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Beijing insists economic policies can adapt to US Fed interest rate rises

Increase in December had only short-term effect on cross-border capital flows for China, says forex oversight agency

China’s economic policies were “completely able to adapt” to US Federal Reserve interest rate rises, the foreign exchange regulator has said, adding the nation’s economic fundamentals supported a stable capital base in the long run.

Wang Chunying, spokeswoman of the State Administration of Foreign Exchange, said on Thursday the Fed’s rate increase in December had only a short-term effect on cross-border capital flows for China.

While the country saw capital outflows in the first quarter, the pressure had gradually eased and the yuan’s exchange rate had stabilised, Wang said.

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Chinese companies and individuals were repaying foreign debt at a slower pace than before and were less willing to hold foreign currencies, she added.

“Since March, the market has formed a much clearer judgement on the path of the Fed’s rate hikes,” Wang said.

The market believed the United States would ease back on pumping the rate, but maintain an eye on the impact of global financial markets on the American economy, she added.

The market’s tolerance for risk was growing, while the strength of the US dollar was weakening, she said, noting the index measuring the value of the greenback against a basket of foreign currencies dropped 5 per cent across February and March.

The yuan’s exchange rate had “started to stabilise”, and China’s cross-border capital flows had “returned to normal” to reflect economic fundamentals.

Policies are completely able to adapt to the normalisation of the Fed’s monetary policy
Wang Chunying, spokeswoman, State Administration of Foreign Exchange

“The established economic and financial policies are completely able to adapt to the normalisation of the Fed’s monetary policy,” she said.

China was under pressure to defend its currency and counter capital outflow following the Fed’s rate increase at the end of last year.

Foreign exchange reserves fell by about US$100 billion in December and January amid market jitters about the weakening yuan and a dimming outlook on growth in the world’s second-largest economy.

But the drain on reserves ended last month, rising by US$10.3 billion in March, to hit US$3.31 trillion.

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Wang said Beijing’s overall policies would maintain the market’s confidence in China’s economic and reform direction.

She said the government would further promote currency reform along market lines, without elaborating.

Wang also said the gap between the onshore and offshore yuan exchange rate narrowed in the first quarter. She didn’t rule out the possibility of short-term, unexpected shocks to capital flows, but said the situation wouldn’t affect long-term trends.

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