US interest rate cuts "squeeze" China's interest rate hike space

□ reporter Wang Donglin

On October 31, the Fed cut interest rates by 25 basis points as expected by the market. The Fed cut interest rates again, indicating that the impact of the subprime debt crisis on its economy is more severe than expected. Analysts believe that the U.S. economy may decline, the Sino-U.S. interest rate gap will shrink, and the pressure of RMB appreciation will increase. These factors have compressed the space for China to continue to raise interest rates in the future.

However, because China's just-announced third-quarter data is still running at a high level, some analysts expect China to raise interest rates 1-2 times before the end of the year. However, starting early next year, the external interest rate environment will gradually show its influence on domestic monetary policy.

Since September, the Federal Reserve has reduced the federal funds rate by 0.75 percentage points to 4.5%. On the 31st, the USD 1-year Libor quoted price was 4.6375%, a decrease of 0.63 percentage points from the end of August.

The central bank of China has raised interest rates five times this year, and the benchmark one-year deposit interest rate has been raised from 2.52% to 3.87%, an increase of 1.35 percentage points. The interest rate of the 1-year central bank bill also rose to 3.6055% this Tuesday. The China-U.S. interest rate differential, which is usually calculated based on the dollar 1-year Libor minus the China 1-year central bank bill interest rate, has been reduced to 132 basis points. Compared with the level of around 300 basis points at the beginning of last year, the China-US interest rate differential has been reduced by more than half.

Although maintaining a 300-basis-point Sino-US spread cannot prevent "hot money" from entering the Chinese market, the narrowing of the spread will definitely reduce the cost of "hot money" entering China and increase its motivation. Calculated at the current rate of RMB appreciation against the U.S. dollar by about 5%, excluding the Sino-US interest rate differential, "hot money" can enjoy at least 3.7% of the annual income in China. Moreover, the current market expectation of the annual appreciation rate of the RMB has exceeded 5%.

From this perspective, if China continues to raise interest rates, it will not help curb the influx of “hot money”, and will also stimulate appreciation expectations to continue to rise, making it more difficult for exchange rate reform.

The appreciation of the renminbi against the U.S. dollar has accelerated since last week. Last Wednesday, it broke through the 7.5 mark that has hovered for a month; yesterday, stimulated by the Fed's interest rate cut, it broke through 7.46, with the median price at 7.4552. The US dollar has been weak due to expectations of interest rate cuts, hitting historical or multi-year lows for various major currencies. If the Fed continues to cut interest rates, it will continue to accelerate the appreciation of the renminbi against the U.S. dollar, which will also impede interest rate policy.

In fact, the United States has cut interest rates twice in two consecutive months, which is enough to prove that the subprime debt crisis has more destructive power on its economy than market expectations. Judging from the statement issued by the Fed yesterday, the shrinking of the US housing market has led to a slowdown in economic growth, which is the main cause of concern for the Fed. In fact, this should also cause the Chinese government to worry.

Because half of the new GDP in the United States comes from the contribution of the housing market. While China is still an economic growth mode driven by external demand, the economy's dependence on foreign trade reached 70.9% in the first three quarters. "The U.S. housing market-the U.S. economy-China's exports-China's economy", because of the existence of such a transmission chain, China cannot but pay attention to the signal revealed by the Federal Reserve's rate cut.

On October 17, the International Monetary Fund’s autumn report lowered the growth rate of the world economy from 5.2% to 4.8%, and lowered the growth rate of the US economy from 2.8% to 1.9%. A spokesperson for the National Bureau of Statistics of China stated at a press conference on economic performance in the third quarter that the current situation of the world economy is worse than previously expected. The cooling of the US real estate market and the impact of the subprime debt crisis on US consumer demand and the world economy are still uncertain.

If China's exports are more likely to decline due to the impact of the international environment in the future, continuing to raise interest rates will not be conducive to the steady and healthy economic development. From this perspective, the Chinese government should observe the world economic growth trend for a period of time before making a decision on interest rate policy.