Federal Reserve

Analysts mull the effects of possible Fed hike on yuan, China equities

PUBLISHED : Thursday, 19 May, 2016, 10:32pm
UPDATED : Monday, 30 May, 2016, 2:19pm

Minutes from the Federal Reserve’s April policy meeting hinted at a rate hike in June, leaving analysts largely sanguine on the possible impact on the yuan and Chinese equities.

“The textbook effect of US rates rise is a lag in the yuan and subsequent negative pressure on equity markets globally,” says Brett McGonnegal, chairman and chief executive officer at Capital Link International. “But I believe the shift by the People’s Bank of China away from a quasi dollar peg will help soften the blow.”

Ken Wong Asia equity portfolio specialist at Eastspring Investments said some of the potential rate hike is already priced in.

“The impact on Asian equity markets depends on the Fed’s guidance after the next rate rise, but Hong Kong equity markets might not be impacted much as the Hong Kong dollar is pegged to the US dollar, and there is a large margin of safety already priced into the Chinese equity markets,” Wong said.

Others said a rate hike would force the yuan modestly lower.

“A hike would result in some depreciatory pressure on the yuan, and that is happening already due to the speculation,”said Nathan Chow, China economist at Deutsche bank, “However, the pressure would remain if they do not hike.”

Heng Koon How, senior investment strategist private banking Asia Pacific, Credit Suisse said he was sanguine about the yuan outlook.

“The yuan held relatively stable to the dollar recently for three main reasons: China macroeconomic indicators held up relatively well, officials reiterated the yuan didn’t have any devaluation risk, and the market expected the Fed to be dovish. Now all three have dissipated.”