Fallout from Fed interest rate rise will affect China, Beijing admits, as analysts predict fall in value of yuan

When the US Federal Reserve entered its rate-hike cycle in 2004, Beijing was unworried about then-Fed chairman Alan Greenspan’s decision

China was the world’s sixth-biggest economy, its financial market was largely closed to the outside world, and the yuan was undervalued.

All that has changed in the 11 years since. Now, with the Fed raising interest rates by a quarter of a percentage point on Wednesday – its first in roughly a decade – China can’t afford not to concern itself with the fallout.

READ MORE: US Fed raises rates 25 points to end near-zero era: Hong Kong property market expected to take a hit

The US interest rate hike also comes ahead of a key meeting by Communist Party leaders to map out economic work for the next year. State-run People’s Daily reported yesterday that the Central Economic Work Conference would start today.

“In the last Fed rate cycle, China was still in the back seat, watching the Fed move from afar and probably wondering how central banking works,” said Sun Lijian, a finance professor at Fudan University in Shanghai. “But now China is on the front line. It has to consider the possible consequences of any major move in the outside world – that’s new territory for policymakers in China.”

Sun said China, the world’s second-biggest economy, might have retained capital controls but it was much more exposed to global capital flow risks.

Li Jie, the director of the foreign exchange reserves research centre at Central University of Finance and Economics in Beijing, said China had enjoyed capital inflows in the past decade but now it had to face the hard reality of a cash retreat.