Stabilising China economy triggers Fed rate hike

14 December,, Lagos – The risk of a hard landing for China has been subdued to a reasonable extent as recent data shows the world’s second largest economy is gradually stabilizing. This alleviates another concern of the Fed, making it more likely that the US Central will raise rates this week, having shied away from a rate hike back in September on a growing global economic weakness, mainly from China. The unanticipated pickup in China’s old growth drivers and renewed vigor in new ones helps clear the way for the first U.S. interest-rate rise since 2006.

A strengthening and stabilising China economy can be seen from the various indexes that have displayed a pick up. One of which is the Bloomberg monthly China gross domestic product tracker, which improved to 6.85 percent estimated growth pace for November. This marks the strongest reading since June, thanks to positive industrial production, retail sales and fixed-asset investment which all came above forecast.

PBOC monetary policy actions

The People’s Bank of China has cut rate six times since last year, down to record low levels, also boosting fiscal spending, adding to a huge pile of economic debt which threatens the long term outlook of the country. However, policy makers have added stimulus recently to help inspire medium to high-speed growth while shifting to a more balanced, services and consumption-led economy and away from manufacturing and infrastructure spending.

“China’s real economy is stabilizing tentatively at low levels,” Wang Tao, chief China economist at UBS Group AG in Hong Kong, wrote in a note to clients after the data release. “The intensification of growth support already delivered and to come (both infrastructure and non-infrastructure related) should underpin near-term economic growth momentum.”

Yuan Dollar linkage

The PBOC is now also planning to reduce the Yuan’s link to the dollar as the currency fell further on Friday, on dollar strengthening. The PBOC’s China Foreign Exchange Trade System unit spurred speculation that policy makers want to reduce the currency’s link to the dollar and let it weaken further. The new Yuan index is expected to comprise of 13 currencies to “help bring about a shift in how the public and the market observe RMB exchange rate movements,” according to the CFETS statement of Friday. The move of a loosened link of the yuan to the dollar is expected to help support trade for China’s export-dependent economy.

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