts defined as "historical", by issuing a 6.8 percent growth forecast for 2016, slightly down from the 6.9 percent growth forecast for 2015. The financial analysts consulted by the South China Morning Post newspaper expressed differing opinions, from downplaying the effects on emerging economies to the need for China to change perspective on decisions taken abroad. (AGI)

(December 17, 2015)