In October, the Federal Reserve raised interest rates by another 25 basis points, bringing the federal funds rate to a range of 5.25% to 5.50%, the fourth increase this year and the highest level since 2007. The Fed's move to raise interest rates has triggered shocks and concerns in the global market, especially for China, a country closely linked to the US economy, how to deal with challenges such as the strong dollar, capital outflow, trade frictions, and so on, has become an urgent problem to be solved.
First, the Fed's motivation for raising interest rates
The Fed's main motivation for raising rates is to control inflation and prevent the economy from overheating.
According to the data released by the US Department of Commerce, in September 2023, the US personal consumption expenditure price index (PCE) rose 4.4% year-on-year, and the core PCE rose 4.7% year-on-year, both of which exceeded the Federal Reserve's 2% target level, and showed a continuous upward trend.
In addition, the US economy is also showing strong growth momentum, in the third quarter of 2023, the US real GDP increased by 6.7%, the highest level in nearly 40 years.
In such circumstances, the Fed feels it is necessary to tighten monetary policy by raising interest rates to avoid runaway inflation and economic bubbles.
However, the effect of the Fed's interest rate hike is not obvious, but it has triggered a series of negative effects.
The Fed's rate hike has led to an appreciation of the dollar's exchange rate, which for export-oriented developing countries means lower export earnings, higher import costs, and greater debt pressure.
At the same time, it also triggered turbulence in the global capital market. As investors' risk appetite for emerging markets declined, capital flowed out of emerging markets and returned to developed markets such as the United States. As a result, the prices of stocks, bonds, currencies and other assets in emerging markets have fallen sharply, threatening financial stability. Finally, the Fed's interest rate hike has also intensified trade friction and economic competition between China and the United States.
The trade deficit between China and the United States has widened as the rising dollar makes Chinese goods more competitive in international markets and American goods harder to sell. At the same time, due to the differences and contradictions between China and the United States in technology, security, geography and other aspects, the economic cooperation between the two countries has also been impacted and hindered.
Ii. China's response
Facing the challenge and pressure brought by the Fed's interest rate hike, China has adopted a series of strategies and measures to cope with it.
The People's Bank of China (PBOC) publishes a daily midpoint for the yuan against the dollar based on market supply and demand and changes in a reference basket of currencies, and allows the yuan to move up or down 2 percent from the midpoint.
This not only ensures the relative stability of the RMB exchange rate, but also maintains a certain degree of flexibility and flexibility, avoiding excessive appreciation or depreciation of the RMB.
China has also implemented a prudent monetary policy, and flexibly used a variety of monetary policy tools, such as the deposit reserve ratio, interest rates, open market operations, according to the changes in the economic situation, to adjust market liquidity and credit scale.
Instead of blindly following the US Federal Reserve in raising interest rates, China has implemented measures such as lowering the reserve requirement ratio and interest rate in a timely and appropriate manner according to its own economic needs, so as to reduce the financing costs of enterprises and households and support the development of the real economy.
In terms of trade, China has adhered to the basic state policy of opening up and actively promoted the optimization and diversification of its trade structure. China has not only conducted several rounds of trade consultations with the United States to seek ways and solutions to trade frictions, but also strengthened cooperation and communication with other trading partners such as the European Union, Japan and ASEAN, and promoted the signing and implementation of free trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) to expand China's influence and voice in the global market.