World’s two largest economies diverge as China leaves key interest rate unchanged in wake of US Fed cut
The People’s Bank of China refused to mirror its US counterpart on Thursday, anxious to maintain low borrowing costs amid smouldering trade war
China’s central bank left interest rates unchanged on Thursday in response to the US Federal Reserve’s rate increase overnight, underscoring Beijing’s desire to keep borrowing costs low to help stabilise economic growth in the midst of its ongoing trade war with the US, according to analysts.
The Fed rise and lack of Chinese response means the gap between US and Chinese interest rates narrowed, which would normally risk a sharp rise in capital outflows as Chinese investors sought better returns abroad.
But China maintains strict controls over capital flows, giving it leeway to keep its interest rates low without risking capital flight.
Given the [current] bearish sentiment in domestic markets, investors were already motivated to transfer capital abroad. China can maintain the status quo and wait for an improvement in the national economy
Earlier on Thursday, the Hong Kong Monetary Authority raised its base lending rate to maintain the differential between Hong Kong and US interest rates, so keeping the exchange rate between the two dollar currencies steady.
The Hong Kong dollar is pegged to the US currency, so the Hong Kong authorities are obliged to take steps to maintain the exchange rate within a narrow range.
The Chinese currency, the yuan, is not tied to the US dollar, so the People’s Bank of China (PBOC) does not need to respond to US interest rate changes unless it wishes to. Instead of changing interest rates on Thursday, it allowed the yuan to weaken.
On Wednesday, the Fed raised its main interest rate by a quarter point to a 10-year high and commentators now expect one greater rate increase this year and three greater in 2019.