China is Not Game for a Federal Rate Hike

China has cut down its interest rates. But, it’s hoped that the Federal Reserve does not nullify its rate cut with an increase in the U.S. Fed rates.

Eye on the Fed Meeting

There is no doubt that the recent cut in the interest rates by China is due to the struggle that its economy is facing currently. The experts are of the opinion that the rate cut made By China is testimony to the fact that the Chinese government is also aware of the weakening of its economy in the world market. Now, China will be keeping a close eye on what is going to happen in the United States.

In September, the Federal Reserve of the United States had voted to retain the earlier interest rates. This was a step taken by the Fed as a reaction to the financial issues that China was going through. Also, there was very low inflation in the United States. The Federal Reserve is all set to meet next week and China is hoping that the Fed does not increase its interest rates.

Chinese Finance Minister’s Hope

Lou Jiwei, the Finance Minister of China, had said during the International Monetary Fund meeting in Lima this month that the Federal Reserve interest rates must not be increased by the U.S. He also called upon the developed countries like the United States to give a boost to the trade between them and the developing countries like China and India.1

The Finance Minister is worried about the basic growth in the United States could result in a hike in the federal interest rates. This is not a good sign for China as if the hike comes, then it is coming at a time when the monetary conditions of China are not looking good and it is not able to stand up against the much stronger U.S. currency. If the growth of the U.S. economy loses its steam midway, then it could lead to a meltdown of the global economy.

What U.S. Economists Feel?

There is no doubt that the U.S dollar will in all likelihood appreciate if the Federal Reserve interest rates are hiked at the end of this month, according to many economic analysts. If there is a close association of the Chinese Yuan to the United States dollar, then an increase in the dollar price means that Chinese Yuan also increases. This will not be the reality as China’s economy is going through a lull at the moment and the Chinese Yuan has every possibility of weakening against the dollar.

China’s Foreign Exchange Reserves

The foreign exchange reserves of China touched a new peak of about $4 trillion in the month of August in 2014. Since then, it has been going through a lull period. The foreign exchange reserves of China saw a huge decline of $94 billion in the month of August 2015, which is a huge figure. One of the ways forward for China is to use some of the reserves to meet the expectations of the currency. As pointed out in an earlier article titled Currency Wars Solution to the Current Global Growth Dilemma is Debatable, China will be looking to not sell most of its reserves and will be holding on to around $3 trillion. The Chinese government is looking for stability in its economic reforms.

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