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Kevin Gin: 3 Questions on how US Rate Hike Affects Chinese Economy
Aspire, Thought Leaders | 16 November 2015
By: Chen Xushuang
Articles (26) Profile

In a recent article by Bloomberg, Federal Reserve Chair Janet Yellen and New York Fed President William Dudley had acknowledged that a rate hike this December could still be a “live possibility”. But again, that is only given the condition that the economy has grown sufficiently, and that jobs data has improved. What does a possible December hike in the US mean to China then? We have interviewed Founder and Principal of Alpha Capital Kevin Gin, whose investment expertise lies in China. Below is a slightly edited version of the interview.

Q1: Previously during the Shares Investment Conference, you have also mentioned that a December hike is likely. How much do you think this would affect the Chinese government or economy?

Ans: I think the issue is not whether they raise rates or not, but whether it will be sustained. In my opinion there will indeed be a rate hike in December, but I also believe that the Fed will hold the new rates steady for at least six months thereafter.

I do not think that the US rate hike will affect the Chinese government’s decisions in future as I believe that they have already factored this into account. However you would see that the interest rate spread between the two countries is reversing. If we were to go back 12 months ago, the spread between China and the US interest rates has narrowed, primarily by the lowering of the Chinese interest rates. As soon as the Fed raises their rates, the spread will narrow even further.

So in the short term, there may be further capital flight from China given the narrowing of the interest rate spreads. The Renminbi will weaken, which will help China’s exporters, especially as Christmas orders are coming in. On the other hand Chinese imports will take a hit due to the weakening Renminbi, and these numbers will be reflected in the 2016 Q1 economic numbers.

Made in China

Q2: The Chinese government has its 13th Five-Year Plan for 2016-2020. How would the Chinese government factor the rate hike into their plan?

Ans: As we are going into the 13th Five-Year Plan, I believe the Chinese government has factored a higher U.S. interest rate environment into their plan.  As we are all aware, the Chinese government is opening up its capital account very quickly with the accelerated deregulation of its finance industry through the increase of Qualified Foreign Institutional Investor (QFII), Renminbi QFII and QDII quotas, the establishment of a number of offshore Renminbi centres and the increase in bilateral Renminbi currency swaps, the liberalisation of domestic interest rates, the Shanghai-Hong Kong connect,  National Equities Exchange and Quotations (NEEQ) etc.  I believe the Chinese government would only have done all these if they had a margin of error to play with.  One such leverage point is its domestic interest rates.  The expected increase in US interest rates gives the Chinese government a much larger margin to maneuver.

RMB FQII pilot programme launched in Hong Kong

Q3: Last but not least, you’ve mentioned before that rates will be raised but plateau for the global economy to adjust accordingly. What are the sectors to note when rates start to plateau and why?

Ans: From an equity perspective I would focus on interest rates-sensitive sectors and companies, as they would be the most affected by shifts in interest rates.  The same can be said for fixed income securities, but the focus would be on changes in cash flow and credit quality. Of course there will be second order effects to consider as well.

As a Communications Studies graduate specialising in journalism, Xushuang is keen to observe and explore issues that readers want to know more about, and to deliver quality content through engaging writing.

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