Alarm bells ring for China’s leaders as US Fed fires warning shot
Interest rate increases pose longer-term challenges for nation as it tries to tame debt and stem the risk of more capital outflows
The US Federal Reserve’s decision to raise interest rates is no doubt ringing alarms bell for Chinese leaders meeting in the capital this week for annual closed-door talks to chart economic policy for next year.
Immediately after the announcement early Thursday (Hong Kong time), Chinese onshore government bond futures plunged to the daily limit, reportedly prompting the central bank to step in. The yuan also tumbled to test the key level of seven to the US dollar, and the benchmark stock index ended the day below the 60-day average.
Watch: US Fed increases interest rate by 25 basic points
But the real challenges for the country from a stronger US currency and higher dollar interest rates loom much larger, posing threats to foreign exchange reserves, currency and prospects for growth.
In the decade or so since the collapse of US financial services firm Lehman Brothers, Beijing has been convinced that the US’ financial power and its free-capitalist model is in decline. It has also been confident that its model of state capitalism is the better bet, and that it is at the forefront of an inevitable shift in global economic gravity to the East.
It has tried to marshal this perceived growing economic might by promoting the yuan as a nominal international reserve currency and creating institutions such as the Asian Infrastructure Investment Bank to help boost regional infrastructure.