Finally, the rate hike has arrived! Although down from 3 to 4 hikes originally anticipated this year. The US Federal Reserve pushed the Fed Funds rate up 25 basis points to the 0.5 to 0.75% range.
Stocks, bonds, commodities and in fact all global financial markets reacted to the change, but the reaction here in China was reasonably tame.
A GDP growth rate above 2% and an unemployment rate under 5% -- those were the reasons behind the US Fed's interest rate hike. Following the announcement, US stocks dipped, bonds yields rose, and emerging markets came under pressure.
"If you look at the market reactions right after the interest rate hikes were announced, the US markets like the US S&P 500 market went down more than 0.8 percent, which is the largest single day decline for more than two months. We've seen the US treasury yield went up to a level not been seen since August 2009. And so as a result, you see that the US dollars strengthened substantially and emerging markets are under a little bit pressure."said Hong Hao, Chief Strategist of BoCom International.
But just how little is that pressure? The Renminbi is sure to face new pressure from a dollar pushed up by the new US interest rates, and that pushed China's bond future prices down to their lowest level since they went on sale.
China's central bank, however, pushed liquidity into the market today with an injection of 14.5 billion yuan. The resulting improved liquidity is intended to help the bond market stabilize.
Compared to bonds, however, there was little reaction on China's A-shares market. The Shanghai Composite dipped 1% today, not much compared to Monday's drop of over two percent. The Shenzhen Component, in fact, rose about 0.2% today.
"China's A-shares market has experienced three previous US interest rate hikes, in 1994, 1999 and 2004. On the first two, China's stocks plunged, but on the last one, China's A-shares in fact saw huge jumps. For this interest rise, Chinese investors are well-prepared and China's central bank has a number of measures to counter the US monetary tightening. So China will stay in a relatively stable financial standing."said Tang Zhehui, Assurance Partner of EY.
While Chinese investors have been pricing in the interest rate rise, and China's central bank has reacted quickly, another reason for the dampened reaction is that China's stocks have been considerably less volatile than in the past.
The Fed's current interest rate hike might not be having much influence on China for the moment, but experts point out that even after the rise, US rates are still far from the Fed's 2% target.
Many caution that the anticipation of more interest rate hikes coming in 2017 could have further effects on China's stocks, bonds and other markets, however.
The minutes of yesterday's Fed meeting suggested the possibility of as many as three more interet rates hikes for 2017, but French investment bank BNP Paribas tells ICS that 2 hikes are more likely in the next year with another four perhaps following in 2018.
